F108 Final Glossary Checked Flashcards
Accelerated benefit
A death benefit where the benefit payment is made prior to death. If less than 100% of the total benefit is accelerated, then the contract remains in force and pays out the remainder of the benefit on death. Some life insurance products have a critical illness (CI) accelerator that pays out on the earlier of death or diagnosis of a CI. Where optional illness benefits are offered as an accelerator on a product, no survival period is applied.
Accrual rate
In a defined benefit (DB) retirement context, the rate at which the pension benefit is built up, often expressed as a fraction of salary per year (generally set to provide a pension, or with a target replacement ratio, with x years’ service). It is the fraction of final or other (for example, career average) salary that the member will receive at retirement for each year of service in the fund.
Accrued benefit method
A DB retirement funding method that targets a stable funding ratio. Includes the projected unit method (PUM) and current unit method (CUM).
Accumulated fund credit
A defined contribution (DC) fund member’s accumulated contributions plus investment returns earned, minus expenses deducted to date. This can be calculated for an individual member or all members of a fund. Also referred to as the member’s fund balance, accumulated fund, or accumulated credit.
Active (or in-service) member
A contributing member of a benefit arrangement.
Active management
An investment management strategy where the investment manager or decision-maker actively selects the underlying securities or asset types based on a particular chosen strategy with the aim of identifying mispriced securities.
Actively at work
Performing the normal function of one’s job. Group arrangements often extend cover up to the evidence-of-health (EoH) limit for all members of the group without underwriting, provided they were actively at work or on regular annual leave on the day the policy commenced.
Activities of daily living (ADL)
ADLs are functional tests used to determine incapacity for products such as CI and LTCI. ADLs that are commonly used as criteria for health and care products include washing, dressing, feeding, toileting, mobility, and transferring (physical positioning).
Actuarial liability (AL)
For a DB or DC retirement fund, the present value of the liabilities of the fund in respect of all members, including the pensioners’ and deferred pensioners’ benefits. May be based on the attained age (AAM), entry age (EAM), projected unit (PUM) or current unit (CUM) methods.
Actuarially neutral
When the expected present value of the cost of the benefits is equal to the expected present value of the income from it. It could also refer to the case where the benefit is equal tåo the actuarial reserve and hence the decrement does not create a surplus or strain.
Acute (condition)
Medical conditions with a sudden onset that are of a non-degenerative nature where a cure is a reasonable prospect. They may occur over a short time or develop into a chronic condition.
Additional Unexpired Risk Reserve (AURR)
Top-up amount required on the UPR so that it equals the URR. AURR = max{(URR - UPR, 0)}
Additional voluntary contributions (AVCs)
Retirement fund members may make voluntary contributions to their retirement fund savings, over and above their regular contribution. In a DB fund, AVCs may buy extra service or accrue an additional DC entitlement. In a DC fund, AVCs will add to the member’s accumulated fund credit.
Adequacy
Related to a benefit system where the system is able to provide benefits at a reasonable standard.
Administrator
(In a South African benefit arrangements context) an entity appointed by a medical scheme or retirement fund to run the operations such as collect premiums or contributions, pay claims or benefits, and enforce regulatory compliance. In retirement funds, administrators may also fulfill such functions as managing cashflows and communicating with members.
Adverse selection
When one party does not have, or has agreed or contracted to give information that the other party does not have and which is relevant to the transaction. In other words, there is asymmetric information between two parties in a transaction, agreement, or contract.
Affinity group
A group of individuals linked by a common definitive purpose, ideology, or interest. For example, members of an organisation that is not common employment.
Age-specific fertility rate
Number of live births per 1,000 women in the relevant age band. (See also total fertility rate.)
Aliasing
A linear dependency among observed covariates in a model. Intrinsic aliasing is when there are inherent dependencies in the definition of the covariates. Extrinsic aliasing is when dependencies arise among the covariates, but which arise from the nature of the data itself rather than inherent properties of the covariates.
Alternative reimbursement models (ARM)
Used by the health and care environment to align the incentives of the provider and the funder. The intention is to move away from a fee-for-service environment and to structure payments to providers to encourage them to provide high-quality, cost-effective healthcare.
Analysis of surplus (AOS) or profit
Analysis of the level of assets relative to the liabilities at one point in time (the opening surplus) and the level of assets relative to the liabilities at a subsequent point in time (the closing surplus) and attributes the change to different causes.
Annuitisation
When a retirement fund member purchases an annuity of any type with their retirement savings.
Annuity guaranteed period
The minimum years after an annuity payment commences that the annuity will be guaranteed to be paid, regardless of the survival of the annuitant.
Appraisal value
The value of a business as a whole, both the existing business and the future new business. In an insurance business, appraisal value would be the sum of the embedded value and the company’s goodwill.
Approved But Not Settled (ABNS)
Reserve for when there is a time delay between approval and settlement of an accounting provision.
Articulation (or integration)
How the various components of a benefit system fit together both within categories (pillars or tiers of a benefit system) and across categories.
Asset-liability model
A model for an investment strategy, where the assets are managed to target a specific set of liabilities, with the aim of matching asset flows to liability flows.
Asymmetric information
Different sides of a market have access to different amounts of information, leading to difficulties contracting on a fair basis.
Attained age actuarial liability (AAAL)
The present value of total benefits based on projected final earnings for current active members in service in a retirement fund, minus the value of the SCRCR multiplied by the present value of total projected earnings for all current active members throughout their expected future membership.
Attained age method (AAM)
A DB retirement prospective funding method where the StCR is the stable rate of contribution that, if paid over the expected future membership of a beneficiary, will accumulate (with investment returns) to the value required to provide the benefits that are expected to accrue over that future period of membership. The value of the future service benefits is taken as the difference between the value of total benefits and the value of the past service benefits calculated as for the projected unit method. This results in the attained age method (AAM) and the projected unit method (PUM) having the same actuarial liability but different standard contribution rates.
Attained age SCRCR (AASCR)
The present value of all benefits that will accrue to current active members in a retirement fund after the valuation date, by reference to service after that date and projected final earnings, divided by the present value of total projected earnings for all current active members throughout their expected future membership.
Attrition claims
Claims that occur in high volumes of relatively small amounts. Individually the claims are small but collectively contribute significantly to the overall claims experience.
Auto-enrolment
All eligible individuals are automatically enrolled in a benefit system there may be conditions under which individuals may opt out.
Average cost per claim (ACPC)
Reserving method where the claim frequency and amounts are used to calculate the average cost per claim. The average cost per claim multiplied by total expected number of claims is the expected claims outgo.
Balance-of-cost fund
A DB retirement fund where the member’s contribution rate is fixed (and can be zero) while the employer contribution rate bears the full extent of the volatility of the value of future benefit payments. The employer is therefore liable for the balance of the cost of contributions meeting the future benefit payments. This is a very common design for employer-sponsored DB funds.
Bancassurance
An insurance company set up by a bank, to which it then becomes a tied agent marketing its insurance through bank branches. Usually, the primary market of a bancassurer is the customer base of the bank. There is usually a strong objective to cross-sell products of one operation to another.
Bargaining council
Established when employer and employee bodies (unions) in a particular industry and country or region agree to come together for collective bargaining. Bargaining councils deal with collective agreements, solve labour disputes, establish various schemes, and comment on labour policies and laws. Bargaining councils may establish and manage schemes or funds to benefit their parties or members.
Base plus benefits
Remuneration structure with a basic salary (specific cash compensation) plus benefits (the cost of which is borne by the employer).
Basket of care
A treatment schedule covered by a PMI provider, which may include a pre-approved list of consultations, procedures, and tests.
Beneficial owner
The rightful owner of an asset.
Beneficiary
The individual that receives benefits from a benefit arrangement (scheme, fund, or society). They may or may not be a member of the arrangement.
Benefit
The proceeds of an insurance or benefit arrangement to an individual who is entitled to receive it. This may be a cash payment or in-kind transfer and can be provided by the insurer or benefit arrangement.
Benefit arrangement
Legal entities set up with the sole purpose of providing benefits to members. These are typically not-for-profit, although some generate profits for their sponsors if they provide services to the benefit arrangement. Benefit arrangements can be sponsored by the state (social security benefits), life insurers, administrators, or employers, and can be mandatory or voluntary and run on a group or individual basis.
Benefit escalation rate
Out-of-payment escalation rate refers to the rate at which the benefit payment(s) commence(s). In-payment escalation rate refers to the rate at which benefit payments increase once they are in payment (relevant to recurring benefit payments such as annuities and LTCI).
Benefit-in-kind
A non-cash benefit, for example, housing or education provided by the state or a wellness programme offered by the employer.
Bequest
Funds or monies that are left by will to a person’s dependants after the person’s death. Bequest motive means a desire to leave an inheritance for dependants.
Biases (as in cognitive)
Biases cause people to make economic and financial decisions that do not appear to be in their long-term interests, usually favouring short-term over long-term gains.
Bond yields plus a risk premium method
An ALM model where the discount rate for the liabilities is equal to the expected return on the set of best-matching assets, using bond rates as a base yield and adding risk premiums for each asset type.
Bornhuetter-Ferguson (BF) method
A blend of reserving methods which combines the chain ladder method with the expected loss ratio.
Brand-name pharmaceuticals (as opposed to generic)
Original drugs developed, patented, and brought to the market by the creator. These drugs are protected by patents for a particular period.
Brokers
May also be known as financial advisors or intermediaries. They bridge the gap between the financial services and products market, and individuals or investors.
Budget constraint
The amount of goods and services that an individual can afford, given current prices and the individual’s available income.
Burning cost
The estimated cost of claims, calculated from the previous years’ history adjusted for changes in the numbers insured, the nature of cover, and medical inflation. The term can also be used to describe historic claims only.
Burning cost premium
The actual cost of claims incurred per policy per unit of exposure (the pure risk premium of an actual portfolio of policies). This is calculated as the sum of all claims divided by the total exposed to risk, or the average claim amount multiplied by the claims incidence rate.
Business mix
The combination of products, services or benefits offered by an insurer or benefit arrangement. Usually refers to the mix by number and size of benefit or contract.
Buy-in
Retirement fund agreement with an insurer to cover pensioner payments. The contract is between the insurer and the retirement fund (and so differs from a buy-out) and the liability remains on the fund’s balance sheet.
Buy-out (or outsourcing)
Large-scale purchase of annuities by an insurer from a retirement fund to transfer longevity and other risks to the insurer. The contract is between the insurer and individual pensioners.
Calibration
Setting model parameters in a stochastic model in which the assumptions vary.
Cape Cod method
Extension of the BF reserving method, where an a priori ultimate loss ratio is used instead of an estimated loss ratio.
Capitated arrangement
A reimbursement model where payment is made per capita, that is per head or per life, regardless of utilisation.
Capitation
A type of alternative reimbursement method used by PMI providers. In effect, the insurance company separates out a set of medical benefits (such as dental claims or mental health claims) and passes this risk on to the provider by giving a proportion of the insurance premium for each person insured to the provider rather than an amount per claim. The risk that funds are insufficient to cover treatment lies with the provider of the healthcare service.
Career average salary (or earnings)
Average salary over the life of an individual, which may or may not be subject to revaluation. Career average schemes pays a benefit based on career average salary. (See also revaluation rate.)
Cash balance fund
A type of hybrid retirement fund in which a percentage of salary is contributed each year for each member. Benefits from the fund are set equal to the member’s and employer’s contributions accumulated at a rate of interest that may be predetermined or prevailing interest rates or some other index. Cash balance funds link more directly to standard DC funds from the point of view of the sponsor. National pension schemes that use this concept are often called notional DC schemes.
Categorical variables
Explanatory variables in a model where the values of the levels of the variable can take on distinct categories and cannot be given any natural ordering or score, for example, male or female.
Cedant
In a reinsurance arrangement, the insurer that is ceding some of its insurance risk to a reinsurer.
Chain ladder method
Reserving method that uses past claims data to fit a cumulative distribution to the claim development. Data is arranged in a run-off triangle where the rows are the origin periods and the columns are the development periods.
Basic chain ladder method uses claims in nominal terms. The inflation-adjusted chain ladder method applies an inflation index to past and projected claims.
Chronic condition
A medical condition with long-lasting effects or which recurs over a long period of time, and is generally incurable or degenerative.
Claims In Payment (CIP)
Reserve for the payment of an annuity-type benefit, when the benefit has been approved. Also known as a disabled life reserve in certain product-specific contexts.
Class selection
Classification of people by certain attributes that affect their mortality or morbidity, for example, smokers and non-smokers.
Closed fund or benefit arrangement
Closed can mean either restricted or closed to new members. Restricted benefit arrangements only allow people from a designated group, for example, the employees of the associated company or industry, to join. Funds that are not restricted and are open to anyone are also called unrestricted. In the medical context, closed is usually used in the restricted sense in both open and closed medical schemes, new people are allowed to join but the pool of eligible members is unrestricted or restricted respectively. However, in the retirement fund context, the term ‘closed’ typically means closed to any new member joining, while in its ‘open’ state only certain people may be eligible to join.
Co-payment
In a health and care product, this is the amount that the covered life is responsible for paying to the provider, and the insurer pays the remainder. This is usually a fixed nominal amount (instead of a percentage of the claim).
Coinsurance
Coinsurance is a method of sharing a risk among a number of direct insurers, each of which accepts a specific (direct) contractual relationship with the insured and is therefore liable only for its own contractual share of the total risk. The insured needs to make separate claims to each co-insurer in respect of its stated proportion of the risk. If any co-insurer defaults, the insured would not receive a recovery for that part of the claim. This contrasts with reinsurance where only the direct writer has a contractual relationship with the insured.
Collective DC fund (defined contribution fund)
A DC retirement fund where the declared level of retirement benefit is fully specified and communicated. However, when experience is adverse and the goal is no longer achievable, the contribution rate can be varied.
Collective investment schemes (CISs) or unit trusts
Legal investment vehicles which pool the assets of many investors. The assets are held in trust, independent of the investment manager.
Combined ratio
A combination of a loss ratio and an expenses ratio: total claims plus expenses divided by premiums (gross or net of reinsurance).
Commission
The payment made by a provider to reward those who sell and subsequently service its products, whether they be brokers, tied agents or a direct salesforce. Typically, the amount of the commission depends on the type and size of the contract.
Commitment device
A way of securing upfront commitment to a certain path of actions by individuals. This may be decided by the individual or can be built into the product design.
Community rating
Community rating refers to standardised benefits that are priced on a collective basis across the whole population. Community rating relies on the principle of solidarity. Premiums are not based on the risk presented by the individual but rather the risk for the pool is assessed and premiums are either set equally or vary according to the ability to pay.
Commutation
An option for retirement fund members to give up part of their pension income in exchange for a lump sum.
Commutation factor
A factor based on life expectancy (such as an annuity factor) used in the calculation of the commutation option (lump sum benefit) in a DB retirement fund.
Compensation package
Total package of remuneration, plus statutory benefits, plus discretionary benefits offered to an employee by an employer.
Compulsory membership group scheme
Where the owner of the policy insists that all eligible lives must participate in the scheme.
Consumption
The use of goods or services by individuals or households.
Consumption smoothing
Maintaining a relatively smooth pattern of consumption over the lifecycle and across different possible future outcomes that may occur at the same point in time.
Contingency Reserves
Reserves to protect a retirement fund or benefit arrangement from unexpected events and to act as a buffer against adverse experience.
Continuation option
An additional premium being paid on a group cover policy so that when an individual leaves the group they may take out an individual version of the policy on similar terms but at the standard individual rates without additional underwriting being applied.
Contributions
Benefit arrangements receive contributions on a specified basis from either the employer or sponsor, the member or both to fund the provision of benefits.
Control period (for funding methods)
A specific period over which certain assumptions and parameters remain fixed for the purpose of calculating actuarial liabilities or funding requirements for a retirement fund or state-sponsored benefit scheme. By fixing assumptions over a defined control period, actuaries and sponsors can better manage the volatility inherent in long-term financial projections and ensure consistency and comparability in funding calculations over the specified timeframe. At the end of a control period, assumptions may be revised, initiating a new control period.
Cook’s distance
A method of testing the appropriateness of a model, which is used to measure the influence of a data point on model results. Model points with a Cook’s distance of 1 or more merit closer examination.
Copula
Statistical tools used to formulate a multivariate distribution in such a way that the underlying individual distributions remain unchanged.
Cost analysis
Assesses the cost of various benefits. This is the simplest method of economic evaluation of a benefit system. Cost-Effectiveness Analysis (CEA): Assesses the cost of the benefit system relative to the system’s non-monetary benefits. Cost-Utility Analysis (CUA): Assesses the cost of a benefit system relative to changes in the quality of life, as well as changes in mortality in the case of healthcare. Cost-Benefit Analysis (CBA): Places a monetary value on the cost of the benefit system and its outcomes, allowing for a direct comparison of cost and outcome.
Cost of capital (CoC)
A notional charge to reflect that providers of capital provide funds which they cannot access again immediately. This is an insurer concept and features in the embedded value (EV) as well as the calculation of the supervisory balance sheet in some regimes.
Counterparty risk
The risk that counterparties renege on agreements or fail entirely.
Coverage ratio
Ratio of actual covered workers to the working age population.
Covered earnings
The salary that applies to the determination of social insurance or benefit arrangements where such arrangements’ contributions are based on salary.
Covered wage ratio (CWR)
The ratio of average covered earnings to average earnings for a population.
Cramér-Rao lower bound (CRLB) theorem
Given a random sample of size n from a distribution with density— FORMULA
Credit spreads
The difference in yield between two securities due to a difference in credit quality of the instrument or issuer.
Critical illness (CI) event
An event, defined in a CI policy, that can trigger a claim and could include the diagnosis of specified illnesses or conditions, a specific health event such as a heart attack, reaching a defined stage of impairment or requiring a specific surgical procedure.
Critical illness (CI) insurance
A pure protection product with a benefit payable if the policyholder suffers a critical illness (CI) event during the term of the policy. This product is designed to protect policyholders from illnesses or conditions that are typically perceived by the public to be serious and to occur frequently. In nearly all cases level premiums are paid until the full sum insured is paid, the insured dies, or the term of the policy ends, whichever comes first.
Current unit actuarial liability (CUAL)
The present value of all benefits accrued at the valuation date, based on current earnings for members in service.
Current unit method (CUM) method
Accrued benefit funding method for a retirement fund, where the AL is the discounted value of the benefits that have accrued over the past period of membership of the beneficiaries, but no allowance is made for earnings growth between the date at which the target fund should be held and the date when benefit payment starts.
Current unit SCRCR (CUSCR)
The present value of all benefits of a retirement fund that will accrue in the control period following the valuation date, by reference to service in that period and projected earnings at the end of that period, plus the present value of all benefits accrued at the valuation date (that is the start of the control period) in respect of members in service, multiplied by the projected percentage increase in earnings over the control period, all divided by the present value of all members’ earnings in that control period.
Custodian
Typically, large banks or trust companies appointed by an asset owner to take custodianship of assets held with an investment manager, to protect the owner from the risk of default or misappropriation of the assets by the investment manager.
Custom factor
A method of grouping factors in a model, where a single parameter represents the relativity for multiple levels of a factor. A custom factor is where two or more levels have been grouped in this way.
Customer lifetime value
A quantification of the profit that a customer is expected to bring to the insurer over the lifetime of the customer, taking into account the future needs of the customer and the extent of cross-selling possible.
Data Error Reserve
Held by a retirement fund as a provision for data errors due to poor quality data.
DB underpin
A guarantee in a DC fund where the benefit is guaranteed not to be lower than a pre-defined DB benefit.
DC underpin
In a DB fund, a DC underpin is an additional guarantee that the benefit is not less than the accumulated value of all contributions in respect of that member.
De minimus amount
In the context of regulation, this is a minimum amount below which regulations do not apply. In a retirement context, this is the lump sum level of accumulated retirement benefit below which the retiree is exempted from an annuitisation requirement.
Deferred member (or deferred pensioner or paid-up member)
Members that remain in an employer-sponsored retirement fund after they have left the employment of that employer. These members typically do not make any further contributions to the fund.
Deferred period
The minimum period between the benefit trigger event and the benefit payment commencing. The deferred period is selected upfront and is not influenced by delays in claim reporting or processing. It can apply on any product with a health trigger.
Defined ambition fund
See collective DC fund.
Defined benefit (DB) fund
A retirement fund where the fund rules define the benefits independently of the contributions payable, and benefits are not directly related to the investments of the fund. Benefits are often set according to a formula relating to members’ wages or salaries, length of employment, or other factors. Specific types of DB funds include salary-related schemes or final-salary schemes.
Defined contribution (DC) funds
Retirement funds that pay a retirement benefit to a member that is equal to the member’s accumulated contributions, plus the investment returns earned on those contributions, less any expenses. Usually the contributions are set (for instance, a percentage of salary) but the amount of the benefit is unknown until payment is actually made.
Degrees of freedom (df)
The number of observations in a model less the number of parameters.
Demographic assumptions
Assumptions relating specifically to the nature of the individuals or lives of the particular group or population. For example, the size of the population, the age profile, sex, or other factors relating to the health or employment status of the individuals.
Demographic dividend
The increase in welfare in a population at the second stage of the demographic transition caused by a significant increase in the number of people of working age, a consequent increase in the contribution to labour ratio because of higher savings by working-age people, and low old age and child dependency ratios.
Dependency ratio
The ratio of the number of dependents, such as the young and elderly, who are receiving benefits to the number of working-age people in a country or region who are funding the benefit.
Development ratio
In a chain ladder reserving method, using a run-off triangle, the development ratio is the expected ratio of cumulative claims at the end of the development month j+1, to the cumulative claims at the end of the development month j.
Deviance
A measure of how much the fitted values in a model differ from the observations. It compares the observed value to the fitted value with allowance for weights, and assigns higher importance to errors where the variance should be small.
Deviance residual
The distance between the actual observation and the fitted value of a model, used as a test of the appropriateness of a model.
Diagnostic tests
Tests carried out on a patient to diagnose a disease or condition based on the signs and symptoms presented by the patient.
Differentiable
A function where the derivative exists at each point in its domain.
Direct marketing
Marketing from the provider direct to the consumer, such as mail, telemarketing, television website, social media marketing, and press and internet advertisements. No intermediary or salesperson is involved.
Disability-Adjusted Life Years (DALYs)
A way of measuring burden of disease incorporating the number of years lost due to premature death caused by a condition plus the number of years of healthy life lost to disability or ill-health caused by the condition.
Disabled member
In a retirement fund context, a member who receives income benefit payments from a retirement fund due to that member meeting the fund’s criteria for receiving a disability or ill-health benefit.
Discontinuance basis
A basis in an actuarial valuation carried out to assess the position of a scheme if it were to be discontinued. Liability values are based on an estimate of securing benefits with a third party such as an insurance company. The valuation may take into account the possible exercise of any discretion to augment benefits. Also known as valuation on a Buy-out basis.
Discounted mean term or duration
The weighted sum of the terms of the future cashflows of an asset or liability, where the weight is the present value of the payment at that term.
Discretionary benefits
In a health and care context, benefits in a policy which are available as extras for a policyholder to select, over and above the main benefits of the policy.
Discrimination
Direct discrimination - a person is treated less favourably because of a particular personal feature. Indirect discrimination - a rule, practice, or policy which appears neutral but has a disproportionate impact on a group of people with a particular personal feature. Fair discrimination - discrimination which is acceptable due to an actuarial and statistical basis. Unfair discrimination - discrimination which does not have an actuarial or statistical basis.
Disease burden (or burden of disease)
The physical, psychological, and social impact of a disease or diseases. This can apply to an individual context in terms of the management of a person’s health or at a population level in public health. In the latter context, the prevalence, severity, and consequences of diseases, illnesses, and injuries are considered.
Domestic care
Care of an individual which takes place in their own home or other similar location which is not a formal medical, treatment, or residential care centre.
Drawdown (rate)
The amount withdrawn from an income drawdown product on an annual basis.
Economic assumptions
Assumptions relating to macro-economic factors or variables, such as interest rates, inflation, exchange rates, investment returns, or yields.
Eligibility criteria
Criteria set by the state, employer, insurer, or benefit arrangement which specify who is entitled to which type, form, and level of benefit.
Eligibility ratio (EL)
Ratio of actual covered workers to the working-age population.
Embedded value (EV)
The sum of net assets and the present value of the expected future profit from existing business, less the cost of capital for this in-force business.
Embedded value financing
A reinsurer makes a loan to the insurer which is paid from future profits. If the future profits do not emerge as expected, the loan may not be paid.
Enterprise risk
Risks which may affect the objectives, performance, and sustainability of the business as a whole.
Enterprise risk management (ERM)
A risk management framework that considers the risks of a business as a whole, allowing concentration and diversification effects of risks to be assessed.
Entry age actuarial liability (EAAL)
The present value of total benefits, based on projected earnings at retirement date for members in service, minus the SCRCR multiplied by the present value of total projected earnings for all members throughout their expected future membership.
Entry age method (EAM)
A prospective funding method to calculate the required contribution rate in a DC fund to target an income replacement ratio.
Entry age SCRCR (EASCR)
The present value of all future benefits for a member joining at the assumed entry age, by reference to projected final earnings, divided by the present value of total projected earnings for the member throughout their expected membership.
Equity
Equity refers to fairness and justice. It does not necessarily mean that every person is treated equally. For example, intentional cross-subsidies from higher-income earners to lower-income earners may be considered more equitable in the broader context of society even though the two groups are not treated equally. Alternatively, equity refers to the ownership of shares of a company. These may be listed or unlisted.
Equity risk premium
The excess yield earned on a market-linked asset, above the risk-free rate, to compensate the investor for the additional risk.
Evidence of health (EoH) limit
Insurers may offer cover to members of a group scheme without requiring medical underwriting, where the amount of cover falls below a certain level, called the evidence of health (EoH) limit. Underwriting may be required for cover above this limit.
Ex ante
Before the event or a prospective view. It can also mean expected as opposed to actual results.
Ex post
After the event or retrospective view. It can also mean actual as opposed to expected results.
Excess
The covered individual or entity may be liable for the first portion of any claim. This pre-specified monetary amount is the excess. (See also co-payment.)
Excess of loss (XoL)
In excess of loss reinsurance, the cost to an insurer of a large claim is capped, with the liability above the cap (called the lower limit or retention) being passed to the reinsurer.
Expense Reserve
Tracks the surpluses and deficits arising from the over- or under-allocation of contributions towards expenses in a retirement fund.
Explanatory variables
The independent variables in a model, which are used to explain or predict the response variable. The selection depends on the purpose of a model. Includes categorical and non-categorical variables.
Exposure
In the context of a model, the weights used in fitting the model to attach a level of importance to each observation.
Externalities
A behavioural bias where the actions of an individual have an impact on others, that is knock-on effects.
Facultative reinsurance
Reinsurance arrangements where there is no obligation on the insurer or the reinsurer to offer and accept risks. The cedant is free to place reinsurance with any reinsurer and the reinsurer is free to accept or reject the reinsurance as offered.
Fiduciary management
An entity’s investment consultant is given full responsibility for making and implementing decisions related to the investment strategy on behalf of the entity.
Final average salary
Salary averaged over a specified period prior to the benefit payment date (a 3-year averaging period is common).
