General terms Flashcards
Accrual rate
The rate at which rights build up for each year of service in a defined benefit scheme
Accrued benefits
The benefits for service up to a given point in time, whether vested rights or not. They may be calculated in relation to current earnings or projected earnings. (Allowance may also be made for revaluation and / or pension increases required by the scheme rules or legislation)
Accumulation of risk
An accumulation of risk occurs when a portfolio of business contains a concentration of risks that might give rise to exceptionally large losses from a single event. Such an accumulation might occur by location (property insurance) or occupation (employers’ liability insurance), for example.
Acquisition costs
Costs arising from the writing of insurance contracts including:
- direct costs, such as acquisition commission or the cost of drawing up the insurance document or including the insurance contract in the portfolio
- indirect costs, such as advertising costs or the actuary’s / underwriter’s expenses connected with the establishment of the premium rating table.
Active member
A member of a benefit scheme who is at present accruing benefits under that scheme in respect of current service.
All risks
A term used where the cover is not restricted to specific perils such as fire, storm, flood etc. The cover is for loss, destruction or damage by any peril not specifically excluded. The exclusions will often be inevitabilities such as wear and tear. The term is sometimes loosely used to describe a policy that covers a number of specific risks, though not all.
Anti-selection
People will be more likely to take out contracts when they believe their risk is higher than the insurance company has allowed for in its premiums. This is known as anti-selection.
Anti-selection can also arise where existing policyholders have the opportunity of exercising a guarantee or an option. Those who have most to gain from the guarantee or option will be the most likely to exercise it.
Arbitrage
In investment markets, the simultaneous buying and selling of two economically equivalent but differentially priced portfolios so as to make a risk-free profit.
In regulatory regimes, making use of the least onerous set of alternative rules that could be applied to a product provider.
Average earnings scheme
A benefits scheme where the benefit for each year of membership is related to the pensionable earnings for that year. Such schemes are alternatively referred to as career average schemes.
Balance of cost scheme
A defined benefits scheme to which beneficiaries make a defined contribution and the main sponsor pays the remainder of the unknown cost of providing the benefits.
Bancassurance
An arrangement between a bank and an insurance company to allow the insurance company to sell its products to the bank’s clients.
Bear market
A period of time during which investors are generally unconfident and stock market prices decline. (compare with bull market)
Benchmark
A standard or model portfolio (e.g. investment index) against which a fund’s structure and performance will be assessed.
Best estimate
An actuarial assumption which the actuary believes has an equal probability of under or overstating the future experience (i.e. the median of the distribution of future experience)
Bid (also selling) price
The price at which a market maker offers to buy a security. The price at which the manager of a unitised financial product is prepared to buy back units from an investor.
Break-up basis
A valuation basis that assumes that the writing of new business ceases and cover on current policies is terminated. In relation to general insurance policies, current policyholders would normally be entitled to a proportionate return of the original gross premium. Deferred acquisition costs would probably have to be written off. Also known as a wind-up basis.
Bond
A bond is a form of loan. The holder of a bond will receive a lump sum of specified amount at some specified future time together with a series of regular level interest payments until the repayment (or redemption) of the lump sum.
Book reserve
A provision in a company’s accounts for a future benefit liability for which no funds have been set aside.
Bulk rate
A premium rate applied uniformly per head on large benefit schemes across a membership type (independent of actual member’s ages). Also called ‘unit rate’.
Bulk transfer
The transfer of liabilities (and usually assets), relating to a group of members, from one benefit scheme to another.
Bull market
A period of time during which investors are generally confident and stock market prices increase. (compare to bear market)
Cancellation
A mid-term cessation of general insurance policy that may involve a partial return of premium.
Cap
An upper limit. For example, on a benefit, a contribution, benefit growth or a funding level.
Catastrophe
A catastrophe is a single event that gives rise to exceptionally large losses. The exact definition often varies and is often dependent on excess of loss wordings, e.g. it might mean all losses incurred in a 72-hour period from a single event such as a wind storm.
Catastrophe reserve
A reserve built up over periods between catastrophes to provide some contingency against the risk of catastrophe.
Ceding company (cedant)
An insurance or reinsurance company that passes (or cedes) a risk to a reinsurer. The term ‘cedant’ may also be applied to a Lloyd’s syndicate.
Chinese walls
Regulations or practices intended to prevent conflicts of interest in integrated security or consultancy firms.
Claim
The most common meanings are:
- as a noun: an assertion by a policyholder that an insurer is liable to make a payment in accordance with the terms of the policy
- as a verb: to make a request for payment from an insurer
Care is often needed to discover the precise meaning in a given context - e.g. whether a reference to ‘claims’ is to the number of claims or their cost.
Claim frequency
The number of claims in a period per unit of exposure, such as the number of claims per vehicle year for the calendar year or per policy over a period.
Closed scheme
A benefits scheme which does not admit new members. (Contributions may or may not continue and benefits may or may not be provided for future service.) Similarly insurers can be closed to new business, or have closed funds.
Coinsurance
An arrangement whereby two or more insurers enter into a single contract with the insured to cover a risk in agreed proportions at a specified premium. Each insurer is liable only for its own proportion of the total risk.
Commission
Commission refers to the payments made by a provider to reward those who sell and subsequently service its products, whether they be independent financial intermediaries, tied agents or a direct sales force. Typically, the amount of the commission depends on the type and size of contract.
Communication
The giving up of a part or all of the stream of future income for an immediate lump sum.
Composite insurer
An insurance company writing both life and non-life business
Continuing Care
Nursing or medical care provided after retirement
Continuing Care Retirement Community
A development in which retired persons can live as a community and receive chosen levels of nursing or medical care.
Convexity
The convexity of a bond is defined as C = (1 d^2 P) / (P di^2) where P is the dirty price of the bond i is the gross redemption yield on the bond
Corporation tax
Tax on company profits
Counterparty
The opposite side in a financial transaction
Coupon
The interest payments on a bond
Covenant
An agreement that is legal and binding on the parties involved. The expression is often used in association with corporate debt, because the borrower is bound to the terms of the agreement. The expression is also used in property investment because the tenant or lessee is bound to the terms of the lease agreement. In fact the meaning of covenant has been extended in the context of property investment so that it usually refers to the quality of the tenant, e.g. a tenant with a good covenant is a good quality tenant who is unlikely to break the terms of the agreement. This last meaning of the term may also similarly refer to the quality of an employer-sponsor of a benefits scheme.
Credibility
A measure of the weight to be given to a statistic. This often refers to the experience for a particular risk (or risk group) compared to that derived from the overall experience of a corresponding parent or larger proportion. The measure is used to determine a premium when using experience rating.
Credit rating
A rating given to a company’s debt by a credit-rating company as an indication of the likelihood of default. Top rating is usually AAA. Credit ratings are much used.
Credit risk
Credit risk is the risk of failure of third parties to meet their obligations.
Custodian
The keeper of security certificates and other assets on behalf of investors.
Cyber risk
Any risk of financial loss, disruption, or damage to the reputation of an organisation from some sort of failure of its information technology systems.
Debenture
A loan made to a company which is secured against the assets of the company. Debentures usually have a floating charge over the assets of the company so that debenture holders rank above other creditors should the company be wound up. Debentures with fixed charges are called mortgage debentures.
Deferred member
A member of benefits scheme who is no longer accruing benefits but who has accrued benefits that will be payable at a future date.
Deficit (or underfunding)
Where a benefits scheme or financial product provider has less assets than required by the funding plan to meet the liabilities.
Defined ambition scheme
A scheme where risks are shared between the different parties involved, such as scheme members, employers, insurers and investment businesses.
Defined benefit scheme
A benefits scheme where the scheme rules define the benefits independently of the contributions payable, and benefits are not directly related to the investments of the scheme. The scheme may be funded or unfunded.
Defined contribution scheme
A scheme providing benefits where the amount of an individual member’s benefits depends on the contributions paid into the scheme in respect of that member increased by the investment return earned on those contributions.
Depreciation
An accounting convention whereby firms write down the value of their assets over time.
Derivative instrument
A financial instrument with a value dependent on the value of some other, underlying asset.
Discontinuance valuation
An actuarial valuation carried out to assess the position if a benefits scheme were to be discontinued. The valuation may take into account the possible exercise of any discretion to augment benefits.
Discounted income model
A model valuing investment which determines a present value for the investments by discounting the expected future income from the assets.
Dividend yield
The running yield (dividends divided by share price) on an equity.
Duration
The duration of a conventional bond (also known as the effective mean term or discounted mean term) is the mean term of the payments from the stock, where each term is weighted by the present value of that payment.
In general, duration = Sum(PV x t) / Sum(PV)
where
t is measured in years
PV is the present value of the payment at time t calculated at the gross redemption yield
Duration is closely related to volatility
Early leaver
A person who ceases to be an active member of a benefit scheme, other than on death, without being granted an immediate retirement benefit.
Economic value added
The percentage difference between the annual return on capital and the weighted average cost of capital.
Efficient frontier
An efficient portfolio is one for which it is not possible to increase the expected return without accepting more risk and not possible to reduce the risk without accepting a lower return. The efficient frontier is the line joining all efficient portfolios in risk-return space. In portfolio theory, risk is defined as variance or standard deviation.
Efficient market hypothesis
A hypothesis that asset prices reflect all relevant information.
Embedded value
It represents the value to shareholders of the future profit stream from a company’s existing business together with the value of any net assets separately attributable to shareholders.
Equity
In investment
Ordinary shares issues by a company as a share in the equity capital of a company. In effect, the equity holders are the owners of the company. Ordinary shareholders have the right to receive all distributable profits of the company after debt holders and preference shareholders have been paid. They also have the right to attend and vote at general meetings of the company.
In life insurance
This is a term that is difficult to define. In essence, it means that all policyholders are treated fairly. That is that some groups of policyholders do not benefit at the expense of other groups. In a proprietary company, equity also needs to be considered between policyholders and shareholders. Questions of equity arise in the distribution of surplus, in the determination of variable charges and in the determination of surrender values and alteration terms.
Excess
The sum, specified in the policy, that the insured must bear before any liability falls upon the insurer. The insured pays the first £E of every claim, where £E is the excess.
Excesses are widely used in personal lines of insurance such as motor insurance. They may be compulsory, in that they apply to all claims of the types specified, or voluntary to secure lower premiums.
Exclusion
An event, peril or cause defined within the policy document as being beyond the scope of the insurance cover.
Experience rating
A system by which the premium of each individual risk depends, at least in part, on the actual claims experience of that risk (usually in an earlier period, but sometimes in the period covered)
Exposure
This item can be used in three senses:
- the state being subject to the possibility of loss
- a measure of extent of risk
- the possibility of loss to insured property caused by its surroundings.
Extra premium
An extra premium is an addition to the standard premium payable under a contract in order to cover an extra risk.
Extra risk
An extra risk arises where a proposal for life insurance is not acceptable at standard rates
Final salary scheme
A defined benefit scheme where the benefit is calculated by reference to the final earnings of the member, and usually also based on pensionable service.
Financial gearing
The expression gearing or financial gearing is often used to refer to the impact on the profits for a company caused by fixed-interest borrowing. For a financially highly geared company a small change in the total profits might have a very large proportionate impact on the profits for shareholders. A company with lots of fixed-interest borrowing is highly geared.
