General terms Flashcards
1
Q
Accrual rate
A
The rate at which rights build up for each year of service in a defined benefit scheme
2
Q
Accrued benefits
A
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)
3
Q
Accumulation of risk
A
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.
4
Q
Acquisition costs
A
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.
5
Q
Active member
A
A member of a benefit scheme who is at present accruing benefits under that scheme in respect of current service.
6
Q
All risks
A
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.
7
Q
Anti-selection
A
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.
8
Q
Arbitrage
A
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.
9
Q
Average earnings scheme
A
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.
10
Q
Balance of cost scheme
A
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.
11
Q
Bancassurance
A
An arrangement between a bank and an insurance company to allow the insurance company to sell its products to the bank’s clients.
12
Q
Bear market
A
A period of time during which investors are generally unconfident and stock market prices decline. (compare with bull market)
13
Q
Benchmark
A
A standard or model portfolio (e.g. investment index) against which a fund’s structure and performance will be assessed.
14
Q
Best estimate
A
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)
15
Q
Bid (also selling) price
A
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.
16
Q
Break-up basis
A
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.
17
Q
Bond
A
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.
18
Q
Book reserve
A
A provision in a company’s accounts for a future benefit liability for which no funds have been set aside.
19
Q
Bulk rate
A
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’.
20
Q
Bulk transfer
A
The transfer of liabilities (and usually assets), relating to a group of members, from one benefit scheme to another.
21
Q
Bull market
A
A period of time during which investors are generally confident and stock market prices increase. (compare to bear market)
22
Q
Cancellation
A
A mid-term cessation of general insurance policy that may involve a partial return of premium.
23
Q
Cap
A
An upper limit. For example, on a benefit, a contribution, benefit growth or a funding level.
24
Q
Catastrophe
A
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.
25
Catastrophe reserve
A reserve built up over periods between catastrophes to provide some contingency against the risk of catastrophe.
26
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.
27
Chinese walls
Regulations or practices intended to prevent conflicts of interest in integrated security or consultancy firms.
28
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.
29
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.
30
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.
31
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.
32
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.
33
Communication
The giving up of a part or all of the stream of future income for an immediate lump sum.
34
Composite insurer
An insurance company writing both life and non-life business
35
Continuing Care
Nursing or medical care provided after retirement
36
Continuing Care Retirement Community
A development in which retired persons can live as a community and receive chosen levels of nursing or medical care.
37
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
```
38
Corporation tax
Tax on company profits
39
Counterparty
The opposite side in a financial transaction
40
Coupon
The interest payments on a bond
41
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.
42
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.
43
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.
44
Credit risk
Credit risk is the risk of failure of third parties to meet their obligations.
45
Custodian
The keeper of security certificates and other assets on behalf of investors.
46
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.
47
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.
48
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.
49
Deficit (or underfunding)
Where a benefits scheme or financial product provider has less assets than required by the funding plan to meet the liabilities.
50
Defined ambition scheme
A scheme where risks are shared between the different parties involved, such as scheme members, employers, insurers and investment businesses.
51
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.
52
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.
53
Depreciation
An accounting convention whereby firms write down the value of their assets over time.
54
Derivative instrument
A financial instrument with a value dependent on the value of some other, underlying asset.
55
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.
56
Discounted income model
A model valuing investment which determines a present value for the investments by discounting the expected future income from the assets.
57
Dividend yield
The running yield (dividends divided by share price) on an equity.
58
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
59
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.
60
Economic value added
The percentage difference between the annual return on capital and the weighted average cost of capital.
61
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.
62
Efficient market hypothesis
A hypothesis that asset prices reflect all relevant information.
63
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.
64
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.
65
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.
66
Exclusion
An event, peril or cause defined within the policy document as being beyond the scope of the insurance cover.
67
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)
68
Exposure
This item can be used in three senses:
1. the state being subject to the possibility of loss
2. a measure of extent of risk
3. the possibility of loss to insured property caused by its surroundings.
69
Extra premium
An extra premium is an addition to the standard premium payable under a contract in order to cover an extra risk.
70
Extra risk
An extra risk arises where a proposal for life insurance is not acceptable at standard rates
71
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.
72
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.
73
Financial strength
This usually refers to the ability of a life insurance company to:
- withstand adverse changes in experience, including those arising from investment in higher yielding but more volatile assets
- fulfill its new business plans
- meet the reasonable expectations of its policyholders
It is often measured by the level of its free assets.
74
Flexible benefits
Benefit provision under which the beneficiary has choice about the types or levels of benefits to be received. Will usually involve an option to receive salary instead of other forms of benefits.
75
Floor
A lower limit. For example on a benefit, a contribution, benefit growth or a funding level.
76
Free assets
This term is loosely used to refer to that part of a life insurance company's assets that are not needed to cover its liabilities. Opinion differs as to what should be included in the liabilities.
For example, in the UK the term is often used to describe the excess of the value of the assets over the value of the liabilities as reported for supervisory purposes.
77
Funding objective
The arrangement of the incidence over time of payments with the aim of meeting the future cost of a given set of benefits.
78
Gearing
The ratio of debt to equity. Often referred to as financial gearing.
79
Going concern basis
The accounting basis normally required for an insurer's published accounts, that is based on the assumption that the insurer will continue to trade as normal for the long-term future.
80
Group contract
This is a contract that covers a group of lives, where the group is specified, but not necessarily the individuals within it.
81
Guarantee (investment)
In the context of life insurance, this refers to a promise that the company will pay a specified sum of money - or sums of money - at specified times if a specified condition is fulfilled. The condition can be an event such as the surrender or maturity of a contract.
The term can also refer to the situation where a company guarantees the rate it will use, at some future date, to convert a lump sum into an annuity or vice versa.
82
Hedging
Action taken to protect the value of a portfolio against a change in market prices. Hedging involves holding offsetting positions in assets or portfolios, the values of which are expected to respond identically to market changes.
83
Hurdle rate
A target or minimum rate of return used in capital project assessment.
84
Immunisation
Ensuring that the discounted mean term of assets equals that of the liabilities and that the spread of the assets is greater than the spread of the liabilities. This means that a uniform change in interest rates will cause the reinvestment rate and capital value on assets to move in opposite directions so that a fund does not make a loss.
85
Indemnity, principle of
The principle whereby the insured is restored to the same financial position after a loss as before the loss. This is typical of most types of insurance. This contrasts with the new-for-old basis of settlement, often used in home contents insurance, under which the insured is entitled to the full replacement value of the property without any deduction for depreciation or wear and tear.
86
Index-linked gilt
A bond issued by the British government for which the interest payments and the final redemption proceeds are linked to movements in the RPI.
87
Index-linked security
A security whose redemption value and / or coupon payments are adjusted to reflect inflation.
88
Index tracking
An index tracking fund (or an index fund) is an investment fund with the specific objective of tracking a particular index. The fund manager can either hold all the stocks in the index in the appropriate proportions (known as full replication) or use some mathematical model to choose a smaller sample or stocks which will perform as closely as possible to the index.
89
Insured scheme
A benefit scheme where the sole long-term investment medium is an insurance policy (other than a managed fund policy)
90
Internal rate of return
The discount rate at which the Net Present Value of a series of cashflows is zero.
91
Lapse
A life insurance contract lapses if the policyholder ceases to pay premiums. In some cases a more specific definition is used: the policyholder withdraws, without the company making a payment - surrender value - to him or her.
92
Leasehold
A lease is an agreement which allows one of the parties (the leaseholder) the use of a specified portion of a building owned (or sometimes itself leased) by the other party for a specified period in return for some payment (the rent)
93
Lloyd's (of London)
Lloyd's is an insurance market that transacts mainly general insurance and reinsurance. Rather than being a company, it is a collection of underwriting pools ('syndicates') that comprise corporations and private individuals.
94
Long position
A long position in an asset means having an economic exposure to the asset. In futures and forward dealing the long party is the one which has contracted to take delivery of the asset in the future (compare short position)
95
Long-tailed business
Types of insurance in which a substantial proportion (by number or amount) of claims take several years to be notified and / or settled from the date of exposure and / or occurrence.
96
Managed fund
1. An investment contract by means of which an insurance company offers participation in one or more pooled funds.
2. An arrangement where the assets are invested on similar lines to unit trusts by an external investment manager.
97
Market capitalisation
The total value of market prices of the securities at issue for a company, or a stock market, or a sector of a stock market.
98
Market risk
Market risk is the risk relating to changes in the value of a portfolio due to movements in the market value of the assets held.
99
Market value of assets
The market value of assets represents what they are worth in the open market, given a willing buyer and a willing seller.
100
Matching
Arranging assets and liabilities so that the cashflow generated by the assets can be expected to meet the liability payouts, either because the assets generate income of the right amount at the right time or because the market values of the assets are linked to the market values of the liabilities appropriately.
101
Member
1. A person who has been admitted to membership of a pension scheme and is entitled to benefit under the scheme.
2. A person who is entitled to participate in the management (usually by having a vote at General meetings) of a mutual insurance company or society.
102
Mismatching reserve
If the assets of an insurance company are not matched to its liabilities, it may be unable to meet claims as they fall due in the event of adverse future investment conditions. It may be required to set up a mismatching reserve that it can call upon if experience so requires.
103
Money purchase
The determination of an individual member's benefits by reference to contributions paid into a benefit scheme in respect of that member, usually increased by an amount based on the investment return on those contributions.
104
Moral hazard
The action of a party who behaves differently from the way they would behave if they were fully exposed to the consequences of that action. The party behaves inappropriately or less carefully than they would otherwise, leaving the organisation to bear some of the consequences of the action. Moral hazard is related to information asymmetry, with the party causing the action generally having more information than the organisation that bears the consequences.
This is not the same as anti-selection which is also taking advantage of particular aspects of an insurance contract, but within the terms offered by the insurer.
105
Mutual insurer
A mutual insurer is owned by policyholders to whom all profits (ultimately) belong.
106
Net asset value per share
The book value of the shareholders' interests in a company, usually excluding intangibles such as goodwill, divided by the number of shares in issue.
107
New business strain
New business strain arises when the premium(s) paid at the start of the contract, less the initial expenses including commission payments, is not sufficient to cover the reserve that the company needs to set up at that point.
108
Nil claim
A claim results in no payment by the insurer, because, for example:
- the claim is found not to be valid
- the amount of the loss turns out to be no greater than the excess
- the policyholder has reported a claim in order to comply with the conditions of the policy but has elected to meet the costs in order to preserve any entitlement to no-claims discount
109
No-claim discount (NCD)
A form of experience rating in which policyholders are allowed a discount from the basic premium according to a scale that depends upon the number of years since the most recent claims.
110
Nominal value
This term refers to an amount of stock. It is the amount specified on the stock certificate. Dealings in debt of securities are carried out in amounts of nominal.
111
Occupational scheme
A benefits scheme organised by an employer or on behalf of a group of employers to provide benefits for or in respect of one or more employees.
112
Offer (also buying) price
The price at which a market maker offers to sell a security. The price at which the manager of a unitised financial product is prepared to sell units to an investor.
113
Open-ended investment company (OEIC)
An investment vehicle similar in corporate governance features to an investment trust but with the open-ended characteristics of a unit trust.
114
Operational risk
Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
115
Option
The right to buy or sell an asset.
116
Option (health)
A health option is where the life insurance company gives a policyholder the right to increase or extend the death - or sickness - cover under a life insurance contract at some future time or times without further evidence of health.
117
Option premium
The price paid for an option. Received by the writer.
118
Option writer
The seller of an option.
119
Pay-as-you-go
An arrangement under which benefits are paid out of revenue and no funding is made for future liabilities.
120
Preference share
A class of share which generally ranks ahead of ordinary shares. Preference shareholders are normally entitled to a specified rate of dividend (provided this is declared by the company for each dividend payment) and, unlike ordinary shareholders, are not entitled to residual profits. Although part of a company's share capital, from an investment perspective preference shares are much more like fixed-interest bonds, but with no guarantee that each future dividend payment will be declared.
121
Prime
Property that is most attractive to investors is called prime. Prime property would score highly on all of the following factors:
- location
- age and condition
- quality of tenant
- the number of comparable properties available to determine the rent at rent review and for valuation purposes
- lease structure
- size
122
Profit commission
Commission paid by a reinsurer to a cedant under a proportional reinsurance treaty that is dependent upon the profitability of the total business ceded during each accounting period. Also used in other arrangements, such as commission contingent on claims experience.
123
Profit test
A profit test is a technique involving consideration of the cashflows arising under a contract to assess the expected profitability of that contract. It can be used to determine the premium or the level of changes under a contract.
124
Proprietary insurer
An insurance company owned by shareholders.
125
Privatisation
The sale of State assets or businesses, often to reduce government debt.
126
Rating basis
The collection of assumptions used to associate the risk premium with the characteristics of the risk being insured.
127
Rating factor
A factor used to determine the premium rate for a policy, which is measurable in an objective way and relates to the likelihood and / or severity of the risk. It must, therefore, be a risk factor or a proxy for a risk factor or risk factors.
128
Real yield
The yield on an investment after inflation has been allowed for. Often approximated as the difference between the nominal yield and the rate of inflation over the corresponding period.
129
Redemption
The return to an investor of the capital value of a debenture or other debt security. Redemption may take place on a fixed date or on one of a series of specified dates. The bond may include an option for the borrower to choose the date or for the lender to choose. The capital amount repaid may be fixed or linked to an index.
130
Redemption yield
The gross redemption yield (the word gross is often omitted), or yield to maturity, is the rate of return at which the discounted value of all future payments of interest and capital is equal to the dirty price of a debt security. The net redemption yield allows for taxation of the amounts received by the investor.
131
Reinsurance
An arrangement whereby one party (the reinsurer), in consideration for a premium, agrees to indemnify another party (the cedant) against part or all of the liability assumed by the cedant under one or more insurance policies, or under one or more reinsurance contracts.
132
Reinsurer
An insurer providing reinsurnace cover. Some reinsurers do not write any direct or primary insurance business.
133
Requirement for capital
On a per contract basis, the requirement for capital is the amount of finance a company needs in order to be able to write that contract, i.e. the new business strain. This can be extended to the whole company where its requirement for capital is the finance it needs in order to be able to carry out its new business plans.
134
Retention
In the context of reinsurance, a company's retention is the amount of any particular risk that it wishes to retain for itself. It will then reinsure the excess over that retention.
135
Retail price inflation
The measurement of price changes at the retail (consumer) level.
136
Return on capital employed (ROCE)
Profit before interest and tax divided by capital employed, expressed as a percentage. An indicator of a company's efficiency in generating profit from its asset base.
137
Risk-based capital (RBC)
The assessment of the capital requirement for a provider by considering the risk profile of the business written and of any other operations.
138
Risk discount rate
A risk discount rate is a rate at which future uncertain cashflows might be discounted. It typically arises when carrying out a discounted cashflow assessment of value of a project. It represents the risk-free rate of return that the providers of capital demand plus an amount to allow for the risk that the profits may not emerge as expected from the project.
139
Risk factor
A factor that is expected, possibly with the support of statistical evidence, to have an influence on the intensity of risk in an insurance contract.
140
Risk premium
The amount of premium required to cover claims expected for a risk, i.e average claim amount x average claim frequency. It may alternatively be expressed as a rate per unit of exposure.
The additional return required over the risk-free return to reflect the riskiness of future cashflows.
141
Running yield
The annual income on an investment divided by its current market value. Important examples are the flat yield on gilts, the gross dividend yield on equities and the rental yield on property.
142
Run-off basis
A valuation basis that assumes an insurer will cease to write new business, and continue in operation purely to pay claims for previously written policies. Typically expenses and reinsurance arrangements change after an insurer ceases to write new business.
143
Self-administered scheme
An occupational benefits scheme where the assets are invested, other than wholly in payment of insurance premiums, with an in-house investment manager or an external investment manager.
144
Self-insurance
The retention of risk by an individual or organisation, as distinct from obtaining insurance cover.
145
Self-investment
The investment of the assets of an occupational benefits scheme in employer-related investments.
146
Short position
A short position in an asset means having a negative economic exposure to the asset. In futures and forwards dealing the short party is the one who has contracted to deliver the asset in the future. (compare long position)
147
Short-tailed business
Types of insurance in which most claims are usually notified and / or settled in a short period from the date of exposure and / or occurrence.
148
Solvency
A provider is solvent if its assets are adequate to enable it to meet its liabilities. Supervisory authorities will usually have requirements, in terms of the values a provider can place on its assets and liabilities, for the purpose of showing statutory solvency.
149
Solvency margin
The solvency margin of a provider is the excess of the value of its assets over the value of its liabilities.
150
Specific risk
The risk of holding a share in which is unique to the industry or company and can be eliminated by having a suitably diversified portfolio of shares of different types of companies. This is sometimes also referred to as alpha, unsystematic, diversifiable or residual risk.
151
Spot interest rate
The n-year spot interest rate is the geometrical average of the interest rates that are expected to apply over the next n years. It is the redemption yield on an n-year zero-coupon bond (see zero-coupon bond)
152
Strips
Debt securities comprise a series of coupons and (possibly) a final redemption amount. For certain such securities, each individual cashflow may be traded as an isolated zero-coupon bond, called a 'strip'. Sometimes the original security is issued in a stripped form; sometimes strips are created via brokerage firms in the market.
153
Surplus
1. Surplus is the excess of the value placed on a life insurance company's assets over the value placed on its liabilities. A negative surplus is usually called a strain.
2. A type of proportional reinsurance where the cedant retains the risk up to its retention level and reinsures the excess.
154
Surrender value
The amount paid out to a policyholder who terminates their contract before the contractual termination date.
155
Swap
A contract between two parties under which they agree to exchange a series of payments according to a pre-arranged formula.
The most common kind of swap is an interest rate swap, where one party with fixed interest cashflows enters a swap with another party based on a variable interest rate.
A credit default swap is an agreement where one party will compensate the other party in the event of a loan default or other credit event.
Non-investment swaps also exist, an important example being longevity swaps on annuity portfolios. Here, an insurer swaps its liability to make annuity payments in line with actual mortality experience with another party who will make payments based on a defined mortality index.
156
Systematic risk
The risk of the individual share relative to the overall market which cannot be eliminated by diversification.
157
Treasury bill
A short-term government debt security. Usually issued with a term of 91 or 182 days. No interest is paid, but the bill is issued at a discount to its redemption value.
158
Trust
A legal concept whereby property is held by one or more persons (the trustees) for the benefit of others (the beneficiaries) for the purposes specified by the trust instrument. The trustees may also be beneficiaries.
159
Trust deed
A legal document, executed in the form of a deed, which establishes, regulates or amends a trust.
160
Trustee
An individual or company appointed to carry out the purposes of a trust in accordance with the provisions of the trust instrument and general principles of trust law.
161
Underwriting
1. The process of consideration of an insurance risk. This includes assessing whether the risk is acceptable and, if so, the appropriate premium, together with terms and conditions of the cover. It may also include assessing the risk in the context of the other risks in the portfolio.
2. The provision of some form of guarantee. In investment, underwriting is where an institution gives a guarantee to a company issuing new shares or bonds that it will buy any remaining shares or bonds that are not bought by other investors.
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Underwriting cycle
The process whereby relatively high and thus profitable premium rates that often result in an increase in the supply of insurance are followed by lower and less profitable premium rates usually associated with increased competition. These in turn may be followed by a decrease in supply as companies leave the less profitable market, reduced competition and a return to higher premium rates. This process is complex but appears to occur in all types of insurance and reinsurance, though at different speeds and to different degrees.
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Underwriting factor
Any factor that is used to determine the premium, terms and conditions for a policy. It may be a rating factor or some other risk factor that is accounted for in subjective manner by the underwriter.
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Unit rate
See bulk rate
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Unitised contracts
After deducting an amount to cover part of its costs, each premium under a unitised contract is used to buy units at their offer price. These units are added to the contract's unit account. When the insured event happens, the amount if the benefit is then based on the bid price value of all the units in the contract's unit account.
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Unsecured loan stock
A form of long-term corporate debt which is not secured on any specific assets of the borrower.
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Valuation rate of interest
The rate at which future liabilities and assets are discounted to the valuation date.
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Vested rights
Benefits to which a member of a scheme is entitled, regardless of whether they remain an active member of the scheme.
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Volatility
The sensitivity of the market price on an investment. A highly volatile investment is one which has a very unstable price. For fixed-interest bonds, volatility is specifically defined as the rate of change in the dirty price (P) of the bond for a change in the gross redemption yield (y).
V = - (1/P) * (dP/dy)
Volatility is also known as modified duration.
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Waiting period
1. In the case of occupational pension provision, the period during which an employee does not yet meet the eligibility conditions for membership of the occupational benefits scheme.
2. In the case of sickness benefits, the period beginning at the policy inception during which the policyholder is not allowed to make a claim.
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Waiver of premium
This is a benefit attached to a contract under which regular premiums are payable. In the event of sickness or disability or, sometimes, unemployment, the premium payable under the contract, including the premium for the waiver of premium benefit, is waived.
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Weighted average cost of capital
The aggregate return required by the providers of debt and equity capital, allowing for the effects of tax and the risks borne by the capital providers.
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Winding-up
The process of terminating a benefits scheme, usually applying the assets to the purchase of individual insurance contracts for the beneficiaries, or by transferring the assets and liabilities to another scheme.
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Withdrawal benefit
A benefit payable when an employee leaves a benefits scheme.
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With-profit (participating)
A life insurance contract is with-profit if the policyholder is entitled to receive part of the surplus of the company. The extent of the entitlement is usually at the discretion of the company.
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Without-profit (non-participating)
A life insurance contract is without-profit if the life insurance company has no discretion over the amount of benefit payable, i.e the policy document will specify at outset either the amount of the benefits under the contract or how they will be calculated.
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Yield curve
A plot of yield against term to redemption. Usually the yield plotted is the gross redemption yield on coupon paying bonds but other yields can be used.
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Zero-coupon bond
A bond where the sole return is the payment of the nominal value at maturity.
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Zero-coupon yield curve
A plot of redemption yields against term to redemption for (usually hypothetical) zero-coupon bonds.
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Provisions and reserves
A potential source of confusion is the term used to denote the value assigned to the liabilities. It has been the practice of accountants to:
1. use the word provision to denote the value of a liability that is known or assumed to exist at the accounting date
2. confine the term reserve to any amount, over and above the provisions, that is available to meet additional liabilities, either in respect of future events or in respect of past events for which the provisions may prove to be inadequate.
However, among insurers, and also among actuaries, there has been a long established practice of applying the term reserve to both categories.
