Glossary Flashcards
Yes, you do need to study the glossary in CA1. I have even come across entire questions in fellowship papers that are built around a single glossary definition (lookup "protected NCD" in ASSA's F103).
Define
Accrual rate
The rate at which rights build up
… for each year of service
… in a defined benefit scheme.
Define
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.
Define
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 or
- occupation.
Define
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.
Define
Active member
A member of a benefit scheme who is
at present ACCRUING BENEFITS under that scheme
in respect of CURRENT SERVICE.
Define
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 specified risks, though not all.
Define
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.
Define
Arbitrage
The simultaneous buying and selling
… of 2 ECONOMICALLY EQUIVALENT
… but DIFFERENTLY PRICED portfolios
so as to make a RISK-FREE PROFIT.
Define
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.
Define
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.
Define
Bear market
A period of time during which investors are generally unconfident and stock market prices decline.
Define
Benchmark
A standard or model portfolio against which a fund’s structure and performance will be assessed.
Define
Best estimate
An actuarial assumption which the actuary believes has
an equal probability
of under- or overstating future experience.
Define
bid 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.
Define
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.
Define
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 repayments (or redemption) of the lump sum.
Define
Book reserve
A provision in a company’s accounts for a future benefit liabilities for which NO FUNDS have been SET ASIDE.
Define
Bulk transfer
The transfer of liabilities (and usually assets) relating to a group of members, from one benefit scheme to another.
Define
Bull market
A period of time during which investors are generally confident and stock market prices increase.
Define
Call option
the right, but not the obligation, to buy a specified asset on a set date in the future for a specified price.
Define
Cancellation
A mid-term cessation of a general insurance policy that may involve a partial return of premium
Define
Catastrophe
A SINGLE EVENT that gives rise to exceptionally large losses.
The exact definition often varies and is often dependent on excess of loss wordings.
Define
Catastrophe reserve
A reserve built up over periods between catastrophes to provide some contingency against the risk of catastrophe.
Define
Ceding company (cedant)
An insurance or reinsurance company that passes (or cedes) a risk to the reinsurer.
The term “cedent” may also be applied to a Lloyd’s syndicate.
Define
Chinese walls
Regulations or practices intended to PREVENT CONFLICTS OF INTEREST in integrated security or consultancy firms.
Define
Claim (noun)
an assertion by a policyholder that an insurer is liable to make a payment in accordance with the terms of a policy.
Define
Claim (verb)
To make a request for payment from an insurer.
Define
Claim frequency
The NUMBER of claims in a period per unit of exposure,
such as the number of claims per vehicle year or for a calendar year or per policy over a period.
Define
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
Define
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.
Define
Commission
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.
Define
Composite insurer
An insurance company writing both life and non-life business.
Define
Continuing Care
Nursing or medical care provided after retirement.
Define
Continuing Care Retirement Community
A development in which retired persons can live as a community and receive chosen levels of nursing or medical care.
Define
Corporate governance
The system whereby boards of directors are responsible for the governance of their companies upon appointment by shareholders, who ensure that an appropriate governance structure is in place.
Define
Corporation tax
Tax on company profits.
Define
Counterparty
The opposite side in a financial transaction.
Define
Coupon
The interest payments on a bond.
Define
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.
Define
Credibility
A measure of the weight to be given to a statistic.
Often refers to the experience for a particular risk compared to that derived from the overall experience of a corresponding parent or larger population.
The measure is used to determine a premium when using experience rating.
Define
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.
Define
Credit risk
The risk that the counterparty to an agreement will be UNABLE OR UNWILLING TO MAKE PAYMENTS required under the agreement.
Define
Custodian
The keeper of security certificates and other assets on behalf of investors.
Define
Debenture
A loan made to a company which is SECURED AGAINST THE ASSETS of the company so that the debenture holders rank above other creditors should the company be wound up.
Debentures with fixed charges are called mortgage debentures.
Define
Deferred member
A member of a benefits scheme who is no longer accruing benefits
but
who has accrued benefits that will be payable at a future date.
Define
Deficit
Where a benefits scheme or financial product provider has LESS ASSETS THAN REQUIRED by the funding plan to meet the liabilities.
Define
Defined ambition scheme
A scheme where RISKS ARE SHARED between the different parties involved, for example - scheme members, - employers, - insurers and - investment businesses.
Define
Defined benefit scheme
The 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.
Define
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.
Define
Depreciation
An accounting convention whereby firms write down the value of their assets over time.
Define
Derivative instrument
A financial instrument with a value dependent on the value of some other, underlying asset.
Define
Discontinuance valuation
An actuarial valuation carried out to assess the position if a benefits scheme were discontinued.
The valuation may take into account the possible exercise of any discretion to augment benefits.
Define
Discounted income model
A model for valuing investment which determines a present value for the investments by discounting the expected future income from the assets.
Define
Dividend yield
The running yield on an equity.
dividends divided by share price
Define
Duration
The duration of a conventional bond is the
MEAN TERM OF THE PAYMENTS from the stock,
where each term is weighted by the present value of that payment.
Define
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.
Define
Economic value added
The percentage difference between
- the annual return on capital and
- the weighted average cost of capital.
Define
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 of return.
Define
Efficient market hypothesis
A hypothesis that asset prices reflect all relevant information.
Define
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
Define
Emerging Market
Stock markets in developing countries such as China, Mexico, Singapore etc.
They offer high expected returns due to rapid industrialisation.
They are also very risky markets.
Define
Equity in investment
Ordinary shares issued 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 debtholders and preference shareholders have been paid.
They also have the right to attend and vote at general meetings of the company.
Define
Equity in life insurance
It means all the 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.
Define
Exclusion
An event, peril or cause defined within the policy document as being BEYOND THE SCOPE of the insurance cover.
Define
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).
Define
Exposure
- The state of being subject to the possibility of loss
- A measure of extent of risk.
- The possibility of loss to insured property caused by its surroundings.
Define
Extra permium
An addition to the standard premium payable under a contract in order to cover an extra risk.
Define
Extra risk
An extra risk arises where a proposal for life insurance is not acceptable at standard rates.
Define
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.
Define
Financial gearing
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.
Define
financial strength of a life insurance company
The ability
- to withstand adverse changes in experience, including those arising from investment in higher yielding but more volatile assets
- to fulfill its new business plans
- to meet the reasonable expectations of its policyholders.
and is often measured by the level of its free assets.
Define
Flexible benefits
benefit provision under which the beneficiary has choice about the types of levels of benefits to be received.
Will usually involve an option to receive salary instead of other forms of benefits.
Define
Floor
A lower limit.
for example on a benefit, a contribution, benefit growth or a funding level.
