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.
Define
Free assets
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.
Define
Freehold
The freeholder of land is the absolute owner of it in perpetuity.
Define
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.
Define
Futures contract.
Like a forward contract, this is a contract to buy (or sell) an asset on an agreed basis in the future.
However, futures contracts are STANDARDISED contracts that can be TRADED on a recognised exchange.
Define
Gearing
The ratio of debt to equity. (financial gearing)
Define
Gilt
A bond issued by the British Government that pays regular coupons.
Define
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.
Define
Group contract
That is a contract that covers a group of lives, where the group is specified but not necessarily the individuals within it.
Define
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.
Define
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.
Define
Hurdle rate
A target or minimum rate of return used in capital project assessment
Define
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.
Define
Principle of Indemnity
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 contracts 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.
Define
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.
Define
Index-linked security
A security whose redemption value and/or coupon payments are adjusted to reflect inflation.
Define
Index tracking
An index tracking fund (index fund) is an investment fund with the objective of tracking a particular index.
The fund manager can either hold all the stocks in the index in the appropriate proportions or use some mathematical model to choose a smaller sample of stocks which will perform as closely as possible to the index.
Define
Inflation risk premium
The difference between the yield on a fixed income bond and the sum of the guaranteed real yield and the expected inflation rate on a similar index-linked bond.
It is required as compensation for the uncertainty in the real return on the bond by investors with index-linked liabilities.
Under the inflation risk premium theory the yield curve will tend to slope upwards because investors need a higher yield to compensate them for holding longer-dated stocks which are more vulnerable to inflation risk than shorter dated stocks.
Define
Insured scheme
A benefit scheme where the sole long-term investment medium is an insurance policy (other than a managed fund policy)
Define
Internal rate of return
The discount rate at which the Net Present Value of a series of cashflows is zero.
Define
Investment trust
Investment trusts are public companies whose function is to manage shares and investments.
They have a capital structure in the same way as other public companies and can raise both loan and equity capital.
Most have quoted shares allowing small investors to gain exposure to the portfolio held by the investment trust.
Define
Lapse
A life insurance contract lapses if the policyholder ceases to pay premiums (ie withdraws), without the company making a payment - surrender value - to him or her.
Define
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)
Define
Liquidity preference.
The liquidity preference theory is based on the generally accepted belief that investors prefer liquid assets to illiquid ones.
Investors require a greater return to encourage them to commit funds for a longer period.
Long-dated stocks are less liquid than short-dated stocks, so yields should be higher for long-dated stocks.
Define
Long
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 who has contracted to take delivery of the asset in the future.
Define
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.
Define
Loss
- The financial loss suffered by a policyholder, as distinct from the amount of any insurance claim that may be payable in respect of that financial loss.
- The amount of the insurance claim, as in the expression “loss reserve” which means the same as the reserve (or provision) for outstanding claims.
- In relation to accounts, the opposite of profit. In this case, the word needs to be appropriately qualified, eg underwriting loss or operating loss.
Define
Managed fund
- An investment contract by means of which an insurance company offers participation in one or more pooled funds.
- An arrangement where the assets are invested on similar lines to unit trusts by an external investment manager.
Define
Market capitalisation
The total value at market prices of the securities at issue for a company, or a stock market, or a sector of a stock market.
Define
Market risk
the risk relating to changes in the value of a portfolio due to movements in the market value of the assets held.
Define
Market value of assets
Represents what they are worth in the open market, given a willing buyer and a willing seller.
Define
Matching
Arranging assets and liabilities so that the cashflows 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.
Define
Member.
- A person who has been admitted to membership of a pension scheme and is entitle to benefit under the scheme.
- 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.
Define
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.
Define
Money purchase
The determination of an individual member’s benefits by reference to the contributions paid into a benefit scheme in respect of that member, usually increased by an amount based on the investment return on those contributions.
Define
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.
Define
Mutual insurer
A mutual insurer is owned by policyholders to whom all profits (ultimately) belong.
Define
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.
Define
New business strain
When the premium(s) paid at the start of a contract, less the initial expenses, is not sufficient to cover the reserve that the company needs to set up at that point.
Define
Nil claim
A claim that results in no payment by the insurer:
- 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 cost in order to preserve any entitlement to no-claim discount.
Define
No-claim discount
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 claim.
Define
Nominal value
Refers to an amount of stock. It is the amount specified on the stock certificate.
Dealings in debt securities are carried out in amounts of nominal
Define
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
Define
Offer 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.
Define
Operational risk
The risk of loss due to fraud or mismanagement within an organisation.
Define
Option
the right to buy or sell an asset
Define
Option (life insurance)
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.
Define
Option premium
The price paid for an option. received by the writer
Define
Option writer
The seller of an option
Define
Pay-as-you-go
An arrangement under which benefits are paid out of revenue and no funding is made for future liabilities.
Define
Payback period
The time period it takes for an investment to generate sufficient incremental cash to recover its initial incremental capital outlay in full.
Define
Preference share
A particular class of share which generally ranks ahead of ordinary shares.
Preference shareholders are normally entitled to a
- specified rate of dividend
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.
Define
Prime
Property that is most attractive to investors is called prime.
Prime property would score highly on 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
Define
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.
Define
Profit test
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 charges under a contract.
Define
Proprietary insurer
An insurance company owned by shareholders.
Define
Privatisation
The sale of state assets or businesses, often to reduce government debt.
Define
Put option
The right, but not the obligation, to sell a specified asset at a specified price at specified times.
Define
Rating basis
The collection of assumptions used to associate the risk premium with the characteristics of the risk being insured.
Define
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.
Define
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.
Define
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.
Define
Redemption yield
The gross redemption yield, or yield to maturity, is the RATE OF RETURN
at which the discounted value of all 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 investors.
Define
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.
Define
Reinsurer
An insurer providing reinsurance cover.
Some reinsurers do no write any direct or primary insurance business.
Define
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, ie 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.
Define
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.
Define
Retail price inflation
The measurement of price changes at the retail (consumer) level.
Define
Return on capital employed
Profit before interest and tax divided by capital employed, expressed as a percentage.
An indicator of a company’s efficiency in generating profits from its asset base.
Define
Risk-based capital
The assessment of the CAPITAL REQUIREMENT for a provider
by considering the risk profile of the business written and of any other operations.
Define
Risk discount rate
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.
Define
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.
Define
Risk premium
The amount of premium required to cover claims expected for a risk. 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.
Define
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.
Define
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.
Define
Self-administered scheme
an occupational benefits scheme where the assets are invested, other than wholly by payment of insurance premiums, with an in-house investment manager or an external investment manager.
Define
Self investment
The investment of the assets of an occupation benefits scheme in employer related investments.
Define
Short
A short position in an asset means having negative economic exposure to the asset.
In futures and forward dealing, the short party is the one who has contracted to deliver the asset in the future.
Define
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.
Define
Solvency
A provider is solvent if its assets are adequate to enable 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.
Define
Solvency margin
The solvency margin of a provider is the excess of the value of its assets over the value of its liabilities.
Define
Specific risk
The risk of holding a share which is unique to the industry or company and can be eliminated by having a suitably diversified portfolio of shares of differing types of companies.
This is sometimes also referred to as alpha, unsystematic, diversifiable or residual risk.
Define
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.
Define
Surplus
- 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.
- A type of proportional reinsurance where the cedant retains the risk up to its retention level and reinsures the excess.
Define
Surrender value
This is the amount paid out to a policyholder who terminates his or her contract before the contractual termination date.
Define
Swap
A contract between two parties under which they agree to exchange a series of payments according to a pre-arranged formula.
Define
Systematic risk
the risk of the individual share relative to the overall market which cannot be eliminated by diversification.
Define
Terminal funding
An arrangement whereby a payment to meet the value of a benefit is made only at or about the time when the benefit is due to commence.
Define
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.
Define
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.
Define
Trust deed
A legal document, executed in the form of a deed, which establishes, regulates or amends a trust.
Define
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.
Define
Underwriting
- 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.
- 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.
Define
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.
The process is complex but appears to occur in all types of insurance and reinsurance, though at different speeds and to different degrees.
Define
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 a subjective manner by the underwriter.
Define
Unitised contracts
After deducting an amount to cover part of the 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 of the benefit is then based on the bid price value of all the units in the contract’s unit account.
Define
Unit trust
An open-ended investment vehicle whereby investors can buy units in an underlying pool of assets from the trust manager.
If there is demand for units, the managers can create more units for sale to investors. If there are redemptions (sales by investors), the managers will buy in units offered to them. Unit trusts are trusts in the legal sense.
Define
Unsecured loan stock
A form of long-term corporate debt which is not secured on any specific assets of the borrower.
Define
Valuation rate of interest
The rate at which future liabilities and assets are discounted to the valuation date.
Define
Vested rights
Benefits to which a member of a scheme is entitled whether or not they remain an active member of the scheme.
Define
Volatility
The sensitivity of the market price of 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
A.k.a. modified duration
Define
Waiting period
- 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.
- In the case of sickness benefits, the period beginning at the policy inception during which the policyholder is not allowed to make a claim.
Define
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 of the waiver of the premium benefit, is waived.
Define
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.
Define
Winding up
The process of terminating a benefits scheme, usually by applying the assets to the purchase of individual insurance contracts for the beneficiaries, or by transferring the assets and liabilities to another scheme.
Define
Withdrawal benefit
A benefit payable when an employee leaves a benefit scheme.
Define
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.
Define
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, ie the policy document will specify at outset either the amount of the benefits under the contract or how they will be calculated.
Define
Yield curve
A plot of yield against term to redemption.
Usually the yield plotted is the gross redemption yield on coupon bonds but other yields can be used.
Define
Zero-coupon bond
A bond where the sole return is the payment of the nominal value on maturity.
Define
Zero-coupon yield curve
A plot of redemption yields against term to redemption for (usually hypothetical) zero-coupon bonds.
