W_Glossary Flashcards
Matching
this refers to the relationship - by size and timing - between the cash flows from the assets and the liabilities. the assets and liabilities of a life insurance company are said to be absolutely / perfectly matched if the 2 cash flows cancel out. otherwise, the company is said to be mismatched. In practice, absolute matching is almost impossible to attain, except in very special circumstances, therefore, some degree of mismatching is inevitable and acceptable. Provided the mismatching does not lead to an unacceptable probability of insolvency for the insurer, then it is acceptable.
Reinsurance
Reinsurance is the process by which a direct writing life insurance company transfers part of its risk under a contract to another life insurance company.
This may be a another direct-writing company or a professional reinsurance company. The reinsuring company may in turn reinsure some of the risk with another direct-writing insurer or reinsurance company. Larger companies may also use reinsurance to transfer liabilities between companies within their own group.
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 business plan, and could include writing new business, acquiring an existing business, or investing in infrastructure such as new computer hardware or software.
Return on Capital
This is broadly defined as profit (before tax) divided by capital employed, expressed as a percentage. It arises in the context of product pricing. A company will usually need to provide capital in order to write new business. The expected return on that capital will influence whether or not the company writes particular types of business and the price at which it will write them.
The expected level of return required will depend on the expected levels from other uses of the company’s capital.
Solvency
A life insurance company is solvent if its assets are adequate to enable it to meet its liabilities and any solvency margin that it is required to hold. Insurance supervisory authorities will usually have requirements, in terms of the values a company can place on its assets and liabilities, for the purpose of demonstrating statutory solvency.
Solvency margin
Teh solvency margin of a life insurance company is the excess of the value of its assets over the value of its liabilities.
Insurance supervisory authorities may have requirements as to the minimum level of solvency margin that a company must have.
Risk discount rate
A risk discount rate is a rate at which future cash flows might be discounted. It typically arises when carrying out a profit test of a life insurance contract. 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 contract.
It also arises in the determination of embedded and appraisal values.
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 contracts unit account.
When the insured event occurs, the amount of the benefit is the bid price value of all the units in the contracts unit account. This may be subject to a minimum amount specified in monetary terms (a guarantee of sorts)
The price of the units may either relate directly to the value of the assets underlying the contract or may be related to an investment or other index, or may be based on smoothed asset values with a guarantee that the price of the units will not fall.
Unitised contracts include unit linked contracts and those accumulating with profits contracts that are written on a unitised basis.
