Actuarial Glossary :: "The Mother of All Actuarial Glossaries"

P

PA(90) Tables (A/D)

A set of mortality tables based on life office pensioners during the period 1967-70. The rates were projected to estimate mortality rates applicable in 1990.

 

Pace of Funding (H)

The rate of progress towards the objective of the funding plan.

 

Paid Up Policy (A)

A regular premium policy (eg an assurance or endowment policy) where the policyholder has elected not to pay any further premiums, but wishes the cover to continue. The benefit amount, called the paid up Sum Assured is reduced accordingly.

 

Paid-Up Policy (F)

This is a policy under which no further premiums are payable. It can arise either where the premiums are contractually payable for a shorter term than the term of the contract and the premium paying term has expired or because the policyholder decides not to pay any further premiums. In the latter case, the company would reduce the benefits under the contract to correspond with the actual premiums paid. The benefit granted is normally in the same form as the original policy.

For example, if a non-profit 20 year endowment assurance is made paid-up after IS years, the paid-up policy will normally be a non-profit endowment assurance with 5 years to run. Sometimes, if a with-profit policy is made paid-up, the new policy will be in the form of a non- profit policy, since it may be difficult to assess a fair with-profit paid-up sum assured.

 

Paid-Up Policy (N)

A policy under which no more premiums are payable. By arrangement a policy can often be kept in force for a reduced sum assured without payment of further premiums.

 

Paid-Up Value (F)

The reduced benefit attaching to a policy which has been made paid-up.

 

Par Value (E)

The (arbitrary) notional value of a security. It is of no significance itself, although coupon and redemption payments on fixed interest securities are usually expressed as a percentage of par value.

 

Par Yield Curve (E)

A plot of coupon value on the y-axis against term to redemption on the x-axis. For each term, plot the coupon that would be required for a fixed interest bond of that term to be issued at par.

 

Partial Payment (G)

Where an insurer pays part of the claim settlement on account. The claim will remain open until the final settlement is paid and the claim is closed.

 

Participating Preference Shares (E)

A very uncommon class of share capital (particularly uncommon in Subject E exams). Similar to 'preference shares' in that they:are entitled to a fixed dividend don't have voting rights in normal circumstances. However, unlike preference shares, they also share in any residual profits like ordinary shares).

 

Participating (F)

A participating policy is one which is entitled to bonuses, although the amounts of bonuses are not guaranteed (and there may in fact be none!). The phrase includes with-profit and unitised with-profit policies.

 

Partly Projected Unit Funding Method (H)

see GN26

The text of GN26 is copied below for ease of reference.

The Actuarial Liability for active members is calculated as for the Current Unit Method except that, where pensionable pay is not projected in that method, some but not full allowance is made in the Partly Projected Unit Method.

 

Passive Management Strategy (E)

An investment strategy based on carrying out detailed fundamental research, and buying shares with a view to holding the shares for a long time. Passive management results in much less trading than active management.

 

Past Service Reserve (H)

A term commonly used to refer to the Actuarial Liability as calculated using either the Projected Unit or Attained Age method.

 

Pay-As-You-Go (H)

An arrangement under which benefits are paid out of revenue and no funding is made for future liabilities.

 

Pension Costs (H)

Under SSAP 24 the cost of providing pensions, which is charged to the profit and loss account of the employer over the expected service lives or average remaining service life of employees in the scheme. The amount may be more or less than the actual payments made to the pension scheme.

 

Pension in Payment (A)

A pension under which the payments have already commenced, as opposed to a Deferred Pension.

 

Pension (A/D)

An Annuity payable under a life office annuity or from a pension scheme.

 

Per Mil(le) (A/D)

A rate per thousand or per 1,000, abbreviated by the symbol %o. It is convenient for expressing insurance premiums where these are small in relation to the sum Insured eg an insurance premium for a building might he 3%o of the rebuilding cost. See also Percent.

 

Percent (A/D)

A rate per hundred or per 100, abbreviated by the symbol %. A fixed interest stock with a coupon of 6% pays 6 per annum interest in respect of 100 of nominal stock. See also Per Mil(le).

 

Peril (A/D)

The type of event causing an insurance claim eg an accident, a storm, a burglary.

 

Peril (G)

The cause of loss.

 

Period of Grace (N)

A period following the premium due date, during which an overdue premium may be paid without penalty, e.g. 15 days for monthly premiums and one month for premiums payable quarterly, half-yearly or annually.. The policy remains in force throughout this period.

 

Permanent Assurance (F)

An assurance contract which doesn't have a defined maximum term eg a whole life assurance contract.

 

Permanent Health Insurance (PHI) (A/D)

Insurance to protect against long term sickness or invalidity. The definition of sickness usually relates to the policyholder's ability to carry out their usual job or a similar type of work. It is "permanent" in the sense that the policy conditions are fixed from the outset.

 

Permanent Health Insurance (PHI) (F)

These are contracts that provide a benefit to the life insured whilst he or she is incapable - through disability - from earning a living. They are long-term non- cancellable (not at the discretion of the life office anyway) insurance policies. The insurance ceases at a pre-specified retirement date, often the same as state pension age for individual contracts, or company pension age for group schemes.

Note that the policy is not permanent (although it is non-cancellable). Also, it is not really health insurance, but an income replacement policy.

Permanent health insurance used to be wholly non-profit. Most contracts are now unit-linked or UWP. With-profit PHI never took off.

Other names are used for marketing purposes, eg long-term disability income benefit.

 

Permanent Health Insurance (PHI) (H)

Also known as long-term disability insurance or an income continuation scheme.

Insurance outside a pension scheme against long-term sickness/disability providing a regular income during periods of sickness/disability before retirement. PHI ceases at retirement.

PHI benefits are normally only payable after a deferred period: for example, a benefit may be payable only after someone has been off work for 1, 3, 6 or 12 months.

PHI (which is an income continuation scheme) should not be confused with the provision of an ill health pension. PHI is therefore not a pension benefit and employees will usually continue to be active members of the scheme (and hence continue to accrue pension benefits) whilst receiving the payments. It will, therefore, affect the cost of pension benefits (eg because more people reach NRA), and will affect pension scheme design (eg there is less need for generous early retirement provision).

 

Permitted Assets/Links (F)

In the UK, there are Regulations that specify the assets to which a company can link its unit-linked business. These are known as the permitted assets/links.

The main assets covered are:

 

• securities (excluding traded options) listed on certain specified Stock Exchanges
• property in certain specified countries
• certain specified types of loan
• units in an Authorised Unit Trust
• building society shares or deposits
• UK government, local authority or nationalised industries loans or deposits (eg conventional gilts)
• loans to or deposits with banks
• sterling cash
• amounts held on short term deposit in other currencies to buy any of the above assets
• certain specified UK indices (eg FTSE 100 Share Index, but note: This is not really an "asset", but it is permissible to link a unit-linked fund to changes in it. The unit liability can be matched by a portfolio of the shares which comprise the index.)

 

Permitted Maximum (H)

The legal name for the Earnings Cap.

 

Perpetuity (A)

An annuity payable for ever.

 

Persistency (G)

The extent to which policies renew rather than lapsing.

 

Personal Lines (A/D)

An expression for the classes of general insurance sold to individuals (eg private motor insurance, household insurance).

 

Personal Lines (G)

Classes of insurance business offered to individuals, as opposed to commercial lines business, includes private motor, domestic household, private medical, personal accident, travel insurance and so on.

 

Personal Pension Scheme (A/D)

A pension arrangement for an individual paid for by premiums paid to an insurance company or other financial institution.

 

Personal Pension Scheme (and Appropriate personal pension scheme) (H)

Usually used to mean a scheme approved under Chapter IV of Part XIV of ICTA 88, under which individuals who are self employed or in non pensionable employment, not in an occupational pension scheme, make pension provision usually by means of unit trust or deposit account contracts.

An appropriate personal pension scheme is a personal pension scheme or free standing AVC scheme granted an appropriate scheme certificate by the Occupational Pensions Board, enabling its members to use it for the purposes of contracting out.

 

Personal Pensions (F)

These contracts are specific to the UK and Ireland.

They were introduced - in the UK - so that people who did not belong to a company run pension scheme because they were:

 

• self-employed, or
• their employer did not have a scheme, or
• their employer did have a scheme but they did not want to belong to it,

could make provision for their retirement.

The contracts are typically endowment assurances, non-linked or linked, and are subject to the following constraints:

 

• except in very exceptional circumstances the policyholder cannot surrender a personal pension contract prior to retirement, although it is possible to take a transfer value provided that this is used towards another personal pension contract
• part of the benefit at retirement must be used to purchase an immediate annuity.

 

Pie Ratio (E)

See Price Earnings Ratio.

 

Probable (possible) Maximum Loss (PML) (G)

Another term for estimated maximum loss.

 

Points Rating System (G)

A system for calculating the office premiums by relating it to points associated with each cell within a rating factor. The higher the risk associated with the cell, the higher the points and the higher the premium. For example, a driver aged 20 would be associated with far more points, and all other things being equal a higher premium, than a driver aged 40.

The extended application has now largely removed the need for this system.

 

Poisson Distribution (A/D)

A discrete statistical distribution which occurs naturally as the number of occurrences of an event which can occur in a large number of opportunities, but each time with a very low probability.

 

Poisson Model (D)

A mortality model based on the Poisson distribution, which models the number of deaths recorded in a population whose size at any point in time is specified.

 

Policy Alteration (A/D)

A change to the conditions of a policy requested by a policyholder during the term of the policy eg increasing the sum insured when a policyholder with an endowment mortgage moves to a bigger house.

 

Policy Conditions (F)

Policy conditions cover such items as guarantees given, options, definitions, exclusions. They are many and varied.

 

Policy Fee (F)

This is an addition made to the office premium payable under a contract to cover part or all of a life insurance company's expenses in respect of the policy.

Policy fees can also be used in unit-linked business where they may be collected by cancelling units rather than by an addition to the premium payable. When this approach is employed the term "policy charge" or "administration charge" is sometimes used .

 

Policy Loan (F)

A loan from the life office to a policyholder on the security of a life assurance policy. The loan is normally limited to (say) 80% of the current surrender value of the policy. Interest is charged on the loan, sometimes at a rate stated in the original policy.

 

Policy Loans (N)

Life offices will lend money up to a high percentage of the surrender value of a policy; i.e. a policy loan is a loan made by an insurance company to a policyholder on the security of the cash value of his policy.

 

Policy Profile (F)

An output from a cashflow model of a policy. It is often presented visually as shown below:

Accumulated negative cashflow (ANC) from the perspective of the office is calculated using a (mostly) realistic basis in the cashflow and the chosen risk discount rate.

On top of this is the profit criterion (PC) accumulated at the risk discount rate.

When the accumulated positive cashflow > PC, there is no entry on the diagram.

The policy profile is used to set and refine surrender penalties on unitised business.

Since the policy profile is used to set surrender penalties it does not allow for a surrender decrement.

 

Policy Reserves (N)

The amounts that an insurance company allocates specifically for the fulfilment of its policy obligations. Reserves are so calculated that, together with future premiums and interest earnings, they will enable the company to pay all future claims.

 

Policy Value (A/D)

The Reserve under a policy.

 

Policy (A/D)

An insurance agreement or the documents specifying the terms of the agreement.

 

Policy (N)

The printed document stating the terms of the insurance contract that is issued to the policyholder by the company.

 

Policyholder Funds (F)

These are assets that are deemed to be needed for benefits promised to policyholders. The total is made up of the individual reserves for each policy. The total is also known as "reserves".

 

Policyholder (A/D)

See also: Insured.

 

Policyholders' Reasonable Expectations (PRE) (F)

This is a term that appears in UK insurance legislation. It relates to policyholders' expectations with regard to the level of benefits - or charges - under contracts where these are at the discretion of the life insurance company.

There is no generally acceptable definition of what they are.

PRE relate critically to the amount of benefits payable and to variable charges where these are at the discretion of the office. They also cover such items as security of benefits, quality of service and options available.

PRE are very important in that they limit what a life office will find commercially acceptable. They are also critical to the actuarial profession, and to professional guidance. There are various times in professional guidance where PRE must be carefully considered.

 

Pollution Insurance (A)

Pollution insurance provides protection to businesses (eg manufacturers and shipping companies) from claims by third parties who have been harmed by chemical emissions, spillages or radiation.

 

Pooling (G)

Arrangements where parties agree to share premiums and losses for specific types of class or cover in agreed proportions. Pooling is mostly likely to apply where the risks have very large unit size (eg atomic energy risks) or via industry mutual associations such as P&I clubs.

 

Portfolio Claims (G)

The outstanding claims that together with the portfolio premiums make up the reinsurance premium required for portfolio transfer.

 

Portfolio Premiums (G)

The unearned premiums that together with the portfolio claims make up the reinsurance premium required for a portfolio transfer.

 

Portfolio Transfer (G)

The reinsurance of an entire portfolio at a premium relating to the estimated outstanding claims and unearned premiums under that portfolio. Usually used when an insurer has decided to discontinue writing a particular class, or by a reinsurer wanting to close a treaty year and pass the liability to the following year for administrative reasons.

 

Portfolio (A/D)

A block of insurance policies or investment holdings.

 

Preference Shares (E)

A particular class of shares which generally rank 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.

 

Preferred Lives (F)

These are lives who can demonstrate, by fulfilling certain specified criteria, that they are in particularly good health. A company may then offer such lives lower premium rates for life assurance contracts, in particular for term insurances.

 

Preferred Shares (E)

A particular class of share capital that falls between ordinary and preference shares. Like ordinary shares they have voting rights. Like preference shares they have a prior entitlement to dividends. Uncommon partly because the London Stock Exchange discourages unusual types of share.

 

Premium Income Limit (G)

The amount of premium that a Lloyd's Name may write in a given year, determined by the size of the Name's wealth, deposit and whether or not incorporated.

 

Premium Rating Structure (A/D)

The mathematical structure of the formula used for calculating premiums in general insurance. This will include the Rating Factors used in the calculation and any adjustments that are applied to premium rates.

 

Premium Rating (A)

The process of determining a set of premium rates to charge for a particular class of insurance.

 

Premium Trust Fund (G)

A fund into which all premiums for a Lloyd's syndicate in a given underwriting year are paid. No monies may be released from the fund other than any profit on closure and ongoing claims and expenses.

 

Premium (A/D)

A payment made by a policyholder in return for insurance cover. Policies may be paid by a single premium or by regular premiums.

 

Premium (E)

The extent to which a security is priced above its nominal or par value (see also Discount and Par Value).

 

Premiums (F)

What the policyholder pays in return for benefits. The premiums may be single or regular. For individual business, monthly by direct debit is most common in the UK, annual a poor 5 and other frequencies rare.

By itself, the phrase premium will normally be taken to mean office premium not net premium.

 

Premiums (N)

What you pay the assurance company; i.e. a premium is the payment, or one of the periodical payments, a policyholder agrees to make for an insurance policy.

 

Present Value (A/D)

The expected discounted value of a series of future payments, allowing for interest and (if applicable) mortality.

 

Preservation (H)

The granting by a scheme of preserved benefits, in particular in accordance with minimum requirements specified by SSA73.

 

Price Earnings Ratio (E)

The ratio of a share's price to its net earnings.

 

Primary Markets (E)

A market for new securities (as opposed to a secondary market).

 

Priority Liabilities (H)

Benefits and other scheme liabilities that take precedence in the event of a wind up ie the ones at the top of the scheme's priority rule.

 

Private Investor (A)

An individual who has funds to invest, as opposed to an Institutional Investor.

 

Private Motor Insurance (A/D)

Insurance for motor vehicles owned by private individuals.

 

Private Placement (E)

The direct issue of securities to institutional investors.

 

Pro Forma (E)

An example layout. Used by examiners when they want standard accounts prepared of information given (ie usually no projection). Less relevant for Subject E than the old Subject 7.

 

Probability Density Function (PDF) (A/D)

A function used to express the probability that a continuous random variable will take a value in a specified range. The probability is found by integrating the PDF.

 

Probability Function (PF) (A/D)

A function used to express the probability that a discrete random variable will take a specified value.

 

Probability Generating Function (PGF) (A)

The expected value of t X, where t is a dummy variable and X is a discrete random variable. This function encapsulates all the mathematical properties of the random variable in a single function. See also: Moment Generating Function.

 

Product Liability Insurance (A/D)

Product liability insurance provides protection to businesses from claims by customers who have been harmed by their products (eg thalidomide).

 

Professional Indemnity Insurance (A/D)

Professional indemnity insurance provides protection to professional people (eg lawyers, accountants, doctors and actuaries) to protect them against claims for negligent advice given to clients.

 

Profit and Loss Account (G)

The account which comprises the underwriting result, any other investment income, any non general insurance income, tax and dividend payments, to produce the retained earnings for the period.

 

Profit Commission (G)

Commission paid by a reinsurer to a ceding office under a proportional reinsurance treaty that is dependent upon the profitability of the total business ceded during each accounting period.

 

Profit Signature (F)

An output from a cashflow model of a policy. It is normally presented visually as shown below:

The profit signature of a life assurance product is the sequence of profit figures that will arise from it, allowing for survivorship to the beginning of each time period.

The period used might be a month or a year.

The amount shown may be the actual amount of net cashflow expected, or the amount discounted at the risk discount rate.

The profit signature shown above illustrates a common situation: a big negative cashflow followed by subsequent rising positive cashflows.

 

Profit Test (F)

A profit test is a procedure - involving consideration of the cashflows arising under a new contract - for assessing the likely profitability of that contract. A profit test is also often used to set premiums or charges by choosing a desired level of profitability.

Note that although cashflow methods are used to calculate valuation reserves, this process should not be called profit testing.

 

Profit Testing (A/D)

A technique which projects the cash flows from a proposed policy to assess its likely profitability under various assumptions and criteria.

 

Profit-Testing (G)

A process whereby proposed premium rates are tested by projecting possible levels of future sales, claim, expense and investment experience.

 

Projected Accrued Benefit Funding Method (H)

see GN26

The text of GN26 is copied below for ease of reference.

The Projected Accrued Benefit Method is required to be used by the Pension Scheme Surpluses (Valuation) Regulations 1987 and relates only to the calculation of the Actuarial Liability as at the valuation date. The Actuarial Liability for active members is calculated as for the Projected Unit Method. Actuarial assumptions and methodology are prescribed in the regulations. Except in certain prescribed circumstances the longest period for eliminating statutory surplus is five years.

 

Projected Unit Funding Method (H)

see GN26

The text of GN26 is copied below for ease of reference.

The Actuarial Liability for active members either as at the valuation date or as at the end of the Control Period is calculated taking into account all types of decrement. In such calculations pensionable pay is projected from the relevant date up to the assumed date of retirement, date of leaving service or date of death as appropriate.

 

Property Investment (A)

Investment in buildings eg office blocks, shopping malls, hotels.

 

Property (E)

Land and buildings (ie what Americans call 'real estate'). Try to avoid using this to mean a feature or belongings (eg a property of property is that it is usually only one person's property!).

 

Proportional Reinsurance (G)

A reinsurance arrangement where the reinsurer and the cedant share the risk, premiums, claims and introductory commission in the same agreed proportions.

 

Proposal (A/D)

An application for insurance cover. Applications are normally submitted on a standard proposal form.

 

Proposal (N)

Basis of the contract - the proposal form is filled in by the person applying for the assurance (known as application in U.S.A.).

 

Proprietary Company (A)

An insurance company supported by capital from outside Shareholders, who expect to receive dividend payments in return for their capital investment. See also: Mutual Insurer.

 

Proprietary Insurer (G)

An insurance company which is owned by shareholders, as opposed to a mutual insurer.

 

Proprietary Office (F)

This is a life insurance company that is owned by shareholders. Many are quoted companies. Some of these offices write participating business, and have complicated rules about how much profit is distributed to shareholders, and how much is distributed as bonus. Recent "start from scratch" proprietary companies do not generally offer participating business.

 

Prospective Benefits Funding Method (H)

see GN26

The text of GN26 is copied below for ease of reference. Prospective Benefits Funding Methods are a further major category of funding methods. The Actuarial Liability for active members is based on the total benefits expected to be awarded, taking into account both the pensionable service accrued up to the valuation date and potential service after that date. Allowance is made for contributions to be paid after the valuation date at the level of the Standard Contribution Rate.

When calculating the present value of benefits, pay is always projected up to the assumed date of retirement, date of leaving service or date of death as appropriate. When valuing future pensionable pay on which contributions will be charged, pay is always projected over the period for which contributions will be paid. Allowance is made both for general increases in pay levels and also for career progression, where appropriate.

Under all Prospective Benefits Funding Methods allowance is normally made for all types of decrement when calculating both the Actuarial Liability and the Standard Contribution Rate.

The Actuarial Liabilities are calculated for Prospective Benefits Funding Methods by a common methodology, expressed in the following formulae:

 

n= Control Period

ALo= Actuarial Liability calculated as at the valuation date.

ALn= Actuarial Liability calculated as at the end of the Control Period
in respect of active members, pensioners and deferred pensioners where
numbers of members, pay and pensions are projected to that date
according to the actuarial assumptions.

B(o,n)= Expected payments of benefits during the Control Period,
projected according to the actuarial assumptions.

S(o,n)= Expected pensionable pay during. the Control Period, projected
according to the actuarial assumptions.

SCR(o,n)= Standard Contribution Rate payable during the Control Period.

Therefore, SCR(o,n)= [PV(ALn) - ALo + PV(B(o,n))]/PV(S(o,n))
Where PV(***) stands for the present value of ***, as at the valuation
date.

Differences between the various Prospective Benefits Funding Methods arise from the method used to calculate the Standard Contribution Rate. This affects the value placed not only on the Standard Contribution Rate but also on the Actuarial Liability.

 

Prospectus (E)

The document giving details about a new issue of securities and their issuer.

 

Protected NCD (G)

A refinement of the NCD system requiring payment of an extra premium, whereby a policyholder who has had many claim-free years can make a specified small number of claims without losing any future discount entitlement.

 

Protected Rights (H)

The benefits under an appropriate personal pension scheme or a money purchase contracted out scheme, deriving respectively from at least the minimum contributions or minimum payments, which are provided in a specified form as a necessary condition for contracting out.

The term may also be used in a general sense to describe rights given to certain members on change of rules or change of pension scheme which are superior to those of a new entrant.

 

Protection and Indemnity (P and I) Clubs (G)

Mutual associations of shipowners that cover, as a pool, risks not traditionally insured by a commercial marine policy, eg damage to harbours, removal of wrecks, pollution, loss of life and personal injury. They also provide shipowners with technical assistance in the marine market and advise on issues coming before the shipping industry.

 

Provisions (G)

The accounting expressions for funds set up to pay for future outgo, usually of unknown amount and/or timing. Commonly referred to in general insurance as reserves.

 

PSBR (E)

Public sector borrowing requirement. The amount of money the government needs to borrow to bridge the gap between its expenditure and its income.

 

PSDR (E)

Public sector debt repayment. The same as a negative PSBR. It is the amount by which government income exceeds outgo, thereby repaying some of the national debt. PSDRs have not been very common in the last few centuries in the UK, although they did exist for a few years in the mid to late 1980s.

 

Public Sector Scheme (H)

An occupational pension scheme for employees in the public sector (eg teachers, doctors, local government employees, employees of a nationalised industry-I can't think of any examples of these!). The benefit structures of these schemes tend to be very similar to each other, but fairly different to most private sector schemes.

 

Pure Endowment (F)

This is a form of endowment contract under which the benefit only becomes payable if the policyholder survives until the maturity date.

An annuity is effectively a series of pure endowments.

(Except as annuities!), pure endowments are not common in the UK. A few are encountered in pensions business, where they might be described as "nil return cash accumulation" contracts.

 

Pure Premium (A/D)

Same as Net Premium.

 

Put (E)

The right to sell a specified stock at a specified price at specified times. Put options are securities giving the holder the option of selling the specified stock. ]be expression may be used in other circumstances. For example, a 'put' facility on a bond gives the holder the right to repay the loan.