- ABI (G)
-
The Association of British Insurers.
- Abnormal Return (E)
-
Return on an asset in excess of that which would be expected given its
risk, marketability, term and liquidity.
- Absorbing State (D)
-
A state in a multiple states model from which there is no exit eg death.
- Accelerator Principle (E)
-
The principle that the demand for capital goods rises much more rapidly
than the demand for consumer goods at the start of an upward part of an
economic cycle.
- Accident Year (G)
-
The basis whereby claims are analysed according to the date of claim
incident (as opposed to reporting year and settlement year).
- Accidental Death Benefit (N)
-
A provision added to an insurance policy for payment of an additional
benefit in case of death by accidental means. Often referred to as
"Double Indemnity".
- Accounting Classes (G)
-
The different classes of insurance business for the purpose of completing
DTI returns. The are currently ten different accounting classes (eg accident
& health, motor vehicle, general liability) which cover the eighteen
different classes of business for authorisation purposes.
- Accrual Rate (H)
-
The rate at which pension benefits build up as pensionable service
increases in a defined benefit scheme (ignoring salary increases, maxima
etc).
For example, the pension might be 1/60th of final salary for each year of
service. This scheme would be referred to as a 60ths scheme. Accrual rates
are sometimes expressed as %'s rather than fractions eg 2% accrual
(corresponding to a 50ths scheme).
The accrual rate is normally explicit. However, sometimes it is
"derived" eg from a total target pension divided by pensionable
service.
- Accrued Benefits Funding
Method (H)
-
see GN26
The text of GN26 is copied below for ease of reference.
Accrued Benefits Funding Methods are a major category of funding methods
in which the Actuarial Liability for active members is based on pensionable
service accrued up to the valuation date or to the end of the Control
Period, as appropriate. The treatment of benefits not directly linked to
pensionable service is not specified but left to actuarial judgement,
subject to the need for consistency between successive valuations. The
Standard Contribution Rate is derived from the definition of the Actuarial
Liability appropriate to the particular Accrued Benefits Funding Method
being. used. It is the rate sufficient, after taking into account the
Actuarial Liability at the beginning. of the Control Period and the benefits
expected to be paid during the Control Period, to provide for the Actuarial
Liability at the end of the Control Period.
Differences between the various Accrued Benefits Funding Methods arise
from the treatment of decrements in membership and increases in pensionable
pay when calculating the Actuarial Liabilities for active members. This
affects the value placed not only on the Actuarial Liability but also on the
Standard Contribution Rate.
When projecting pay during the Control Period, or thereafter when
required by the particular funding method, allowance is made for general
increases in pay levels and also for career progression, where appropriate.
Once the link with pensionable pay is deemed to be broken by the particular
funding method, the amount of benefit could be assumed to continue to
increase by other means, for example, at the statutory revaluation rate for
preserved pensions.
Contributions and payments of benefits during the Control Period and
numbers of members, amounts of pension and pensionable pay at the end of
that period are projected using a common method for all Accrued Benefits
Funding Methods. Normally allowance is made for all types of decrements, for
example death in service, early withdrawal, early and normal retirement etc.
Whether or not allowance is made for new entrants during the control period
is not specified but left to actuarial judgement and should be stated in the
actuarial assumptions.
Standard Contribution Rates are calculated for Accrued 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.
If future entrants are taken into account, both the numerator and
denominator of the formula would make allowance for them.
- Accrued Benefits (H)
-
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.
- Accrued Interest (E)
-
The amount of interest that has accrued on a bond since the last coupon
payment. The amount of accrued interest increases linearly over time, and
then falls by the amount of the coupon payment to zero at the instant the
coupon is paid.
- Accumulation Units (F)
-
Units allocated to a policyholder with a unit-linked policy which are
subject to normal management charges.
Accumulation units can be contrasted with initial units or capital units.
Initial units have a high rate of cancellation, capital units have an extra
management charge (although some offices and practitioners use the
descriptions initial and capital units interchangeably).
Policies which use capital/initial units have an initial period of a few
years where capital/initial units are allocated. After this period,
accumulation units will be allocated.
The name accumulation comes from the fact that income generated by the
underlying assets (eg dividends on equities) is used to increase the value
of units. The alternative (rarely used on insurance funds) is to pay the
income to the owners of the units. This would be a "distribution"
unit.
- Acquisition Costs (G)
-
Those costs relating to the acquisition of the insurance business (eg
commissions).
- Active Management Strategy (E)
-
An investment strategy designed to provide additional returns by active
trading, ie frequently buying and selling shares. Opposite of passive
management.
- Active Member (H)
-
A member of a pension scheme who is currently accruing benefits under the
scheme.
- Actual Death Strain (A)
-
The actual total Death Strain for a block of policies during a given
year. If the actual death strain exceeds the Expected Death Strain there is
a mortality loss.
- Actual Death Strain (A/D)
-
The actual total death strain at risk for a block of policies during a
given year. A high actual death strain corresponds to a mortality loss.
- Actual Total Loss (G)
-
A form of total loss, defined by the Marine Insurance Act 1996. Actual
total loss is deemed to occur in one of three ways:
- where the insured item is totally destroyed
- where it is so damaged that it can no longer be classed as the type of
object originally insured
- where the insured is irretrievably deprived of the insured item
- Actuarial Funding (F)
-
This is a method that a life insurance company can use to reduce the size
of the "unit reserves" it needs to hold in respect of its
unit-linked business. The company effectively capitalises the charges it
expects to receive from the units it is holding. When associated with
capital units and surrender penalties it enables the company to reduce its
financing requirement.
Also described as "buying fewer units" or "discounting the
unit reserve".
- Actuarial Liability (H)
-
see GN26
The text of GN26 is copied below for ease of reference.
The value, using actuarial methods and assumptions, placed on the
obligations of a pension fund for outgoings, including expenses expected to
fall on the fund after the date to which the calculations relate. It
includes the present value of future instalments of pensions in payment and
related contingent benefits, the present value of future payments in respect
of deferred pensioners and a provision for all other members (referred to as
active members). The method of calculating the Actuarial Liability in
respect of existing pensioners and deferred pensioners is common to all
funding methods. The provision for active members is defined by the specific
funding method used. Whether or not allowance is to be made for
discretionary payments, for example increases to be made to pensions after
award, is not specified by the method and the treatment of such payments
should be described in the valuation assumptions.Whether the actuarial
liability takes account of the present value of future contributions is part
of the definition of specific funding methods.
- Actuarial Philosophy (E)
-
The actuarial philosophy is officially defined as:
- past experience enable reasonable future projections to be made
- elements of risk and uncertainty are unavoidable but can be managed
- regard should always be had to the long term consequences
- the analysis should always be as thorough as the information allows
and not based on superficial appearances
- mathematical modeling is an appropriate strategy for handling the
interactions of probability and investment return
- a good actuarial model should not be more complicated than is required
to provide results
- further experience should be fed back to aid the subsequent
development of the model and the assumptions
- Actuarial Scientific Method (E)
-
The actuarial scientific method is how actuaries solve problems and is
defined as:
- selecting and collecting information
- structuring, presenting and analysing information, including
investigation secular and other trends
- formulating assumptions and constructing models to process information
for diverse purposes, including long term future application
- monitoring and appraising emerging experience against the model and
the assumptions
- Actuarial Statement (H)
-
A statement given by an actuary of the security of the accrued and
prospective rights of members of an occupational pension scheme, as required
by disclosure regulations.
- Actuarial Surplus (H)
-
see GN26
The text of GN26 is copied below for ease of reference.
The difference between the Actuarial Value of Assets and the Actuarial
Liability.
- Actuarial Techniques (E)
-
The principal techniques used by actuaries:
- probability
- statistics
- stochastic processes and related mathematics
- economics
- Actuarial Value of Assets (H)
-
see GN26
The text of GN26 is copied below for ease of reference.
The value, following actuarial practice, placed upon the assets for the
purpose of the valuation. It could be an assessed value, the market value or
some other value.
- Additional Reserve for
Unexpired Risks (G)
-
The reserve held in excess of the unearned premium reserve for unexpired
risks.
- Additional Voluntary
Contributions (AVCs) (H)
-
Contributions over and above a member's normal contributions if any,
which the member elects to pay to the scheme in order to secure additional
benefits, either added years or money purchase.
- Adjustment Premium (G)
-
Where retrospective experience rating is applied, the adjustment premium
is the further premium payable at the end of the period of cover, based on
the actual claims experience in the period. An adjustment premium may also
be necessary at the end of the year when the total exposure for the year
becomes known.
- Administrator (H)
-
The administrator is the person or persons regarded by the PSO/OPB as
responsible for the management of the scheme. One of the conditions for
approval is that you have a UK resident administrator.
- Admissible Asset (F)
-
Under UK legislation, a life insurance company can only take into account
for the purpose of demonstrating statutory solvency specified maximum
amounts of certain assets. The maxima are in terms of percentages of the
value of the company's non- linked liabilities. Any asset not specifically
mentioned in the Regulations must be left out of account.
The assets to which the company can give a value are the admissible
assets. Assets that are not admissible are called inadmissible.
Thus, there are two occasions when an asset is inadmissible:
- Assets which are not specifically mentioned in the Regulations (eg
works of art, the commercial value of your current managing director).
- Assets which are mentioned are inadmissible to the extent that they
exceed the admissibility limits.
- Agent (N)
-
A sales and service representative of an insurance company. Life
insurance agents are also called life underwriters (in U.S.A.).
- Agents' Balances (G)
-
Monies belonging to the insurer held by an agent. Typically premiums
received which have yet to be passed to the insurer.
- Aggregate Claims (A)
-
The totality of all claims in a portfolio. The aggregate claim amount can
be assumed to have certain statistical properties.
- Aggregate Excess of Loss
Reinsurance (G)
-
A form of excess of loss reinsurance which covers the aggregate of the
losses, above an excess point, sustained from a single event or from a
define cause (or causes) over defined period, usually one year.
- Aggregate Funding Method (H)
-
see GN26
The text of GN26 is copied below for ease of reference.
No Standard Contribution Rate is determined. A Modified Contribution Rate
is calculated directly as the contribution rate which, if paid over the
expected future membership of the active members, would be sufficient,
taking into account the Actuarial Value of Assets, to provide for the
benefits.
- Aim (E)
-
Alternative Investment Market. A market run by the Stock Exchange for
shares in small companies. Ibis market has replaced the Unlisted Securities
Market.
- All Risks (G)
-
Insurance cover relating to all causes of loss, and not restricted to
specified events.
- Allocation Rate (F)
-
A unit-linked term. The percentage of premiums used to purchase units eg
102%.
Units purchased may be accumulation, capital or initial. The allocation
rate is not necessarily the same throughout the term of the contract. The
level is generally fixed at the start of the contract, however, and may not
be changed by the life office.
- Amortisation (A)
-
Paying off a debt over a period of time by a series of payments.
- Annual General Meeting (AGM) (A)
-
An official meeting held each year for the Shareholders of a limited
company. The procedures for these meetings are specified by law.
- Annuitant (A/D)
-
An individual receiving payments from an Annuity.
- Annuitant (N)
-
The person during whose life an annuity is payable, usually the person to
receive the annuity.
- Annuity Certain (N)
-
A contract that provides an income for a specified number of years,
regardless of life or death.
- Annuity (F)
-
A regular series of payments. Annuities include annuities certain, where
payments are made at definite times, and life annuities, where payments
depend on the survival of an Annuitant.
A life annuity is a contract that provides a regular payment typically
monthly during the lifetime of the policyholder or a fixed period if less.
If the payments start at the outset of the contract, it is an immediate
annuity. If they start at some point in the future, it is a deferred
annuity.
The annuity can be on more than one life and the amount payable may
increase. Annuities can be payable in advance or in arrears.
There are two "legislative" types of annuity sold in the UK:
- compulsory purchase annuities, bought from individual or group pension
fund monies
- general annuity business (or purchased life annuities) bought from
private individuals' personal money
Annuities are often payable monthly or annually, sometimes quarterly or
half yearly.
- Antiselection (F)
-
People will be more likely to take out contracts when they believe their
risk is higher than the assurance 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 f from the guarantee or option will be the most likely to exercise it.
Thus, anti-selection is the effect whereby applicants for policies will
attempt to choose a policy or an option within a policy which (because of
information available to them but not the insurer) would be expected to be
very good actuarial value for them, and cause an insurer to expect to make a
loss (unless the insurer can obtain that same information).
One example is people who are ill trying to obtain life assurance cover.
This is countered by underwriting.
Another example is people who are in very good health applying for
annuities. This is countered by assuming light mortality for people who take
out annuities in calculating premiums.
- Antiselection (G)
-
Selection against the insurer.
- Appointed Actuary (A)
-
UK law requires each life insurance company to have an appointed actuary
who has certain legal responsibilities. The primary role of the appointed
actuary is to ensure that the company's assets are adequate for the
liabilities and that the terms for new business (eg premium rates) are
appropriate. The appointed actuary must be over age 30, but need not be an
employee of the company.
- Apportionable Premium (D)
-
Premiums payable under regular premium life insurance policies may be
apportionable, which means that a fractional premium (calculated on a
proportional basis) must be paid in respect of the period between the date
of the last premium paid before death and the date of death.
- Appraisal Value (F)
- to its shareholders in terms of the future profits they expect to receive
from its existing and future new business.
Appraisal values are sometimes described as having two components:
- embedded value
- value to shareholders of future new business
Appraisal values are also affected by synergy (the additional value that
might be realised if the office were joined to another organisation). If the
"synergy" component is large, a proprietary office might be
vulnerable to a takeover by that organisation.
- Approved and Exempt
Approved Scheme (H)
-
An approved scheme is a retirement benefits scheme which is approved by
the Inland Revenue under Chapter 1 of Part XIV of ICTA 88, including a free
standing AVC scheme. The term may also be used to describe a personal
pension scheme approved under Chapter IV of that Part.
An exempt approved scheme is an approved scheme other than a personal
pension which is established under irrevocable trusts (or exceptionally,
subject to a formal direction under S.592(1)(b) of ICTA 88) thus giving rise
to the tax reliefs specified in ICTA 88.
- Approved Pension Scheme (A/D)
-
A pension scheme that has been approved by the Inland Revenue. Approved
pension schemes are largely exempt from tax in the UK.
- APR (A)
-
the Annual Percentage Rate specified under the Consumer Credit Act 1974
which reflects the "true" interest rate of a financial
arrangement. Money lenders must publish APRs to enable borrowers to
appreciate the actual rate of interest they are paying and to allow them to
make meaningful comparisons. The APR is an approximation to the effective
yield. See also: Flat Rate of Interest.
- Arbitrage (E)
-
Buying and selling of assets to exploit discrepancies between markets to
make riskless profit. For example, an investor might simultaneously buy an
ICI share in London for 8.35, sell an ICI share in New York for $14.20,
and arrange to swop $14.20 for 88.55 on the currency markets thus making
8.20 in riskless profits (Ignoring dealing costs).
- A67/70 TABLES (A/D)
-
A standard set of mortality tables based on deaths among assured lives
during 1967-70.
- Asset Cover (E)
-
Same as capital cover.
- Asset Proceeds (F)
-
These are the income that a life insurance company expects to receive
from its investments, ie its assets, by way of dividends, coupons, rents and
redemptions including the ultimate proceeds of sale.
The term is used in the contexts of matching and immunisation, where
asset proceeds and liability outgo are arranged so as to remove or reduce
the risk of loss caused by interest rate changes. It is also used in the
context of a discounted cashflow valuation.
- Asset (A)
-
Anything that has a financial value. Examples include: buildings,
equipment, shares.
- Assets (F)
-
The assets of a life insurance company are what it holds in order to meet
its liabilities. It usually refers to the investments the company has bought
with the net cash inflows from its contracts.
Although "assets" is generally another word for
"investments" it has slightly wider connotations. Assets are held
by the office to meet liabilities or to allow the office to function.
Examples of assets are:
- UK equities
- overseas equities
- conventional UK gilts
- index-linked UK gilts
- property
- cash
- policy loans
- office equipment
This term is not well-defined in actuarial literature. Also known as
retrospective earned asset share, or earned asset share. There is no useful
or agreed distinction between these terms.
It is usually taken to mean the retrospective accumulation of past
premiums, less expenses and the cost of cover, at the actual rate of return
on the assets. Allowance may also be made for taxation, profit from other
contracts, transfers to shareholders and other complications. The
accumulation could be done for a single contract or a group of contracts.
The per policy asset share is the group asset share divided by the number of
surviving policies.
Although there might be disagreement about the figure for a retrospective
earned asset share, there is only really one basis to use: the actual past.
Unfortunately, w e will often not have enough information to determine this
exactly hence the disagreement about the figure.
The distinction between reserve and asset share is critical
Crudely, the reserve is what you need and the asset share is what you've
got.
The term "asset share" can also be taken to refer to a
particular amount of money or to a particular set of assets. In the latter
case, different "values" may be placed on the asset share, eg
market value, discounted cashflow value.
- Assignment (N)
-
The legal transfer of one person's interest in an insurance policy to
another person.
- Assurance (A/D)
-
A benefit payable on death. See: Life Assurance.
- Assurance (F)
-
Assurance is a contract to pay a specified amount on the happening of a
specified event. The event is contingent on a human life or lives.
AVC
Additional voluntary contribution to an occupational pension scheme by a
scheme member. AVCs are often invested with life offices. AVCs are
technically held within the scheme trust.
- Assured Life (A/D)
-
An individual whose life is covered by a life assurance policy.
- Attained Age Funding Method (H)
-
see GN26
The text of GN26 is copied below for case of reference.
The Standard Contribution Rate is determined as the contribution rate
which, if paid over the expected future membership of the active members,
would provide for the expected benefits payable in respect of them arising
from their future service. The value of the future service benefits is taken
as the difference between the value of total benefits and the value of the
past service benefits calculated as for the Projected Unit Method. This
results in the Attained Age Method and the Projected Unit Method having the
same Actuarial Liability but different Standard Contribution Rates.
- Attribution Analysis (E)
-
Splitting a manager's performance into stock selection and sector
selection (and sometimes into more sub-divisions of these). Often done
through the use of notional funds.
- Average Earnings Scheme (H)
-
A scheme where the benefit for each year of membership is related to
pensionable earnings for that year.
- Average (G)
-
The principle whereby a claim amount is scaled down to reflect the
proportion of the value of the insured items for which premiums are paid. If
for example the sum insured is only 80% of the actual value of the insured
items, the insurer may apply the principle of average and pay only 80% of
any losses.
- Aviation Insurance (A)
-
Insurance of aeroplanes. This may include insurance of the aeroplane
itself, the cargo and damage to third parties and passengers.
