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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
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:

stochastic processes and related mathematics

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.

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.

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.


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
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.


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.

There are no glosary terms for the letter you have selected.