IAI CP3 key terms

A repeating professional process of specifying the problem, forming assumptions, building a model, interpreting results, and monitoring experience so that future decisions are revised as evidence accumulates.

The amount and type of risk an insurer or scheme is willing to accept in pursuit of its objectives, expressed through limits, tolerances, and qualitative statements that guide decision-making.

A structured record of identified risks, each with an owner, an assessed likelihood and impact, existing controls, and planned actions, reviewed regularly as part of enterprise risk management.

An insurer's internal process for identifying risks, assessing capital needs over a forward horizon, and demonstrating to supervisors that solvency is managed on a continuous basis.

The amount of eligible capital a regulated insurer must hold so that it can absorb a specified severe shock to its balance sheet over a one-year period while meeting obligations.

An addition to best-estimate liabilities intended to compensate a hypothetical transferee for the cost of holding regulatory capital against insurance risks until obligations run off.

The probability-weighted present value of future cash flows arising from insurance obligations, calculated without any prudential margin and using current assumptions about experience.

The interest rate used to convert future cash flows into a present value, reflecting the time value of money and, where required, the risk characteristics of the liabilities being valued.

A measure of the sensitivity of a present value to changes in interest rates, commonly the weighted average timing of cash flows and used to gauge interest-rate exposure of assets and liabilities.

An investment strategy that arranges asset cash flows and durations so that the value of assets remains sufficient to meet liabilities despite small changes in interest rates.

The coordinated management of investments and obligations so that the timing, currency, and amount of asset proceeds can meet liability payments under a range of scenarios.

The observed or assumed long-term reduction in death rates at a given age over calendar time, which raises the cost of longevity-linked liabilities such as annuities and pension promises.

The risk that people live longer than assumed, increasing the cost of pensions, annuities, and other benefits payable for life, and often requiring additional capital or hedging.

A tabulation of death rates or survivorship probabilities by age and sex, derived from population or insured-group experience and used to price and value life-contingent benefits.

The process of setting contributions and investment strategy so that a defined benefit scheme's assets are projected to meet its accrued obligations within an agreed recovery period.

A contract that pays a series of amounts, often for life, in exchange for a lump sum, transferring investment and longevity risk from the individual to the insurer.

The process of setting prices for insurance cover by estimating expected claims, expenses, and profit, then allowing for uncertainty, expenses, and competitive and regulatory constraints.

An estimate of the expected future claims cost per unit of exposure, derived from historical claims experience adjusted to current conditions and used in pricing and reserving.

Incurred but not reported: a provision for claims that have occurred before the valuation date but have not yet been notified to the insurer, estimated from reporting delays.

Incurred claims divided by earned premium over a period, a core indicator of underwriting performance that can be compared across lines and against pricing assumptions.

The transfer by an insurer of part of its risk to another insurer in exchange for a premium, used to protect capital, stabilise results, and support growth in capacity.

The incidence and severity of illness or injury in a population, measured through rates such as diagnosis, hospital admission, or duration of disability, and central to health insurance pricing.

The rate at which the average cost of settled claims rises over time, driven by prices, medical advances, legal awards, and utilisation, and often differing from general price inflation.

A financial contract whose value depends on an underlying asset, rate, index, or event, used to hedge risk or to take positions, and typically settling in cash or by delivery.

Taking an offsetting position or arranging a contract so that losses on an existing exposure are reduced or cancelled by gains elsewhere, lowering volatility of results.

The risk that a hedging instrument does not move exactly in line with the exposure being hedged, leaving residual losses because the offset is imperfect.

The reasoned application of training and experience to reach a conclusion where rules are incomplete, documented transparently so that another competent actuary could follow and challenge it.

Independent scrutiny of an actuary's work by another suitably qualified person before it is relied upon, checking assumptions, methods, and reasonableness of conclusions.

Testing whether a model is fit for its purpose through checks of inputs, logic, sensitivity, back-testing, and independent review, with limitations clearly communicated to users.

The comparison of actual outcomes such as deaths, claims, or persistency against the assumptions used, producing evidence to revise assumptions and improve future estimates.

A situation where a personal or commercial interest could improperly influence professional advice, requiring disclosure, avoidance, or management so that the client's interest prevails.

A regulatory principle requiring firms to deliver outcomes that meet customers' reasonable expectations across product design, sales, servicing, and complaints, not merely to follow process.

The risk that a firm's behaviour, culture, or product design causes unfair customer outcomes, leading to redress, reputational damage, and supervisory intervention.

The assessment of whether an insurer holds enough capital, of sufficient quality, to absorb adverse experience and meet obligations with an acceptable probability.

A regression framework that links a response variable to explanatory factors through a specified distribution and link function, widely used in claims frequency and severity modelling.

A statistical approach that blends an individual risk's own experience with a broader collateral estimate, weighting each according to the volume and reliability of data available.

The fitness of data for actuarial use, judged by completeness, accuracy, consistency, and timeliness, with deficiencies documented and their effect on results assessed.