IAI SA1 key terms

A professional framework describing the iterative process of specifying the problem, forming assumptions, building a model, monitoring experience, and feeding results back into revised assumptions and decisions.

The process of apportioning a firm's total required capital among business units, products, or risks so that each bears a share consistent with the risk it contributes.

A capital requirement calibrated to the risks a company runs, so that riskier activities or portfolios demand more capital than safer ones rather than a flat percentage of exposure.

The amount of eligible own funds a regulated insurer must hold to absorb adverse shocks at a prescribed confidence level over a specified horizon, often one year.

The excess of an insurer's assets over its liabilities, split into tiers by quality and availability, that counts toward meeting regulatory capital requirements.

The portion of an insurer's assets remaining after liabilities and required capital are met, available for distribution, new business, or absorbing unexpected losses.

The reduction in total required capital that arises because imperfectly correlated risks do not all crystallise at once, so the aggregate need is less than the sum of standalone needs.

A table of pairwise association measures between risks or lines of business, used to aggregate standalone capital requirements into a total while capturing diversification.

A function that joins separate marginal distributions into a joint distribution, allowing dependence between risks to be modelled independently of their individual marginal behaviour.

The tendency for two risks to move to extreme adverse values together, which correlation alone may understate, making it critical for capital modelling at high confidence levels.

The loss threshold that is not expected to be exceeded over a stated horizon with a given probability, commonly used to size capital but silent about losses beyond it.

The average loss in the worst outcomes beyond the Value at Risk threshold, giving a coherent risk measure that reflects the severity of extreme tail losses.

Evaluating a model or balance sheet under specified severe but plausible scenarios to reveal vulnerabilities that statistical distributions fitted to normal experience may hide.

Working backwards from a defined failure point, such as insolvency, to identify which combinations of adverse events would cause it, exposing hidden concentrations of risk.

Assessing outcomes under coherent narratives of future conditions, combining several variables moving together rather than shocking one factor in isolation.

Coordinating the composition and cash flow profiles of assets and liabilities so that obligations can be met as they fall due while managing interest rate and other market risks.

Structuring an asset portfolio so its value or cash flows respond to interest rate changes in a way that offsets the effect on liabilities, protecting a surplus position.

A weighted average term of cash flows, measuring how sensitive a present value is to small parallel changes in interest rates, often expressed in years.

The curvature of the relationship between a present value and interest rates, capturing how duration itself changes as rates move and improving accuracy for larger rate shifts.

A plot of interest rates or yields against term to maturity at a point in time, whose level, slope, and shape drive the valuation of cash flows at different horizons.

Generating many simulated future paths for variables such as investment returns or interest rates from assumed probability distributions, so results can be expressed as distributions rather than single values.

A numerical technique that draws random samples from assumed distributions and runs the model repeatedly, building an empirical distribution of outcomes for analysis.

A projection in which each input follows one fixed path with no random variation, producing a single outcome useful for illustration but unable to show a range of results.

Two modelling bases: real-world assumptions reflect actual expected returns and probabilities for projections, while risk-neutral assumptions price cash flows consistently with market prices and exclude expected excess returns.

Placing a value on liabilities using observable market prices and risk-free discounting plus an explicit allowance for non-hedgeable risk, rather than the return actually expected to be earned.

An additional amount above the best-estimate liability that compensates a hypothetical transferee for bearing non-hedgeable risk, often calculated as a cost of holding required capital.

The probability-weighted mean of future cash flows under current assumptions, with no deliberate margin for prudence, forming the base liability before risk allowances.

A deliberate conservative bias in assumptions or margins intended to protect against adverse deviation, which must be distinguished from genuine best-estimate expectations.

Choosing the demographic, economic, and behavioural inputs for a model, balancing relevance, credibility, and available data, and documenting the rationale and any margins.

Comparing actual outcomes such as mortality, persistency, or expenses against prior assumptions to identify trends and justify revised bases for future work.

A method for blending a company's own limited experience with a broader reference population, weighting each by the volume and reliability of data behind it.

The observed or projected long-term decline in death rates over time, which materially affects annuity and longevity-linked liabilities and must be reflected in projections.

The risk that people live longer than assumed, raising the cost of pensions and annuities, distinct from the risk of higher mortality affecting life insurance.

The risk that death rates differ from those assumed, with higher mortality increasing claims costs on life protection business and lowering annuity costs.

The risk that policyholders lapse, surrender, or stop paying premiums at rates different from those assumed, altering expected profits and cash flow timing.

An expectation about how policyholders or counterparties will act, such as take-up of options, withdrawal patterns, or premium payment behaviour, which materially shapes projections.

A contract in which an insurer transfers part of its risk to another party, reducing volatility and capital needs while giving up some profit and retaining counterparty exposure.

The degree to which a reinsurance or hedging arrangement genuinely shifts economic risk away from the cedant, as opposed to only smoothing accounting results.

Taking an offsetting position or instrument whose value moves opposite to an exposure, reducing sensitivity to a specified risk, though often at a cost and with residual basis risk.

The risk that a hedge does not move in perfect step with the exposure it is meant to offset, leaving residual losses because the two are not identical.

The risk that a party owing money or obligations under a contract, such as a reinsurer or derivative counterparty, fails to pay when due.