IAI SA3 key terms

The EU risk-based prudential regime for insurers, built on three pillars covering quantitative capital requirements, governance and supervision, and disclosure. SA3 assumes working fluency with its valuation and capital logic.

The capital an insurer must hold to absorb a one-in-200 one-year adverse event, calculated by standard formula or an approved internal model. It is the central quantity actuaries must explain and challenge.

A lower supervisory capital floor, calibrated to roughly a one-in-200 event over a shorter horizon, below which supervisory intervention is triggered. It sits beneath the SCR and is computed more simply.

The prescribed modular calculation of the SCR, combining risk sub-modules through correlation matrices and applying firm-specific parameters in limited places. It is the default for firms without an approved internal model.

A firm's own risk and capital model, approved by the supervisor, used instead of or alongside the standard formula. Approval requires use test, statistical quality, calibration and documentation standards.

The requirement that an internal model is genuinely embedded in decision-making, governance and risk management, not built purely for regulatory reporting. Evidence of use is a condition of model approval.

An addition to technical provisions representing the cost of holding required capital to support insurance obligations run off by a third party. It is sensitive to duration, capital intensity and the cost-of-capital rate.

The total liability recognised for insurance obligations, equal to the best estimate of future cash flows plus the risk margin. Valuation is market-consistent and gross of reinsurance recoverables.

The probability-weighted mean of future cash flows arising from in-force obligations, discounted to present value, without prudential margins. It is the base layer on which the risk margin is added.

The rules determining which future cash flows belong to existing contracts and therefore enter technical provisions. They hinge on when the insurer can reprice, reject renewal or terminate obligations.

A volatility adjustment to the discount rate for eligible long-duration liabilities whose cash flows are matched by a ring-fenced asset portfolio. It reduces spread-driven capital volatility subject to strict conditions.

A discount-rate add-on intended to dampen artificial balance-sheet swings from illiquid credit spreads, applied with a country and currency-specific component. It interacts with matching adjustment eligibility.

The firm's own forward-looking assessment of the risks it faces and the capital needed over its business planning horizon, reported to the supervisor. It links strategy, risk appetite and capital.

The escalating set of supervisory responses triggered as capital falls from the SCR towards and below the MCR. It defines when recovery plans, finance schemes or withdrawal are required.

The prescribed table of pairwise dependencies used to aggregate risk sub-modules into higher-level capital requirements. It encodes diversification benefits and is a common target for criticism and challenge.

The reduction in aggregate capital arising because risks are imperfectly correlated. It is quantified as the gap between the sum of standalone capital charges and the aggregated requirement.

The process of combining individual risk distributions or capital charges into a firm-wide total, using copulas, correlation matrices or scenario approaches. Model choice materially changes the answer.

A function that couples marginal distributions into a joint distribution, capturing dependence separately from the marginals. It is widely used in internal models for aggregating non-normal risks.

The tendency of risks to co-occur in extreme scenarios more often than a linear correlation implies. It matters for capital aggregation, reinsurance structuring and catastrophe exposure.

Statistical methods for modelling the behaviour of rare, large losses beyond observed data, using threshold exceedances or block maxima. It underpins operational and catastrophe risk capital.

The risk of loss from inadequate or failed internal processes, people, systems or external events, including legal risk. It is modelled with scenarios, loss data and frequency-severity approaches.

A structured method of assessing the impact of plausible but severe events that are poorly captured by historical data. It feeds capital models, ORSA and risk appetite calibration.

Applying defined adverse changes to key assumptions to measure balance-sheet and capital sensitivity. It is used both for regulatory reporting and for internal management insight.

Working backwards from a defined failure point, such as breaching the SCR, to identify which combinations of events could cause it. It exposes vulnerabilities that forward scenarios may miss.

Independent assessment of whether a model is conceptually sound, appropriately calibrated and fit for purpose, including backtesting and sensitivity review. It is a governance control over model risk.

The risk of adverse consequences from decisions based on incorrect or misused model outputs, including errors, inappropriate assumptions and over-reliance. It is managed through governance, validation and documentation.

Comparing model predictions with realised outcomes to test calibration and identify bias. It is standard for risk models and capital projections, though limited by sparse tail data.

The amount and type of risk an insurer is willing to accept in pursuit of its objectives, expressed in quantitative limits and qualitative statements. It drives strategy and capital allocation.

Projecting available and required capital over a multi-year horizon under base and stress scenarios, including dividend and issuance assumptions. It connects business plans to solvency positions.

Converting future cash flows to present value using a term structure consistent with the relevant risk and liquidity. The choice of curve is a major driver of technical provisions and capital.

The risk of loss from changes in credit spreads on fixed-income assets, affecting both asset values and liability discounting. It is a major module in market risk capital.

The risk of loss from movements in interest rates, equities, property, spreads and currency. It is typically the largest capital module for life insurers and a key driver of balance-sheet volatility.

The risk of loss from changes in the level or shape of yield curves, affecting asset values and the valuation of long-duration liabilities. Duration mismatch amplifies it.

A plan submitted to the supervisor when capital breaches or is likely to breach the SCR, setting out corrective actions and timetables. It is a step on the supervisory ladder.

Supervision of an insurance group as a whole, including group solvency, intra-group transactions and risk concentration. It complements solo supervision and involves supervisory colleges.

The designated control function responsible for coordinating technical provisions, opining on underwriting and reinsurance, and contributing to risk management. It has explicit regulatory duties.