IFoA CP1 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Actuarial control cycle

An iterative four-stage process: define the problem, develop the solution, monitor experience, and feed back. It applies across all practice areas and links assumptions to observed outcomes.

TAS 100

The FRC's Technical Actuarial Standard setting principles for technical actuarial work: relevance, reliability, transparency and completeness. It applies to all UK technical actuarial work unless a specific TAS overrides it.

Actuaries' Code principles

Five fundamental principles: integrity, competence and care, objectivity, communication, and compliance. Members must act honestly, maintain skills, avoid bias, communicate clearly and obey the law and professional standards.

Risk versus uncertainty

Risk is measurable variation around an expected outcome with a known distribution. Uncertainty is lack of knowledge about the distribution itself, so it cannot be quantified from data alone.

Risk appetite

The amount and type of risk an organisation is willing to accept in pursuit of its objectives. It is set by the board and operationalised through limits, triggers and escalation procedures.

Reverse stress testing

A technique that identifies the scenario or combination of events that would cause a business to fail or breach solvency. It reveals vulnerabilities not captured by forward stress tests.

Diversification

Combining imperfectly correlated risks so that total risk is less than the sum of individual risks. It reduces unsystematic risk but correlation assumptions can break down in stress.

IBNR reserves

Incurred but not reported reserves estimate claims that have occurred but not yet been notified. They are a major part of general insurance liabilities and require development pattern and tail assumptions.

Chain-ladder method

A claims reserving technique that applies historical development factors to cumulative claims to project ultimate losses. It assumes past development patterns continue and works best for stable, mature portfolios.

Bornhuetter-Ferguson method

A reserving method blending reported claims with an expected loss ratio. It is more stable than chain-ladder for immature or volatile portfolios because it relies less on early development data.

Combined ratio

The sum of the loss ratio and expense ratio, expressed as a percentage of earned premium. A value above 100% indicates an underwriting loss before investment income.

Frequency-severity rating

A general insurance pricing approach where expected loss cost equals claim frequency multiplied by average claim severity. Expenses, commission, profit and risk margins are added to derive the premium.

Defined benefit scheme

A pension arrangement promising benefits based on salary and service. The employer bears investment and longevity risk, and funding is assessed through actuarial valuations against scheme assets.

Defined contribution scheme

A pension arrangement where contributions are invested and the member bears investment and longevity risk. The retirement benefit depends on the accumulated fund and annuity conversion terms.

Employer covenant

The employer's financial ability and willingness to support a defined benefit scheme. It is central to assessing funding risk and the appropriate investment strategy for the scheme.

Scheme actuary

The statutory actuarial adviser to a defined benefit pension scheme's trustees. Responsibilities include valuations, funding certificates, and reporting to the regulator where required.

IAS 19 discount rate

Under IAS 19, defined benefit liabilities are discounted using high-quality corporate bond yields at the reporting date, not the scheme's expected asset return. This affects reported surplus volatility.

Longevity risk

The risk that people live longer than assumed, increasing the cost of annuities and defined benefit pensions. It is a systematic, long-tailed risk that cannot be diversified away within a portfolio.

Mortality risk

The risk that deaths occur earlier or more frequently than assumed, increasing claims for life protection products. It is the opposite of longevity risk and affects term and whole life assurance.

With-profits smoothing

A mechanism spreading investment returns across policyholders over time through bonuses. It reduces volatility for policyholders but creates estate and fairness issues for the with-profits actuary.

Unit-linked contract

A life insurance contract where benefits are linked to the value of underlying investment units. The policyholder bears investment risk while the insurer retains expense, persistency and operational risk.

Asset-liability management

The process of matching asset cash flows and characteristics to liability obligations. Tools include duration matching, cash-flow matching and convexity analysis to control interest rate risk.

Solvency II SCR

The Solvency Capital Requirement is the capital needed to cover unexpected losses over one year at a 99.5% confidence level. It can be calculated by standard formula or internal model.

Medical inflation

The rate of increase in healthcare costs, which typically exceeds general inflation. It is a key assumption in private medical insurance pricing and reserving.

Critical illness insurance

A product paying a lump sum on diagnosis of specified conditions. Pricing depends on incidence rates, condition definitions and the risk of anti-selection.

Income protection insurance

A product replacing income during incapacity. Pricing requires assumptions on morbidity, recovery, termination and occupation class, with deferred periods affecting claim duration.

Long-term care insurance

Cover for the cost of care in later life. It is long-tailed and driven by longevity, disability incidence and care costs, making it highly uncertain to price.

Efficient frontier

The set of portfolios offering the highest expected return for each level of risk. It underpins modern portfolio theory and asset allocation for insurers and pension schemes.

Model risk

The risk of loss from decisions based on incorrect or misused models. It is managed through validation, independent review, documentation and governance of model changes.

Sensitivity analysis

Varying one assumption at a time to measure its effect on results. It identifies key drivers but does not capture joint movements, which require scenario analysis.

Data quality dimensions

Accuracy, completeness, relevance, timeliness, consistency and granularity. Limitations in any dimension must be disclosed and their impact on results assessed.

Stakeholder analysis

Identifying the parties affected by a decision (policyholders, shareholders, regulators, tax authorities, reinsurers) and their objectives. Conflicting interests must be stated in recommendations.