IFoA SA2 key terms

The fund an insurer must hold, calculated on the same prudent basis as premiums but including explicit margins for future expenses and profit, to meet future policy obligations.

A policy reserve calculated using a premium that covers only mortality and interest, ignoring expenses, so the reserve implicitly includes the value of future expense loadings.

A modified net premium reserve that deducts the unamortised initial acquisition expenses from the reserve, subject to the reserve not falling below zero.

The extra capital an insurer holds so it can withstand specified adverse scenarios, such as a fall in asset values or a rise in interest rates, without breaching its capital requirements.

An addition to the best estimate liability representing the compensation a third party would require to take on the insurance obligations, reflecting non-hedgeable risk.

The expected present value of future cash flows from in-force business, calculated using realistic assumptions without prudential margins.

An addition to the discount rate applied to certain long-term liabilities, allowing insurers to recognise part of the spread earned on matching assets that are held to maturity.

The projection of asset and liability cash flows under many scenarios to test solvency, liquidity and the sensitivity of surplus to changes in markets and experience.

A single-scenario projection of future cash flows or reserves using one fixed set of assumptions, useful for base-case results but not for measuring the range of outcomes.

A projection in which economic or demographic assumptions are generated randomly many times, producing a distribution of outcomes rather than one path.

Pricing or valuing cash flows using probabilities adjusted so that all assets earn the risk-free rate, which gives market-consistent values for tradable risks.

A projection using assumptions believed to reflect actual future experience, including risk premia, used for solvency and business planning rather than market pricing.

An embedded value that values assets and liabilities on market-consistent assumptions, with the shareholder-owned portion of future profits discounted at a risk-free rate.

An embedded value framework allowing some use of real-world assumptions and a risk discount rate above the risk-free rate, with disclosures on the effect of assumption changes.

The present value of expected future profits from business written in a period, measured at the point of sale on the reporting embedded value basis.

The reduction in surplus or capital at the point of sale when initial expenses and required reserves exceed the first premium received.

The time taken for the accumulated surplus from a policy to return to zero after the initial strain at outset, given expected future profits.

The rate used to discount future shareholder profits in an embedded value or appraisal value calculation, reflecting the required return on capital.

The return shareholders require on the capital tied up in the business; in a risk margin it is the rate applied to required capital over the run-off period.

The amount of eligible capital an insurer must hold so that it can absorb a specified one-year shock at a defined confidence level without failing.

The lower threshold of capital below which supervisory intervention is triggered, calculated by a simpler formula than the full solvency requirement.

An insurer's own forward-looking assessment of the risks it faces and the capital needed over the business planning horizon, submitted to the supervisor.

A firm's own risk-sensitive model, approved by the supervisor, used to calculate the solvency capital requirement instead of the standard formula.

The process of demonstrating that a model is fit for purpose, including review of assumptions, data, methodology and results against independent evidence.

The comparison of actual mortality, lapse, expense and investment experience against the assumptions previously made, used to set and revise bases.

The proportion of policies that remain in force over a period; low persistency means high lapse or surrender rates and lost future profit.

The risk of financial loss because policyholders terminate cover earlier or later than assumed, changing expense recovery, reserves and asset-liability matching.

A severe stress in which a large proportion of policyholders surrender at once, testing liquidity and the capital needed to fund surrender values.

The amount paid to a policyholder who terminates a savings or protection policy early, often less than the reserve or accumulated fund.

A policy kept in force with no further premiums, where the sum assured is reduced to reflect the premiums already paid.

The continuing fall over time in death rates at a given age, which raises the cost of annuities and longevity-linked liabilities.

The risk that people live longer than assumed, increasing the cost of pensions and annuities and the reserves held for them.

The tendency for people born in a particular year or period to experience systematically different mortality from earlier generations at the same age.

A tabulation of death rates by age and sex, often with projected improvements, used to price and reserve for life and annuity business.

The initial years after underwriting during which mortality is lower than for lives of the same age accepted some time earlier, because of selection effects.

A derivative in which an insurer or pension scheme exchanges fixed payments for actual longevity experience, transferring longevity risk to a counterparty.

The risk that a hedging instrument does not move exactly in line with the liability being hedged, leaving residual exposure.

The risk that an insurer cannot meet cash outflows when due without incurring unacceptable losses from selling assets quickly.

The risk that coupons and maturing proceeds must be reinvested at lower yields than assumed, reducing future returns and surplus.