IFoA SA3 flashcards
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33 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Pure premium
- Expected loss cost per unit of exposure, calculated as expected claim frequency multiplied by expected claim severity. It excludes expenses, profit, and risk margins, forming the basis for gross premium rating.
- Chain-ladder development factor
- A ratio of cumulative claims at development period j+1 to cumulative claims at period j, summed across accident years with data at both periods. Used to project ultimate losses from reported-to-date amounts.
- Bornhuetter-Ferguson method
- A reserving technique that blends reported claims with an a priori expected ultimate loss. Ultimate = reported to date + expected ultimate × (1 − proportion reported), reducing reliance on immature development factors.
- Mack's chain-ladder standard error
- A formula quantifying the uncertainty of chain-ladder reserves by combining process variance (random claim fluctuations) and parameter variance (estimation error in development factors). It assumes development factors are independent across periods.
- Over-dispersed Poisson bootstrap
- A stochastic reserving method that resamples Pearson residuals from an ODP GLM, refits the model many times, and derives a predictive distribution of reserves. It captures both process and parameter uncertainty.
- IBNR reserves
- Incurred But Not Reported reserves cover claims that have occurred but are not yet known to the insurer. Estimated using development methods, expected loss ratios, or frequency-severity models.
- IBNER reserves
- Incurred But Not Enough Reported reserves represent expected development on claims already reported but not yet at their ultimate cost. Often estimated separately from pure IBNR for long-tail classes.
- Case reserves
- The amount set aside for individual reported claims based on the claims handler's estimate of ultimate cost. They are a component of total reserves and are updated as new information emerges.
- Solvency II premium and reserve risk
- The non-life underwriting risk sub-module combining premium risk (future business) and reserve risk (existing reserves). SCR = 3 × σ × V, where V is the volume measure and σ the combined coefficient.
- Risk margin
- The additional amount above best-estimate liabilities required to compensate a hypothetical transferee for bearing insurance risk. Under Solvency II it is calculated using a cost-of-capital approach at 6% per annum.
- Best estimate liability
- The probability-weighted average of future cash flows, including claims, expenses, and reinsurance recoveries, discounted to present value. It excludes any risk margin or prudence margin.
- Reinsurance cession decision
- A rule comparing the cost of reinsurance (premium loading) with benefits: reduced cost of capital, reduced earnings volatility, and expected recoveries. Cede when marginal benefit exceeds marginal cost.
- Excess of loss reinsurance
- A reinsurance arrangement where the reinsurer pays the portion of each claim exceeding a specified retention, up to a limit. It protects the cedant against large individual losses or accumulation events.
- Quota share reinsurance
- A proportional reinsurance treaty where the reinsurer receives a fixed percentage of every policy's premium and pays the same percentage of every claim. It reduces net exposure uniformly across the portfolio.
- Surplus reinsurance
- A proportional treaty where the cedant retains a fixed amount per risk (the line) and cedes the excess up to a multiple. It provides capacity for large risks while retaining smaller ones.
- Experience rating
- A rating method where the premium for a specific risk is adjusted based on its own historical loss experience relative to the class average. Credibility weighting balances individual and class data.
- Credibility theory
- A statistical framework for blending an individual risk's experience with a broader class estimate. The credibility factor Z (0 to 1) determines the weight on individual data, often based on claim count.
- Bühlmann credibility
- A credibility model where Z = n / (n + k), with k = process variance / variance of hypothetical means. It gives the optimal linear weight to individual experience under squared-error loss.
- Generalized linear model
- A regression framework extending linear models to non-normal responses via a link function and variance function. In non-life insurance, log link with Poisson or Tweedie errors is common for claim frequency and cost.
- Tweedie distribution
- A compound Poisson-gamma distribution with a point mass at zero, used in GLMs to model aggregate claim cost per exposure. Its power parameter p typically lies between 1 and 2.
- Frequency-severity model
- A two-part model estimating claim frequency (e.g., Poisson) and claim severity (e.g., gamma) separately, then multiplying to obtain expected loss cost. It allows different covariates to affect each component.
- Loss ratio
- Incurred losses divided by earned premium, often expressed as a percentage. It measures underwriting profitability before expenses and is a key input to a priori expected ultimate in reserving.
- Combined ratio
- The sum of the loss ratio and expense ratio. A combined ratio below 100% indicates an underwriting profit; above 100% indicates an underwriting loss before investment income.
- Catastrophe model
- A stochastic simulation tool estimating loss distributions from natural or man-made catastrophes. It combines hazard, vulnerability, and exposure modules to produce exceedance probability curves for reinsurance and capital.
- Exceedance probability curve
- A plot showing the probability that aggregate loss exceeds a given threshold in a year. Used to price catastrophe reinsurance layers and to determine capital requirements for extreme events.
- Return period
- The reciprocal of the annual exceedance probability for a given loss level. A 1-in-100-year event has a 1% probability of being exceeded in any single year.
- Probable maximum loss
- An estimate of the largest loss expected from a single event under a defined scenario, often used for catastrophe risk assessment. It is not a worst-case bound but a high-percentile estimate.
- Risk-based capital
- Capital required to absorb unexpected losses at a specified confidence level over a horizon. It is derived from the loss distribution and covers underwriting, market, credit, and operational risks.
- Solvency capital requirement
- The amount of capital an insurer must hold to remain solvent at a 99.5% confidence level over one year under Solvency II. It can be calculated by standard formula or internal model.
- Own risk and solvency assessment
- A regular internal process where an insurer assesses the adequacy of its risk management and solvency position. It considers all material risks and is embedded in strategic decision-making.
- Underwriting cycle
- The recurring pattern of soft and hard market conditions in general insurance, driven by competition and capacity. Soft markets feature lower premiums and looser terms; hard markets follow capital depletion.
- Claims reserving triangle
- A tabular arrangement of cumulative claim amounts by accident year and development year. It is the basic data structure for chain-ladder and related reserving methods.
- A priori loss ratio
- An expected loss ratio for an accident year based on pricing assumptions, exposure, and planned premium. It serves as the input to Bornhuetter-Ferguson and expected loss ratio methods.