IFoA SA3 key terms

The amount a policyholder pays an insurer in exchange for cover over a defined period, usually stated gross of expenses and profit loadings but before any experience refund.

A measure of the amount of risk an insurer carries, such as vehicle-years, payroll, or sum insured, used to compare losses across policies of different sizes and periods.

The historical loss cost per unit of exposure, computed by dividing past claims (often adjusted for inflation and trend) by the corresponding exposure, used as a starting point for pricing.

A modelling approach that splits expected loss cost into the number of claims per unit of exposure and the average cost per claim, each projected separately before multiplication.

Incurred claims divided by earned premium over a period, a core measure of underwriting performance that can be compared across classes and years.

Underwriting expenses such as commission, acquisition costs, and administration divided by written or earned premium, showing the cost of distributing and servicing business.

The sum of the loss ratio and expense ratio; a value below 100% indicates an underwriting profit before investment income is considered.

The profit or loss from insurance operations alone, being earned premium less incurred claims and underwriting expenses, excluding investment return on reserves and capital.

Incurred But Not Reported: the estimated cost of claims that have occurred by the valuation date but have not yet been notified to the insurer, including late-reported and reopened claims.

Estimates set by claims handlers for individual reported claims, reflecting expected eventual settlement cost net of any amounts already paid.

A deterministic reserving method that projects future development of cumulative claims using ratios of successive development periods, applied to the latest diagonal of a development triangle.

The ratio of cumulative claims at one development age to cumulative claims at the prior age, estimated by averaging historical ratios across accident years and used to project to ultimate.

A reserving method blending an a priori expected loss ratio with observed claims, so that immature years rely more on the prior expectation than on unstable observed development.

The total expected cost of all claims arising from a given accident year once all development has run off, including paid amounts, case reserves, and IBNR.

The pattern by which claims for an accident year emerge and settle over time, typically shown in a triangle of cumulative paid or incurred amounts by development period.

An individual claim or event of unusual size that distorts aggregate loss statistics and is often excluded or separately loaded when estimating attritional loss levels.

A single event or accumulation of events, such as a storm or earthquake, causing many claims at once and requiring separate modelling of frequency, severity, and capital impact.

Insurance purchased by an insurer to transfer part of its risk portfolio to a reinsurer, protecting capital against large individual claims or accumulations of losses.

A proportional reinsurance arrangement in which the reinsurer takes a fixed percentage of every risk's premium and pays the same percentage of every loss.

A proportional reinsurance arrangement in which the insurer retains a fixed amount per risk and cedes the excess up to a stated multiple, sharing premium in proportion to risk ceded.

A non-proportional reinsurance arrangement in which the reinsurer pays the portion of each loss (or aggregate of losses) above a retention, up to a limit.

The amount of loss an insurer keeps for its own account before reinsurance responds, whether expressed per risk, per event, or as an aggregate over a period.

The balance-sheet liability for insurance obligations, comprising a best-estimate of future claim payments and expenses plus a risk margin for uncertainty.

An additional amount held above the best estimate of liabilities to compensate for the cost of capital needed to support the uncertainty in those liabilities.

The capital an insurer must hold to absorb a specified severe adverse scenario over one year, typically calibrated to a defined confidence level such as 99.5%.

The interest rate used to convert future expected claim payments into a present value, reflecting the time value of money and the risk profile of the liabilities.

The rise in the general or claims-specific price level over time, which must be projected and applied when adjusting historical losses to current or future cost levels.

The price charged per unit of exposure, obtained by dividing premium by exposure and used to compare pricing levels across periods and portfolios.

Remuneration paid to intermediaries or brokers for placing business, usually a percentage of premium and a significant component of the expense ratio.

Recoveries obtained from selling damaged property or from pursuing third parties who caused a loss, which reduce the net cost of claims to the insurer.

A provision for the possibility that future claims and expenses on unexpired policies exceed the unearned premium held, required where the business is expected to be loss-making.

The calendar year in which a claim event occurs, used to group losses for reserving and performance analysis regardless of when the policy incepted or the claim was reported.

The calendar year in which a policy incepts, grouping together all business written in that year so that its full lifetime result can be tracked as it develops.

A liability policy that responds to claims reported during the policy period, regardless of when the incident occurred, often paired with a retroactive date limitation.

A pricing mechanism that adjusts an individual risk's premium using its own historical claims experience relative to the class average, rewarding better-than-average loss records.

The weight given to a risk's own experience versus the wider class experience when setting rates, increasing with the volume and stability of the data available.

The reduction in the risk margin over time as liabilities run off and uncertainty falls, producing a profit or loss effect in the insurer's accounts each period.