IFoA SP1 key terms

The expected present value of future benefit payments and expenses less future premium income, calculated without any prudential margin, using assumptions that reflect the actuary's unbiased expectation of future experience.

An additional amount held above the best estimate liability so that the technical provision equals the amount another insurer would require to take over the obligations, reflecting the cost of holding regulatory capital.

The amount of eligible own funds a regulator requires an insurer to hold so that it can absorb a specified severe shock, usually calibrated to a one-year value-at-risk confidence level.

The excess of an insurer's assets over its liabilities on a regulatory balance sheet, split into tiers by quality, which must exceed the solvency capital requirement and minimum capital requirement.

An addition to the discount rate for certain long-dated liabilities, allowing part of the spread earned on matching assets to be recognised, subject to the assets' cash flows matching the liability profile.

The rate used to convert future cash flows into a present value, chosen to reflect the time value of money and, depending on the basis, the riskiness of the cash flows being valued.

A prospective reserving method that values future premiums and future benefits and expenses together, so the reserve emerges as the present value of the net future cash flows of the contract.

A retrospective-style reserving approach where the reserve equals the present value of future benefits less the present value of future net premiums, with net premiums set at outset using valuation assumptions.

The practice of choosing assets whose cash flows, durations and sensitivities correspond to those of the liabilities, so that the surplus is protected against movements in interest rates and inflation.

A portfolio construction technique in which the sensitivity of asset values to interest rate changes is made equal and opposite to that of the liabilities, typically by matching duration and convexity.

A weighted average term of a series of cash flows, used as a measure of sensitivity of present value to small parallel changes in interest rates.

A measure of how the sensitivity of a bond's price to interest rates itself changes as rates move, capturing the curvature of the price-yield relationship that duration alone ignores.

A graph or table of interest rates for a given credit quality plotted against term to maturity, forming the basis for discounting cash flows of different dates.

An interest rate agreed now for a loan or investment beginning at a future date, implied by the relationship between spot rates of different maturities on the yield curve.

The interest rate applicable today for a single payment at a specified future date, used to discount that cash flow directly without intermediate reinvestment assumptions.

The probability that a life aged exactly x dies before reaching age x+1, usually denoted qx and derived from exposed-to-risk counts and recorded deaths.

The instantaneous rate of mortality at a given age, equal to the limit of the death probability over a very short interval divided by that interval, underlying continuous survival models.

A function giving the probability that a life survives from birth, or from a chosen starting age, to at least a specified age, decreasing from one to zero over time.

The tendency of death rates at a given age to fall over calendar time, which must be projected forward when pricing or reserving long-term contracts to avoid overstating future mortality.

The risk that people live longer than assumed, increasing the cost of annuities and pension promises, arising from unpredictable future improvements in mortality.

The tendency of people who buy or retain a particular insurance or annuity product to have mortality or morbidity different from the general population, because of self-selection or underwriting.

The tendency of individuals who know they are higher risk to buy more cover or retain it longer than those who believe they are lower risk, worsening the insured pool's experience.

The change in behaviour of an insured person, in the direction of greater carelessness or greater use of cover, arising because the financial consequences of loss are borne by the insurer.

The process of assessing a proposed risk, gathering information and deciding whether to accept it and on what terms, including any premium loading, exclusion or decline.

An addition to the base or office premium to reflect a particular hazard, such as impaired health, a hazardous occupation or a higher expected claims frequency.

The part of the premium that covers the expected cost of claims and benefits, before allowances for expenses, profit, contingencies and the cost of capital.

The component of a premium intended to recover acquisition, administration, claims handling and overhead costs, often expressed as a percentage of premium or a fixed amount per policy.

The total amount charged to the policyholder, comprising the risk premium plus loadings for expenses, profit, contingencies and any other margins.

The amount of each loss that the policyholder must bear before the insurer pays anything, reducing small claims and helping to control moral hazard and administration costs.

A reinsurance or insurance arrangement in which the insurer pays losses above an agreed retention up to a stated limit, protecting against large single claims or aggregate events.

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.

The risk of a single event, such as a storm, flood or earthquake, causing many claims at once, producing a highly skewed aggregate loss distribution that is difficult to model.

An estimate of the largest loss likely to arise from a single event under a defined scenario, used in setting reinsurance retentions, capital and pricing for catastrophe cover.

Incurred but not reported claims: the reserve for losses that have occurred before the valuation date but whose existence or amount is not yet known to the insurer.

A claims reserving technique that uses historical development factors between successive delay periods to project reported claims to their estimated ultimate cost.

A reserving approach blending an expected loss ratio with observed claims development, giving weight to actual data only to the extent that claims have emerged.

A contract or arrangement that pays a series of regular amounts, often for life, in exchange for a lump sum or contributions, transferring longevity and investment risk to the payer.

A derivative-style contract in which a pension scheme or insurer exchanges its actual longevity experience for an agreed fixed series of cash flows, hedging the risk of members living longer.

A pension promise whose benefit is set by a formula, usually linked to salary and service, so that the sponsoring employer or scheme bears investment and longevity risk.

A pension arrangement where contributions are specified and the eventual benefit depends on the accumulated fund and annuity rates at retirement, so the member bears the risks.

The ratio of a pension scheme's assets to the value placed on its liabilities, a key indicator of the surplus or deficit and of the contributions needed.

An arrangement in which two or more insurers each accept a stated share of the same risk and premium, often used for large or specialised risks beyond one insurer's capacity.