IFoA SP2 flashcards

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

Net premium reserve

The present value of future benefits less the present value of future net premiums, valued at the reserving basis at duration t; for whole life it is A_{x+t} minus P times a-double-dot_{x+t}.

Gross premium reserve

A reserve calculated using the gross premium and explicit expense assumptions, rather than the net premium; it reflects the actual cash flows and is used for profit testing and for reporting.

Recursive reserve formula

(V_t + G - e) times (1+i) equals q_{x+t} times S plus p_{x+t} times V_{t+1}; it rolls the reserve forward one year and checks that the premium and reserve fund the claim.

Profit signature

The vector of annual profits from a policy, each equal to premium plus investment income plus reserve release less claims, expenses and reserve held; it is discounted to give the net present value.

Risk discount rate

The rate used to discount the profit signature, equal to the risk-free rate plus a risk premium for the cost of capital and the systematic risk of the profit stream.

New business strain

The loss at inception when acquisition expenses and the initial reserve exceed the first premium; it is recovered over the policy term and must be funded by capital or reinsurance.

Asset share

The accumulated value of premiums less charges and the cost of cover, credited with investment return; it is the policyholder's fair share of the with-profits fund and anchors payout decisions.

Terminal bonus

A non-guaranteed bonus paid at claim to bring the payout up to the asset share; it is used to smooth payouts and is not part of the guaranteed sum assured.

Reversionary bonus

A bonus declared periodically that adds to the sum assured and, once declared, is guaranteed; compound reversionary bonuses earn further bonuses in later years.

With-profits estate

The excess of the fund's assets over the sum of policyholders' asset shares; it funds smoothing, guarantees and regulatory capital and must not be built up excessively.

Smoothing

The practice of paying out amounts around the asset share rather than exactly at it, to avoid sharp falls in payouts; the estate funds the difference and the policy must be documented.

Guaranteed annuity option

An option allowing the policyholder to convert the fund to an annuity at a guaranteed rate; it is valuable when annuity rates fall and is priced as a put on the annuity rate.

Select mortality

Mortality in the first years of a policy is lighter than ultimate mortality because of underwriting; q_{[x]+t} is less than q_{x+t} during the select period.

Standardised mortality ratio

The ratio of observed deaths to expected deaths based on a standard table; an SMR of 90 means mortality is 10% lighter than the standard.

Cohort effect

The tendency for people born in a particular year to experience different mortality improvement from other cohorts; it means improvement rates vary by year of birth, not just by age.

Longevity risk

The risk that mortality improves faster than assumed, so annuities and pension liabilities cost more; it is a systematic risk that cannot be diversified within the portfolio.

Mortality catastrophe risk

The risk of a sudden increase in deaths, for example from a pandemic; the Solvency II shock is a 1.5 per mille absolute increase in mortality rates over the next 12 months.

Mass lapse risk

The risk that a large proportion of policyholders surrender at once, typically modelled as a 40% immediate lapse; it hurts when acquisition costs are unrecouped.

Dynamic lapse

The tendency for lapse rates to rise when interest rates rise and guarantees become less valuable; it makes lapse behaviour dependent on economic conditions.

Risk margin

The cost of holding the SCR for future years, calculated at 6% per annum on the projected SCR and discounted at the risk-free rate; it is part of the Solvency II technical provisions.

Matching adjustment

An increase in the discount rate for assets held to match fixed cash flows, subject to eligibility; it reduces technical provisions but must not be used to mask a mismatch.

Contractual service margin

Under IFRS 17, the unearned profit at initial recognition; it is accreted with interest and released to profit over the coverage period, and it absorbs changes in estimates.

Risk adjustment (IFRS 17)

The compensation an insurer requires for bearing non-financial risk such as mortality, lapse and expense; it is released over the coverage period and differs from the Solvency II risk margin.

Onerous contract

A contract whose fulfilment cash flows are positive at inception; the loss is recognised immediately in profit and is not deferred into the contractual service margin.

Premium allocation approach

An IFRS 17 simplification for coverage of one year or less; the liability for remaining coverage is the unearned premium and the incurred claims liability is the expected claim cost.

Embedded value

Net assets plus the value of in-force business, where the in-force value is the present value of future profits after tax and the cost of capital; it falls when the discount rate rises.

RAROC

Risk-adjusted return on capital, equal to profit plus investment income divided by the capital allocated to the line; the line is viable if RAROC exceeds the cost of capital.

Quota share reinsurance

The reinsurer takes a fixed percentage of every risk's premiums and claims; the insurer's retention is reduced proportionally and the reserve credit is the reinsurer's share.

Surplus reinsurance

The insurer retains a fixed amount of each risk and cedes the excess up to a limit; the cession is proportional to the sum assured above the retention.

Excess of loss reinsurance

The reinsurer pays claims above a retention up to a limit; it protects against large individual claims or a catastrophe and is priced on the expected loss and capital cost.

Critical illness cover

A benefit paid on diagnosis of a listed condition; the claim cost depends on incidence rates and definitions, and advances in diagnosis can increase claims.

Income protection

A benefit replacing income during incapacity; the claim cost depends on the definition of incapacity, the deferred period and the recovery rate.