IFoA SP7 flashcards
IFoA SP7 · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Indemnity principle
- The insured is restored to their pre-loss financial position, no better and no worse. Valued policies are an exception and increase moral hazard risk.
- Claims-made trigger
- Cover responds to claims first made or notified during the policy period, regardless of when the incident occurred. Common in professional indemnity and D&O.
- Combined ratio
- Loss ratio plus expense ratio. A value below 100% indicates an underwriting profit before investment income; above 100% indicates an underwriting loss.
- Burning cost
- Incurred claims net of recoveries divided by exposure. Used to price short-tail insurance and reinsurance layers from historical experience.
- Credibility factor
- A weight between zero and one applied to an individual risk's experience. The complement is applied to a broader class or prior estimate.
- Tweedie distribution
- A compound Poisson-gamma distribution with power parameter between one and two. It models pure premium with many zero claims and positive claim amounts.
- Chain-ladder method
- A development technique that projects ultimate claims using volume-weighted age-to-age factors. It assumes a stable historical development pattern into the future.
- Bornhuetter-Ferguson method
- Ultimate equals reported claims plus expected unreported claims, where expected unreported is a prior ultimate multiplied by the undeveloped proportion.
- IBNR versus IBNER
- IBNR covers claims not yet reported; IBNER is development on claims already reported. Together they form the outstanding claims reserve.
- Mack chain-ladder
- A distribution-free method producing the standard error of chain-ladder reserves. It assumes accident years are independent and development factors are unbiased.
- Quota share treaty
- A proportional reinsurance arrangement ceding a fixed percentage of premium and losses. The ceding commission covers the cedant's acquisition expenses.
- Excess of loss
- Non-proportional reinsurance where the reinsurer pays losses above an attachment point up to a limit. It can apply per risk or per occurrence.
- Rate on line
- Reinsurance premium divided by the limit of cover. It expresses the cost of a layer and allows comparison across different layer sizes.
- Parametric trigger
- A cover that pays when an index such as wind speed or earthquake magnitude exceeds a threshold. Settlement is fast but carries basis risk.
- Solvency capital requirement
- The capital needed to survive a one-in-two-hundred-year loss over one year under Solvency II. It is a risk-sensitive regulatory minimum.
- Risk margin
- An additional liability equal to the cost of holding required capital in run-off. Under Solvency II it uses a six percent cost of capital.
- Contractual service margin
- Under IFRS 17, the unearned profit in a group of insurance contracts. It is released to profit as coverage is provided.
- ORSA
- The insurer's own risk and solvency assessment. It is a forward-looking review of risks, capital needs and solvency under stress, approved by the board.
- Duration gap
- The difference between asset and liability durations. A positive gap means falling interest rates increase the surplus of assets over liabilities.
- Immunisation
- Matching the present value and duration of assets to liabilities so that small parallel interest rate changes leave the surplus approximately unchanged.
- Liquidity risk
- The risk of being unable to meet claim payments without forced asset sales. It is heightened after catastrophes when claims arrive in a surge.
- Risk appetite statement
- A formal articulation of the amount and type of risk an insurer is willing to accept, expressed in qualitative and quantitative terms linked to limits.
- Three lines model
- A governance structure where the business owns risk, a risk and compliance function provides oversight, and internal audit gives independent assurance.
- Reverse stress test
- A test identifying scenarios that would breach the solvency requirement or business model. It highlights vulnerabilities not captured by forward stress tests.
- Model validation
- Independent review of a model's conceptual soundness, data, assumptions and performance. It includes back-testing, benchmarking and sensitivity analysis.
- Overfitting
- A model captures noise rather than signal by using too many parameters relative to data. It performs poorly out of sample.
- GLM link function
- A function relating the expected response to the linear predictor. A log link makes covariate effects multiplicative, common in insurance pricing.
- Actuaries' Code
- Professional standards requiring integrity, competence and care, compliance, and clear communication. Breach can lead to disciplinary action.
- Peer review
- Independent checking of assumptions, methods and results by another qualified actuary before advice is relied upon. It reduces error and bias.
- Conflicts of interest
- Situations where personal or firm interests could compromise professional judgement. They must be identified, disclosed and managed appropriately.
- Technical provisions opinion
- A formal actuarial statement on the adequacy of reserves. It states scope, data, methods, assumptions, results, uncertainty and any limitations.
- Catastrophe model
- A simulation of hazard, vulnerability and financial loss producing exceedance probability curves. It estimates probable maximum loss and capital needs.