IFoA SP7 key terms

A reinsurance pricing method that divides the historical cost of claims actually ceded to the reinsurer, loaded for trend, inflation and expenses, by the exposure base to derive a rate.

A reinsurance pricing approach that estimates expected loss to a layer from the modelled loss potential of each individual risk and the number of risks covered, rather than from the cedant's past ceded claims.

The point on the loss distribution at which a reinsurance layer begins to respond, typically expressed as an attachment point and used with layer limit to define the cover.

A clause allowing a cedant to restore reinsurance limit after a loss, usually in return for an additional premium calculated pro rata to the amount and time remaining.

A proportional reinsurance arrangement in which the reinsurer accepts a fixed percentage of every risk written within the treaty scope, together with the same percentage of premium and losses.

A proportional reinsurance arrangement in which the cedant retains a fixed monetary amount per risk and cedes the excess up to an agreed number of lines, sharing premium and losses proportionally.

Reinsurance of a single, individually negotiated risk that the reinsurer may accept or decline, used for large or unusual exposures outside the scope of automatic treaty arrangements.

The amount added to the best estimate of liabilities to compensate an assuming insurer for the cost of holding the required capital until the obligations run off.

The probability-weighted expected present value of future cash flows arising from in-force insurance obligations, calculated without prudential margins and using current assumptions.

The amount of eligible own funds a regulator requires an insurer to hold so that it can absorb a specified severe adverse scenario, often calibrated to a one-year value-at-risk target.

The excess of an insurer's assets over its liabilities measured on the regulatory balance sheet, split into tiers by quality and available to meet capital requirements.

A firm's own risk and capital calculation system, used to derive regulatory capital where approved by the supervisor, capturing risks and dependencies specific to its business.

Independent assessment of whether a model remains fit for purpose, covering conceptual soundness, data quality, assumption reasonableness, results back-testing and documentation, performed regularly and after material change.

Comparing model forecasts or predicted distributions with subsequently observed outcomes to test calibration and identify bias or structural weakness.

Documented, reasoned selection of assumptions or adjustments by an actuary where data are sparse, unstable or unrepresentative, ideally supported by sensitivity analysis and peer review.

Incurred but not reported: the estimated cost of claims that have occurred before the valuation date but have not yet been notified to the insurer, including development on known claims.

A reserving technique that applies historical development factors to cumulative claims by accident period to project ultimate cost and derive outstanding claim liabilities.

A reserving approach blending an expected loss ratio with observed claims development, giving weight to the prior expectation where reported claims are still immature.

Amounts set aside for individual reported claims based on the claims handler's estimate of the ultimate settlement cost at the valuation date.

The cost of administering and settling claims, including staff, investigation and legal fees, which must be allowed for in reserves and pricing separately from claim payments.

Incurred claims expressed as a percentage of earned premium, a core measure of underwriting performance and a key input to pricing and reserving analysis.

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

Underwriting expenses, including acquisition costs and administration, expressed as a percentage of earned or written premium.

The recurring pattern in general insurance markets where soft markets with abundant capacity and weak pricing are followed by hardening, capital withdrawal and rate increases after large losses.

The total amount of risk, in premium or limit terms, that insurers and reinsurers are willing and able to accept given their capital and risk appetite.

The tendency of an insured party to alter behaviour and take greater carelessness or risk because insurance reduces the financial consequence of loss.

The tendency for higher-risk individuals or risks to seek or retain insurance more than lower-risk ones when pricing does not fully reflect risk, worsening the pooled experience.

Pricing that adjusts a risk's premium according to its own past claims record, rewarding favourable experience and penalising poor experience.

The amount of each loss that the insured bears before the insurer's liability begins, reducing premium and mitigating moral hazard and small-claim costs.

A multiplier applied to the expected loss cost at a basic limit to reflect the additional expected cost of covering higher sums insured or policy limits.

A probabilistic model combining hazard, vulnerability, exposure and financial modules to estimate the distribution of losses from natural or man-made catastrophes.

An estimate of the largest loss likely from a single event or accumulation scenario at a stated return period, used to size reinsurance and capital.

The coordinated management of assets and liabilities so that cash flows, durations and currency exposures are matched and solvency is maintained under adverse conditions.

A measure of the sensitivity of the present value of a cash flow stream to changes in interest rates, used to match asset and liability exposures.

The risk that an insurer cannot meet obligations as they fall due without incurring unacceptable losses from forced sale of assets.

The amount and type of risk an insurer is willing to accept in pursuit of its objectives, expressed through limits, tolerances and qualitative statements approved by the board.

A governance structure in which operational management owns risk, a separate risk and compliance function oversees it, and internal audit provides independent assurance.

A structured record of identified risks, their owners, assessed likelihood and impact, controls and actions, used to monitor and report the risk profile.

The reasoned application of professional skill and experience to select methods and assumptions where evidence is incomplete, communicated transparently with its limitations.