IFoA SP8 key terms

Total premium written by an insurer over a period before deducting reinsurance ceded or unearned premium. It measures the volume of business accepted, not the revenue actually earned or retained.

The portion of written premium attributable to the cover already provided during the accounting period. It is the premium figure matched against incurred claims and expenses in the underwriting result.

A liability representing premium received for cover not yet provided. It is released to earned premium as the policy period runs off, and its adequacy matters where acquisition costs or claims inflation are high.

An additional provision recognised when expected future claims, expenses and deferred acquisition costs on unexpired business exceed the unearned premium held. It tests whether premium liabilities are sufficient on a prudent basis.

Acquisition expenses such as commission and policy administration costs that are carried forward as an asset and amortised in line with premium earning. Deferral aligns cost recognition with the revenue it helped generate.

Incurred claims divided by earned premium over a period, usually expressed as a percentage. It isolates claims cost from expense cost and is a core driver of the underwriting result.

Underwriting expenses divided by earned premium, expressed as a percentage. It captures commission, administration and other acquisition costs and shows how efficiently business is produced and serviced.

The sum of the loss ratio and expense ratio. A figure below 100% indicates an underwriting profit before investment return; above 100% indicates an underwriting loss.

The profit or loss from insurance operations, being earned premium less incurred claims, expenses and any reserve movements. It excludes investment income on technical reserves and capital.

The total balance-sheet liabilities for insurance obligations, comprising premium liabilities for unexpired cover and claim liabilities for incurred claims. Their valuation is central to solvency and reserving analysis.

The provision for claims already incurred, whether reported or not, including claim handling expenses. It covers case reserves for known claims plus an incurred but not reported estimate.

The provision for obligations arising from future cover under contracts already incepted. It is normally the unearned premium plus any unexpired risk reserve, less deferred acquisition costs.

Incurred but not reported: an estimate for claims arising from incidents already occurred but not yet notified to the insurer. It is derived statistically from reporting delay patterns rather than individual case estimates.

The amount set aside for an individual reported claim, based on the claims handler's assessment of its likely ultimate cost. Case reserves aggregate into the reported claims component of claim liabilities.

A reserving technique that projects ultimate claims by applying historical development factors to cumulative paid or incurred claims by origin period. It assumes past development patterns persist into the future.

A reserving approach blending an expected loss ratio with observed claims development. It gives weight to the a priori estimate for immature periods where reported data are unreliable, and is common for long-tail lines.

The ratio of cumulative claims at one development age to the prior age, estimated from historical triangles. Applying successive factors projects reported claims to their estimated ultimate level.

A development factor applied beyond the most mature age observed in the data, to bring claims to ultimate. It is needed where settlement continues long after the latest available development period.

The tabulation of cumulative claims by origin period and development period, forming the data basis for projection methods. Its shape reveals reporting and settlement patterns and data quality issues.

Insurance where claims are reported and settled slowly, often over many years, such as liability or professional indemnity. Reserving uncertainty and investment income on reserves are both more significant.

Reducing projected future claim payments to present value using a discount rate reflecting the time value of money. It is required in some solvency regimes and increases sensitivity to interest rate assumptions.

The probability-weighted expected present value of future claim cash flows, without deliberate margin for risk or uncertainty. Prudent margins are added separately through a risk margin.

An amount added to the best estimate liability to compensate a transferee for assuming the risk and uncertainty of the obligations. It is often calculated using a cost-of-capital approach.

The capital an insurer must hold to absorb a specified severe adverse scenario over one year at a given confidence level. It is calibrated to a defined ruin probability, such as 99.5% over one year.

The lower threshold of capital below which supervisory intervention becomes mandatory. It is set below the solvency capital requirement and acts as a hard floor on an insurer's financial resources.

An insurer's internal forward-looking assessment of the risks it faces and the capital needed, documented and submitted to the supervisor. It complements the standard formula with firm-specific insight.

The amount and type of risk an insurer is willing to accept in pursuing its objectives, expressed qualitatively and quantitatively. It guides underwriting, investment and capital decisions and is tested through ORSA.

The quantified limits within which risk may be taken, translating broad risk appetite into operational thresholds such as maximum exposure per event or per counterparty. Breaches trigger escalation and corrective action.

Reinsurance covering the aggregate of many losses arising from one event, once a retention is exceeded. It protects capital against frequency and severity of catastrophe events rather than individual large claims.

Reinsurance covering a single claim or risk above a retention, up to a limit. It protects against large individual losses and is distinct from catastrophe cover, which aggregates many losses from one event.

A proportional reinsurance arrangement in which the reinsurer accepts a fixed percentage of every risk written, along with the same percentage of premium and claims. It reduces volatility and frees capital.

A proportional reinsurance arrangement ceding the amount of each risk above a retained line, up to a stated multiple. It targets large risks while the insurer keeps smaller ones in full.

Reinsurance of a single risk, offered and accepted separately for each case. It gives flexibility for unusual or large risks but involves higher administration and no automatic cover.

A clause allowing cover to be restored after a loss, usually in return for an additional premium pro rata to the amount and time remaining. It limits how much catastrophe cover is ultimately available.

The amount of loss or proportion of risk an insurer keeps for its own account before reinsurance responds. Setting retention balances premium retention and capital protection against reinsurance cost.

An estimate of the largest loss likely from a single event under a given set of assumptions, used to size catastrophe cover and assess accumulation. It is a modelled estimate, not a worst-case bound.

The process of monitoring and limiting total exposure to a single event, counterparty or source of aggregation, such as a windstorm across a region. It prevents a single occurrence from threatening solvency.

A curve showing the proportion of total loss expected to be eliminated by a deductible, or retained, across a range of loss sizes. It supports pricing of deductibles and reinsurance layers.

The historical cost of claims within a reinsurance layer per unit of exposure, used to price prospective reinsurance. It is adjusted for trend, exposure and development before being applied forward.

Pricing that adjusts a manual or base rate to reflect the insured's own past claims experience relative to the expected level. It rewards better-than-average risk and is common in commercial lines.

Grouping risks into categories with similar expected claim cost so that each group can be charged an appropriate rate. Effective classification improves fairness and reduces adverse selection.

The tendency for those with higher-than-average risk to buy more cover, or for lower-risk customers to leave, when price does not reflect individual risk. It erodes profitability and can destabilise a market.

The change in behaviour of an insured or claimant towards greater carelessness or exaggeration because insurance exists. Controls include deductibles, exclusions, claims validation and policy conditions.

A statistical framework for blending an individual risk's own experience with a broader group rate, weighting each by its reliability. It avoids overreacting to small samples of volatile claims data.

The amount of each loss an insured bears before the insurer pays, reducing premium and discouraging small claims. It also reduces moral hazard and administration cost.

The insurer's right, after paying a claim, to pursue a third party responsible for the loss and recover the amount paid. It reduces net claims cost and reinforces incentives for care.

The residual value of damaged property that the insurer may take over or sell after settling a total loss, reducing the net cost. The treatment is set out in policy conditions.

Amounts received from reinsurers, salvors or third parties that reduce gross claims cost. Net incurred claims are gross claims less such recoveries, and reinsurer credit risk affects their value.