F103 Semester 2 > Definitions > Flashcards

Definitions Flashcards

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1
Q

Operational risk

A

The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

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2
Q

Insurance risk

A

The risk of loss arising from the inherent uncertainties about the occurrence, amount and timing of insurance liabilities, expenses and premium. It is normally divided between underwriting risk (relating to risks yet to be written/ earned) and reserving risks (relating to risks already earned).

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3
Q

Risk tolerance

A

The required confidence level stated in the risk measure. It is simply a parameter that links the risk measure to the risk profile, to a single capital amount.

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4
Q

Risk measure

A

Links the outcome to the capital required to achieve that outcome. Will be defined in terms of a required confidence level and a time horizon

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5
Q

Risk profile

A

The risks that have been modelled (including the way that they have been modelled) and the key outcome used to measure success or failure (eg: a financial outcome such as profit)

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6
Q

Economic Capital

A

The amount of capital that a provider determines is appropriate to hold given its assets, liabilities and business objectives

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7
Q

Regulatory/ Solvency capital

A

The amount of capital an insurer is required to hold for regulatory purposes

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8
Q

Required Capital

A

Capital is set aside to allow the insurer to withstand losses, Thus the amount of capital an insurer needs depends on may factors, including the risks the insurer is exposed to and the desired level of loss absorption ability

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9
Q

Available Capital

A

The excess of an insurer’s financial assets over the value of liabilities is colloquially known as capital, and more specifically, available capital

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10
Q

Group risk

A

The risk a firm experienced from being part of a group as opposed to being a standalone entity.

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11
Q

Credit risk

A

The risk of financial loss due to another party failing to meet its financial obligations (ie pay amounts to the insurer), or failing to do so in a timely fashion. This is split into investment credit risk and counterparty credit risk.

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12
Q

Economic risk

A

The risk of investing in certain asset classes at certain stages in the economic cycle when the assets are overpriced

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13
Q

Market risk

A

The risk that, as a result of market movements, a firm may be exposed to fluctuations in the value of its assets or in the level of income from its assets. This risk exists to the extent that any movement in assets is not matched by a corresponding movement in liabilities. This will be split into asset values, value of liabilities and mis-match between assets and liabilities.

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14
Q

Currency risk

A

The risk that changes in the value of the assets, or the liabilities of the company adversely impact the available capital or investment funds

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15
Q

Liquidity risk

A

The risk that a firm if unable to meet its obligations as they fall due as a consequence of having a timing mismatch or a mismatch between assets and liabilities. This risk is associated with managing timing relationships between assets and liabilities.

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16
Q

Cost based systems

A

This is where the premium adjustments are based on the total amount of claims incurred in respect of the policyholder over a defined period

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17
Q

Number based systems

A

This is where premium adjustments are based on the number of claims paid in respect of the policyholder, and the amounts of the claims are ignored

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18
Q

Retrospective rating

A

The premium for the current policy period is adjusted, based on the experience of that period of risk

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19
Q

Prospective rating

A

Uses the past experience as a rating factor

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20
Q

Experience rating systems

A

The premium for each individual risk depends, at least in part, on the actual claims experience of that risk. Eg, the more claims a policyholder has made in the past, the more likely they will make claims in the future.

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21
Q

ILFs

A

Applies to risks where there is no upper bound to the loss, in this case it does not make sense to express the limits as a percentage of the loss. We therefore choose a relatively low primary limit and calculate the risk premium if the insurer were to cap claims at that level. We then construct a table of multiplicative factors giving the ratio of the premium for higher limits to the basic limits premium.

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22
Q

XL scales

A

Similar to a first loss scale except they give the proportion to be allocated to excess layers rather than the primary layer

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23
Q

First loss scales/exposure curves

A

Usually seen in property business, these curves give the proportion of the full premium allocated to primary layers where losses are limited at different value

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24
Q

Original loss curves

A

Original loss curves provide another way for us to split the risk premium into various layers. We commonly use them in pricing to infer prices for layers at which the data are too sparse to derive a credible experience rate.

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25
Multivariate models (GLMs)
Provides a way of estimating the effect that different combinations of rating factors have on a certain response variable. Can be used to model frequencies, average claim amounts and aggregate claim amounts.
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Annual aggregate limit
The maximum amount that the insurer can retain when all losses for an annual policy period are aggregated
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Per occurrence limit
The maximum amount that the insurer can retain for each individual loss
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Trailing deductible
The amount that is retained by the insured for each individual loss once the aggregate deductible has been fully eroded
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Ranking deductible
The ranking component of a deductible does contribute towards and insured's aggregate deductible
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Non-ranking deductible
The non-ranking component of a deductible (applied to each individual loss) does not contribute to an insured's aggregate deductible
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Aggregate deductible
The maximum amount that the insured can retain within their deductible when all losses are aggregated
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Frequency-severity approach
We asses the expected loss cost for a particular insurance structure by estimating the distribution of expected claim frequencies and severities and combining the results. Assumes the loss frequency and severity distributions are not correlated.
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Indexed burning cost
Burning cost with adjusted or indexed data.
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Effective burning cost
The burning cost using unadjusted data
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Burning cost approach:
The burning cost is the actual cost of claims during a past period of years expressed as an annual rate per unit of exposure. BC = Aggregate claims/ Total exposed to risk
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Diagnostic
A measure used to assist with interpretation of data or results and to help us test and verify the underlying methodology and assumptions. It can indicate that experience is inconsistent with the assumptions.
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Bayesian approach
The prior distribution of the predicted variable is first chosen based on judgement or experience. Then the posterior distribution of the predicted variable is calculated using Bayes' formula
38
Over-dispersed Poisson model
The method is based on modelling incremental claims on the assumption that they follow an ODP distribution. Key assumptions: 1. the run-off pattern is the same for each origin period 2. Incremental claim amounts are statistically independent 3. The variance of the incremental claim amounts is proportional to the mean 4. Incremental claims are positive for all development periods
39
Bootstrapping
Involves sampling (with replacement) multiple times from an observed data set in order to create a number of pseudo data sets. We can refit the model to each new data set, and obtain a distribution of the parameters.
40
Monte Carlo simulation
A simulation method to obtain predictive distributions of reserves
41
Mack model
Reproduces chain ladder estimates, and makes limited assumptions about the distribution of the underlying data, specifying the first two moments only. Key assumptions: 1. The run-off pattern is the same for each origin period 2. the future development of a cohort is independent of historical factors 3. the variance of the cumulative claims to development time t is proportional to the cumulative claims amount to time t-1
42
Average cost per claim method
We estimate two separate components for each origin year: the claims frequency, which relates to the number of claims, and the claims severity, which relates to the average size of those claims
43
Bornhuetter-Ferguson method
A credibility estimate, based on a weighted average of an expected level of claims as estimated by the loss ratio method, and a projection of the ultimate claims based on experience to date as estimated by the chain ladder method
44
Expected Loss ratio method
A loss ratio method requires a measure of exposure, where the loss ratio it the cost of claims per unit exposure
45
Chain ladder method
A statistical method of estimating the ultimate value of a set of development data, whereby a weighted average of the past development is projected into the future
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Variable expenses
Expenses that vary according to the amount of insurance business being handled
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Fixed expenses
Expenses that remain fixed regardless of how many policies is sold
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Indirect expenses
Those that relate general management and service departments that are not directly involved in new business acquisition or policy maintenance activities, and that are insensitive to either the volume of new business or the level of business on the books.
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Direct expenses
The expenses we allocate accurately to individual policies, whether new business acquisition or the administration of business on the books
50
Court awards
Courts determine liability and award compensation for wrongs suffered by organisations or individuals. They can affect both the frequency and severity of liability insurance claims.
51
Soft market
the unprofitable market with low premiums
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The underwriting cycle
When insurance premiums are high and profitable, more insurers enter the market because they want a share of the profits. This increases competition, which proceeds to drive down premiums. Low, unprofitable premiums lead to insurers struggling to stay afloat. Some insurers become insolvent and leave the market, while others write less business (either by choice or because they do not have enough capital to write more business). This reduces competitive pressures and allows the remaining insurers to increase premiums until business is profitable again. And so the cycle continues.
53
Hard market
the profitable market where premiums are high
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Syndicates
Groups of members who collectively coinsure risks
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Corporate names
A limited-liability company whose only business is to provide capital to Lloyds
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Names
Individual members of Lloyds
57
Clash cover
An form of XoL cover for liability business, obtained by insurers to limit their exposure to the risk that one event gives rise to claims on more than one policy, where otherwise the insurer might be liable for claims up to any retention limit for each individual policy
58
Hours clause
A clause within a catastrophe reinsurance treaty that specifies the limited period during which claims can be aggregated for the purpose of on claim on the reinsurance contract.
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Reinstatements
After a number of separate events have collectively drained the available XoL cover, the reinsurer will allow one or more reinstatements of the coverage. The premiums may be more ore less than the original premium scaled down for the unexpired risk term.
60
Indexed limits (stability clause)
Where inflation has a significant effect on the cost of claims, a stability clause may be applied to the excess point
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Working layer
The first layer above the cedant's excess point (retention) where moderate to heavy loss activity is expected by the cedant and reinsurer
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Estimated maximum loss (EML)
The largest loss that is reasonably expected to arise from a single risk
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Number of lines (L)
This is the specified in the contract and is used to calculate the maximum cover available from the reinsurer. The maximum cover available from the reinsurer is calculated as L x R.
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Maximum retention (R)
This is the maximum level of retention for any risk to be included in the treaty and will be specified in the treaty
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Minimum retention
This is the minimum level of retention the reinsurer requires to prevent the insurer from having too little interest in the risk
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Profit commission
The reinsurer pays the direct writer as a reward for passing on goof business.
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Return commission
The reinsurer will reimburse the direct writer with some percentage of the premium to help cover the acquisition expenses.
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Ceding commission
The sum of the return and override commission.
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Override commission
The commission over and above the return commission, to compensate the direct writer for the extra work that the direct writer will have carried out in attracting and administering the business.
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Policies-incepting basis (aka risks attaching)
The reinsurer provides cover to the direct writer for the claims arising from all policies written under the treaty over a period, ie corresponding to an "underwriting-period". Usually for proportional reinsurance.
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Non-proportional reinsurance
The reinsurer covers the loss suffered by the insurer that exceeds a certain amount, called the excess point (or retention)
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Proportional reinsurance
The reinsurer covers an agreed proportion of each risk and the reinsurance premium is proportional to this risk ceded.
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Reciprocal arrangements
Whereby each insurer reinsures a block of business with the other.
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Facultative/ Obligatory treaty basis
For each risk, the insurer has the choice of whether to include it in the treaty, but the reinsurer is obliged to accept all the requested risk. Such treaties are normally associated with reciprocal arrangements.
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Obligatory/ Obligatory treaty basis
The ceding insurer is obliged under the terms of the treaty to pass on some of the risk in a defined manner and the reinsurer is obliged to accept it.
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Treaty reinsurance
Whereby groups of similar risks are reinsured on pre-arranged terms under one reinsurance arrangement. This allows them to place business with the reinsurer automatically,
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Facultative reinsurance
When each individual risk on which reinsurance is required is offered separately to a reinsurer. Usually for large one-off risks, or to risks that fall outside the scope of any treaty reinsurance.
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Reinsurance to close (RITC)
With 3-year accounting, there will be some residual liabilities from business written at the end of the third year. RITC is a convention at Lloyd's to pay a premium to another account to pass on these liabilities (or reinsure).
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DAC
When policies are written the insurer pays commission and other initial expenses. At the accounting date those acquisition costs have been paid out but not wholly incurred for any policy that is unexpired at the time, just as part of the premium received has not yet been earned. DAC is usually a significant debtor item (ie asset) in the insurer’s accounts. It is like a negative reserve. Decreasing DAC reduces the insurer’s profit, just as increasing reserves does.
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Funded accounts
Which consider the business written in each year and do not permit the release of profits until the end of a subsequent year (usually the third year)
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Annual accounts
Which consider all income earned and outgo incurred in a year and permit the release of profits at the end of that year
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Constructive total loss
Where the insured abandons the insured item because an "actual total loss" is unavoidable or because the costs of preventing a total loss exceed the value saved.
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Escalation clause
An inflationary increase applied annually to the sum insured of contents insurance, in order to prevent policyholders becoming underinsured.
84
Rating factors
The expression for the factors actually used in the premium rating process is rating factors. Rating factors will be either objectively measurable risk factors or other factors that can be used as reliable proxies for the risk factors.
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Risk factors
Risk factors are any factors that have a bearing on the amount of risk.
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Pure risk premium
The pure risk premium is the premium required to cover the expected claim amount only.
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Claims-made policy
A claims-made policy covers all claims reported to an insurer within the policy period irrespective of when they occurred. Even if the claim event happened while the insurance policy was not active, it will still be paid if the policy is in force when the claim is reported.
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Losses-occurring policy
A losses-occurring policy is a policy providing cover for losses occurring in the defined period no matter when they are reported. Cover is provided if the loss occurs while the insurance policy is active.
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Underwriting
Underwriting is the process of consideration of insurance risk on individual policies. This includes assessing whether the risk is acceptable and, if so, the appropriate premium, together with terms and conditions of the cover.
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Subrogation
Subrogation means that the insurer replaces the policyholder in law and acquires all rights and responsibilities in legal matters regarding the loss suffered, be it before or after the claim has been settled.
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First loss
First loss is a form of insurance cover for which the chosen sum insured is restricted, with the insurer’s agreement, to a figure less than the full reinstatement-as-new value of the property.
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Underinsurance
If the contents of your home are worth R100 000 then you should take out a home contents policy with a sum insured of R100 000. However, you may choose a policy with a sum insured of only R80 000 because you have under-estimated the value of your belongings, or because you think the chance of losing more than R80 000 is very small.
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Principle of average
if the sum insured is less than the full value of the property at the time of a loss, the insurance payment will only be a proportion of the value of the loss – the same proportion as the sum insured bears to the full value
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Moral hazard
moral hazard refers to the insured becoming less risk averse after taking out insurance
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Uberrima fides
This honesty principle is assumed to be observed by the parties to an insurance, or reinsurance, contract
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Committed (or contingent) capital
Based on a contractual commitment to provide capital to an insurer after a specific adverse event occurs that causes financial distress. The insurer purchases an option to issue its securities at a predetermined price in the cause that the defined situation occurs, on the understanding that the price would be much higher after such an event.
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Risk factor
A factor that is expected, possibly with the support of statistical evidence, to have an influence on the intensity/ amount of risk in an insurance cover.
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Rating factor 3
1. A factor used to determine the premium rate for a policy 2. It must be measurable in a objective way and relate to the intensity of the risk 3. It must, therefore, be a risk factor or a proxy for a risk factor
F103 Semester 2
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