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achieved profits (uk)
Prudential - investors glossary
Category: Economy and Finance > Investing
Date & country: 24/09/2007, UK
In the UK, achieved profits are embedded value profits and are calculated by discounting back the surplus expected to emerge on the in-force business. They are calculated by using prudent economic and operational assumptions (e.g. investment returns, surrenders, expense inflation). Importantly, they are not cash earnings in the sense that they do not correspond with a cash flow measure, and they are sensitive to assumptions. They do not factor in profits on business to be written in the future. The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting (MSSB), but the timing of recognition is different. Achieved profits aim to give a more realistic measure of profitability for management and valuation purposes than other reporting measures.
Costs incurred in writing new business. These typically include commissions paid to intermediaries, marketing and other related expenses. In specific accounting systems, acquisition costs are accounted for as an asset and amortised over time (deferred acquisition costs): this leads to a smoothing of up-front expenses. Acquisition costs are often responsible for new business strain, especially in life insurance.
Please see Commerical Insurance for who to contact.
Costs of an administrative nature related to the ongoing management of insurance policies. They contrast with acquisition costs and investment expenses, the latter being related to the cost of managing invested assets. Also known as management expenses.
admissible (admitted) assets
Assets admissible to cover policyholder liabilities for the purpose of demonstrating solvency to the regulator. Some assets may be inadmissible because they are not specifically mentioned in the regulations, or because the company has reached the admissibility limits for the investment class or a given asset.
If only policyholders with a high-risk profile seek insurance, there is no averaging of losses for the insurer, which undermines a key insurance principle. Insurance companies need to limit the risk of adverse selection, and ensure that not only the 'bad' risks seek insurance. The compulsory coverage of specific risks for all policyholders can be a solution to alleviate the effects of adverse selection.
alternative risk transfer (art)
Use of capital markets to cover insurance risks, e.g. with the securitisation of catastrophe risks.
The purchase price of a redeemable fixed income security adjusted by any increase or decrease in value, representing the proportion of any difference between the acquisition price and the final redemption proceeds of the investment.
annual premium equivalent (uk)
Annual premium equivalent is a common sales measure in the UK. APE is calculated as total new business regular premium plus 10% of new business single premium. It gives a broadly comparable measure across companies to allow for differences between regular and single premium business.
annual premium policy
Also known as a regular or periodic premium policy.
Policyholder receiving an annuity, typically a person at retirement receiving a pension.
A life insurance policy where an insurance company pays an income stream to an individual, usually until death, in exchange for the payment of a lump sum. Commonly used at retirement when lifetime savings are converted into an income. At death, there is usually no payment to the estate, although many annuities include a provision to pay an income to the spouse. Immediate annuities provide an income from the date the policy is accepted, and deferred annuities at a future date. Unless part of the investment risk is transferred to the annuitant (e.g. in a UK with-profits annuity), annuity business is non-profit business and is usually matched with fixed income investments. Longevity risk is an important consideration for insurance companies, and a possible source of losses if annuitants live longer than initially expected.
appointed actuary (uk)
An actuary appointed by a life insurance company, as required by legislation. The main statutory role of the appointed actuary is to carry out a regular valuation of the provisions held to pay future policy benefits.
The value of a life insurance company, comprising its embedded value and a goodwill value. The latter is a value for policies not written at the reporting date. The appraisal value is used in the context of M&A operations, for instance. Only the embedded value is published by insurance companies on a regular basis.
asset share (uk)
A realistic estimate calculated as the sum of the premiums received and accrued investment returns, less expenses. The asset share gives an indication of the underlying value of a life insurance policy, in comparison with the amount effectively reserved for under regulatory guidelines. In simple terms, the asset share is what the insurer holds to cover a policy, and reserves are what it needs to cover it.
assets under management
Total assets managed by an insurance company, including those not held on the balance sheet. Many insurance groups manage assets for third parties outside the context of insurance. These assets are reported as off-balance sheet assets under management.
available assets (uk)
For a regulated operating insurance company, total assets minus total liabilities. They are the assets available to cover the required minimum margin of solvency. Mathematically, available assets are equivalent to the sum of free assets (excluding future profits) and the required minimum margin of solvency.
Usually refers to benefits paid to policyholders in the form of claims paid, policyholder bonuses, profit-sharing and other accrued benefits.
bonds of caution
Please see Commerical Insurance for who to contact.
Usually refers to a non-guaranteed benefit added to life insurance policies. A company will usually have a lot of discretion over the level of bonuses it allocates to contracts. Once allocated, bonuses may or may not be reversed by the insurer in case the contract is terminated early.
An independent agent who acts on behalf of the insured in placing business with an insurance company. Brokers are usually compensated with commissions, and may help collect premiums, although they do not provide insurance coverage. In some cases they are compensated with fees paid for by the insured. In the UK, IFAs are brokers. Tied agents or an insurance company's salesforce, on the contrary, sell products from one single provider and are agents of the insurance company.
bulk purchase annuity (bpa) (uk)
Describes a contract between an occupational pension fund and an insurance company, whereby an insurance company insures the liabilities of the occupational pension fund. This is usually when the fund is wound-up. The BPA market is concentrated in the hands of a few UK insurance companies with large balance sheets and resources to value and administer the funds.
A specific type of non-life insurance policy guaranteeing the loss of income resulting from the occurrence of specific risks. As an example, a company can cover its income against the consequences of bad weather on its activity.
The concept is usually used at the Lloyd's market, and with reference to a given insurance market (e.g. reinsurance) and it refers, broadly speaking, to the capital available to subscribe non-life insurance risks. It is dependent upon the capitalisation of the sector and minimum regulatory capital requirements.
capital at risk
Under EU regulation, it generally refers to the sum assured on life insurance business (e.g. the amount payable on death) less the mathematical provision. A charge on capital at risk is made in the solvency ratio.
captive insurance company
An insurance company usually set up by a large non-insurance group, such as a multinational organisation, and which aims to provide cheaper insurance coverage than available in the general market. Captives are often set-up in offshore markets with a favourable tax and regulatory framework. They insure the group's operations, and seek insurance/reinsurance externally whenever appropriate.
The type of insurance related to legal liability for losses caused by bodily injury to others or physical damage to the property of others.
A bond issued by an insurance or reinsurance company where repayment and/or payment of the coupon are linked to the occurrence of a catastrophic event (e.g. earthquake). This form of financing is part of alternative risk transfer mechanisms.
ceding insurer (cedent)
The insurance company (primary insurer) transfers some of its insurance risks to another insurance company through a reinsurance contract. Policyholders of the primary insurance company have no contractual relationship with the reinsurer: the primary insurer remains liable for insurance coverage even if the reinsurer defaults on its obligations.
See reinsurance. The operation by which an insurance company transfers some of its risks to a reinsurance company.
The amount payable under an insurance contract and arising from the occurrence of an insured event.
A claim is incurred when the event that gives rise to the claim occurs. Claims incurred include paid claims and the change in the provision for outstanding claims, irrespective of whether or not they have been reported.
See loss ratio.
Provision made to cover reported claims. See loss reserve.
closed to new business
An insurance company (or fund) that is closed to new business no longer accepts funds from new clients. It may still receive premiums on existing contracts, e.g. on regular premium business. Liabilities are managed until the last policy expires - which may take years. A company closed to new business may still be able to pay dividends to its shareholders. See run-off.
(i) Co-insurance involves the sharing of an insurance risk between two or more primary insurance companies. There is a contractual link between the insured and the various insurance companies: this mechanism differs from reinsurance; (ii) Co-insurance sometimes relates to the sharing of a risk between the insured and an insurance company, with the benefit of a lower premium charged by the latter.
In non-life insurance, the ratio of claims and operating expenses as a percentage of premiums; also equivalent to the sum of the loss ratio and the expense ratio. Depending on the definition, the rat calculated with either earned or written premiums. It is expressed gross of reinsurance (i.e., before taking into account the sums received back from reinsurers), or net (i.e., after receiving proceeds from reinsurance protection). It is usually analysed by line of business, and by geography. A ratio inferior to 100% indicates that the company makes an underwriting profit, i.e. premiums more than cover the cost of claims and operating expenses. A ratio superior to 100% indicates the company has an underwriting loss: the higher the ratio, the greater the underwriting loss. A company with a combined ratio greater than 100% can still be profitable, however, because investment income is not factored in. The combined ratio can be volatile in industrial risks/reinsurance, where large claims in a given year will have a major effect on the ratio; it is typically more stable in personal lines.
Prudential has for a number of years conducted commerical insurance. These policies included Public Liability, Employers Liabilty, Administration Bonds, Bonds of Caution, Defective Title, Restrictive Covenant, Legal Indemnity and Legal Contingency. The administration of these policies is done by a third party, VSB Services. If you have any queries or a claim, please contact VSB Services by telephone on 020 7400 9999 or by letter at Riverbridge House, Anchor Boulevard, Crossways, Dartford, Kent, DA2 6SL.
By opposition to personal lines, commercial lines in non-life insurance cover business interests.
Coverage of a number of different risks (e.g. third-party liability, fire, theft in motor insurance).
Any type of insurance that is required by law. As an example, third-party motor insurance is usually compulsory, but not protection against theft.
consolidation ratio (sweden)
A ratio used by Swedish life insurance companies comparing total assets with total liabilities; it is a measure of solvency.
Form of insurance covering losses suffered by the default of policyholders' customers. This is a specialised insurance business where a handful of global insurance groups have a dominant market share. Underwriting results are dependent upon macro-economic conditions and the level of insolvencies in the economy.
critical illness insurance
Covers the risk of the insured suffering from long-term ailments. Death does not need to occur for a payout to be made by the insurance company.
current value of investments
Refers to the market value of investments.
Portion of the loss kept by the insured; the insurance company only covers losses in excess. A deductible contributes to lower management expenses, helps cut premiums and reduce moral hazard in insurance. Also known as excess.
Please see Commerical Insurance for who to contact.
deferred acquisition costs (dacs)
Costs accounted for as an asset and amortised over time to match the emergence of a surplus on life insurance policies. They effectively match the recognition of acquisition costs as an expense on the P&L with fees/profits emerging on a life insurance policy. DACs are intangible assets and may need to be written off if the profits expected to emerge on the life insurance book of business are deemed insufficient to cover DACs.
A deferred annuity starts only after a number of years, for instance at retirement, by comparison with immediate annuities, where a regular payout starts immediately.
defined benefit pension scheme
An occupational pension scheme where the benefits paid to the annuitant depend on the number of years in service and the salary at the time of retirement. Also known as a final salary scheme in the UK.
defined contribution pension scheme
An occupational pension scheme where the benefits served to members depend on the final value of accumulated contributions and investment income. They differ from defined benefit schemes, where benefits depend on the number of years in employment and the salary level. Also known as a money purchase scheme in the UK.
Refers to the process whereby a mutually owned financial institution, for instance an insurance company, is being converted into a stock company. Members usually receive shares in the new company, and in some cases a cash windfall, in exchange for their ownership rights.
An insurance company selling insurance directly through its employees, without the use of independent intermediaries. Note the difference with the concept of primary insurance company, used in the context of reinsurance transactions.
The reduction to present value at a given date of a future cash transaction at an assumed date, using a discount factor reflecting the time value of money. The choice of a discount rate will usually greatly influence the value of insurance provisions, and may give indications on the conservatism of provisioning methods.
Usually dividends paid to shareholders, although in some cases, especially in the US, policyholder dividends refer to policyholder bonuses/benefits.
Usually refers to a situation where a holding company raises debt and downstreams it as equity capital, or subordinated debt, to an operating insurance subsidiary. The operation contributes to an increase in the solvency of the operating company but at the expense of an increase in consolidated indebtedness.
dti returns (uk)
Former name given to regulatory returns, when the Department of Trade and Industry (DTI) regulated UK insurance companies. Now called FSA returns.
Premiums covering the accounting year, by comparison with premiums written, which are simply written during the year. Earned premiums are effectively premiums attributable to the risks borne by the insurer during the accounting year. For instance, for a 12-month policy signed on 1 November 2002, the premium written in 2002 is the full premium, but only two months of the premium are earned in 2002; the rest (10 months) relate to risk coverage in 2003 and is earned in 2003.
In the context of a catastrophic event, in particular, the insured loss differs from the economic loss because not all losses are insured. The insured loss only reflects the portion of the losses covered by the insurance and reinsurance industry; the economic loss reflects the total loss for the economy. For catastrophic losses, the difference can be substantial in markets where the penetration of insurance is low, or when the risk that caused the damage was an uninsurable event.
The sum of the net asset value of a life insurance company and the discounted value of profits expected to emerge on business already written. The latter is calculated with a set of economic and operational assumptions. A deduction for the effect of holding the minimum statutory solvency margin is usually made. The embedded value excludes any value that may be attributed to future new business: this would be captured in the appraisal value.
embedded value profits-margins
The difference in embedded value between two dates gives the embedded value profit. Embedded value margins are calculated by comparing such profits with new business premium.
employers' liability insurance
Employers' liability insurance provides coverage to employers against claims made by employees who are injured or become ill as a result of their work.
Mortgages where repayment is effected through an endowment policy. At maturity, the endowment policy should repay the loan; if the borrower dies before maturity, the sum assured will repay the loan. In the UK, endowment mortgages have been popular, but tax changes, lower investment returns, and the emergence of modern, flexible repayment mortgages have made them less attractive and many providers have removed them from their product offerings.
A contract with a savings component involving asset accumulation, and a life insurance protection component. If death occurs before maturity, the sum assured is paid out. At maturity, the amount built-up is payable. Endowment policies can be written in a number of different forms (unit-linked, with-profits, non-profit), and are long-term contracts.
In non-life insurance and reinsurance mainly, a reserve set-up to cover high-severity, low frequency claims (e.g. catastrophic events). Tax regulation limits the constitution of equalisation reserves. Because it does not relate to incurred losses, it is sometimes added to solvency capital. It is built over periods when claims experience is better than average to strengthen the balance sheet.
equity-backing ratio (uk)
The ratio of equity investments (and sometimes, property investments) as a percentage of total assets (or sometimes, assets in the with-profits fund only). The equity-backing ratio shows the exposure of the insurance company to more volatile equity investments. Only companies with a strong capital base will typically be able to maintain a high equity-backing ratio, as they have the capital necessary to weather the volatility of equities.
excess of loss reinsurance
A form of reinsurance contract where the ceding insurance company pays claims up to a certain level, and then is covered by the reinsurance company. The participation of the reinsurer in the claims effectively depends on the size of the claim. This is a form of non- proportional reinsurance.
The ratio of operating expenses as a percentage of premiums gives an indication on the efficiency of the business independent of the claims experience and the performance of the investment portfolio.
The reinsurance company decides to cover or not individual risks presented by the ceding insurance company. Differs from treaty reinsurance.
The market price of an instrument, either an asset (e.g. an investment) or a liability (e.g. an insurance policy). It is the price at which the instrument would be exchanged freely between two parties. A key concept under International Accounting Standards.
final salary scheme (uk)
See defined benefit pension scheme.
Often refers to a reinsurance operation concluded primarily to stabilise the balance sheet of the ceding insurance company and provide capital support. There is no clearly accepted definition of what financial reinsurance involves.
Insurance and reinsurance policies where the aggregate risk to the insurer or reinsurer is capped at a given ceiling. Finite risk contracts are usually long-term contracts, and include a profit-sharing mechanism.
fluctuation (revaluation) reserve
Under some accounting standards, a portion of realised or unrealised gains on investments is accounted for in a fluctuation or revaluation reserve to smooth earnings. It is part of the insurance company's capital base.
form 9 (uk)
Probably the most commonly used section of FSA returns, Form 9 gives the summary solvency position of a regulated insurance operating company.
free asset ratio (uk)
For UK life insurance companies only, a solvency measure calculated as (available assets minus the required minimum margin of solvency)/admissible assets. Everything else being equal, the higher the free asset ratio, the higher the level of surplus capital relative to the asset base. Note that different definitions exist in the industry and that headline free asset ratios may not be directly comparable; further, in some cases future profits are included. Reported free asset ratios are dependent on assumptions made to value liabilities.
free assets (uk)
Assets available on top of a life insurance company's liabilities and the required minimum margin of solvency. It is effectively a measure of surplus capital, and shows what is left 'free' once minimum solvency requirements have been covered. The measure is sensitive to assumptions used to value liabilities, e.g. the choice of discount rates. The concept of available assets in FSA returns is close: available assets are calculated as total assets minus total liabilities, before deducting the required minimum margin of solvency. Note that in some cases the free asset ratio includes future profits, an intangible asset.
In reinsurance, the practice of the ceding company to retain only a small portion of a risk and to cede the remainder to a reinsurance company.
The Financial Services Authority, the UK regulator for the financial services industry.
fsa returns (uk)
Regulatory returns sent annually to the Financial Services Authority and prepared for each regulated operating insurance company. FSA returns comprise detailed financial information on solvency, investments, business mix, claims and premiums, etc. and are publicly available. Note the difference with the Report & Accounts, which are prepared under a different set of accounting standards and filed with Companies House.
In life insurance, it often refers to a pool of assets managed separately for asset and liability management purposes. Funds may be legally or contractually segregated, in which case the company has limited freedom to move assets between them. As an example, the with-profits fund of a UK life insurance company is earmarked and is managed separately from the non- profit fund, which covers non-profit business; however, both may be part of the same operating company. The fact that an insurance company's balance sheet is separated into sub-funds does not mean that, in the unlikely event of liquidation, the sub-funds would be treated separately.
A concept used in EU regulation referring to the profits expected to emerge in a life insurance company. They are calculated retrospectively based upon the profits that emerged in the previous years, and are admissible in the regulatory solvency margin of the company, under certain conditions. They exist because of the conservative assumptions used to value liabilities under statutory accounting. The concept does not apply to non-life insurance. There is a debate on the value of this intangible asset, and the EU has announced future profits would no longer be admissible in solvency capital starting in 2009. Importantly, comparisons between companies may be biased if one company reports future profits and the other does not: reported solvency ratios for the latter will, everything else being equal, be lower.
general account (us)
In life insurance, the general account excludes separate accounts, i.e. it excludes unit-linked business where investment risk is transferred to policyholders.
general insurance (uk)
Another expression for non-life insurance.
Usually means 'gross of reinsurance', i.e. before taking into account reinsurance operations (e.g. gross combined ratio, gross underwriting result, gross claims, gross premiums). In the context of investment income, it refers to a measure before deducting investment expenses (i.e. before deducting the cost of managing assets). In the context of income, it usually refers to a pre- tax measure (e.g. gross income).
gross premium method
A method for placing a value on a life insurance company's liabilities that explicitly values the future office premiums payable. In addition, it usually values explicitly future discretionary benefits and future expenses. As a result, the method values explicitly liabilities in respect of future renewal expenses and (for with-profits business) future bonus additions, unlike the net premium, where allowances for these factors are implicit. Note the difference with the net premium method.
gross premiums written
See premiums written.
(i) Under EU regulation, a minimum level of solvency insurance companies must cover with solvency capital. It is the very minimum level of funding required by EU legislation, below which some more severe form of regulatory intervention would happen; (ii) Also relates to market guarantee funds, where losses stemming from defaulting insurance companies are covered with a safety net.
guaranteed surrender value
In life insurance, the minimum value the policyholder is entitled to receive if he/she decides to surrender (cancel) a policy. Guaranteed surrender values are mostly relevant for accumulation- type life insurance policies, e.g. savings, and vary greatly across Europe. The asset mix of a life insurance policy will partly depend on the level of guaranteed surrender values: the higher the value, the lower investment flexibility for the insurer, meaning investments are more likely to be in fixed- income assets.
Refers to market conditions in non-life insurance/reinsurance where premiums are increasing and terms/conditions strengthened for the benefit of the insurer. See soft market.
See unrealised capital gains. They sometimes refer to a conservative level of insurance liabilities, where some of the provisions are likely to be released over time, meaning there is 'hidden value' built into the liabilities.
home service company (uk)
An insurance company collecting premiums at policyholders' homes. This type of business has declined rapidly in the recent years.
Usually refers to subordinated securities where the deep subordination of creditors, a long maturity, and interest deferral features provide a buffer for the protection of policyholders.
The payment of an income stream starts immediately after the contract is concluded. Immediate annuities differ from deferred annuities.
Usually relates to policyholders with a reduced life expectancy, e.g. as a result of ill-health. There is a market for 'impaired life annuities', where annuitants with ill-health may be able to find better pensions terms based on a reduced expected payout duration.
Implicit items are intangible assets, which under certain conditions are admissible to cover an insurance company's required minimum margin of solvency. They appear because of the conservatism built in the valuation of liabilities by insurance regulation. Future profits are implicit items.
Insurance on which the premiums are being paid or have been fully paid. In other words, the portfolio of policies active at a given point in time. In life insurance, the 'value of business in-force' is the discounted value of the profits expected to emerge on in-force business.
income drawdown (uk)
Instead of converting a lump sum into an annuity, a retiree may decide to keep money invested and draw down an income from the fund, until the age of 75. The retiree effectively keeps the fund at risk, and retains more flexibility than with an annuity.