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industrial branch (uk)
Prudential - investors glossary
Category: Economy and Finance > Investing
Date & country: 24/09/2007, UK
Refers to life insurance business where door-to- door sales people collected premiums at the policyholder's home. The concept is somewhat dated, but is still found in FSA returns.
The expression refers to the coverage of large non-life insurance business risks.
inherited estate (uk)
For life insurance proprietary companies, surplus capital available on top of what is necessary to cover policyholders. reasonable expectations. An inherited (orphan) estate is effectively surplus capital on a realistic basis, built over time in the last fifty years, and not allocated to policyholders or shareholders. Some companies have tried to allocate this capital between policyholders and shareholders, but regulatory restrictions make the process relatively difficult.
The concept of insolvency usually refers to insolvency under insurance regulation, which tends to be more conservative than the concept of insolvency under company law. It is different from the concept of liquidation (winding-up).
The EU terminology for an insurance company or mutual.
The person on whose life the policy is issued.
See the article on economic loss.
Reinsurance contracts between affiliates of the same group to help manage capital and transfer risk within the group. Intra- group reinsurance operations would typically be excluded from consolidated financial statements.
investment trust (uk)
A listed investment company. It invests in shares of other companies, and can be geared with borrowings. Its share capital is fixed, not like an OEIC, and the stock price may not reflect the investment trust's net asset value.
Reinsurance business accepted by an insurer or reinsurer, as opposed to that ceded to another insurer.
Occurs when the policyholder has failed to pay the premium. Differs from surrenders, although statistics often show 'lapses and surrenders' together.
Please see Commerical Insurance for who to contact.
Please see Commerical Insurance for who to contact.
life insurance provision
The actuarial estimate of the liabilities of a life insurance company. It excludes the required minimum margin of solvency but, in the UK, it includes the resilience reserve.
Refers to a life insurance policy where benefits are expressed in a unit of account, usually an investment fund. Benefits are effectively 'linked' to the value of the underlying units rather than fixed benefits set up at inception or a share of a participating fund.
With long-tail liability business, claims can be presented to the insurance company a long time after the occurrence of the trigger event. As a result, the insurer is exposed to claims for a number of years after subscription, even though the risk may no longer be covered; estimating the likely cost of such claims can be difficult. This exposes the insurer to the deterioration of its claims experience due to changes in the legal environment, for instance. Asbestos and environmental claims are typical examples of claims made under long-tail liability contracts.
long-term business (uk)
UK regulatory expression broadly equivalent to life insurance and pensions.
Care provided to those who are unable to look after themselves without some kind of support. Some insurance policies pay out an income in case the policyholder needs such help.
long-term fund (uk)
The long-term fund consists of assets that are attributed to long-term (life insurance) business. In the case of a proprietary office, the fund excludes shareholders' assets.
The loss adjuster investigates and assesses losses, and negotiates settlement with the claimant, usually on behalf of the insurance company.
In non-life insurance, the ratio of claims expenses to premiums. Claims expenses include claims paid, a provision for unpaid claims and an adjustment in the outstanding claims provision; premiums are usually earned premiums. The lower the ratio, the better the underwriting performance of the insurer. The ratio can be calculated net or gross of reinsurance, i.e. after or before taking into account reinsurance receivables. The sum of the expense ratio and the loss ratio makes the combined ratio. Also called claims ratio.
An estimate of the cost of claims incurred but not yet settled. The loss reserve includes IBNR, which allow for claims not reported to the insurer at the time the balance sheet is calculated.
See administrative expenses.
market value accounting
Investments are valued at their current market value. This compares with historical cost accounting. Depending on accounting standards, the balance sheet of an insurance company may be reported on a market value basis, or unrealised capital gains may be reported off-balance sheet.
market value adjuster factor (uk)
A penalty applied to with-profits bonds when policyholders surrender in poor market conditions. Most UK life insurance companies have applied the penalty recently to protect solvency levels and the benefits of remaining policyholders, and ensure that a fair share of the assets is paid out. In falling equity markets, the risk exists that, without such a penalty, policyholders would receive a payment in excess of the underlying asset value of their contracts (asset share). MVAs are an essential tool used by UK companies to protect their capital bases. Some contracts have no MVA provision, or are 'MVA-free' at specific anniversary dates, however.
See life insurance provision.
Agreed date when the policy comes to an end and benefits are paid (e.g. accrued value of the policy in the case of a savings policy) or when risk coverage stops (e.g. term insurance).
money purchase scheme (uk)
UK term for a defined contribution pension scheme. Employees/employers pay contributions to a fund, on behalf of employees: investment risk is borne by employees.
The attitude of a policyholder can increase the probability a loss is incurred, which represents moral hazard. For instance, an insured person may adopt a risky behaviour knowing an insurance company would cover losses ('I am insured, so I can drive fast'). Risk underwriting, the use of deductibles, and exclusions, are commonly used to reduce moral hazard.
Actuarial tables displaying the frequency of death for an individual, by sex and generation. The use of mortality tables is often regulated and drives pricing and reserving in life insurance. Adjustments to life insurance provisions are sometimes made to take account of changes in life expectancy and the use of new mortality tables.
mutual fund (us)
US form of collective investment vehicle.
(i) Refers to mutually owned companies, where certain categories of policyholders (members) have ownership rights; (ii) Refers to a key insurance concept where independent risks are pooled to become insurable.
Usually means 'net of reinsurance', i.e. after taking into account reinsurance operations (e.g. net combined ratio, net underwriting result, net claims, net premiums). In the context of investment income, it refers to a measure after deducting the cost of managing assets. In some cases, it refers to an after-tax measure (e.g. net income).
net premium method
A method for valuing a life insurance company's liabilities that involves valuing the contractual liabilities to date allowing for mortality and interest, and deducting the value of future net premiums. The premium brought into account will exactly provide for the benefits payable under the policy excluding any additions for future profits, expenses or other charges. A variation of the net premium method involves zillmerisation. See also gross premium method.
net premiums written
See premiums written.
new business premium
Refers to new contracts (policies) written in a given year, by comparison with premium income or premiums written, which usually include premiums collected on regular premium policies written in previous years.
new business strain
New business strain arises when the early years' premiums under a contract, less the initial expenses, are not sufficient to cover the provision and the required solvency margin that the company needs to set up. It mainly arises at inception, but it is possible to have further strains in subsequent years, usually lower. Rapidly growing insurance companies, or companies with a thin capital base, may find it difficult to finance this new business strain. The concept is mostly used in the context of life insurance.
Synonyms are general insurance (UK) and property & casualty insurance (US). Payments made by insurance companies are based on the loss incurred: they are not a fixed sum like in life insurance.
Assets covering non-linked life insurance business, i.e. excluding unit-linked business. To the extent that unit-linked business transfers most investment risk if not all to policyholders, credit analysts usually focus on non-linked assets when assessing the quality and volatility of a life insurance company's investment portfolio. In non-life insurance, all assets are usually non-linked assets, meaning that investment risk is borne by the insurance company.
A life insurance policy where the policyholder is not entitled to a share of the company's profits and surplus, but receives certain guaranteed benefits. Also known as non-profit in the UK. Examples include pure risk policies (e.g. fixed annuities, term insurance, critical illness) and unit-linked insurance contracts.
See excess of loss reinsurance.
See technical account.
occupational pension fund
Pension fund set up by an employer for the benefit of its employees, usually within a distinct legal structure. Contributions are paid either by the employer, the employee, or both. Occupational pension funds may be run as defined benefit schemes or defined contribution schemes. By comparison, personal pension schemes are contracts set up by private individuals.
In insurance, it refers to a company with a licence to write insurance policies, by comparison with pure holding companies, asset management companies, etc. which do not write insurance business. Regulatory solvency is mostly assessed at the level of operating companies, with a solvency ratio calculated for each operating entity within a group. New EU regulation has introduced consolidated solvency requirements to correct for double leverage and the use of the same capital in various parts of a group.
ordinary branch (uk)
By comparison with industrial branch business, with ordinary branch insurance the premium is paid by cheque, direct debit or other banking means and not with a cash payment. The concept is somewhat dated, but is still found in UK regulatory returns to the FSA.
orphan estate (uk)
See inherited estate.
Describes cessions in reinsurance, by comparison with inward reinsurance, which relates to acceptances.
A life insurance policy where the policyholder shares profits with the company's owners, by comparison with non-participating (non-profit) policies. In the UK, with-profits contracts are participating policies.
A pension arrangement under which benefits are paid out of revenue and no funding is made for future liabilities. Typical of the State pension system in many European countries, where the current generation of workers pays contributions to cover the pensions of the retired population.
pensions mis-selling (uk)
Following regulatory changes in the UK in the mid-1980s, a number of companies promoted personal pension vehicles. The pensions mis-selling scandal emerged when it appeared some investors where being advised to leave more generous occupational pension schemes to invest in personal pension products. This led to a formal industry-wide review, and compensation by individual insurance companies.
A periodic premium contract is a contract where the policyholder accepts to pay a premium on a regular basis over a number of years, say annually. Also known as a regular premium contract or an annual premium contract.
permanent health insurance (uk)
Such a contract pays out a replacement income when the insured is unable to work. It differs form private medical insurance, which pays out medical expenses.
In opposition to commercial lines, personal lines cover the risks borne by individuals.
personal pension schemes
Subscribed by individuals, not employers.
Under regulation currently subject to revision, financial advisors have to be either independent (and distribute products from an array of providers), or tied to one provider (and advise only on the product offering of that specific provider). With 'depolarisation', financial advisors would be either independent and charge fees, or would be tied to a small number of providers.
Legal document issued to the insured setting out the terms of the contract with the insurance company.
The person (or persons) whose risk of financial loss from an insured peril is protected by a policy.
A group of insurance companies sharing premiums and expenses, usually to cover large risks (e.g. aviation risks).
Amount of money paid by the insured to the insurance company to cover the risk.
Share of the premiums transferred to a reinsurance company by an insurance company.
Premiums that an insurer is contractually entitled to receive from the insured in relation to insurance contracts. It is used as a measure of revenue, sometimes called premium income. Premiums written can be expressed gross or net of reinsurance.
primary insurance company
A primary insurance company insures individuals and companies other than insurance companies, by comparison with a reinsurance company, where primary insurers get coverage for themselves. Note that companies operating mainly as primary insurers may also have a limited reinsurance activity, for instance they may reinsure affiliates. Also sometimes called a direct insurer.
private medical insurance
It pays out medical expenses. It differs from permanent health insurance (UK), which pays a replacement income when the policyholder is unable to work.
program business (us)
With program business, primary insurance companies cede highly specialised risks and risks that are difficult to place in the broader insurance market, to a reinsurance company. The reinsurance company uses its scale and expertise to cover the risks, and may retrocede them to other reinsurance companies.
property & casualty insurance (us)
Also known as non-life insurance or general insurance. Payments made by insurance companies are based on the loss incurred: they are not a fixed sum like in life insurance.
A portion of every risk is transferred to a reinsurance company. By comparison, see excess of loss reinsurance.
The pure premium is the premium that covers the expected claim on a given risk, with a calculation based on claims frequency and the severity (cost) of claims. The pure premium excludes expenses and the insurance company's profit, the addition of which gives the commercial premium.
Sometimes used to describe a situation where an insurance operating company 'A' directly owns another insurance operating company 'B'. In that context, the shares in 'B' held by 'A' are accounted for as an investment by 'A' and under certain conditions are admissible to cover A's policyholder liabilities. At the same time, the shares are an element of solvency capital for 'B', meaning that there is effectively a double use of capital within the group, which is potentially negative from a credit point of view.
qualifying policy (uk)
Refers to the tax treatment of life insurance policies. The payout at maturity on a qualifying policy will be exempt from further taxation.
A proportional type of reinsurance contract, where a given percentage of premiums, claims, liabilities and expenses is transferred to a reinsurance company on a given book of insurance policies.
See fluctuation reserve.
realistic solvency capital (uk)
Excess capital on top of liabilities, as calculated with a set of 'realistic', economic assumptions instead of more conservative regulatory assumptions. Solvency capital on a realistic basis is deemed to be higher than on a statutory basis. Some companies publish an estimate of their surplus capital on a realistic basis. For proprietary companies, the concept of excess capital on a realistic basis is close to the concept of orphan estate.
See periodic premium.
They are prepared for the regulator, essentially for supervisory purposes, and may be different from returns prepared for shareholders or internal management purposes. Regulatory returns are often prepared with conservative assumptions, and as a result may not always reflect the true economic position of an insurance company's business.
The process by which an insurance company cedes some of its business to another insurance company. If the latter only writes business with insurance companies, it is a reinsurance company - but primary insurance companies can write reinsurance contracts themselves. The insurance company seeking insurance protection for itself is the ceding insurance company, and the operation is called a reinsurance cession. The expressions reinsurance inwards and reinsurance outwards are sometimes used to qualify the direction of the risk transfer: the former is the acceptance of risks, the latter the placing of risks under a reinsurance contract. A reinsurer may, in turn, seek reinsurance on a portion of the risks it has reinsured, a process known as retrocession. The reinsurance market is global by nature, and contributes to risk transfer on a worldwide basis. Reinsurance companies also help primary insurance companies by providing data and market expertise, and reinsurance is often used to transfer capital strength between insurance companies. Under EU regulation, the use of reinsurance lowers the required minimum margin of solvency and boosts solvency, with limitations.
In non-life insurance, the ratio of reserves to premiums. It can be calculated gross or net of reinsurance, and is a measure of reserve strength. The ratio is dependent upon the line of business: for long-tail risks, the ratio would usually be higher than, say, for motor insurance.
Usually refers to liabilities established by insurers and reinsurers to reflect the estimated cost of claims payments payable in the future. Sometimes refer to surplus capital, mainly in the US.
Please see Commerical Insurance for who to contact.
The amount of risk kept by an insurance company in its own books, in comparison with insurance risks ceded to a reinsurance company. Retention ratios can be calculated on premiums and on reserves, and express the proportion of premiums (reserves) the cedent keeps in its own books, typically calculated as net premiums (reserves)/gross premiums (reserves). The lower the retention ratio, the higher the reliance on reinsurance.
The process by which a reinsurance company cedes (reinsures) some of its own risks to another reinsurance company (the retrocessionaire). The ceding reinsurer usually remains liable towards its own clients even if the retrocessionaire defaults.
A reinsurance company accepting business from another reinsurance company.
See fluctuation reserve.
reversionary bonus (uk)
Annual bonuses added to the sum assured of a life insurance with-profits policy. They are usually not guaranteed in advance, except sometimes for the first year, but once added cannot usually be removed. They are complemented by terminal bonuses.
A policyholder bonus reserve used in life insurance. The free portion of the RfB is the portion of the reserve not allocated to individual life insurance policies, and available for solvency purposes.
An insurance company is in run-off if it has stopped writing new business and only manages existing policyholder liabilities. A solvent run-off is when the company, while in run-off, fulfils regulatory solvency requirements; an insolvent run-off is when the company is being run-off in breach of solvency rules. Run-offs can last for decades, especially for long- tail risks and in life insurance/pensions. They may be a source of dividends for shareholders as and when reserves are freed over time, or, on the contrary, a source of risk if the reserving of the run-off company is not sufficient. Some outsourcing companies specialise in the management of run-off companies.
section 2c transfer (uk)
A section 2C transfer refers to a merger of two insurance companies, and is used to restructure insurance groups.
Refers to a situation where no external coverage is used: risk is kept and losses covered directly without seeking external insurance. Risk management policies usually include an element of self-insurance, especially in large, diversified groups. External insurance is then used for compulsory insurance, and to cover low probability, high severity events.
(i) In most cases, it refers to shareholders' equity and reserves; (ii) In the UK, the shareholders' fund is also the fund in the life insurance operating company that represents shareholders' interests in the company. Transfers from the long-term fund to the shareholders' fund are strictly limited. Shareholder dividends are paid out of the shareholders' fund.
Claims are reported when the policy is still in force or shortly after the policy expires (e.g., motor insurance). This compares with long-tail insurance.
EU terminology related to the authorisation for an insurance company to sell insurance throughout the EU and EEA on the basis of authorisation in its home country. Under the single passport regulation, the insurance company can operate from its home country without the use of a local insurance subsidiary.
A single premium contract involves the payment of one premium at inception with no obligation for the policyholder to make subsequent, additional payments. It compares with regular/annual/periodic premium contracts, where the policyholder accepts at inception to make a regular payment. Some flexible products offer the option for the policyholder to make voluntary top-up payments later in the future.
Term used to qualify a non-life insurance/reinsurance market where premiums are inexpensive, usually as a result of competition and abundant supply of insurance.
solvency i, solvency ii
Under EU regulation, Solvency I refers to the existing solvency framework with three main directives. Solvency II refers to an ongoing review of solvency regulation, which could lead to the implementation of a risk-based capital model in the next few years.
Usually refers to the solvency ratio under EU regulation. It is calculated at the level of each operating company. Broadly speaking, in life insurance it is calculated as admissible solvency capital as a percentage of provisions weighted by investment risk. In non-life insurance, admissible solvency capital is compared with claims and premiums; a frequently calculated measure is also the ratio of shareholders' funds to net premiums written. Note that new EU regulation introduced consolidated solvency requirements to correct for double leverage and pyramiding in the industry; this is calculated at group level.
stakeholder pensions (uk)
Form of pension products with low expenses, targeted at the mass market and introduced in 2001. There are restrictions on the management expenses the provider can charge, and the annual contribution is capped at £3,600.
As complying with the main legal reporting method, usually for the regulator. Statutory earnings are usually calculated under conservative assumptions driven by solvency principles; they may not give an adequate picture of the economic value created by the company, however. Embedded value accounting often supplements this reporting method.
stop loss reinsurance
The reinsurer provides coverage for losses arising between two loss ratios, or between two amounts of losses. A stop loss provision for an insurance company effectively guarantees a maximum loss ratio. Used mainly in classes of business whose results tend to fluctuate strongly over time (e.g. windstorm, earthquakes).
Mostly subordinated debt taking the form of loans or traded securities. Under EU insurance regulation, subordinated debt is not treated as a liability and counts towards the coverage of the required minimum margin of solvency, with limitations.
Minimum guaranteed benefit level under a life insurance policy. The sum assured may increase over time with the payment of bonuses.