Appendix 1: Glossary of terms
Accident Year (AY) – Refers to a way of classifying a cohort of claims, so that an analysis of development over time can ensue. Under an AY definition each claim is attached to the year in which the claim event occurred.
Actuarial Function Report (AFR) – A report, usually prepared annually, by the Actuarial Function that covers (as a minimum) technical provisions, underwriting and reinsurance.
Additional Unexpired Risk Reserve (AURR) – An IFRS/GAAP liability held in excess of the Unearned Premium Reserve (UPR) if the UPR is not expected to be sufficient to cover all future claims and expense costs from unexpired business. Sometimes it is referred to as Unexpired Risk Reserve (URR).
Allocated Loss Adjustment Expenses (ALAE) – Allocated expenses are those which are attributable to individual claims. They are usually included with claim settlement amounts in claims triangles.
All Year Loss-Weighted Average (AYLWA) – The weighted average of the loss development factors for a development period, weighted by claims amounts over all of the years for which data is available.
Binary Events – Alternative name for ENID.
Binding Agreement (Binder) – An alternative term for a delegated authority. The term “binder” is widely used in the London Market.
Bound But Not Incepted (BBNI) – Alternative term for written but not (yet) incepted (WBNI).
Burning Cost – The expected claims cost per unit of exposure.
Claims Handling Expenses (CHE) – Term commonly used for a provision intended to cover future expenses expected from the settlement of outstanding claims (including IBNR). Exactly what is included in CHE may differ between (re)insurers. Often it excludes direct claims expenses which may be included in claims amounts. It may be limited to the expenses of the claims handling department or include other indirect costs.
Claims Provision – The element of the Solvency II technical provisions relating to cash flows stemming from past exposure periods.
Claims Ratio – Claims costs expressed as a percentage of the premium charged. Can be expressed gross or net of reinsurance and on an Accident Year or Underwriting Year basis. Also known as Loss Ratio.
Delegated Authority – Where an insurer agrees to accept policies introduced by a third party to whom the underwriting of the policy, to varying degrees, may be delegated. May also be referred to as a partnership agreement or a binding authority or binder.
Earned Premium – Premiums expressed in relation to the period in which exposure to risk occurs. For example an annual policy written on 1 April would have its premiums spread across 12 months of exposure, therefore making a contribution to the earned premium from 1 April through to the following 31 March.
Events Not In Data (ENID) – A loading in the claims and premium provisions intended to cover the difference between a best estimate of all possible outcomes and whatever the insurer has as a best estimate on an accounting or other basis. Necessary because most accounting/management information bases do not require the provisions to cover all possible outcomes. Will include low-probability high severity events not already allowed for. Should reflect both positive and negative possible future outcomes.
Legally Obliged Unincepted (LOU) – Alternative term for written but not (yet) incepted (WBNI).
Line of Business (LoB) – The actuarial segment or homogeneous grouping at which the claims experience is projected/analysed, which at a minimum is defined by the Solvency II proposed segmentation.
Incurred But Not Reported (IBNR) – Estimated claim amounts arising from events that have happened but that have not yet been reported to the (re)insurer.
Incurred But Not Enough Reserved/Reported (IBNER) – An actuarial allowance for expected understatement or overstatement of claims handlers’ case estimates on reported claims.
Losses Occurring During (LOD) – Reinsurance written on a LOD basis will cover claims incurred during the term of the reinsurance contract, regardless of the date that the underlying gross policy commenced. (See also Risk Attaching During).
Key Performance Indicator (KPI) – A measure used to gauge experience.
Loss Development Factor – Usually the assumed ratio of cumulative claims at the end of one development period to the cumulative claims at the end of the previous period. Used in reserving methods such as the chain-ladder. “Claims” may be paid or incurred (including outstanding claims estimates) or numbers, depending on the data concerned.
Loss Ratio – Another name for the Claims Ratio.
Market Value Margin (MVM) – Another name for the Risk Margin.
Materiality – A term used to indicate the relative importance of something. It may be expressed as a value such that numbers in excess of the number are considered important and worthy of greater attention whereas numbers below the “materiality” are regarded as less or unimportant.
Obligated Business – Policies that the (re)insurer is committed to at the valuation date including policies that the (re)insurer has accepted but for which cover has not yet commenced.
Own funds – The excess of the value of assets over the value of liabilities on the Solvency II balance sheet.
Periodical Payment Order (PPO) – Annuity-type settlement of a claim imposed by the Courts. Also known as a Structured Settlement.
Pre-Inception Contracts – Alternative term for written but not (yet) incepted (WBNI).
Premium Provision – The element of the Solvency II technical provisions relating to cash flows stemming from future exposure periods.
Quantitative Reporting Templates (QRTs) – Templates for numerical information that (re)insurers will be required to submit to regulators (usually at regular intervals).
Reference Undertaking/(Re)insurer – A hypothetical (re)insurer who takes over the (re)insurer’s obligated business at the valuation date.
Reported But Not Settled (RBNS) – Claims that have been notified to the (re)insurer but have not yet been fully paid.
Risk Attaching During (RAD) – Reinsurance written on a risk attaching basis will cover claims arising from underlying gross policies written during the term of the reinsurance contract only. (See also Losses Occurring During.)
Risk Margin – The Solvency II technical provisions are the sum of the premium provision, claims provision and risk margin. The risk margin is defined as the amount, in excess of the best estimate, of future cash flows that a (re)insurer would require in order to take over and meet the (re)insurance obligations covered by the technical provisions. It is calculated using a cost of capital approach and is also sometimes referred to as the Market Value Margin (MVM).
Regular Supervisory Report (RSR) – A report required by the Solvency II regulations that each (re)insurer has to provide to the regulator.
Reported But Not Settled (RBNS) – Claims related to events that have happened, have been reported to the insurer but have not yet been settled.
Segment – For the purpose of reporting, technical provisions are to be allocated to specific lines of business defined by EIOPA. These are known as segments.
Solvency Capital Requirement (SCR) – The amount of capital that (re)insurer is required to hold in addition to its technical provisions and other liabilities.
Solvency and Financial Condition Report (SFCR) – A report required by the Solvency II regulations that must contain specified disclosures about the (re)insurer. The SFCR will be a public document.
Special Purpose Vehicle (SPV) – Defined by the Solvency II Directive as any undertaking, whether incorporated or not, other than an existing insurance or reinsurance undertaking, which assumes risks from insurance or reinsurance undertakings and which fully funds its exposure to such risks through the proceeds of a debt issuance or any other financing mechanism where the repayment rights of the providers of such debt or financing mechanism are subordinated to the reinsurance obligations of such an undertaking.
Technical Actuarial Standards (TAS) – Standards set by the Financial Reporting Council with which members of the Institute and Faculty of Actuaries must comply.
Unallocated Loss Adjustment Expenses (ULAE) – Those expenses incurred in settling claims that are not directly attributable to individual claims. Usually includes claims department costs and some, but not all, overheads.
Underwriting Year (UY) – Refers to a way of classifying a cohort of claims or policies, so that an analysis of development over time can ensue. Under an UY definition each claim is attached to the year in which the policy giving rise to the claim incepted.
Unearned Premium Reserve (UPR) – A liability held on the IFRS/GAAP balance sheet to cover the cash out-flows and profit expected to emerge from the remaining term of policies that have incepted but not yet expired. Determined as a proportion of the written premium. If the UPR is insufficient to cover all future cash flows an Additional Unexpired Risk Reserve (AURR) is also held.
Unexpired Risk Reserve (URR) – Alternative term for Additional Unexpired Risk Reserve (AURR).
Written But Not (Yet) Incepted (WBNI) – Business that the (re)insurer is committed to at the valuation date but for which insurance cover has not yet commenced. Also known as Bound But Not Incepted (BBNI), Pre-Inception Contracts and Legally Obliged Unincepted (LOU) Business.
Written Premium – Premiums expressed in relation to the date on which a policy commences. For example, a £100 policy commencing on 1 February would contribute £100 to the written premium for 1 February. This contrasts to Earned Premium where the £100 would be likely to be spread across the term of the policy.
Appendix 2: References and further reading
The Solvency II Directive: Directive 2009/138/EC, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:335:0001:0155:EN:PDF
EIOPA (formerly CEIOPS) Solvency II Final L2 Advice, https://eiopa.europa.eu/publications/sii-final-l2-advice/index.html
European Commission Draft Implementing measures Solvency II, 31 October 2011 (“EC Draft L2”).
EIOPA Final Report on Public Consultations No. 11/009 and 11/011 On the Proposal for the Reporting and Disclosure Requirements to EIOPA Insurance and Reinsurance Stakeholders’ Group (IRSG) EIOPA-264-2012, 12 July, https://eiopa.europa.eu/fileadmin/tx_dam/files/Stakeholder_groups/opinions feedback/IRSG_Final_Report_on_CP09_and_CP11.pdf
EIOPA Long term guarantees technical specifications, https://eiopa.europa.eu/consultations/qis/insurance/long-term-guarantees-assessment/technical-specifications/index.html
Lloyd’s of London: Technical Provisions under Solvency II, Detailed Guidance, March 2011 Update, http://www.lloyds.com/~/media/Files/The%20Market/Operating%20at%20Lloyds/Solvency%20II/2011%20Guidance/Solvency%20II%20%20Lloyds%20Technical%20Provisions%20March2011.pdf
Lloyd’s of London: Solvency II, Technical Provisions Data, Suggestions for Allocation Methodologies, http://www.lloyds.com/~/media/files/the%20market/operating%20at%20lloyds/solvency%20ii/2011%20guidance/allocation%20methodologies%20guidance.pdf#search=‘Solvency II Allocation’
ABI Statement of Recommended Practice on Accounting for Insurance Business (ABI SORP), December 2005 (as amended in December 2006), https://www.abi.org.uk/~/media/Files/Documents/Publications/Public/Migrated/Prudential/SORP2006.ashx
The Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (“A&R Regs”).
Technical Actuarial Standard on Reporting (TAS R) as developed and published by the Board for Actuarial Standards (BAS).
The Actuarial Standard of Practice number 41 “Actuarial Communications”, developed and published by the United States Actuarial Standards Board (ASB), http://www.gccapitalideas.com/2012/02/16/calling-all-general-insurance-reserving-actuaries-does-the-bootstrap-model-%E2%80%9Cwork%E2%80%9D/
Brosius, E. (1993). Loss development using credibility, CAS Study Note, March.
Mack, T. (1993). Distribution-free calculation of the standard error of chain-ladder reserve estimates. ASTIN 23(2).
Bootstrap modeling: beyond the basics, CAS Forum, Summer 2010.
CAS working party on quantifying variability in reserve estimates (2005). The analysis and estimation of loss & ALAE variability: a summary report, CAS Forum (Fall), 29–146.
Bootstrap modeling: beyond the basics, CAS Forum, Summer 2010.
Madigan, K. A healthy skepticism toward models.