Glossary GLOSS.

Risk Management and Product Design for Insurance Companies

Glossary

absorption costing. See full costing.

accessibility. Relative to data quality, the ease with which needed data can be
obtained. [4]
account value. See accumulation value.
accumulation units. Units that represent ownership shares in selected variable
subaccounts. [9]
accumulation value. For a deferred annuity contract, the total amount of premiums and earnings, less the amount of any withdrawals or charges assessed by
the insurer; also known as account value. [9]
accuracy. Relative to data quality, the degree to which data correctly describe the
real-world phenomena they are designed to measure. [4]
acquisition expenses. For insurance and annuity products, the expenses an insurer
incurs to obtain and issue new business; a type of operating expense. Some
companies classify all pre-issue and rst-year expenses as acquisition expenses.
Other companies classify as acquisition expenses only those expenses incurred
before contract issue. For these companies, expenses incurred after contract
issue are classied as maintenance expenses. Contrast with maintenance
expenses. [3]
actuarial assumption. An assumed value used in a life insurance or annuity product design. [6]
actuarial memorandum. The part of an Actuarial Opinion and Memorandum
(AOM) that consists of a lengthy report supporting the conclusion expressed
in the actuarial opinion. Based on the size and complexity of the insurance
company, this document may or may not be required. See also actuarial
opinion. [2]
actuarial opinion. The document in an Actuarial Opinion and Memorandum
(AOM) which states that the companys reserves are adequate, given the assets
supporting them. See also actuarial memorandum. [2]
Actuarial Opinion and Memorandum (AOM). A formal asset-liability
management (ALM) report that consists of two documents: an actuarial opinion and an actuarial memorandum. See actuarial opinion and actuarial
memorandum. [2]
administrative charge. For a universal life insurance contract or a xed annuity
contract, a charge an insurer levies to cover the costs of issuing the contract,
making administrative changes to the contract and records, preparing contract
owner statements, and performing general maintenance activities. [7]

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GLOSS.2 Glossary

Risk Management and Product Design for Insurance Companies

administrative expense charge. For variable (unit-linked) life insurance and

annuity products, a periodic charge assessed to cover the insurers costs of issuing the contract, making administrative changes to the contract and records,
making transfers among variable fund subaccounts, crediting investment earnings to contract accounts, and paying claims and annuity income benets. [7]
adverse deviation. In product operations, a deviation that produces a decrease in
actual product protability relative to assumed product protability. Contrast
with favorable deviation. [6]
ALM. See asset-liability management.
annual reset method. For xed indexed annuities (FIAs), an index-crediting
mechanism that involves comparing the value of the index at the start of the
contract year with its value at the end of the contract year. Also known as the
ratchet method. [13]
annuity. For purposes of nancial analysis, any series of equal payments made
at regular intervals over a specied time period. See also annuity due and
ordinary annuity. [8]
annuity due. A series of periodic payments for which the payment occurs at the
beginning of each payment period. Contrast with ordinary annuity. [8]
annuity mortality table. A type of mortality table that shows the projected mortality rates and survival rates for a population of annuitants only. [10]
AOM. See Actuarial Opinion and Memorandum.
appraisal value. A companys embedded value (EV) plus the value of its future
sales. See also embedded value (EV) and market value. [15]
asset adequacy analysis. A broad actuarial practice undertaken to ensure that the
assets backing reserves meet established standards. [4]
asset-based commission schedule. For annuities, a commission schedule in
which commissions are calculated as a percentage of the accumulation value of
a deferred annuity contracts funds. Contrast with deposit-based commission
schedule. [3]
asset concentration risk. The risk of the excessive concentration of assets in any
single category. [2]
asset-liability management (ALM). The practice of coordinating the administration of an insurers asset portfolio (its investments) with the administration
of its liability portfolio (its obligations to customers) so as to achieve the best
possible nancial effects. [2]
asset management charge. For variable (unit-linked) life insurance and annuity
products, a periodic charge assessed to cover the operating costs associated
with establishing and managing a variable products underlying investment
funds. [7]
asset portfolio. In asset-liability management (ALM), the portfolio in which the
insurer holds securities and other invested assets. [2]

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Glossary GLOSS.3

Risk Management and Product Design for Insurance Companies

asset risk. For an insurer, the risk that it will lose money on its investments in
stocks, bonds, mortgages, and real estate. One of four ofcially recognized C
risks. Also known as C-1 risk. [1]
assets. All the things of value owned by a company, such as cash, investments,
buildings, furniture, and land. [1]
assumed mortality. The hypothetical or assumed number or rate of deaths in a
given cohort, or group of people. [10]
assuming company. See reinsurer.
back-end sales charge. A one-time transaction charge imposed when shares in subaccount investment funds are sold. Contrast with front-end sales charge. [7]
balance sheet. A nancial document that lists the values of a companys assets,
liabilities, and capital and surplus as of a specic date. Contrast with income
statement. [1]
basic accounting equation. A mathematical formula which states that an insurers
assets equal the sum of its liabilities and owners equity (capital and surplus);
forms the basis of a balance sheet. See also balance sheet. [1]
basic mortality table. A type of mortality table that has no margin built into
the rates, is used for technical product design, and provides realistic mortality
rates so that an insurer can best estimate future mortality costs. Contrast with
valuation mortality table. [10]
basis point (bp). One-hundredth of a percent0.01%or 0.0001. [9]
benchmark index. See reference index.
benchmarking. A comparison study that consists of (1) identifying the best outcomes that other companies have achieved for a specic activity or process
and the practices that produced those outcomes and (2) implementing the best
practices to equal or surpass the best outcomes. [3]
benet utilization. See policyholder behavior.
bp. See basis point.
business credit risk. See counterparty risk.
business plan. See product proposal.
C-1 risk. See asset risk.
C-2 risk. See pricing risk.
C-3 risk. See interest-rate risk.
C-4 risk. See general management risk.
cap. For xed indexed annuities (FIAs), the upper limit on the amount of a reference indexs gain in value that is credited to the annuity contract. [13]
capital adequacy. The minimum amount of capital an insurer must hold to meet a
specied standard for capital. [4]
capital adequacy testing. See dynamic solvency testing.

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GLOSS.4 Glossary

Risk Management and Product Design for Insurance Companies

capital and surplus. For insurers, the amount remaining after liabilities are subtracted from assets; owners equity in an insurance company. [1]
capital budgeting. The analysis of decisions about the investment of long-term
funds. [15]
cash ow. Any movement of cash into or out of an organization. [1]
cash-ow matching. A technique that involves identifying the patterns of cash
outows for products and matching those cash outows with a selection of
assets that will produce a similar pattern of cash inows. [2]
cash-ow testing (CFT). The use of simulation modeling to project into a future
period the cash ows associated with an insurance companys assets and liabilities as of a given valuation date and to compare the timing and amounts of asset
and liability cash ows at various times after the valuation date. [4]
cash inow. A movement of cash into an organization. Also known as a source
of funds. [1]
cash outow. A movement of cash out of an organization. Also known as a use of
funds. [1]
cash surrender value. The amount that is actually available to the owner of a cash
value life insurance policy when the policy is surrendered, after adjustments
have been made for additions and subtractions. [9]
ceding company. See direct writer.
CFT. See cash-ow testing.
coherence. Relative to data quality, the degree to which data can successfully
be integrated with other statistical information, both over time and in a broad
analytic framework. [4]
cohort. A dened group of people. [10]
combined retention. See corporate retention limit.
common cost. See indirect expense.
competitive intelligence. The systematic collection and analysis of publicly available information about competitors and ongoing developments in the marketing
environment. [5]
compounding period. Each of the interest periods used in future value calculations. Contrast with discounting period. [8]
comprehensive business analysis. In the product development process, the stage
in which a company evaluates all the factors that are likely to affect the design,
production, pricing, marketing, and sales potential of a new product. [5]
concurrent control. A type of control that addresses a companys current activities
and systems by continuously monitoring activities as they are performed. [11]
conditionally vested commission. For life insurance sales, a commission that
becomes vested only after a producer reaches a certain age or number of years
of service with the company. [3]

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Glossary GLOSS.5

Risk Management and Product Design for Insurance Companies

conditional tail expectation (CTE). A statistical measure of the severity of tail

risk; calculated as the average of all the values within a specied range of a
probability distribution. See also tail risk. [4]
constants. See xed assumptions.
contingency pricing structure. A variation in premium rate structures for individual life insurance products that gives the company mechanisms for adjusting
the companys charges for an in-force product to reect the companys nancial
results from the product. [6]
contractholder behavior. See policyholder behavior.
contract maintenance charge. For variable (unit-linked) life insurance and annuity products, a periodic charge assessed to cover general maintenance costs,
such as preparation of account and other statements. [7]
contractual reserve. A liability account that identies the amount that, together
with future premiums and investment income, an insurer estimates it will need
in order to pay policy benets as they come due. [1]
control cycle. A repetitive process designed to ensure that all areas of a company
adhere to the companys performance standards. [11]
controllable expense. A cost over which a specied manager or organizational
unit has power and inuence. Contrast with noncontrollable expense. [3]
corporate retention limit. The maximum amount of acceptable total retention
under all lines of business that a group of afliated companies will retain on any
one person. Also known as combined retention. [11]
cost accounting system. An accounting subsystem that accumulates expense
data for the dual purposes of effective cost control and accurate product design
activities. [3]
cost accumulation. The process of capturing all of a companys costs and categorizing them in meaningful ways. [3]
cost allocation. The accounting process of assigning an indirect cost to a particular cost object according to a formal procedure. Also known as expense
allocation. [7]
cost allocation method. The formal procedure used to assign indirect costs. [7]
costing. The process used during technical product design to set a products
expense projections. [7]
cost object. An operational unit for which a business accumulates, tracks, and
measures costs. [7]
cost of benets. The value of the benets guaranteed under in-force contracts.
The projected cost of benets generally equals the sum of each potential benet
payment to a customer times the expected probability that the benet will be
payable. Also known as the cost of insurance. [6]
cost of capital. The overall percentage cost the insurer pays for the funds it
employs. [15]
cost of insurance. See cost of benets.
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GLOSS.6 Glossary

Risk Management and Product Design for Insurance Companies

counterparty risk. The risk that a counterparty will fail to perform an obligation
to an insurer; also known as business credit risk. [2]
credit risk. The risk that either a party will default on its obligations to an insurer
or an insurer will sustain a loss based on an adverse change in a partys creditworthiness. [2]
crediting-rate resolution. A formal declaration by the board of directors of the
rate of interest the insurer will credit on customers money held in interestbearing products. [2]
CTE. See conditional tail expectation.
currency risk. The risk arising from changes in currency exchange rates. [2]
current interest-crediting rate. The interest rate an insurer declares and pays if
a xed deferred annuity contract remains in force for a specied period of time.
See also guaranteed interest-crediting rate and excess interest-crediting
rate. [9]
current mortality rate. In universal life (UL) products, the monthly mortality rate
actually used to calculate the monthly mortality charge; is generally substantially lower than the guaranteed maximum mortality rate. See also guaranteed
maximum mortality rate. [12]
customer behavior. See policyholder behavior.
customer behavior risk. See policyholder behavior risk.
Day 1 functionality. Product administration and IT elements that a company must
have in place and functioning when a product is rst made available for sale. [6]
Day 2 functionality. Product administration and IT elements that a company may
delay in making functional until after Day 1. [6]
declined. In individual life insurance underwriting, a risk that an insurer will not
accept. [11]
default. A failure to meet a nancial obligation. [2]
default risk. The risk that an insurer will not receive the cash ows to which it
is entitled because a party with which the insurer has a nancial arrangement
is late with payments or entirely fails to pay its obligations. Also known as
invested asset credit risk. See default. [2]
dependent variable. A variable that reacts to outside inuences. By convention,
dependent variables are labeled y. Contrast with independent variable. [4]
deposit-based commission schedule. For annuities, a commission schedule that
pays commissions only on new premium payments made by annuity owners.
Contrast with asset-based commission schedule. [3]
derivative. See derivative security.
derivative security. A nancial security, such as a stock option, that derives its
value from another security. Also known as a derivative. [6]

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Glossary GLOSS.7

Risk Management and Product Design for Insurance Companies

deterministic modeling. A form of quantitative modeling that simulates the realworld interactions of a stated set of input variables and produces a single set of
output variables. Contrast with stochastic modeling. [4]
development expenses. For insurance and annuity products, the expenses an
insurer incurs in starting a new product or product line; a type of operating
expense. Also known as research and development (R&D) expenses. [3]
DFA. See dynamic nancial analysis.
direct costing. See marginal costing.
direct expense. A product expense incurred for or physically traceable to a specied life insurance or annuity product. Also known as a traceable cost. Contrast
with indirect expense. [3]
direct writer. In reinsurance, the insurance company that purchases insurance
from another insurance company. See also reinsurance and reinsurer. Also
known as a ceding company. [2]
discounting period. Each of the interest periods used in present value calculations. Contrast with compounding period. [8]
diversiable risk. Risk that is specic to an individual asset or issuer. Also known
as nonsystematic risk or specic risk. [2]
diversication. A technique for spreading risk by investing in different assets
having different risk proles. [2]
downsizing. See rightsizing.
DST. See dynamic solvency testing.
duration. A statistic that measures the price sensitivity of an asset to changes in
interest rates. [2]
duration gap report. A report that describes the results of duration analysis of an
insurers investment and product portfolios; provides a snapshot of the insurers
asset-liability match at the time of the report. [2]
duration matching. A strategy that involves matching the duration statistics for
xed-income assets such as bonds with the duration statistics for the products
that the assets support. [2]
dynamic assumptions. In product modeling, variables that change over time, but in
a way that is predictable and formula driven. Contrast with xed assumptions.
[14]
dynamic nancial analysis (DFA). The use of simulation modeling and multiple
scenario testing to project into a future period an insurers assets, liabilities, and
owners equity as of a given valuation date and to compare the values of those
variables at various times after the valuation date. [4]
dynamic solvency testing (DST). An application of dynamic nancial analysis
that involves projecting into a future period an insurers capital as of a given
valuation date and comparing the projected amounts of capital at various times
after the valuation date. Also known as capital adequacy testing. [4]

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GLOSS.8 Glossary

Risk Management and Product Design for Insurance Companies

earnings. For an insurance or annuity product, the amount that a product adds to
the insurance companys capital in a given period; takes into account noncash
adjustments, such as a products contribution to capital. [15]
earnings statement. See income statement.
economic capital. An estimate of the amount of capital that a nancial institution
calculates to internally manage its own risks. Also known as internal capital.
Contrast with regulatory capital and rating agency capital. [1]
embedded value (EV). A measure of the economic worth of a life insurance business, excluding any value attributable to future new business; equal to the present value (PV) of expected future distributable prots pertaining to in-force
covered business, after sufcient allowance is made for the aggregate risks represented by this business. [15]
enterprise risk management (ERM). A system that identies and quanties
risks from both potential threats and potential opportunities and manages these
risks in a coordinated approach that supports the organizations strategic objectives. [2]
equity risk. The risk arising from movements in the direction of the stock market.
See also market risk. [2]
ERM. See enterprise risk management.
ethical behavior. Behavior that meets accepted standards of moral conduct. [3]
ethics. Standards of moral conduct. [3]
EV. See embedded value (EV).
excess capital. See uncommitted capital.
excess interest-crediting rate. For xed deferred annuities, the amount by which
the current interest-crediting rate exceeds the guaranteed interest-crediting rate.
See also interest-crediting rate and guaranteed interest-crediting rate. [9]
expected mortality. The number or rate of deaths statistically likely to occur in a
group of people at a given age. [10]
expense. An amount that a company spends in the course of conducting business.
Contrast with revenue. [1]
expense allocation. See cost allocation.
experience mortality rate. The historical rate of death in a given cohort. [10]
experience study. A study of data representing company or industry-wide historical experience with a specied modeling variable. [4]
exponent. A number that indicates the power to which a base number has been
raised. [8]
extrapolation. In nancial modeling, the process of estimating values outside of
a known range on the basis of other values derived from direct observation. [4]
favorable deviation. In product operations, a difference between actual and
assumed product values that produces an increase in actual product protability
relative to assumed product protability; such a deviation requires no corrective
action. Contrast with adverse deviation. [6]
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Glossary GLOSS.9

Risk Management and Product Design for Insurance Companies

feasibility study. An evaluation of whether a company has the capability to take

a new product to market. [5]
feedback control. A type of control that is used to compare performance or output
with established standards. [11]
feedforward control. See steering control.
FIA. See xed indexed annuity.
eld underwriting standards. Criteria for sales producers to use for pre-screening life insurance applicants. [11]
nancial model. A computer-based mathematical model that approximates the
operation of real-world nancial processes. [4]
nancial risk characteristic. In individual life insurance underwriting, nancial information about a persons economic status, including an indication of
whether the person is applying for more insurance than he reasonably needs or
can afford. [11]
rst-year commission. In individual life insurance, a commission that is payable
when a policy is sold. Contrast with renewal commission. [3]
xed amount option. A guaranteed annuity payout option that requires the annuity owner to choose the payment amount of the periodic payments, so the
same sum will be paid on a regular basis until the contract value is exhausted.
Contrast with xed period option. [13]
xed assumptions. In product modeling, variables for which actuaries assign a
specic value or proportional relationship and for which the value or proportion
remains unchanged throughout multiple iterations of a model. Also known as
constants. Contrast with dynamic assumptions. [14]
xed expense. An expense that remains relatively constant regardless of the number of policies sold or some other measure of the level of operating activity.
Contrast with variable expense. [3]
xed fund option. For deferred variable annuities, an option that guarantees a
xed rate of interest for a specied period of time. Premiums allocated to a
xed fund option are administered and invested with the insurers general
account. [13]
xed indexed annuity (FIA). A type of annuity that offers the contract owner
specied guarantees as to premiums and earnings on premiums, but also offers
the possibility of additional earnings by linking crediting on the accumulation
value to a published index of stock market prices. [13]
xed period option. A guaranteed annuity payout option that requires the annuity owner to choose the length of time the periodic payments will continue, and
then the company distributes the contract value in a series of equal payments
that, in total, are actuarially equivalent to the contract value. Contrast with
xed amount option. [13]

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GLOSS.10 Glossary

Risk Management and Product Design for Insurance Companies

exible premiums. For life insurance products, a form of premium payment

in which a customer can make payments to the company at various times to
increase the savings element in a contract that was established with a single
initial premium; such premiums are used with universal life insurance. [12]
oor provision. For xed indexed annuities (FIAs), a provision which species
that the contracts values are not reduced if the linked index decreases in value
during a measurement period. [13]
fraud. An act by which someone intentionally deceives another party to get that
party to part with something of value. [3]
free surplus. See uncommitted capital.
front-end sales charge. A one-time transaction charge imposed when shares in
subaccount investment funds are purchased. Contrast with back-end sales
charge. [7]
full costing. A method for estimating product-related expenses in which both direct
and indirect expenses are counted. Also known as absorption costing. [7]
fund operating expense charge. For variable (unit-linked) life insurance and
annuity products, an annual charge assessed by a fund manager to cover the
advisory and administrative services provided by the manager. [7]
futures studies. Studies that identify possible developments that could disrupt
trendsthereby changing the extrapolation of the values from the past
and then produce an array of possibilities for future values based on these
developments. [4]
future value (FV). The amount that an original sum is expected to be worth at
a specied future date, given a specied interest rate. Contrast with present
value (PV). [8]
future value interest factor (FVIF). The future value of $1.00 at a given rate of
interest for a stated number of periods. [8]
future value interest factor for an annuity (FVIFA). The compound value interest factor that represents the future value of a $1.00 annuity at a given rate of
interest for a stated number of periods. [8]
future value interest factors (FVIF) table. A table that lists the values of future
value interest factors (FVIFs) for a variety of interest rates and compounding
periods. [8]
future value interest factors for an annuity (FVIFA) table. A table that lists the
values of future value interest factors for an annuity (FVIFAs) for a variety of
interest rates and interest compounding periods. [8]
future value of an annuity. The amount that a series of equal payments earning
compound interest will be worth at a given future date. [8]
FV. See future value.
FVIF. See future value interest factor (FVIF).
FVIF table. See future value interest factors (FVIF) table.
FVIFA. See future value interest factor for an annuity (FVIFA).
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Glossary GLOSS.11

Risk Management and Product Design for Insurance Companies

FVIFA table. See future value interest factors for an annuity (FVIFA) table.
gender-based mortality table. See sex-distinct mortality table.
general account portfolio. A portfolio of assets that supports a companys contractual obligations to owners of the companys guaranteed products, including whole life insurance, xed-rate annuities, and other nonvariable products.
Contrast with separate account portfolio. [9]
general and administrative expenses. The expenses that result from undertaking
normal business activities to generate sales of products and to support products;
include expenses for contractual benets and operating expenses. [3]
general management risk. For an insurer, the risk of losses resulting from the
insurers ineffective general business practices or from the need to pay a special
assessment to cover another insurers unsound business practices. One of four
ofcially recognized C risks. Also known as C-4 risk. [1]
GLWB. See guaranteed lifetime withdrawal benet.
GMAB. See guaranteed minimum accumulation benet.
GMDB. See guaranteed minimum death benet.
GMIB. See guaranteed minimum income benet.
GMWB. See guaranteed minimum withdrawal benet.
growth capital. See uncommitted capital.
guaranteed annuity payout options. Options in annuities that provide periodic
payments of either a designated amount or for a designated period and that are
not linked to any life expectancy or mortality risk. [13]
guaranteed interest-crediting rate. The minimum interest rate an insurer must
pay on a xed deferred annuity contracts accumulation value. See also excess
interest-crediting rate. [9]
guaranteed lifetime withdrawal benet (GLWB). A type of living benet rider for
variable annuities (VAs) that guarantees minimum withdrawals to a VA owner
for life. The withdrawal amount is usually specied as a percentage of the contracts living benet value or accumulation value, whichever is greater. [13]
guaranteed maximum mortality rate. For universal life (UL) products, a monetary amount specied in the contract which sets an upper limit on the mortality
charge. The insurer guarantees not to charge a rate higher than the guaranteed
maximum mortality rate. See also current mortality rate. [12]
guaranteed minimum accumulation benet (GMAB). A type of living benet
rider for variable annuities (VAs) that guarantees a minimum protected value for
the customers account even if the contracts actual accumulation value declines
because of poor investment performance. The guaranteed account value provided
under the GMAB becomes available only after a specied waiting period, typically 7-10 years. The amount of the guarantee is generally equal to a return of the
contract owners premium or the premium plus a modest growth factor. [13]

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GLOSS.12 Glossary

Risk Management and Product Design for Insurance Companies

guaranteed minimum death benet (GMDB). A type of variable annuity (VA)

rider that generally guarantees that the VA death benet will equal at least a
specied minimum amount. [13]
guaranteed minimum income benet (GMIB). A type of living benet rider for
variable annuities (VAs) that guarantees a minimum protected value that can be
converted into annuity periodic payments, usually after a waiting period, even
if the annuitys actual accumulation value declines because of poor investment
performance. [13]
guaranteed minimum withdrawal benet (GMWB). A type of living benet
rider for variable annuities (VAs) that guarantees a protected value against which
a variable annuity (VA) owner may make annual withdrawals of a specied
amount, without charge, even if the contracts actual accumulation value falls
below the protected value as a result of poor investment performance. [13]
heaped commission schedule. For traditional life insurance sales, a commission
schedule that features relatively high rst-year commissions and lower renewal
commissions. [3]
hedge cost. An expense for trading and holding derivative securities. [6]
hedging. A risk management strategy that involves holding an asset with characteristics that counterbalance one or more of the risks in the investors risk array.
[2]
high water mark method. For xed indexed annuities (FIAs), an index-crediting
mechanism that involves comparing the value of the index at the beginning
of the contract term to the highest value that the index reaches at specied
pointsusually anniversary datesduring the contract term. [13]
hurdle rate. The minimum percentage rate of return on capital that an insurer
must earn to cover its cost of capital. Also called required return. [15]
idea generation. In the product development process, an activity that involves
searching for new product ideas that are consistent with the companys overall
product development strategy and the needs of its target markets. [5]
idea screening. In the product development process, an activity in which new
product ideas are evaluated quickly and inexpensively based on a predetermined set of criteria. [5]
income statement. A nancial statement that lists a companys revenues and
expenses over a specic period, such as a year, and shows the resulting prot or
loss realized for that period. Also known as a statement of operations, an earnings
statement, or a prot and loss statement. Contrast with balance sheet. [1]
independent variable. A variable that inuences the behavior of another variable.
By convention, independent variables are labeled x. Contrast with dependent
variable. [4]
indeterminate premium structure. A variation in premium rate structures for
individual life insurance products that allows the company to periodically reset
premium rates on in-force whole life products while guaranteeing customers
that premiums will not exceed a maximum specied level. [6]

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Glossary GLOSS.13

Risk Management and Product Design for Insurance Companies

index. A statistical measurement system that tracks the changes in a group of

similar values. [13]
index credits. For xed indexed annuities (FIAs), the monetary credits that are
awarded to the contracts value. [13]
indexed crediting. For xed indexed annuities (FIAs), guarantees that the company will periodically award monetary credits, known as index credits, to the
contracts accumulation value on a specied basis related to a specied external
index of stock market price movements. [13]
indirect expense. A product expense that cannot be traced to or that is not incurred
for one specic product. Also known as a common cost. Contrast with direct
expense. [3]
initial investment. For a new product, the amount of capital that an insurer must
invest to establish the product. [15]
insolvency. For a business in general, a condition of being unable to meet its nancial obligations on time. Contrast with solvency. [1]
insurance rating agency. See rating agency.
interest-crediting formula. A method that insurers use to credit interest to xed
annuity contracts. See portfolio method and new money method. [9]
interest-crediting rate. The interest rate an insurer applies to a xed deferred
annuity contracts values to determine the accumulation value. [9]
interest-crediting strategies. The formulas and criteria a company uses to set the
interest rates it will credit for interest-sensitive products. [2]
interest margin. See interest spread.
interest-rate margin. See interest spread.
interest-rate risk. The uncertainty arising from uctuations in market interest
rates. Also, within the system of contingency risks (C risks), the risk that market
interest rates might shift, causing the insurers assets to lose value or its liabilities to gain value; this contingency risk is also known as C-3 risk. [1, 2]
interest-sensitive cash-ow testing. A type of cash-ow testing in which an
insurer analyzes the effects of various interest-rate scenarios on cash ows. [4]
interest spread. The share of investment earnings that the insurer retains to either
pay expenses or provide a prot to owners; equals the difference between the
rate of investment return the insurer is actually earning and the current crediting rate. Also known as interest margin and interest-rate margin. [9]
internal audit. An examination of a companys records, policies, and procedures
conducted by a person associated with the organization. [3]
internal capital. See economic capital.
internal control. For a company, consists of the steps the company takes to encourage adherence to its management policies, promote operational efciency, and
safeguard the organizations assets. [3]

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GLOSS.14 Glossary

Risk Management and Product Design for Insurance Companies

internal rate of return (IRR). For a life insurance or an annuity product, the
interest rate at which the products net cash ows must be discounted, using
present value techniques, in order to exactly repay the insurers initial investment in the product. [15]
interpretability. Relative to data quality, the ease with which data can be correctly interpreted. [4]
in the money (ITM). Refers to a policyholders benet or ownership option when
the policyholder would benet economically from exercising the option. [14]
investable capital. See uncommitted capital.
invested asset credit risk. See default risk.
investment. Any use of resources that is intended to generate a prot or a positive
return of some type. [1]
investment activity report. An asset-liability management (ALM) report that
species the details of all investment portfolio transactions, including all asset
acquisitions and all dispositions of assets from the portfolio through sales, prepayments (redemptions), or repayment at maturity. [2]
investment expenses. For life insurance companies, the costs associated with
investing the companys assets. [3]
investment policy. A policy that actuaries and investment experts set to manage
the investment risk associated with new products; species limits on the asset
types and the proportions of the assets the company will use to support a product, as well as any strategies needed to balance a new products unmanaged
liability risks. [6]
investment portfolio performance review. A quarterly investment and assetliability management (ALM) report that summarizes the companys investment
performance for the board of directors and the ALM committee. [2]
investment yield. A nancial ratio that determines the rate of return, or yield, on
an insurers investment portfolio; calculated by dividing the insurers investment portfolio income by the companys average invested assets for the period.
[15]
IRR. See internal rate of return.
ITM. See in the money.
J&S annuity. See joint and survivor (J&S) annuity.
joint and last survivorship annuity. See joint and survivor (J&S) annuity.
joint and survivor (J&S) annuity. A life annuity payout option that guarantees
a series of periodic payments to two or more individuals until both or all of the
individuals die. Also known as a joint and last survivorship annuity. [13]
joint life annuity. A life annuity payout option that typically covers more than one
life and guarantees periodic payments until one of the covered individuals dies,
and then pays nothing more. [13]
lapse. The termination of a life insurance policy for nonpayment of premium. [7]

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Glossary GLOSS.15

Risk Management and Product Design for Insurance Companies

lapse rate. For a block of life insurance policies, the ratio of business in force that
terminates for nonpayment of premium during a given period to the total business in force at the beginning of that period. [7]
level annual premium (LAP). For life insurance products, any set of equal annual
payments having a present value equal to a given single premium. [12]
level premium. For life insurance products, periodic premium payments that
are equal in amount; such premiums are generally paid monthly, quarterly, or
annually. [12]
liabilities. A companys debts and future obligations. [1]
liability portfolio. In asset-liability management (ALM), the portfolio that represents
the insurers obligations to customers. Also known as a product portfolio. [2]
life expectancy. The average number of years of life remaining for a group. [10]
life insurance mortality table. A type of mortality table that shows the projected
mortality rates and survival rates for a population of life insureds only. [10]
liquidity. The condition of having enough cashor assets that can easily be converted into cashavailable as needed to meet obligations as they come due. [1]
liquidity risk. The risk of not having adequate liquidity to meet obligations as
they come due. [2]
loss. A monetary excess of expenses over revenues. Sometimes known as a net
loss. See expense and revenue. Contrast with prot. [1]
M&E charge. See mortality and expense risk charge.
maintenance expenses. The product-related expenses an insurer incurs while
a contract is in force. Also known as renewal expenses. A type of operating
expense. [3]
marginal costing. A method for estimating product-related expenses in which
only direct expenses are counted. Also known as direct costing. [7]
market analysis. An evaluation of all factors that might affect product sales. [5]
marketing committee. A senior management group whose primary role is to provide overall guidance and control of the product development process. [5]
marketing plan. A plan that denes a companys product, price, distribution,
and promotion strategies for reaching potential customers and meeting their
needs. [5]
marketing projection. An estimate of future sales; species an expected or a
most likely valuerather than a best-case value or a worst-case valuefor an
unknown future value. [5]
market risk. The risk arising from movements in the direction of an entire
market. [2]
market value. A companys appraisal value plus its brand valuethat is, the psychological and emotional value of a company to potential customers at a given
time. See also appraisal value and embedded value (EV). [15]

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GLOSS.16 Glossary

Risk Management and Product Design for Insurance Companies

medical risk characteristic. In individual life insurance underwriting, a physical

or psychological characteristic that may diminish a persons life expectancy.
[11]
moral hazard. A risk that an applicant for insurance or an insured person may act
dishonestly in a business transaction. [11]
mortality and expense (M&E) risk charge. For variable (unit-linked) life insurance and annuity products, a periodic charge assessed to compensate the insurer
for risks under the contract. [7]
mortality experience. The number or rate of deaths that actually occurs in a given
cohort, or group of people. [10]
mortality margin. A provision for conservatism in mortality risk projections.
[10]
mortality rate. The rate of deaths among a dened group of people. [10]
mortality table. A statistical table that shows the number of people in a cohort
or group of peopleand the number or rate of deaths for the cohort at given
agesthat is, how many deaths may be expected at each age. [10]
mortality table with projection. A type of mortality table in which the rates have
been adjusted using the projection method. See also projection method. [10]
negative tail scenario. A highly unfavorable scenario identied in a stochastically
modeled product design as a potential outcome. [6]
net amount at risk. For universal life (UL) insurance products, generally represents the amount of the insurers funds that would be required at any given time
to pay the policy death benet. At any given time, a UL policys net amount at
risk equals the difference between the death benet and the cash value. [12]
net cash ow. For an insurance or annuity product, a products total cash inows
generated from premiums, investments, and other sources minus the total cash
outows generated by such items as commissions, expenses, and benet payments; focuses only on cash. [15]
net income. See prot.
net loss. See loss.
net present value (NPV). For an investment project, a monetary amount that is
generally calculated by subtracting the initial investment in the project from the
present value of the projects earnings over a future period, usually the entire
expected life of the project. [15]
net prot margin. A nancial ratio that shows how much after-tax prot is generated by each dollar of total revenue; found by dividing net income by total
revenues. Also known as return on revenue ratio. [15]
new money method. An interest-crediting method under which the insurer applies
different interest rates to payments, depending on the market conditions when
each payment was made. Contrast with portfolio method. [9]

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Glossary GLOSS.17

Risk Management and Product Design for Insurance Companies

new product project. The most complex type of product development project;
requires the company to develop new product features and also requires comprehensive regulatory lings. Contrast with rate change project and product
revision project. [5]
new product risk. Any risk that a company faces in developing and supporting
new life insurance and annuity products. [5]
NGEs. See nonguaranteed elements.
no-load fund. A type of fund that does not assess sales charges. [7]
noncontrollable expense. A cost over which no specied manager or organizational unit has power or inuence. Contrast with controllable expense. [3]
nondiversiable risk. Risk that affects all assets in our economic system and is
therefore not specic to an individual asset or issuer. Also known as systematic
risk. [2]
nonguaranteed elements (NGEs). In life insurance and annuity products, product features that allow an insurer to reward customers when the insurer has
experienced or anticipates that it will experience favorable deviations from its
assumptions or, conversely, allow the insurer to charge customers more when
the insurer has experienced or anticipates it will experience unfavorable deviations from its assumptions. [14]
nonsystematic risk. See diversiable risk.
nonvested commission. For life insurance sales, a commission that is payable to
a producer only if the producer still represents the company when the commission becomes due. Contrast with vested commission. [3]
normal curve. A bell-shaped curve produced when data values in a normal distribution are plotted on a graph. [4]
NPV. See net present value.
operating expenses. The costs of operations other than expenses for contractual
benets. Types of operating expenses include development expenses, acquisition expenses, maintenance expenses, and overhead expenses. [3]
operational risk. The risk of nancial loss resulting from (1) inadequate or failed
internal processes and controls, people, or systems, or (2) external events. [3]
optimization modeling. A form of mathematical modeling that focuses on nding an optimum solution to several simultaneous equations. [4]
ordinary annuity. A series of periodic payments for which the payment occurs at
the end of each payment period. Contrast with annuity due. [8]
outsourcing. The practice of hiring an external vendor to perform specied operations or functions. [3]
overhead expenses. The costs an insurer incurs during normal business operations that are not directly connected to a specic product or service; a type of
operating expense. [3]
owners equity. See capital and surplus.

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GLOSS.18 Glossary

Risk Management and Product Design for Insurance Companies

PAD. See provision for adverse deviation.

participation percentage provision. For xed indexed annuities (FIAs), the provision that stipulates the rate at which the excess of the reference index growth
percentage is shared between the insurer and the customer. [13]
PBA. See principles-based approach.
persistency bonus. For life insurance sales, extra earnings awarded to a producer
who has favorable persistency results. [3]
personal risk characteristic. In individual life insurance underwriting, a lifestyle
choice that may diminish a persons life expectancy. [11]
point estimate. An estimate that is assigned a single value. Contrast with range
estimate. [4]
point-to-point method. For xed indexed annuities (FIAs), an index-crediting
mechanism that involves comparing the value of the index at the start of the
annuity contract term to its value at the end of the term to determine what, if
any, excess interest has accrued because of a change in the index. [13]
policyholder behavior. A key design consideration for life insurance and annuity
products that refers to the benet utilization choices of customers. Also known
as customer behavior, contractholder behavior, or benet utilization. [6, 14]
policyholder behavior risk. The risk that a company faces as the result of the
choices made by policyholders. Also known as customer behavior risk. [2]
policyowner dividends. Refunds of excess premium paid to the owners of individual participating life insurance policies. [1]
population mortality table. A type of mortality table that shows mortality statistics for all members of a given population. [10]
portfolio. A collection of assets with differing degrees and kinds of risk, usually
assembled for meeting a dened set of goals. [2]
portfolio method. An interest-crediting method under which the insurer applies
one specied current interest rate to all money in an annuity account on the
interest-crediting date, regardless of when the money was paid into the account.
Contrast with new money method. [9]
post-death underwriting audit. An external audit of life insurance claims in
which the reinsurer determines whether a life insurance case really should have
been issued at all and if the risk classication was accurate based on the underwriting information obtained at the time of issue. [11]
preferred risk. In individual life insurance underwriting, a case whose risk characteristics represent a lower risk than standard. Contrast with standard risk
and substandard risk. [11]
present value (PV). The amount that, if invested at a specied interest rate on a
specied date, would grow to equal a specied future amount. Contrast with
future value (FV). [8]

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Glossary GLOSS.19

Risk Management and Product Design for Insurance Companies

present value interest factor (PVIF). The present value of $1.00 discounted at an
interest rate of i percent per period for n periods. [8]
present value interest factor for an annuity (PVIFA). The present value of a
$1.00 ordinary annuity at a given rate of interest and for a stated number of
periods. [8]
present value interest factors (PVIF) table. A table that shows the values of
present value interest factors (PVIFs) for many possible interest rates and numbers of periods. [8]
present value interest factors for an annuity (PVIFA) table. A table that lists
the values of present value interest factors for an annuity (PVIFAs) for various
interest rates and various interest periods. [8]
price appreciation. An increase in the market value of an invested asset. [9]
price depreciation. A decrease in the market value of an invested asset. [9]
pricing premium. For a life insurance product, the monetary amount per unit of
coverage that an insurance company must collect from customers to cover the
products cost of benets plus the companys expenses for supporting the product, after net investment earnings. [12]
pricing risk. For an insurer, the risk that the insurers experience with product
expenses or benets will differ signicantly from the assumptions used in the
products nancial design, causing the insurer to lose money on its products.
One of four ofcially recognized C risks. Also known as C-2 risk. [1]
principal. A sum of money originally invested; the sum upon which interest is
calculated. [8]
principles-based approach (PBA). An approach to reserve valuation in which
the valuation actuary may apply stochastic (probabilistic) analysis to develop
probabilities for various outcomes and also applies professional judgment to set
appropriate values. Contrast with rules-based approach. [9]
probabilistic modeling. See stochastic modeling.
probability distribution. A listing or other depiction of all the values in a data set
and the probability of observing each of those values. [4]
product design objectives. For life insurance and annuity products, specications
that document a products basic characteristics, such as its benets, any limits
on the contract amount or the applicants age at issue, any special features, the
commission range, and any settlement options. [5]
product development budget. A project planning document that shows the costs,
such as stafng requirements, associated with each planned work activity and
the anticipated revenue from the new product. [6]
product development team. A team that usually performs hands-on development
of a new product. [5]

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GLOSS.20 Glossary

Risk Management and Product Design for Insurance Companies

product mix. A companys total assortment of product types in force by proportion according to a monetary measure of business volume, such as premiums
collected, reserves, or in the case of life insurance, face amount in force. [5]
product portfolio. In asset-liability management (ALM), another name for a liability portfolio. See liability portfolio. Also refers to the array of products a
company offers. [2, 5]
product proposal. A document used to present a product idea to an internal team
that decides whether to allocate company resources toward developing the product idea. Also known as a business plan. [5]
product retention limit. The specied maximum amount of insurance under a
given product that an insurer is willing to issue without transferring some of
the risk to a reinsurer. [11]
product revision project. A project that involves broader changes than does a
rate change project but fewer changes than does a new product project. Contrast
with rate change project and new product project. [5]
prot. A monetary excess of revenues over expenses. Also known as net income.
See also expense, revenue, and return. Contrast with loss. [1]
protability. A companys overall degree of success in generating returns for its
owners; refers both to a companys ability to generate prot and its ability to
increase the companys wealth. [1]
prot and loss statement. See income statement.
prot margin. For a life insurance or an annuity product, the present value of
prots divided by the present value of premiums. [15]
projection method. A method of modifying tabular mortality that involves multiplying the tabular mortality rates by a chosen percentage. See also setback
method. [10]
project schedule. A project planning timetable that shows the times required for
the completion of planned tasks and the relationships among these tasks. [6]
proprietary mortality table. A type of mortality table developed by a single insurance company, based largely on its experience with its own customers. [10]
prospective valuation method. A method of determining a life insurance products cash value that looks at the products future cash ows. Contrast with
retrospective valuation method. [9]
provision for adverse deviation (PAD). In product design, any amount included
in the assumption values to provide an allowance for unexpected negative outcomes. [6]
public mortality table. See published mortality table.
published mortality table. A type of mortality table that is made available to the
general public through printed documents and electronic sources. Also known
as a public mortality table. [10]
PV. See present value.
PVIF. See present value interest factor (PVIF).
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Glossary GLOSS.21

Risk Management and Product Design for Insurance Companies

PVIF table. See present value interest factors (PVIF) table.

PVIFA. See present value interest factor for an annuity (PVIFA).
PVIFA table. See present value interest factors for an annuity (PVIFA) table.
quality rating. An alphabetical grade or rating assigned to an insurance company
by a rating agency to indicate the level of the insurance companys nancial
strength, its ability to pay its obligations to customers, or its ability to pay its
obligations to creditors. [1]
random number generator. A routine that automatically provides software with
a pattern of individual values that we would expect to get by sampling from a
given probability distribution. See also random sample. [4]
random sample. A statistical sample in which each possible value is equally likely
to be selected. [4]
range estimate. An estimate that provides a range of possible outcome values.
Contrast with point estimate. [4]
ratchet method. See annual reset method.
rate change project. A project that involves changing rates for adjustable policy elements, such as administrative fees and mortality and expense charges.
Contrast with product revision project and new product project. [5]
rate class. See risk class.
rate of return. The earnings on an investment expressed as a percentage of the
principal. [9]
rating agency. An independently owned, private organization that evaluates the
nancial condition of insurers and provides information to potential customers
of and investors in insurance companies. Also known as an insurance rating
agency. [1]
rating agency capital. The minimum standard of capital that an insurer must
maintain in order to receive a favorable quality rating from a specic rating
agency. Contrast with regulatory capital and economic capital. See also
quality rating and rating agency. [1]
rating experience. The proportional assignment of new business cases to the
companys available rate classes. [11]
reference index. For xed indexed annuities (FIAs), the specied external index;
also known as the benchmark index. [13]
renance. To make new borrowing arrangements, usually because of a drop in
market interest rates. [14]
regulatory capital. The legal minimum standard of capital that an insurer must
maintain in order to be considered solvent by the regulatory authorities. Contrast
with rating agency capital and economic capital. [1]
reinsurance. A type of insurance that one insurance company purchases from
another insurance company. See also direct writer and reinsurer. [2]

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GLOSS.22 Glossary

Risk Management and Product Design for Insurance Companies

reinsurer. In reinsurance, the insurance company that provides insurance to

another insurance company. Also known as an assuming company. See also
reinsurance and direct writer. [2]
reinvestment-rate risk. The risk that the returns on funds to be reinvested will
fall below anticipated levels. [2]
relevance. Relative to data quality, the degree to which information meets the
needs of users. [4]
renewal commission. For life insurance, a commission that is payable while a
policy is in force. Contrast with rst-year commission. [3]
renewal expenses. See maintenance expenses.
required capital. The amount of capital an insurer must hold to back the liabilities for in-force covered business and for which distribution to shareholders is
restricted. [1]
required rate of return. The return on an investment adjusted for the risk represented by that investment; typically found by adding the risk-free rate of return
to the risk premium. See also risk-free rate of return and risk premium. [1]
required return. See hurdle rate.
research and development (R&D) expenses. See development expenses.
retention limit. A specied maximum amount of insurance that a direct writer is
willing to carry at its own risk. [11]
retention schedule. A schedule that presents an insurers retention limits, organized by applicable categories such as product, product line, issue age, and
underwriting rating. [11]
retrospective valuation method. A method of determining a life insurance
products cash value that looks at the products past cash ows. Contrast with
prospective valuation method. [9]
return. Any reward, prot, or compensation that an investor hopes to earn for
taking a risk. [1]
return of premium provision. In a xed indexed annuity (FIA), a provision
which species that the company promises to pay the customer the full value of
premiums, minus partial withdrawals, upon surrender before the contract has
built an accumulation value greater than that promised in the return of premium
provision. [13]
return on capital ratio. A nancial ratio that represents the percentage return
an insurer has earned on its capital; calculated by dividing a given measure of
earnings by some measure of total capital employed. [15]
return on equity (ROE). A nancial ratio that measures an insurers operating
efciency; derived by dividing an insurers net income by its owners equity.
[3]
return on invested assets (ROIA) ratio. A nancial ratio that measures a companys protability by dividing the companys net income by its average invested
assets. [15]

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Glossary GLOSS.23

Risk Management and Product Design for Insurance Companies

return on revenue ratio. See net prot margin.

revenue. An amount that a company earns from its business operations. Contrast
with expense. [1]
rider charge. The additional premium to purchase a variable annuity guarantee
rider. Also known as a rider premium. [13]
rider premium. See rider charge.
rightsizing. The elimination of nonessential employees or jobs within an organization. Also known as downsizing. [3]
risk. The possibility of an unexpected outcome. In investing, the possibility that
an investor will fail to earn an expected return or will lose all or part of an
investment. [1]
risk appetite. Under enterprise risk management (ERM), a companys long-term
capacity for risk-taking. Contrast with risk tolerance. [2]
risk characteristic. In individual life insurance underwriting, a measurable or
observable factor that underwriters use for assigning each new business case to
one of the risk classes of a risk classication system. [11]
risk class. In insurance underwriting, a set of risks grouped together under a risk
classication system. See risk classication system. Also known as a rate
class. [11]
risk classication system. In insurance underwriting, a system used to assign
new business cases to risk classes and an associated rate table in a manner that
reects the expected cost of benets for the insurance product. Also known as
an underwriting classication system. [11]
risk committee. A senior management group whose primary role is to provide
overall guidance and control of an insurers ERM efforts; this group must
ensure that all the internal units have appropriately understood, measured,
and arranged to manage all the signicant risks to which the organization is
exposed. [2]
risk-free rate of return. The return on a risk-free investment. See also required
rate of return and risk premium. [1]
risk premium. The remainder of the required rate of return after the risk-free rate
is subtracted from it; the risk premium compensates the investor for taking on
the risk associated with a specic investment. See also required rate of return
and risk-free rate of return. [1]
risk-return trade-off. The relationship between risk and return that can be summarized as follows: all other factors being equal, the greater the risk associated
with an investment, the greater the potential return on the investment; and the
lower the risk associated with an investment, the lower the potential return on
the investment. [1]
risk tolerance. Under enterprise risk management (ERM), a companys stated
limits on risk-taking in specied categories. Contrast with risk appetite. [2]
ROE. See return on equity.

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GLOSS.24 Glossary

Risk Management and Product Design for Insurance Companies

ROIA. See return on invested assets.

rules-based approach. An approach to reserve valuation in which a valuation
actuary applies deterministic analysis and a required set of rules to determine
the reserves. Contrast with principles-based approach. [9]
sales revenue. The total dollar volume of sales; calculated by multiplying the sales
volume by the average price-per-unit. See also sales volume. [5]
sales volume. The number of units of product sold. [5]
scenario testing. A method of evaluating modeling results that involves entering
different sets of data into a model and then determining how changes in the
input data affect the models output. [4]
segregated account portfolio. See separate account portfolio.
select and ultimate mortality table. A type of mortality table that combines
coordinated sets of select mortality rates and ultimate mortality rates. Contrast
with select mortality table and ultimate mortality table. [10]
select mortality period. A specied period of time following an underwriting
evaluation of a given individual. [10]
select mortality table. A mortality table that shows the expected mortality rates
of people who have recently been underwritten for insurance policies. Contrast
with ultimate mortality table. [10]
sensitivity analysis. A method of measuring the responsiveness of the outputs
produced by a mathematical model to changes in the values of the models input
variables. [4]
separate account portfolio. For an insurer, a portfolio of assets that supports
such products as variable life insurance and variable annuities. Also known as
a segregated account portfolio. Contrast with general account portfolio. [9]
setback method. A method of modifying tabular mortality rates that consists of
showing future decreases in mortality for people of a given age by using the
tabular mortality rate for a younger age. See also projection method. [10]
sex-distinct mortality table. A type of mortality table that shows different mortality rates for males and females. Also known as a gender-based mortality
table. Contrast with unisex mortality table. [10]
simulation modeling. The use of a real-world process model and extrapolation to
emulate the behavior of the process over time. [4]
single life annuity. A life annuity payout option that provides periodic payments
in an amount based on both the single premium and the annuitants life expectancy. Payments continue from the inception of payout until the annuitants
death. [13]
single life annuity with period certain. A life annuity payout option that guarantees periodic payments throughout the lifetime of a named individualthe
annuitantand also guarantees that the periodic payments will continue for
at least a specied period. If the annuitant dies before the end of that specied
period, the periodic payments continue to be paid until the end of the period to
a contingent payee designated by the annuitant. [13]
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Glossary GLOSS.25

Risk Management and Product Design for Insurance Companies

single life with refund annuity. A life annuity payout option that guarantees
specied periodic payments throughout the lifetime of a named individualthe
annuitantand also guarantees that a refund will be made if the annuitant dies
before the total of the periodic payments made equals the amount paid for the
annuity. [13]
single premium (SP). For life insurance products, a form of premium payment
in which one lump sum covers all of the nancial considerations for the life of
the contract; one-year term life insurance policies are purchased with a single
premium. [12]
solvency. A business organizations ability to meet its nancial obligations on
time. Contrast with insolvency. [1]
source of funds. See cash inow.
specic risk. See diversiable risk.
spread compression. The narrowing of an insurers interest spread. See interest
spread. Contrast with spread expansion. [14]
spread expansion. The widening of an insurers interest spread. See interest
spread. Contrast with spread compression. [14]
standard costs. Cost estimates representing the average amount of a given type of
expenditure for normal business operations. [7]
standard deviation. In statistics, a measure of the dispersion of values in a data
set around the mean of the data set. [4]
standard risk. In individual life insurance underwriting, a case whose mortality risk characteristics overall are nominally standard for the coverage being
sought. Contrast with substandard risk and preferred risk. [11]
statement of operations. See income statement.
static mortality table. A type of mortality table that has not been adjusted to
provide for future changes in mortality. [10]
steering control. A type of control that is established in advance and that
describes a companys expectations of performance. Also known as
feedforward control. [11]
stochastic assumptions. In product modeling, variables that are selected randomly
from a specied statistical distribution applied across multiple simulations or
scenarios. Also known as stochastic modeling assumptions. [14]
stochastic modeling. A form of modeling in which an automatic process randomly assigns values to specied input datathereby creating a large number
of scenariosconducts numerous process iterations as needed, and produces
output data that can be described in the form of a probability distribution. Also
known as probabilistic modeling. Contrast with deterministic modeling. [4]
stochastic modeling assumptions. See stochastic assumptions.
stock. A type of nancial security that represents a share of ownership in a
company. [1]

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GLOSS.26 Glossary

Risk Management and Product Design for Insurance Companies

substandard risk. In individual life insurance underwriting, a case whose risk

characteristics overall are higher than standard, but who are still insurable.
Contrast with standard risk and preferred risk. [11]
surrender. A transaction in which the owner of a cash value life insurance contract
or deferred annuity contract elects to receive the contracts entire cash value or
accumulation value, less any charges, before the contract reaches maturity. [7]
surrender charge. A transaction charge assessed when the contract owner of a
cash value life insurance policy or deferred annuity contract surrenders the contract or withdraws money from a contract in excess of specied amounts. [7]
surrender rate. For a block of insurance or annuity contracts, the ratio of the
number of contracts surrendered during a contract year to the total number of
contracts in force at the beginning of the year. [7]
surrender value. For a deferred annuity contract, the accumulation value of the
contract less any surrender or expense charges associated with the termination
of the contract. [9]
survival rate. The percentage of people who have attained a given age and are
expected to be alive at their next birthday. [10]
systematic risk. See nondiversiable risk.
tabular mortality rate. A mortality rate shown in a mortality table. [10]
tail risk. The risk associated with scenarios in the tails at the ends of a probability
distribution. See also conditional tail expectation. [4]
timeliness. Relative to data quality, the delay between the reference date for the
data and the date the analysis is published. [4]
time value of money. A concept which states that the value of a sum of money
changes over time as a result of the effects of interest. [8]
traceable cost. See direct expense.
trend analysis. A form of technical analysis that projects the future movement of
specied variables based on historical patterns. [4]
UL. See univeral life insurance.
ultimate mortality period. The period of time after the select mortality period
has ended. [10]
ultimate mortality table. A mortality table that shows the expected mortality
rates of people who have not recently been underwritten for insurance policies.
Contrast with select mortality table. [10]
unallocated capital. See uncommitted capital.
uncommitted capital. Any capital held in excess of the minimum capital requirement. In embedded value, the market value of any capital and surplus, over and
above the required capital, allocated to in-force covered business; this amount could
be immediately distributed to shareholders. Also known as unallocated capital,
growth capital, excess capital, investable capital, and free surplus. [1, 15]

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Glossary GLOSS.27

Risk Management and Product Design for Insurance Companies

underwriting classication system. See risk classication system.

underwriting risk. The specic risks that insurers assume through the insurance
and annuity contracts they underwrite. [2]
unisex mortality table. A type of mortality table that shows a single set of mortality rates to be used for both males and females. Contrast with sex-distinct
mortality table. [10]
universal life (UL) insurance. A form of cash value life insurance having exible
premiums, a exible face amount, and a exible death benet amount. [12]
use of funds. See cash outow.
valuation mortality table. A type of mortality table that has a margin built into
the mortality rates, is used to calculate policy reserves, and is inherently more
conservative than is a basic mortality table. Contrast with basic mortality
table. [10]
value of business in force (VBIF). In embedded value (EV) calculations, the present value (PV) of future shareholder cash ows from the in-force covered business; the different types of cash ows include premiums, investment income,
fees, benets, and expenses. See also embedded value (EV). [15]
variable expense. An expense amount that varies in direct proportion to some variation in a specied level of operating activity. Contrast with xed expense. [3]
variable universal (VUL) insurance. A version of universal life (UL) insurance
with a variable cash value component. VUL owners have the option to allocate
the cash value to the insurers general account or to invest in various subaccounts (funds) of the insurers separate account. VUL policies do not guarantee
minimum investment earnings or cash values for premiums allocated to variable subaccounts. [12]
variables. Items of data whose numerical value varies over time. [4]
VBIF. See value of business in force.
vested commission. For life insurance sales, a commission that is guaranteed payable to a producer whether or not the producer represents the company when the
commission becomes due. Contrast with nonvested commission. [3]
weak signals. Incomplete and fragmented data that hint at relevant future events.
[4]
wild cards. Potential future, low-probability, high-impact events that may constitute turning points in the evolution of a trend or system. [4]
withdrawal. A transaction in which the owner of a universal life insurance policy
or a deferred annuity contract removes a portion of the account value. [7]
yield spread provision. For xed indexed annuities (FIAs), a provision which
states that the insurer always deducts a specied percentage from the growth in
the reference index. See reference index. [13]

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