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7/30/2019 Sol2 Glossary Final 160307
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Solvency II Glossary
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CEA Groupe Consultati
Acknowledgements
The glossary project o the Comit Europen des Assurances (CEA) and the Groupe
Consultati Actuariel Europen (Groupe Consultati) has been conducted in closecollaboration with a wide range o experts rom the European insurance industry without
whose contributions this project could not have been achieved.
A word o thanks goes to those lie and non-lie experts rom the national associations
o the CEA and the Groupe Consultati who have contributed with their eedback
throughout the process.
Special thanks go to Dirk Navest who has managed the project or the CEA and
Rol Stlting and Petra Wildemann who have managed the project or the GroupeConsultati.
Important Notice
The CEA-Groupe Consultati Solvency II Glossary provides a common set o terminology or a
selected number o terms. It aims to be an objective reerence document and not presenting
the particular views o CEA and the Groupe Consultati.
Several o the denitions in this glossary are still being discussed and debated by the various
parties involved in Solvency II. Consequently, this work will need to continue to evolve in the
uture in line with the developments o Solvency II.
CEA - Groupe Consultati
Brussels, March 2007
All rights reserved
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1.Introductory Note
Solvency II is one o the most challenging and exciting projects in Europes Financial
Services Action Plan. The importance and necessity to review the existing ramework isgenerally accepted, the scope o the project is extremely broad, the parties involved are
numerous and the ambition is thus very high.
It has requently been noted by the many stakeholders and involved parties that a lack
o common denitions on key terms exists, or example with respect to risk denitions
and valuation principles. This potentially leads to a reduced understanding and even
misunderstandings between parties involved and has thereore been identied as one
o the potential obstacles to rapid progress and the building o consensus within the
Solvency II project.
The Comit Europen des Assurances (CEA) and the Groupe Consultati Actuariel
Europen (Groupe Consultati) have thereore decided to work on a glossary o Solvency
II terminology, ocusing on a selected number o key terms.
The purpose o this document is to provide a common set o terminology or all parties
involved in the Solvency II project, hence aiming to be an objective reerence document
and not presenting the particular views o the CEA and the Groupe Consultati. The
glossary wants to create clarity and alignment on terminology and concepts which are
currently being reerred to in multiple ways, and which are currently being dened in a
divergent manner by various users. To this end, the glossary proposes preerred terms
where multiple terms exist or the same concept. Where appropriate, notes have been
provided in addition to the denitions to urther improve clarity and give more detailed
explanation.
The glossary only covers a selection o terms used in the context o Solvency II, relating
to risk types, insurance products availability requirements and risk management. It has
not been the ambition to be exhaustive, nor to provide denitions or well-dened and
generally accepted terminology. The selection o terms and the denitions retained in
this glossary are based on discussions held between the CEA and the Groupe Consultati.Where possible we have drawn on existing denitions, giving particular weight to
ormal sources. Feedback has been received rom a large number o individuals and
organisations. The CEA and the Groupe Consultati want to thank those involved or
their valuable contributions.
Some o the denitions in this glossary are still being discussed and debated by the
various parties involved in Solvency II. Consequently this work will need to continue to
evolve in the uture.
The glossary project o the CEA and the Groupe Consultati has been conducted inclose collaboration with a wide range o experts rom the European insurance industry
without whose contributions this project could not have been achieved.
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2. List o Dened Terms
Acceptable asset
Accident insuranceAdjusted Solvency Capital Requirement
Admitted asset
Aliated investment risk
Alternative risk transer
Annuity
Arms length transaction
Asset-liability management
Asset-liability mismatch risk
Available economic capitalAvailable solvency margin
Back-testing
Best estimate
Best estimate liability
Biometric risk
Book value
Break-up basis
Business risk
Calamity risk
Captive insurer
Carrying amount
Casualty insurance
Catastrophe risk
Central estimate
Claims risk
Compliance risk
Concentration riskCondence level
Contagion
Contingent capital
Cost o capital approach
Counterparty credit risk
Credit insurance
Credit risk
Critical illness insurance
Current entry valueCurrent estimate
Current exit value
Custody risk
Deault riskDisability insurance
Disability risk
Diversication
Double gearing
Dread disease insurance
Economic balance sheet
Economic capital
Economic value
Eligible capitalEmbedded guarantee
Embedded option
Embedded value
Endowment insurance
Entry value
Equity risk
European embedded value
Excess capital
Exit value
Expected loss (only or credit insurance)
Expected policyholder decit
Expected shortall
Expense risk
Extreme value model
Fair value
Financial conglomerate
Financial groupForeign exchange risk
Funeral insurance
Fungible capital
General insurance
Going concern basis
Group insurance
Guarantee
Guaranteed benet
Guaranteed elementHealth insurance
Hedgeable risk
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Historic cost
Home supervisor
Host supervisor
Hybrid capital
Infation risk
In-orce businessInsolvency
Insurance contract
Insurance group
Insurance guarantee scheme
Insurance obligation
Interest rate risk
Internal model
Lapse
Lapse risk
Lead supervisor
Legal risk
Liability insurance
Lie insurance
Liquidity risk
Longevity risk
Loss given deault
Management riskMarine, aviation, and transport insurance
Market-consistent valuation
Market discipline
Market risk
Market value
Market value margin
Mark-to-market valuation
Mark-to-model valuation
Migration riskMinimum Capital Requirement
Mispricing risk
Model risk
Morbidity risk
Mortality risk
Motor insurance
Non-diversiable risk
Non-lie insurance
Operational riskOption
Parameter uncertainty risk
Parent company
Pension scheme
Percentile approach
Perormance linked benet
Permanent capitalPersistency risk
Premium risk
Pricing risk
Probability o deault
Probability o ruin
Procyclicality
Product design risk
Property and casualty insurance
Property insurance
Provision
Prudential lter
Prudent person approach
Pure endowment insurance
Quantile approach
Rating agency driven capital
Real-estate risk
Regulatory capitalRegulatory surplus
Reinsurance
Reinsurance counterparty risk
Reinvestment risk
Reputational risk
Required economic capital
Reserve risk
Risk margin
Run-o basisScenario analysis
Sensitivity test
Settlement risk
Solvency Capital Requirement
Solvency margin
Spread risk
Standard ormula
Strategic risk
Stress testSupervisory ladder
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Supervisory review process
Surety business
Surplus capital
Surrender
Surrender risk
Systematic riskSystemic risk
Tail-Value-at-Risk
Target capital
Technical provision
Technical risk
Term insurance
Time horizon
Total balance sheet approach
Underwriting risk
Unexpected loss (only or credit risk)
Unit-linked contract
Universal lie insurance
Value-at-RiskValue o in-orce business
Whole lie insurance
With-prot product
Workers compensation insurance
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3.Glossary
Acceptable asset Capital (either on or o-balance sheet) which, under
regulatory rules, may be taken into account (ully or partially)to cover insurance obligations.
Related terms: Available solvency margin, Eligible capital
Accident insurance Generic term applying to all types o insurance indemniying
or reimbursing or losses caused by bodily accident or or
expenses o medical treatment necessitated by bodily
accident.
Related term: Healthinsurance
Dened as Accident and Health insurance in EU law. For more
details see Annex A and B(a) o First Council Non-Lie Directive
73/239/EEC and consecutive amending directives.
Adjusted Solvency
Capital Requirement
Adjustment to the Solvency Capital Requirement under Pillar
I based on Pillar II regulation under the Solvency II regime.
Related terms:Minimum Capital Requirement,Solvency Capital
Requirement
Pillar II adjustments are expected to be made on the basis o thesupervisory review process, hence being rm specic.
Admitted asset See: Acceptable asset and Eligible capital
Aliated
investment risk
The risk that an investment in a member company o
the same nancial conglomerate or nancial group may
be dicult to sell, lose its value, or create a drain on the
nancial resources o the insurer.1
Related term: Market risk
A
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Alternative risk transer Any orm o risk transer that includes at least an element o
insurance risk, opposed to pure nancial risk, other than a
pure insurance contract.
Abbreviation: ART
Related term: ReinsurancePossible eatures o ART include, but are not restricted to:3
Tailor-made solutions;
Multi-year policies;
Oten the coverage o risks that the conventional market would
regard as uninsurable;
Oten the inclusion o some orm o risk transer o non-
insurance risk;
The denition o ART includes, but is not restricted to, nancial
reinsurance and securitisation o insurance risks.4
Annuity* A contract that provides a series o regular payments (both
amount and timing) by the insurer (amount payable / benet)
under specied conditions or a specied period o time.
Related term: Pension scheme
An annuity may begin at a specied time ater the issuing o the
contract (deerred annuity), or ollowing a specied trigger such
as death or disability, e.g. orphans benets or disability annuities.
Annuity benets under an insurance contract typically end upon the
death o the insured person, or cease upon recovery o the insured
rom disability or ater a predened period. Coverage may relate to
one or two persons, respectively single-lie or joint-lie.
The contract can be unded by the policyholder by means o a single
premium or through a series o instalments. The amount o regular
payments to the beneciary may be xed or not, i.e. variable or
xed annuity, certain or temporary. Annuity contracts are sold on
an individual and group basis.
Arms lengthtransaction
A transaction between two related or aliated parties thatis conducted as i they were unrelated, so that there is no
question o a confict o interest.
A
* The denition applies to annuity products within the EU, not per denition to US products in its
entirety.
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Asset-liability
management
The management o an insurers assets with specic reerence
to the characteristics o its liabilities so as to optimise the
balance between risk and return.
Abbreviation: ALM
Related term: Asset-liability mismatch riskAsset-liability management orms part o the overall risk
management ramework o an insurer.
Asset-liability mismatch
risk
Risk o a change in value rom a deviation between asset and
liability cash fows, prices, or carrying amounts, caused by:
A change in actual cash fows (or assets and/or
liabilities);
A change in the expectations on uture cash fows (or
assets and/or liabilities); Accounting inconsistencies.
Synonym: Asset-liability risk
Related term: Asset-liability management
The deviation rom the expected values may relate to a dierence (or
dierent evolvement) in timing and/or the amount o cash fows.
Asset-liability mismatch risk originates rom changes in market risk-
actors.
See: Risk Map in Appendix I or an overview o the types o market
risk.
Available economic
capital
Internally dened capital measure based on the companies
valuation o the market-consistent value o assets minus the
market-consistent value o obligations.
Related term: Required economic capital
Available solvency
margin
The dierence between the value under regulatory
measurement o the eligible capital held by an insurer, and
the sum o the values under regulatory measurement o the
obligations.
Related term: Eligible capital
A
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Back-testing The process o comparing actual experience with statistical
predictions.
For example used as a ormal statistical ramework to veriy i actual
losses are in line with projected losses in VaR models.
Best estimate The probability-weighted average, also reerred to themean. The estimation process is unbiased and based on
all currently available inormation including inormation
o currently observable trends, but excluding eects rom
events not yet occurred.
Related term: Best estimate liability
Also reerred to ascentral estimate or current estimate.
The concept o best estimate applies to many circumstances,
including the valuation o insurance contracts, the valuation oassets or liabilities, a cash fow stream, an individual assumption, or
a valuation approach.
Sometimes the term best estimate reers specically to the current
estimation o the mean value, i.e. the probability-weighted average,
o cash fows. In other cases, the term best estimate reers specically
to the current estimation o the mean value o risk weighted cash
fows, as e.g. IAS 39.42.
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Best estimate liability The expected or mean value (probability weighted average)
o the present value o uture cash fows or current
obligations, projected over the contracts run-o period,
taking into account all up-to-date nancial market and
actuarial inormation.
Related term: Best estimate
Sometimes also being reerred to as central estimate or current
estimate.
Note that the term liability does not reer to a liability in the
accounting sense, but is used in its general meaning (as a synonym
or any certain or potential obligation or payment now or in the
uture). The use o the term best estimate liability has historically
grown. When used in the context o solvency, calculations should
include all current obligations, including policyholder obligations
and expenses, e.g. administration cost and loss adjustments, and
explicitly value all embedded options and guarantees.
Best estimate values do not include any risk margins whatsoever.
The assessment o the best estimate liability reers to the valuation
o uture liability cash fows in aggregate, not to each individual
assumption, as in practice it can be very dicult to determine
whether an individual assumption is a best estimate.
The best estimate reers to the total obligations under the contract,
taking into account the timing or answering these obligations,hence discounting is implicitly included.
Whether it is possible to split the measurement o the liability in
an estimate o the mean value o the distribution unction and an
estimate o the risk adjustments, depends on circumstances, but
it should provide the same result as directly estimating the entire
liability.
Biometric risk Underwriting risks covering all risks related to human lie
conditions, e.g. death, disability, longevity, but also birth,marital status, age, and number o children (e.g. in collective
pension schemes).
Related terms: Disability risk, Longevity risk, Morbidity risk,
Mortality risk
See: Risk Map in Appendix I or an overview o the types o lie
underwriting risks.
Book value See: Carrying amount
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Break-up basis A method o considering the nancial situation o an
institution assuming that the company is liquidated by
settling all obligations at their current value as ar as the
current value o available resources allows that.
Synonym: Wind-up basis
Related terms: Going concern basis, Run-o basis
Business risk Unexpected changes to the legal conditions to which
insurers are subject, changes in the economic and social
environment, as well as changes in business prole and the
general business cycle.10
Related terms: Custody risk, Management risk, Operational
risk,Reputational risk,Strategic risk
In practice it is oten dicult to distinguish between legal changescauses business risk and those causing insurance risk.
Business risk is dicult to quantiy and is hence expected not to be
modelled under Solvency II regulation.
See: Risk Map in Appendix I.
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Calamity risk The risk that a single event o major magnitude leads to a
signicant deviation in actual claims rom the total expected
claims.
Related term: Catastrophe risk
The concept strongly relates to the notion o catastrophe risk, butis considered to be broader, as catastrophe risk relates to events
occurring over a short period, whereas calamity risks typically
include longer lasting events, e.g. a pandemic.
The notion o calamity risk is per denition relative to the nancial
position o the individual insurer and any signicance will need to
be dened in mathematical terms. The exact denition o what
constitutes a calamity hence varies per insurer.
Captive insurer An insurance company established by a parent rm or
the purpose o insuring the exposures o the parent or its
aliates.11
Related terms: Financial conglomerate,Financial group
Usually only a small part, i any, o a captives risk exposure is related
to providing insurance or reinsurance to other parties.1
This denition does not include mutual insurers, because they have
no share capital so the ownership is jointly and undivided amongst
its members, unlike a captive where the ownership is linked to a
parent or group.
Carrying amount The amount at which an asset or liability is recognised in the
balance sheet.
Synonym: Carrying value
Linked to IAS 36.6 (impairment o assets), IAS 16.6 (property, plant
and equipment) and IAS 38.8 (intangible assets).1
This value is not necessarily the same as historic cost, e.g. because
the carrying amount takes into account depreciation or could be aair value.
Casualty insurance A generic term used to describe all types o insurance
products which are not Lie, Health, or Property insurance.
Related terms: Liability insurance, Property insurance
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Catastrophe risk The risk that a single event, or series o events, o major
magnitude, usually over a short period (oten hours),
leads to a signicant deviation in actual claims rom the total
expected claims.1
Related term: Calamity risk
The notion o catastrophe risk is per denition relative to the
nancial position o the individual insurer and any signicance will
need to be dened in mathematical terms. The exact denition o
what constitutes a catastrophe hence varies per insurer.
Central estimate See: Best estimate
Claims risk An underwriting risk. A change in value caused by ultimate
costs or ull contractual obligations (claims without
administration costs) varying rom those assumed whenthese obligations were estimated.
Related term: Underwriting risk
Claims risk is oten split in reserve and premium risk in order to
distinguish between expired and unexpired contracts.
Reserve risk only relates to incurred claims, i.e. existing claims, (e.g.
including IBNR and IBNER), and originates rom claim sizes being
greater than expected, dierences in timing o claims payments
rom expected, and dierences in claims requency rom thoseexpected.
Premium risk only relates to uture claims (excluding IBNR and
IBNER), and originates rom claim sizes being greater than expected,
dierences in timing o claims payments rom expected, and
dierences in claims requency rom those expected.
See: Risk Map in Appendix I.
Compliance risk The risk o legal or regulatory sanctions resulting in a nancial
loss, or loss o reputation as a result o an insurers ailure tocomply with laws, regulations, rules, related sel-regulatory
organisation standards, and codes o conduct.1
Related terms: Business risk, Legal risk, Operational risk
See: Risk Map in Appendix I.
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Concentration risk The exposure to increased losses associated with inadequately
diversied portolios o assets and/or obligations.
Related term: Diversifcation
Concentration risk or an insurer may arise with respect to
investments in a geographical area, economic sector, or individual
investments, or due to a concentration o business written within a
geographical area, o a policy type, or o underlying risks covered.
Condence level Statistical measure o the level o certainty regarding an
outcome, typically expressed as the probability value (1 - )
associated with a condence interval.
The condence level is oten expressed as a percentage, e.g. the
condence level with = 0,05, is the 95% condence level.
Contagion The propagation o the eect o a ailure or nancial distress
o an institution in a sequential manner to other institutions,
markets or systems, or to other parts o a nancial group or
nancial conglomerate.
Related term: Systemic risk
Contingent capital Contractually obligated instruments that trigger under a
pre-dened condition.1
Cost o capital approach An approximation through which a risk margin is determined
based on the present value o the cost o capital charge or
all uture capital requirements until run-o.
Related term: Market value margin
The cost o capital approach is oten applied to determine the
market-consistent value o cash fows with non-hedgeable risks
(e.g. motor claims). In this case the risk margin is reerred to as the
Market value margin.
Counterparty credit risk See: Credit risk
Credit insurance A orm o guarantee against loss resulting rom deault on
the part o debtors.1
Synonym: Credit risk insurance
Related legal EU term is Credit and Suretyship Insurance. For more
details see Annex A and B(g) o First Council Non-Lie Directive
73/239/EEC.
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Credit risk The risk o a change in value due to actual credit losses
deviating rom expected credit losses due to the ailure to
meet contractual debt obligations.
Related terms: Deault risk, Settlement risk, Spread risk
Credit risk comprises deault and settlement risk.Credit risk can arise on issuers o securities (in the companys
investment portolio), debtors (e.g. mortgagors), or counterparties
(e.g. on reinsurance contracts, derivative contracts, or deposits) and
intermediaries, to whom the company has an exposure.1
A related but dierent type o risk, classied under market risk,
is spread risk, which reers to the risk o a change value due to
movements in the market price o credit risk.
Expected loss and Unexpected loss or credit risk are specic
elements o Basel II and the Capital Requirements Directive orthe calculation o capital requirements or credit risk. The ormer
is dened as the ratio o the amount expected to be lost on an
exposure rom a potential deault o a counterparty or dilution over
a one year period to the amount outstanding at deault, the latter
as the dierence between the maximum loss incurred and expected
losses, measured to a specic condence level.1
See: Risk Map in Appendix I.
Critical illness insurance An insurance policy that pays a benet i the insured isdiagnosed with a specied critical illness during the policy
term.
Abbreviation: CII
Synonym: Dread disease insurance
Related terms: Health insurance, Lie insurance
Critical illness insurance can be sold as a separate health or lie
insurance policy, but can also be a rider to a (group) lie or health
insurance contract.
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Current entry value The amount that the insurer would charge to a policyholder
today or entering into a contract with the same remaining
rights and obligations as the existing contract.0
Synonym: Entry value
Related term: Current exit valueAt inception, the measurement would be calibrated to the actual
premiums incurred (and recoverable acquisition cost incurred).
That calibration would act as a starting point or determining risk
margins at later dates.1
Because there is no secondary market or most insurance liabilities,
that amount would need to be estimated.
Current estimate See: Best estimate
Current exit value The amount that the insurer would expect to have to pay
today to another entity i it transerred all its remaining
contractual rights and obligations immediately to that entity
(and excluding any payment receivable or payable or other
rights and obligations, such as renewal rights).
Synonym: Exit value
Related term: Current entry value
Because there is no secondary market or most insurance liabilities,that amount would need to be estimated.
This is a type o market-consistent value o the entire portolio o
the insurer and similar to the air value o that portolio.
Custody risk The risk arising rom the ailure to hold secure custody o
assets or to incur a loss in ailing to obtain or release the
correct secure custody when conducting purchase and sale
transactions.
Related terms: Business risk
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Deault risk The risk o a change in value caused by the act that actual
deault rates deviate rom expected deault rates with
respect to non-payment o interest or principle.
Related terms: Credit risk, Settlement risk, Spread risk
Deault risk is a sub-type o credit risk, which also comprisessettlement risk.
See: Risk Map in Appendix I.
Disability insurance A health or lie insurance policy, or rider to a lie insurance
policy, that provides a single or periodic payments to replace
lost income when the insured is unable to work because o
illness or injury.
Abbreviation: DI
Synonym: Disability income insurance
Related term: Health insurance
Disability risk A change o value caused by a deviation o the actual
randomness in the rate o insured persons that are incapable
to perorm one or more duties o their occupation due to
a physical or mental condition, compared to the expected
randomness.
Related terms: Biometric risk, Morbidity risk
Disability risk only relates to cover against loss o income, contrary
to morbidity risk, relating to cover other than loss o income, e.g.
medical expenses.
Such a disability may be partial (a disabled person can perorm
a material part o their occupation), total (a disability which is
sucient to prevent the person rom perorming any o the duties
o their occupation), permanent (the disability is expected to be or
the lie o the person), or temporary (a disability rom which the
person is expected to recover).
See: Risk Map in Appendix I.
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Economic balance sheet Balance sheet statement based on one o those accounting
approaches using market-consistent values or all current
assets and current obligations relating to in-orce business,
including o-balance sheet items.
Related term: In-orce business, Total balance sheet approach
Depending on the reporting approach dierent items can be recognized
or not recognized in the balance sheet, as well the denition o a
current resource or obligation can vary rom approach to approach.
The economic balance sheet provides the market-consistent value o
the shareholder equity.
Economic capital See: Available economic capital, Required economic capital
Economic value See: Market-consistent valuation
Eligible capital Capital (either on or o-balance sheet) which, under
regulatory rules, may be taken into account (ully or partially)
in determining the insurers available capital or solvency
purposes.
Related term: Available solvency margin
Also reerred to also as admitted assets, acceptable assets, and
unrestricted assets, but eligible capital is the preerred term or
Solvency II purposes.
More ormally reerred to in European Commission publications as
Eligible Elements to cover Capital Requirements.
Embedded guarantee See: Guaranteed beneft, Guaranteed element
Embedded option See: Option
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Embedded value An estimate o the value to shareholders o a book o
insurance business at a given date, consisting o the ollowing
components:
Free surplus allocated to the covered business; Required capital, less the cost o holding required
capital; Value o uture shareholder cash fows rom in-orce
covered business.
Abbreviation: EV
Related terms: European embedded value, Value o in-orce
business
Theembedded value concept is applicable to general insurance,
although it is more commonly encountered in the lie context.
The value o renewals o existing contracts is included, but the valueo uture new contracts is excluded.0
Endowment insurance Insurance payable to the beneciary i the insured survives
the maturity date o the contract, or to a beneciary i the
insured dies prior to the maturity date.1
Related terms: Lie insurance, Pure endowment insurance
The minimum benets are dened at the point o sale.
Entry value See: Current entry value
Equity risk The risk o a change in value caused by deviations o the
actual market values o equities and/or income rom equities
rom their expected values.
Related terms: Market risk, Real-estate risk
See: Risk Map in Appendix I.
European embedded
value
A method or calculating the embedded value according the
principles and guidelines set by the CFO Forum.*
Abbreviation: EEV
Related term: Embedded value
Excess capital See: Surplus capital
Exit value See: Current exit value
E
* Chie Financial Ocer Forum, orum o major European insurance companies.
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Expected loss
(only or credit risk)
See: Credit risk
Expected policyholder
decit
Risk-measure used to determine the risk-based capital o an
insurer. It reers to the expected cost o insolvency.
Abbreviation: EPD
Related terms: Probability o ruin, Value-at-Risk
The expected cost is obtained through multiplying the probability
o the occurrence o insolvency by the average cost o that
insolvency.
There are dierent denitions available or this term.
Expected shortall See: Tail-Value-at-Risk
Expense risk The risk o a change in value caused by the act that the
timing and/or the amount o expenses incurred diers rom
those expected, e.g. assumed or pricing basis.
Synonym: Operating expense risk
Related term: Operational risk
See: Risk Map in Appendix I.
Extreme value model Mathematical and probabilistic models that provide methodsto assign probabilities to the tails o the distribution curve o
a particular kind o risk actor.
Extreme value theory covers the ollowing two main types
o models:
The distribution o the maximum value o a sequence
o random observations, as a reerence distribution or
more general cases;
The distribution o the excesses over a high threshold.
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Fair value The amount or which an asset could be exchanged or a
liability settled, between knowledgeable, willing parties in an
arms length transaction [IAS , 11].
Related terms:Arms length transaction, Market value, Market-
consistent valuation
This is a similar concept to market value, but the air value may be a
mark-to-model price i no actual market price or asset/liability exists.
It needs to be considered that there exist dierent concepts on
what a market price is, especially considering prices observed in
markets which are not deep, active or liquid, or where dierent
markets exist.
Financial conglomerate Any group o entities under common control whose exclusive
or predominant activities consist o providing signicant
services in at least the insurance sector and the bankingsector or investment services sector, subject to conditions
dened in EU law.
Abbreviation: FC
Related term: Financial group
Financial group A group o undertakings deploying nancial activities, which
consists o a parent undertaking, its subsidiaries, and the
entities in which the parent undertaking or its subsidiarieshold a signicant participation. Or, undertakings linked to
each other by a relationship subject to conditions dened
in EU law.
Related term: Financial conglomerate
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Foreign exchange risk The risk o a change in value caused by the act that actual
oreign currency exchange rates dier rom those expected.
Abbreviation: FX risk
Synonym: Currency risk
Foreign exchange risk can arise i the assets and liabilities o aninsurer are not in the same currency, or i contracts or administrative
and other services are contracted in a currency dierent to the
currency implied in the premium determination.
Also, in some jurisdictions, the sale o contracts in other than
the local currency has an impact on the rates o persistency or
discontinuance in the event that the policyholders are exposed to
a mismatch.
For insurers it is common to distinguish between FX mismatch risk,
where there are dierences in currencies o assets and liabilities orsupporting capital, and FX translation risk, which arises in groups
where the currency o assets and liabilities/supporting capital in a
local entity is dierent to the reporting currency o the group.
See:Risk Map in Appendix I.
Funeral insurance A lie policy with a low sum assured intended to pay or the
burial costs on the death o the insured.
Synonym: Funeral cost insurance
Related term: Lie insurance
Also reerred to as an assistance policy.39
Fungible capital That part o the capital o a group which can be transerred
between dierent legal entities o the group.
Capital fow rom a legal entity may be restricted due to regulatory
capital requirements.
However a group has always the option to sell a legal entity and
thereby ree capital.
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General insurance Generic term mostly used in Anglo-Saxon countries to reer
to all risks others than lie.
Synonym: Non-Lie insurance
Going concern basis A method o considering the nancial situation assuming
that an entity will continue to operate.0
Related terms: Break-up basis, Run-o basis
Going concern means that the entity (which can be a holding entity)
continues its operations. It does not impose requirements on the
type o operations, only that the total business volume should
not be reduced too much. Hence, the selling o part, or even the
entire insurance business, while starting another insurence business
does not per denition violate the going concern assumption. The
purpose is mainly to reer to a situation where the entity is able
to proceed all its activities in the oreseeable uture unorced by
liquidation procedures.
Group insurance Contracts in which insurance cover is provided to a number
o insured people (normally a workorce) or a number o
other individual risks o one party, usually the counter-party,
or many aected parties, which are not necessarily parties
under the contract, under a single master contract.
The group plan is typically arranged by the employer o the insured
individual or another group, e.g. sport clubs or all their members
or automobile clubs or third party liability o all their members.
Group contracts and policy conditions are usually issued on a yearly
renewable term, but permanent plans also exist. The premium may
be shared between contract holder and those insured.
Guarantee See: Guaranteed beneft, Guaranteed element
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Guaranteed benet Payments or other benets to which a particular policyholder
or investor has an unconditional right that is not subject to
the contractual discretion o the issuer.1
Related term: Guaranteed element
The unconditional right o the policyholder implies that no conditionis subject to the insurers discretion, nor to insurers perormance.
Hence, a guaranteed benet, or its determination, is contractually
stipulated without any ability o the insurer to infuence that
benet, neither by discretion nor by its perormance. Accordingly,
a guarantee is a risk bearing eature, since the amount to be paid
might deviate rom the earnings o the insurer, without the ability
o the insurer to avoid that.
Guaranteed element An obligation to pay guaranteed benets, included in a
contract that may also contain other benets, which may besubject to insurers discretion or subject to the perormance
o the insurer.
Related term: Guaranteed beneft
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Health insurance Generic term applying to all types o insurance indemniying
or reimbursing or losses (e.g. loss o income) caused by
illness or disability, or or expenses o medical treatment
necessitated by illness or disability.
Related terms: Accident insurance, Disability insurance
Dened as Accident and Health insurance in EU law. For more
details see Annex A and B(a) o First Council Non-Lie Directive
73/239/EEC and consecutive amending directives.
Hedgeable risk A risk associated with an asset or an obligation that can
be eectively neutralised by buying or selling a market
instrument (or engaging in a contract with a third party in an
arms length transaction under normal business conditions),
whose value is expected to change in such a way as to oset
the change in value o the asset or liability caused by the
presence o the risk.
Related terms: Arms length transaction, Diversifcation,
Systematic risk
The term hedgeable risk depends on market conditions. It is not a
characteristic o the risk itsel. Further it may be that the risk can be
cheaper and more easily mitigated through other means, e.g. some
storm risks can be mitigated at lower cost in a world-wide pool than
through storm bonds.
Non-hedgeable risks are risks that cannot be hedged or easily
transerred to a third party due to the lack o a deep and liquid
market.
Historic cost Assets are recorded at the amount o cash or cash equivalents
paid or the air value o the consideration given to acquire
them at the time o their acquisition. Liabilities are recorded
at the amount o proceeds received in exchange or the
obligation, or in some circumstances (or example, incometaxes), at the amounts o cash or cash equivalents expected
to be paid to satisy the liability in the normal course o
business.
Related term: Carrying amount
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Home supervisor The supervisory authority which is responsible or the
prudential supervision in the EU Member State in which the
insurer has obtained its license to perorm its EU insurance
activities (home country), and which is also responsible or
the prudential supervision o business underwritten in other
EU Member States via branches or reedom o services.
Related terms: Host supervisor, Lead supervisor
In EU legislation, home Member State is dened as the Member
State where the undertaking has its based oce, see Article 2()
2005/68/EC.
Host supervisor The supervisory authority which is responsible or the
prudential supervision in the EU Member State in which an
insurance undertaking has a subsidiary, other than the home
Member State which has licensed the insurer to perorm its
EU insurance activities.
Related terms: Home supervisor, Lead supervisor
In EU legislation, host Member State is dened as the Member
State where the undertaking provides services or has a branch, see
Article 2(n) 2005/68/EC, whereas home Member State is dened as
the Member State where the undertaking has its based oce, see
Article 2() 2005/68/EC.
Hybrid capital Capital that has the orm o a combination o two or more
dierent nancial structures or instruments.
Examples are subordinated and deeply subordinated debt.
Hybrid capital is used to provide cheaper unding than share
capital.
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Infation risk The risk o a change in value caused by a deviation o the
actual market-consistent value o assets and/or liabilities rom
their expected value, due to infation, e.g. price infation,
wage infation, etc., leading to an unanticipated change in
insurance cost and/or impact o an insurance contract, e.g.
with respect to contract limits.
In-orce business The portolio o insurance contracts which give raise to
current obligations or current rights.
Insolvency The point at which under national bankruptcy procedures the
owner looses ownership rights and/or the policyholders are
no longer entitled to the orderly settlement o contracts.
Insurance contract A contract under which one party (the insurer) accepts
signicant insurance risk rom another party (the
policyholder) by agreeing to compensate the policyholder
or its beneciary i a specied uncertain uture event (the
insured event) aects the policyholder.
IFRS4, Appendix B provides detailed guidance on the denition o
insurance contract.
Insurance group A group structure which contains two or more insurers.
Related terms: Captive insurer, Financial conglomerate,Financial conglomerate, Insurance entity
The structure o insurance groups may derive rom an ultimate
holding company which is not an insurer. Such a holding company
can be an industrial or commercial company, another nancial
institution (or example a bank), or a company the majority o
whose assets consist o shares in insurance companies (and/or other
regulated nancial institutions).
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Insurance guarantee
scheme
Arrangements which should ensure that policyholders and
beneciaries are not let without compensation in the event
o the insolvency o an insurance entity.
Abbreviation: IGS
This can either be achieved by providing reimbursement topolicyholders/beneciaries or by securing the continuation o the
insurance contracts.
In the eld o third motor liability insurance, the EU legislation
requires Member States to set up a compensation body with the
task o providing compensation, at least up to the limits o the
insurance obligation or damage to property or personal injuries
caused by an unidentied vehicle or a vehicle or which the legal
insurance obligation has not been satised.0
Insurance guarantee schemes also exist or workers compensation.IGS can be ocused on one or on multiple lines; the nancing o
these schemes can be either private or public and can be very
diverse.
Insurance obligation An insurers contractual obligations/rights under an insurance
contract.1
Related term: Best estimate liability
Total net obligations associated with an insurance company can be
split into various parts such as policyholder obligations, obligations
arising rom business and management cost o the portolio, tax
liabilities, and debts to creditors and others, and in total rights to
policyholders (e.g. regarding premiums due or recoveries).
Liabilities can be measured net or gross o risk mitigation and
transer contracts including reinsurance and hedging.
Amount recognized on the balance sheet to meet as liabilities to
refect obligations arising out o insurance contracts, include:
Claims liabilities (whether reported or not);
Liabilities or unearned premiums;
Liabilities or unexpired risks;
Lie insurance liabilities, and;
Other liabilities related to lie insurance contracts (e.g. premium
deposits, accumulated savings or unit-linked contracts,
accumulated guaranteed bonus or participating contracts,
liabilities or uture bonuses or participating contracts).
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Interest rate risk The risk o a change in value caused by a deviation o the
actual interest rates rom the expected interest rates.
Related terms: Market risk, Asset-liability mismatch risk
See: Risk Map in Appendix I.
Internal model Risk management system o an insurer or the analysis o
the overall risk situation o the insurance undertaking, to
quantiy risks and/or to determine the capital requirement
on the basis o the company specic risk prole.
Related term: Standard ormula
Within the Solvency II ramework an internal model is intended to
ully or partially replace the standard ormula or the calculation o
the Solvency Capital Requirement. Both quantitative and qualitative
requirements will be set by the regulator and explicit approval hasto be granted by the supervisor.
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Lapse The expiration o all rights and obligations under an
insurance contract i the policyholder ails to comply with
certain obligations required to uphold those, e.g. premium
payment.
Related terms: Lapse risk, Surrender
Typically, the insurer must receive the premium payment within a
specied period ater the due date.
Lapse risk The risks o a change in value caused by deviations rom the
actual rate o policy lapses rom their expected rates.
Synonym: Persistency risk
Related terms: Lapse, Surrender risk, Underwriting risk
See: Risk mapin Appendix I.
Lead supervisor The supervisory authority responsible or the supervision o
a nancial group or conglomerate.
Related terms: Home supervisor, Host supervisor
Legal risk The possibility that lawsuits, adverse judgements rom courts,
or contracts that turn out to be unenorceable, disrupt or
adversely aect the operations or condition o an insurer.
Related terms: Business risk, Operational riskThe result may lead to unplanned additional payments to
policyholders or that contracts are settled on an unavourable basis,
e.g. unrecoverable reinsurance.
See: Risk Map in Appendix I.
Liability insurance Type o non-lie insurance that provides insurance to meet
legal obligations to third parties arising rom non-intentional
acts or wrongs, e.g. negligence by the insured.
Related term: Casualty insurance
Reasons or legal obligations include bodily injury, property damage,
and proessional errors.
Dened as Third party liability insurance in EU law.
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Lie insurance Category o insurance contracts or which the benet
payment is based on the occurrence o death, disability, or
critical illness o the insured within the specied coverage
term, or on the lie status o the insured at maturity.
Related term: Health insurance
Lie insurance oers lie and/or death coverage o the insured in the
orm o a single or multiple (as well regular in case o an annuity)
lump sum payments to a beneciary.
Health insurance products are oten sold as a rider to a (group) lie
contract. In sensu stricto these are not lie insurance, because they
do not relate to the occurrence o death.
The classes o lie insurance that EU insurers can write on a license
are dened in Annex I o Lie Directive 2002/83/EC.
Liquidity risk The risk stemming rom the lack o marketability o an
investment that cannot be bought or sold quickly enough to
prevent or minimize a loss.
Related term: Market risk
Liquidity risk may arise due to illiquidity o the assets held to meet
the cash fow requirements (commonly reerred to as asset, market,
or trading liquidity risk), but also due to insucient unds being
available to meet cash fow requirements (unding liquidity risk).
From a more theoretical point o view liquidity risk on a day-to-
day basis could also be understood as a change in value due to a
deviation o the actual cash fow requirements rom the expected
cash fow requirements, being the cost o being over- or under
capitalised.
See: Risk Map in Appendix I.
Longevity risk Type o biometric risk. A change in value caused by the
actual mortality rate being lower than the one expected.
Related term: Biometric risk
Longevity risk aects contracts where benets are based upon the
likelihood o survival, i.e. annuities, pensions, pure endowments,
and specic types o health contracts.
See: Risk Map in Appendix I.
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Loss given deault Means the ratio o the loss on an exposure due to the deault
o a counterparty to the amount outstanding at deault.
Abbreviation: LGD
Synonyms: Loss in the event o deault, Loss severity
Related term: Probability o deault
Management risk Type o business risk. The risk associated with an incompetent
management or a management with criminal intentions.
Related terms: Business risk, Operational risk, Strategic risk
See: Risk Map in Appendix I.
Marine, aviation, and
transport insurance
Category o insurance products dened in EU law providing
coverage or:
Accidental injury o passengers,
All damage to or loss o railway rolling stock, sea, river
and canal vessels, goods in transit and baggage, and
All liability arising out o the use o ships vessels or boats
on the sea, lakes, rivers or canals, including carriers
liability.
Abbreviation: MAT
Dened as Marine, Aviation, and Transport insurance in EU law.
For more details see Annex A and B(a) o First Council Non-LieDirective 73/239/EEC and consecutive amending directives.
Market-consistent
valuation
The practise o valuing assets and liabilities on market values
where observable with a given quality (mark-to-market),
where not, on market-consistent valuation techniques
(mark-to-model).
Related terms: Market value, Mark-to-market valuation, Mark-
to-model valuation
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Market discipline The creation o disciplining pressure through the publication
o nancial inormation and other inormation about
the insurers activities to the public, sometimes only to
policyholders, providing transparency, hence allowing market
participants and policyholders to assess key organisational
and product inormation.
Disclosure requirements and recommendations may either be
imposed by the responsible supervisory authority or based on the
insurers own initiatives.
Market discipline serves to ensure that insurers display a air attitude
towards policyholders and provide nancial transparency toward
market participants.
Market risk The risk o changes in values caused by market prices or
volatilities o market prices diering rom their expected
values.
Related term: Asset-liability management
See: Risk Map in Appendix I.
Market value The amount or which an asset could be exchanged or a
liability settled, between knowledgeable, willing parties in
an arms length transaction; based on observable prices
within an active, deep and liquid market which is availableto and generally used by the entity.
Abbreviation: MV
Related terms: Arms length transaction, Fair value, Market-
consistent valuation
Fair value is a similar concept to market value, but the air value may
be a mark-to-model price i no actual market price or asset/liability
exists.
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Market value margin The measurement attribute or determining the risk margin in
a market consistent measurement o an insurance obligation
or asset refecting the price charged by market participants
or accepting the deviation risk inherent in a cash fow.
Abbreviation: MVM
Related terms: Best estimate liability, Fair value, Market-
consistent valuation, Market value
Under the cost o capital approach the MVM is to be approximated
as the present value o the cost o capital or all uture Solvency
Capital Requirements or economic capital requirements which will
have to be put up during the entire run-o o the portolio o assets
and liabilities or the risks o the in-orce book o business.
Mark-to-market
valuation
The practice o valuing insurance rights and obligations,
or more broadly security and nancial instruments, using
current market prices.0
Related terms: Mark-to-model valuation, Market-consistent
valuation
Mark-to-model
valuation
The practice o valuing insurance rights and obligations, or
more broadly security and nancial instruments1 based on
modelling.
Related term: Market-consistent valuation
Mark-to-model valuing is oten based on benchmarking,
extrapolation or other orms o calculation based on current and
market-consistent parameters, i case any such orm o modelling
can be applied.
Migration risk The risk o a change in value caused by a deviation o the
actual probability o a uture deault by an obligor rom the
expected probability o uture deault, adversely aecting
the present value o the contract with the obligor today.
Related term: Credit risk
Minimum Capital
Requirement
The capital level representing the nal threshold that
triggers ultimate supervisory measures in the event that it
is breached.
Abbreviation: MCR
Related term: Solvency Capital Requirement
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Mispricing risk Term used to describe the act that or a range o reasons
premiums may turn out to be too low to cover the
insurers expenses related to claims, claims handling, and
administration.
Synonym: Pricing risk
Related term: Underwriting risk
Mispricing risk is not depicted in the risk map o Appendix I, because
it is no unique source o risk.
Model risk The risk that a model is not giving correct output due to a
misspecication or a misuse o the model.
Related term: Parameter uncertainty risk
See: Risk Map in Appendix I.
Possible sources o model risk include, but are not restricted to:
The use o an inappropriate model;
The inappropriate use and implementation omodels;
The selection o inappropriate models;
Errors within the models or the estimated parameters;
Insucient or incorrect data.
Correct model choice given the inormation available, but a deviation
o reality rom the model at a later stage.
Morbidity risk Type o biometric risk. A change o value caused by the
actual disability and illness rates o the persons insured
deviating rom the ones expected.
Related terms: Biometric risk, Disability risk
Morbidity risk is generally considered as to only relate to insurance
cover or losses other than loss o income, i.e. medical expenses,
contrary to disability risk.
An increase in the requency o an insured becoming disabled or ill
may or example result in higher claim patterns than charged or inthe premiums.
It aects health insurance contracts where payments are paid or
insured types o disability and/or illness.
See: Risk Map in Appendix I.
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Mortality risk Type o biometric risk. A change in value caused by the
actual mortality rate being higher than the one expected.
Related terms: Biometric risk, Longevity risk
An increase in the requency o the death o insured persons may
or example result in higher claim patterns than charged or in the
premiums.
Mortality risk aects all lie insurance contracts and those health
insurance contracts where claims depend upon the death o the
insured.
See: Risk Map in Appendix I.
Motor insurance A generic term reerring to all types o insurance
indemniying or third party liability, legal liability or bodily
injury, and damage to property o others, arising out oownership or operation o a motorised vehicle (compulsory
cover as in EU Directives), and/or other losses arising out o
the ownership, or operation o a motorised vehicle by the
insured (comprehensive cover).
Related term: Liability insurance
Dened as Motor third party liability insurance and Motor other
classes in EU law. For more details see Annex A and B(a) o First
Council Non-Lie Directive 73/239/EEC and consecutive amending
directives.
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Non-diversiable risk See: Systematic risk
Non-lie insurance Generic term used to reer to all types o insurance business
other than Lie insurance, including or example Property
insurance, Liability insurance, Motor insurance, Accident
insurance, and Health insurance.
Synonym: General insurance
Related terms: Lie insurance, Health insurance
In Anglo-Saxon countries the term General insurance is commonly
used.
Ocial term used in EU law to reer to specied classes o insurance
dened in First Council Directive 73/239/EEC and amended in
consecutive Non-lie Directives.
Operational risk Risk o a change in value caused by the act that actual
losses, incurred or inadequate or ailed internal processes,
people and systems, or rom external events (including legal
risk), dier rom the expected losses.
Related terms: Business risk, Compliance risk, Expense risk,
Legal risk, Management risk, Model risk, Reputational risk,
Strategic risk
Operational risks relate to operational loss events caused by internal
or external reasons, excluding all nancial risks that a company hastaken on in the expectation o a nancial return.
See: Risk Map in Appendix I.
Option A contract eature that gives a party o a contract the right
(or potential right) to aect the discretionary net cash fows
under the contract under conditions and limitations o the
discretion as outlined in the contract.
It involves a right granted by the insurer to the policyholder to
exercise a particular choice related to a specic product; the product
in which the option is embedded. The option may be exercisable by
the policyholder at certain pre-specied points in time and under
particular circumstances. It may be exercised automatically or may
require an explicit decision by the policyholder.
Most options are conversion eatures granted to the buyer or early
termination options reserved by the issuer o a security, but there
are also options or management decisions o the insurer.
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Parameter uncertainty
risk
A change o value caused by the uncertainty in the estimation
o the parameter values applied in a model.
Related terms: Model risk, Operational risk
Possible sources o parameter uncertainty risk include, but are not
restricted to:
The number o observations on which best estimates are based
is limited because the observation period is too short;
The volatility o the observations makes estimation less certain;
The period over which the observations were made may not
include certain calamitous events that, in act, should be
refected in the parameters o the distribution;
The observations contain contaminated data.
The observed population diers rom the one being
underwritten;
There is an uncertainty or long-term insurance in projection othe parameters (diagnosis versus orecasting).
See:Risk Map in Appendix I.
Parent company A company that controls subsidiaries through partial or ull
stock ownership or some other nancial or legal connection,
or that in the opinion o the competent authorities, eectively
exercises a dominant infuence over another undertaking.
Synonym: Parent undertaking
Related legal EU term is Parent undertaking dened in Article
2.9 o Directive 2002/87/EC on the supplementary supervision o
nancial conglomerates and Article 1 o Seventh Council Directive
83/349/EEC.
Pension scheme A contract, an agreement, a trust deed, or rules stipulating
which retirement benets are granted and under which
conditions.0
Related terms: Annuity, Lie insurance
Percentile approach See: Quantile approach
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Perormance linked
benet
A contractual benet sharing the policyholder in the
perormance o the insurer, i.e. the surplus under a group
o contracts or the surplus o the entire entity; achieved
ater providing the guaranteed benets, ater making the
related internal expenses as a result o received guaranteed
premiums, and taking into account the investment income.
Contracts can limit the surplus in which policyholders share, can
determine to which extent they share in those surplus, and when
and by which means the policyholders share in surplus is beneted
to individual policyholders. Contracts oten grant insurers a certain
discretion in that process.
There are various methods or deciding how prots are shared.
Permanent capital Instruments that have no end-date and are available
indenitely to absorb losses in dened circumstances.1
Related term: Available solvency margin
Persistency risk See: Lapse risk
Premium risk See: Claims risk
Pricing risk See: Mispricing risk
Probability o deault Risk measure. The likelihood that a counterparty will notrepay contractual obligations according to the agreement.
Abbreviation: PD
Related term: Loss given deault
The probability o deault is typically specied in terms o a one year
period, but may also relate to a longer or shorter period.
Probability o ruin Risk measure. The likelihood that total net cash outfows
exceed at any time the available resources starting with agiven amount o resources, within a specied time horizon.
Synonym: Ruin probability
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Procyclicality The cumulative pressure on a larger number o institutions
to sell assets or raise capital at the same time, due to the
Solvency Capital Requirements and thereby potentially
causing more extreme market movements than would
otherwise be the case.
In addition, this causes sales to occur at inopportune times, i.e.
when the achieved returns are such that in a cascade reaction even
more assets need to be sold, with the consequence that a major
impact on the entire industry is possible.
Product design risk Generic term used to describe the act that an insurer may
ace a risk exposure under its insurance contracts that was
unanticipated in the design and pricing o the insurance
contract.
Related term: Underwriting risk
Product design risk is not depicted in the risk map o Appendix I,
because it is no unique source o risk. It contains pricing risk and
legal risk, to some extent as well operational risk and the risk, that
the product is not successul in the market.
Property and casualty
insurance
See: Casualty insurance, Property insurance
Property insurance A generic term used to describe all non-lie insurance
products that can protect an insured against loss o, or
damage to, property or specied peril(s).
Related term: Casualty insurance
Dened as Insurance against Fire and other Damage to Property in
EU law. For more details see Annex A and B(a) o First Council Non-
Lie Directive 73/239/EEC and consecutive amending directives.
Provision The amount needed under a certain measurement o apresent obligation to meet that obligation adequately.
The term technical provision is a part o the provision separated or
presentation purposes, reerring to parts subject to uncertainty.
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Prudential lter Regulatory requirements applied to the measurement o
rights and obligations under insurance contracts and capital
obligations o the insurer which result in dierences to the
values shown in public nancial reporting.
They are applied or prudential reporting purposes to ensure
that the capital is suitably quantied to meet the specic aims o
prudential supervision, i.e. adjusting the measurement rom the
intend to represent the net obligations aithully to the intend to
meet them adequately.
Prudent person
approach
A principle which guides asset management by requiring the
manager to invest as a prudent person would do.
Synonym: Prudent man approach
Pure endowmentinsurance
Insurance payable to the beneciary i the policyholder isalive at the maturity date stated in the policy.
Related terms: Endowment insurance, Lie insurance
Quantile approach Approach to dene a risk margin above best estimate
liabilities in terms o a condence level. It denes a risk
margin as the dierence between the stated quantile o
the applicable probability distribution (value at risk) and the
mean o that distribution.
Synonym: Percentile approach
Related terms: Confdence level, Cost o capital approach, Risk
margin, Value-at-Risk
As this can, or low quantiles and/or skew distributions, lead to
negative risk margins, a supplementary rule is needed i the resulting
risk margin is always to be positive.P,Q
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Rating agency driven
capital
Amount o capital the rating agencies expect the company
to hold or a given rating.
It is designed to test and communicate capital adequacy warranting
the target debt rating based on the rating agency metrics and
models.
Real-estate risk The risk o a change in value caused by a deviation o the
actual values o real-estate securities and/or income rom
real-estate securities, rom their expected values.
Related term: Equity risk
See: Risk Map in Appendix I.
Regulatory capital See: Minimum Capital Requirement, Solvency CapitalRequirement
Regulatory surplus See: Surplus capital
Reinsurance Type o risk mitigation on the basis o an insurance contract
between one insurer or pure reinsurer (the reinsurer) and
another insurer or pure insurer (the cedant), to indemniy
against losses, partially or ully, on one or more contracts
issued by the cedant in exchange or a consideration (the
premium).0
Reinsurance
counterparty risk
See: Credit risk
Reinvestment risk Risk o a change in value caused by a deviation o the actual
return on investment or unds to be reinvested, rom the
expected return on investment o these unds.1
Related term: Market risk
Reputational risk Type o business risk. The risk that adverse publicity
regarding an insurers business practices and associations,
whether accurate or not, will cause a loss o condence in
the integrity o the institution.
Related term: Operational risk
Reputational risk could arise rom other risks inherent in an
organisations activities. The risk o loss o condence relates
to stakeholders, which include, inter alia, existing and potential
customers, investors, suppliers, and supervisors.
See: Risk Map in Appendix I.
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Required economic
capital
The total o assets measured at market-consistent value,
internally required by an insurer above the market-
consistent value o obligations, in order to reduce the risk
o not meeting the obligations to a dened risk measure
(e.g. VaR, TVaR, EPD), and within a dened time period (e.g.
one year).
Related term: Available economic capital
Reserve risk See: Claims risk
Risk margin A generic term, representing the value o the deviation risk
o the actual outcome compared with the best estimate,
expressed in terms o a dened risk measure
Related terms: Market value margin, Quantile approach
The term risk margin in the context o Solvency II reers to the
amount above the best estimate liability.
Run-o basis A method o considering the nancial situation assuming
that no new business will be written, but that the company
will continue to operate with in-orce business until the end
o the term set by the policy conditions (e.g. the renewal
date, the end o a xed term, death o the insured person),
including the settling o claims eventually arising during thisperiod.
Related terms: Break-up basis, Going concern basis
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Standard ormula In the context o the Solvency II regime, a set o calculations
prescribed by the regulator or generating the Solvency
Capital Requirement.
Related term: Internal model
The standard ormula is intended to be able to be used by a verywide range o undertakings.
Strategic risk Type o business risk. The risk o a change in value due to
the inability to implement appropriate business plans and
strategies, make decisions, allocate resources, or adapt to
changes in the business environment.
Related terms: Business risk, Management risk, Operational
risk
See: Risk Map in Appendix I
Stress test A type o scenario analysis in which the change in parameters
are considered signicant, or even extreme.
Abbreviation: ST
Related terms: Scenario analysis, Sensitivity test
Supervisory ladder In the context o Solvency II, describes the scale o control
levels and accompanying supervisory measures or capital
levels between the Solvency Capital Requirement and the
Minimum Capital Requirement.
Supervisory review
process
In the context o Solvency II, describes the process that
enables the supervisory authority to evaluate, on an ongoing
basis, i the undertaking ulls all relevant regulatory
requirements.
Abbreviation: SRP
Surety business An obligation undertaken (a surety bond or guarantee) by
one party (the surety) to another party (the beneciary),
to ensure the ullment o contractual, legal, or regulatory
obligations by a third party (the principal) up to the bond
limit.
Related term: Credit insurance
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Surplus capital Term commonly used to reer to that part o the available
solvency margin that is held by an insurer in excess o the
Solvency Capital Requirement.
Synonyms: Excess capital, Regulatory surplus
Related terms: Available solvency margin, Solvency CapitalRequirement
Surrender The termination o an insurance contract by the
policyholder.
Related terms: Lapse, Surrender risk
The insurer pays the policyholder or its beneciary the cash value
which is contractually agreed or legally prescribed.
Surrender risk The risk o a change in the value o an insurance policycaused by a deviation o the actual surrenders (premature
terminations) rom the expected surrenders, i.e. those
assumed in the valuation, due to ull repurchase, partial
repurchase, premium reduction, conversion to paid-up
policy status or transer.
Related terms: Lapse risk, Surrender
Though driven by the same risk driver, i.e. the potential premature
termination o an insurance contract, surrender risk is dierent rom
lapse risk because it relates to the change in value that is caused
by the premature termination o contracts with a surrender value,
while lapse only relates to the premature termination o contracts
without a surrender value.
See: Risk Map in Appendix I.
Systematic risk Any risk inherent to the entire market or entire market
segment which cannot be mitigated through diversication.
Synonym: Non-diversifable riskRelated term: Hedgeable risk
Also known as non-diversiable risks (as measured by an assets
beta), contrary to idiosyncratic risks.
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Systemic risk The risk o experiencing systemic events which may lead to
the ailure o institutions, markets or nancial systems.
Related term: Contagion
The spectrum o systemic risk ranges rom the second-round eect
on a single institution or market to the risk o having a systemic
crisis aecting most o the (or even the whole) nancial system.
The geographical reach o systemic risk can be regional, national
or international.
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Tail-Value-at-Risk A coherent risk measure. For a given condence level 1-
it measures the average losses over the dened threshold
(typically set as the VaR or a given quantile), i.e. the
conditioned mean value, given that the loss exceeds the 1-
percentile.
Abbreviations: TVaR, TailVaR
Synonym: Expected shortall
Related term: Value-at-Risk
Target capital Term ormerly used in the initial papers o the Commission
Services, but no longer used and changed into Solvency
Capital Requirement.0
Technical provision See:Insurance obligation, Provision
Technical risk See: Underwriting risk
Term insurance Insurance payable to a beneciary upon the death o the
insured, provided death occurs within the term o the
contract.1
Synonym: Term lie insurance
Related term: Lie insurance
Term products are oten sold as a rider or linked to another product,e.g. a mortgage or investment product.
Time horizon The period over which any amount o required capital, e.g.
Solvency Capital Requirement, is held in order to cover
losses, within a given risk tolerance level.
The time horizon or the SCR is set at one year and the condence
level will be set accordingly.
Total balance sheetapproach
Principle which states that the determination o an insurerscapital that is available and needed or solvency purposes
should be based upon all assets and liabilities, as measured
in the regulatory balance sheet o the insurer, and the way
they interact.T
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Underwriting risk The risk o a change in value due to a deviation o the
actual claims payments rom the expected amount o claims
payments (including expenses).
Related terms: Biometric risk, Expense risk, Lapse risk, Claims
risk, Surrender risk
Total underwriting risk or non-lie insurance includes the total o
claims risk and expense risk or claims. For lie insurance it includes
the total o lapse, surrender, and biometric risks, as well as expense
risk or claims.
See: Risk Map in Appendix I.
Unexpected loss
(only or credit risk)
See term: Credit risk
Unit-linked contract A contract, under which benets are determined based on
the air value o units o a mutual und. The benet refects
the air value o a specic number o units, which is either
contractually determined as a xed number, or derived rom
other events under the contract, e.g. premium payments
associated with a specic additional number o units
based on the air value o the units at the time o premium
payment.
In some cases additional guarantees can be given, e.g. minimumguaranteed maturity benets, term insurance, etc.
The investment risk is borne by the policyholder.
Other orms are index-linkage, where the linked items are o such a
kind, that the insurer is able to match entirely, or investment-linkage,
where the contract does not reer to the air value o units but to the
air value o assets in a portolio. Perormance-linked contracts reer
to the returns recognized under a specic measurement approach
rom that portolio or other perormance o the insurer as actually
occurred or recognized.
Universal lie insurance A fexible premium lie insurance policy, resembling a savings
account combined with a term insurance unded rom the
savings account, under which the policyholder may change
the death benet rom time to time (with satisactory
evidence o insurability or increases) and vary the premium
payments.
Related term: Lie insurance
U
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Value-at-Risk Value-at-risk is a quantile o a distribution and used as a
(non-coherent) risk measure.
Abbreviation: VaR
Related term: Tail-Value-at-Risk
For example, i the twelve month value-at-risk with a 95%condence level ( = 0,05) represents the amount o one million
Euro, this means that an insurer would only expect to lose more
than one million Euro once in 20 years (1/).
Value o in-orce
business
The value o uture distributable post-tax prots, expected
to emerge on business already written (including renewals),
i.e. the in-orce business. VIF excludes any value associated
with uture new contracts that have not yet been written.
Abbreviation: VIF
Related terms: Embedded value, European embedded value,
In-orce business
VIF is calculated using current actuarial, economic and operational
assumptions and is part o the embedded value.
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Whole lie insurance Insurance payable to a beneciary upon death o the insured
whenever that occurs: premiums may be payable or a
specied number o years (limited payment lie) or or lie
(straight lie).
Whole lie products typically provide level death benets and vary
mainly with respect to the period over which premiums are paid,
varying rom single premium to ull lietime premium payments.
With-prot product See: Perormance linked beneft
Workers compensation
insurance
Insurance cover or the cost o medical care and rehabilitation
or workers injured on the job, during the way to and rom
the job, or to work related diseases.
Related terms: Disability insurance, Health insurance, Lie
insurance
Workers compensation insurance also compensates or wage loss
and provides disability or death benets or beneciaries i the
insured person is killed or injured in work-related accidents.
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Notes
1 Based on IAIS (00) Glossary o terms, March 00. Based on European Commission (000) ART Market Study, Final Report, October
000.
Based on European Commission (000) ART Market Study, Final Report, October000.
Based on European Commission (000) ART Market Study, Final Report, October
000. The denition applies to annuity products within the EU, not per denition to US
products in its entirety. Based on IAIS (00) Glossary o terms, March 00. Based on IAIS (00) Glossary o terms, March 00. Note rom CFO Forum (00) Elaborated principles or an IFRS Phase II Insurance
Accounting Model, June 00. Note rom CFO Forum (00) Elaborated principles or an IFRS Phase II Insurance
Accounting Model, June 00.10 Denition o General business risk in IAIS (00) Glossary o terms, March 00.11 IAIS (00) Glossary o terms, March 00.1 Note rom IAIS (00) Supervisory Standard on Suitable Forms o Capital, Revised
Drat, 1 July 00.1 Note rom IASB (00) International Financial Reporting Standards, Framework or
the Preparation and Presentation o Financial Statements (F), January 00.1 Based on IAIS (00) Glossary o terms, March 00.1 Based on BIS, Committee on Banking Supervision (00) Compliance and the
compliance unction in banks, April 00.1 Swiss Re (001) The Economics o Insurance, How insurers create value or
shareholders, 001, pp. .1 IAIS (00) Glossary o terms, March 00.1 Based on IAIS (00) Glossary o terms, March 00.1 Based on European Parliament and Council (00) Capital Requirements Directive,
COM (00) nal, July 00.0 Drat denition: IASB (00) Insurance contracts (phase II): Summary o possible
accounting approaches (Agenda Paper 10D), Inormation or Observers, February
00.1 Note rom IASB (00) Insurance contracts (phase II): Summary o possible accounting
approaches (Agenda Paper 10D), Inormation or Observers, February 00. Note rom IASB (00) Insurance contracts (phase II): Summary o possible accounting
approaches (Agenda Paper 10D), Inormation or Observers, February 00. Drat denition: IASB (00) Insurance contracts (phase II): Summary o possible
accounting approaches (Agenda Paper 10D), Inormation or Observers, February00.
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Note rom IASB (00) Insurance contracts (phase II): Summary o possible accounting
approaches (Agenda Paper 10D), Inormation or Observers, February 00. IAIS (00) Glossary o terms, March 00. Based on denition Disability income insurance in IAIS (00) Glossary o terms,
March 00.
Based on BIS (1) Capital Adequacy Principles Paper, February 1. Notes based on BIS (1) Capital Adequacy Principles Paper, February 1. Based on CFO Forum (00) Embedded Values, An educational session prepared by
the CFO Forum or the Insurance Working Group, September 00.0 Based on CFO Forum (00) Embedded Values, An educational session