Chapter 49 - Glossary

Question 1

Define a rating factor.

Answer 1

• A rating factor is a factor used to determine the premium of a policy.
• Must be measurable in an objective way
• Must be related to the severity or likelihood of the claim
• Must be a risk factor or a proxy for a risk factor

Question 2

Define a risk factor.

Answer 2

• A factor that is expected to have an impact on the intensity of a risk in an insurance contract.
• Possibly with support of statistical evidence

Question 3

Define a mutual.

Answer 3

• A mutual is owned by policyholders to which all profits belong.

Question 4

Define a proprietary company.

Answer 4

• A company owned by shareholders.

Question 5

Define anti-selection.

Answer 5

Anti-selection is when people are more likely to take out an insurance contract if they believe they pose a higher risk than what has been allowed for by the insurer in the premium of the policy. It is also related to the situation where a policyholder is more likely to exercise an option or guarantee when they have the most to gain.

Question 6

Define moral hazard.

Answer 6

• When a party behaves differently than they would have behaved if they were fully exposed to the consequences of their behaviour.
• Relates to information asymmetry where one party has more information relating to a risk than the organisation who bears the consequences.

Question 7

Define an option.

Answer 7

An options is the right to buy or sell an asset.

Question 8

Define an option premium.

Answer 8

An option premium is the price of an option.

It is received by the option writer.

Question 9

Define the option writer.

Answer 9

The person who sells the option.

Question 10

Define a put option.

Answer 10

A put option is the right, but not the obligation, to sell an asset at a specific price at a future date.

Question 11

Define a call option.

Answer 11

A call option is the right, but not the obligation, to buy an asset at a specified price at a specific future date.

Question 12

Define a cap.

Answer 12

A cap is an upper limit.

Question 13

Define a coupon.

Answer 13

A coupon is the interest payment on a bond.

Question 14

Define a floor.

Answer 14

A floor is a lower limit.

Question 15

Define free assets.

Answer 15

• Assets that are not needed to cover liabilities.

Question 16

Define gearing.

Answer 16

Gearing is the ratio of debt to equity.

Question 17

Define an active member.

Answer 17

• Member of a benefit scheme who is currently accruing benefits in respect of current services.

Question 18

Define a deferred member.

Answer 18

• Member who is no longer accruing benefits, but have accrued benefits which will be paid out on a future date.

Question 19

Define a short position.

Answer 19

• Having negative economic exposure to the asset.

- The seller of the asset.

Question 20

Define a long position.

Answer 20

• Having economic exposure to an asset.

- Buyer of an asset.

Question 21

Define corporate governance.

Answer 21

• Corporate governance is a high level framework within which management decisions are made.
• Shareholders appoint a board of directors who is then responsible for ensuring appropriate governance structures are in place.
• Aim to manage company in such a way that all the stakeholder needs are met.

Question 22

Define latent claims.

Answer 22

• Claims arising from a cause which was not known when the policy was sold.

Question 23

Define a composite insurer.

Answer 23

An insurer that sells both life and non-life insurance.

Question 24

Define corporation tax.

Answer 24

Tax on company profits

Question 25

Define a counter-party.

Answer 25

Opposite side of a financial transaction

Question 26

Define catastrophe.

Answer 26

A single event that gives rise for exceptionally large losses.

Question 27

Define claim frequency.

Answer 27

It is the number of claims over a given period per unit of exposure.

Question 28

Define a closed scheme.

Answer 28

It is a benefit scheme where no new members are admitted.

Question 29

Define a credit rating.

Answer 29

A credit rating is a rating that is given to a company’s debt as an indication of likely default (Top=AAA)

Question 30

Define a bull market.

Answer 30

Period of time during which investors are confident in the market and stock market prices increase.

Question 31

Define a bulk transfer.

Answer 31

A transfer of liabilities (and assets) of a group of members from one scheme to another.

Question 32

Define a bond.

Answer 32

• Form of a loan.
• The issuer receives a lump sum in exchange for a series of regular interest payments.
• At redemption the issuer pays the lump sum back to the holder of the bond.

Question 33

Define a bid price.

Answer 33

The price at which a market maker offers to buy securities.

Question 34

Define an offer price.

Answer 34

The price at which a market maker is willing to sell a security.

Question 35

Define a bear market.

Answer 35

A period of time during which investors are not confident and stock market prices are declining.

Question 36

What is a short straddle?

Answer 36

• Sell a put and a call option

- Do not believe market will move