Sol2 Glossary Final 160307

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

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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.

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* 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

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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.


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


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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


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.


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).


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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


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


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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0


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


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.


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.


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.


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.


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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


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


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


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


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.


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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.


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.


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.


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

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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


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


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.


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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.


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


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

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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.


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.


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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

Documents

Sol2 Glossary Final 160307