Description:
Calibration test
A test to demonstrate that the regulatory capital requirement determined by the internal model satisfies the specified modelling criteria.
Capital
The financial resources of an insurer and different variation/calculations of capital may be referred to as equity capital (i.e. paid-up, share, subscribed), economic capital and regulatory capital.
Capital add-on
An additional capital requirement imposed by the supervisor to address, for example, any indentified weaknesses in an internal model or other more tailored approach as a condition on its use or in the context of a review of the ongoing validity of an internal model for regulatory capital purposes.
Capital adequacy
The adequacy of capital resources relative to regulatory capital requirements.
Capital resources
Financial resources that are capable of absorbing losses.
Captive insurer
An insurance or reinsurance entity created and owned, directly or indirectly, by one or more industrial, commercial or financial entities, the purpose of which is to provide insurance or reinsurance cover for risks of the entity or entities to which it belongs, or for entities connected to those entities and only a small part if any of its risk exposure is related to providing insurance or reinsurance to other parties. In practice, supervisors in captive jurisdictions tend to use the following classifications:
• Pure captives: single parent companies writing only the risks of their owner and/or affiliates;
• Group and/or association captives: multi-owned insurance companies writing only the risks of their owners and/or affiliates, usually within a specific trade or activity;
• Rental captives: insurers specifically formed to provide captive facilities to unrelated bodies for a fee. They are used by entities that prefer not to form their own dedicated captive;
Diversified captives: captives writing a limited proportion of unrelated business in addition to the risks of their owner and/or affiliates. Some jurisdictions consider that an insurance company writing any unrelated party business cannot be classified as a captive.”
Catastrophe reinsurance (life and health)
This provides for payment by the reinsurer when the ceding company's aggregate net retained claims resulting from a single accidental event exceed the insurer's retention under the reinsurance agreement. Commonly the reinsurer pays something less than 100% of such excess, the balance being retained by the insurer, and a limit is placed on the amount the reinsurer will pay on any one catastrophe. An annual limit may also be placed on the total amount to be paid by the reinsurer. The coverage may be purchased on the ceding company's entire portfolio of retained risks or on any readily definable category, such as all retained individual risks, a particular group case, a category of group cases, etc. Normally, both the regular life insurance risk and the accidental death risk will be included.
ChurningThe practice of selling insurance policies to a policyholder which unnecessarily replace existing policies, for the purpose of increasing turnover -usually to generate commission.
Claim reserves
see Claims provision
Claims development triangle
The triangle showing the insurer's estimate of the cost of claims (claims provisions and claims paid) as of the end of each accident year/underwriting year and how this estimate develops over time. [Related definitions: Claims provision, Underwriting year basis.]
Claims incurred
An insurer's total liability arising from insurance events related to an accounting period either on an accident year basis or on an underwriting year basis. [Related definitions: Loss ratio, Underwriting year basis.]
Claims provision
Amount set aside on the balance sheet to meet the total estimated ultimate cost to an insurer of settling all claims arising from events which have occurred up to the end of the reporting period, whether reported or not, less amounts already paid in respect of such claims. [Equivalent terms: Claim reserves,] [Related definitions: Claims development triangle, Underwriting year basis]
Coinsurance basis
This type of reinsurance is considered to be the most comprehensive basis since it usually involves transfer of a portion of all the risks inherent in the original business on a quota share or excess of retention basis from the ceding company to the reinsurer. In this type of reinsurance, the insurer and the reinsurer share a portion of the risks under the original insurance policy. The reinsurer receives a portion of the gross paid policy premiums based on the amount of risk assumed and establishes a correlating reserve. In addition to fulfilling the assumed portion of the claim, the reinsurer is also required to reimburse the insurer for any other benefits provided under the policy (i.e., policy dividends, commissions, premium taxes, etc.). The reinsurer also provides the ceding insurer with a commission to cover the marketing, underwriting and distribution aspects of the policy.
Coinsurance with funds withheld
A slight variation of the coinsurance basis method may occur if assets are retained by the insurer. Under this method, the insurer withholds assets supporting the reserves on the ceded portion of the business and the insurer sets up an interest bearing amount payable to the reinsurer. Under these circumstances, the ceding company may wish to retain control of the funds arising from its own policies either to maximise its own investment returns, or as security against the event that the reinsurer's ability to discharge its obligations to the ceding insurer becomes impaired.
Collateral
Assets held as security in support of a promise to the payment of a debt or performance of a contract.
Combined ratio
The sum of the loss ratio (claims ratio) and the expense ratio.
Consumer
The universe of all actual and potential customers for insurance products.
Contagion
As part of a group or conglomerate, and aside from intragroup exposures of a financial nature, there may be a risk that the support of the insurer by internal or external parties may suffer if there is a concern about another part of the group of which it is a part. [Related definition: Risk concentration]
Continuity analysis
An analysis of an insurer's ability to continue in business, and the risk management and financial resources required to do so over a longer time horizon than typically used to determine regulatory capital requirements.
Continuum-based approach
Involves the setting of characteristics against which individual capital elements can be assessed as to their quality; instruments are ranked against other instruments to determine whether they are included as capital resources. Where a categorisation approach is used, the criteria will be used to determine the category of capital resources in which a capital element is included.
Control functions
Refers to properly authorised functions, whether in the form of a person, unit or department, serving a control or checks and balances function from a governance standpoint and which carry out specific activities including risk management, compliance, actuarial matters, and internal audit.
Control level
A threshold solvency level that requires intervention of the supervisor or imposes certain restrictions on the insurer if the actual solvency level falls below this level.
Corporate governance
Refers to systems (such as strategies, policies, processes and controls) through which an entity is managed and controlled.
Counterparty
The other party with whom a transaction is made.
Counterparty credit risk
The risk that a counterparty is not able or willing to pay amounts owing to the insurer as they fall due
Credit default risk
The risk that an insurer will not receive the cash or assets to which it is entitled because a party with which the insurer has a bilateral contract defaults on one or more obligations.
Credit ratings
Assessments of the abilities of debtors (e.g. bond issuers) to pay amounts owing to investors as they fall due. [Related definition: Rating agency]
Credit risk
The risk of financial loss resulting from default or movements in the credit rating assignment of issuers of securities (in the insurer's investment portfolio), debtors (e.g. mortgagors), or counterparties (e.g. on reinsurance contracts, derivative contracts or deposits) and intermediaries, to whom the company has an exposure. Credit risk includes default risk, downgrade or migration risk, indirect credit or spread risk, concentration risk and correlation risk. Sources of credit risk include investment counterparties, policyholders (through outstanding premiums), reinsurers, intermediaries and derivative counterparties.
Cross border provision of services
Provision of insurance on a services basis (without local establishment) in a jurisdiction other than the company's home jurisdiction.
Currency risk
The risk that arises from movements in foreign currency exchange rates. This can arise if the assets and liabilities of an insurer are not in the same currency, or if contracts for administrative and other services are contracted in a currency different to the currency implied in the premium determination. Also, in some jurisdictions, the sale of contracts in other than the local currency leads to an impact on rates of persistency / discontinuance in the event that the policyholders are exposed to a mismatch.
Current estimate
The probability weighted average of the range of present values of the cash flows associated with fulfilling an insurer's obligations under an insurance policy. For some types of insurance liability, it may be considered that the projection of future cash flows is unrealistic, and therefore presents a spurious level of accuracy in the estimate. For such examples the alternative estimate should be arrived at using similar considerations regarding the obligations of the contract as for those examples where projected cash flows are realistic. [Related terms: Margin over the Current Estimate (MOCE), Technical provision]
Customer
Policyholder or prospective policyholder with whom an insurer or insurance intermediary interacts, and includes, where relevant, other beneficiaries and claimants with a legitimate interest in the policy.
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