We have written this glossary to help readers understand certain
words and jargon used in our industry. In line with our aim of
writing this report in plain English, the definitions are not
precise or technical: they should not be used as the basis for
making investment or other decisions.
A technical glossary of the financial terms can be found on our
website at www.oldmutual.com
Actuary
Someone who uses mathematics (in particular, probability) to
provide solutions to insurance-related problems. Actuarial
techniques are used to design new insurance products and to assess
the profitability of new and existing business.
Adjusted net worth (ANW)
Represents the market value of the net shareholders' assets held
in respect of the covered business and forms part of the embedded
value of a life company.
Affiliate
An investment firm specialising in offering specific services to
a select number of individuals (term interchangeable with
boutique).
Annual premium equivalent (APE)
A standardised measure of the volume of new life business
written. It is calculated as the sum of (annualised) new recurring
premiums and 10% of the new single premiums written in an annual
reporting period. It gives a broadly comparable measure across
companies to allow for differences between regular and single
premium business.
Annuity
A regular payment from an insurance company made for an agreed
period of time (usually up to the death of the recipient) in return
for either a cash lump sum or a series of premiums which the
policyholder has saved during their working lifetime.
Asset management
An investment management service provided by financial
institutions on behalf of their customers.
Assumptions
Variables applied to data used to project expected outcomes. In
the life insurance business, this might include assumptions on
average life expectancy and policy surrender rates.
Bancassurance
An arrangement whereby banks and building societies sell life,
pension and savings products on behalf of other financial
providers.
Boutique
A small investment firm specialising in offering specific
services to a select number of individuals (term interchangeable
with affiliate).
Capital adequacy requirement (CAR)
The level of capital required by Old Mutual Life Assurance
Company (South Africa) Limited to support its insurance business.
It is mostly driven by the capital required to absorb investment
risk and generally exceeds the level of capital required by the
(national) regulator (called the Statutory Capital Adequacy
Requirement).
Carbon Disclosure Project
The Carbon Disclosure Project (CDP) is an independent
not-for-profit organisation holding the largest database of primary
corporate climate change information in the world. Thousands of
organisations from across the world's major economies measure and
disclose their greenhouse gas emissions, water use and
climate-change strategies through CDP. Corporations are rated and
the information helps investors, corporations and regulators to
make more informed decisions.
Correlation
Correlation is a statistical measurement of the relationship
between two variables. Possible correlations range from +1 to -1. A
zero correlation indicates that there is no relationship between
the variables. A correlation of -1 indicates a perfect negative
correlation, meaning that as one variable goes up, the other goes
down. A correlation of +1 indicates a perfect positive correlation,
meaning that both variables move in the same direction
together.
Covered business
A concept defined in the Market Consistent Embedded Value (MCEV)
principles and guidelines. It refers to long-term business, which
includes traditional life insurance, long-term healthcare and
accident insurances, savings, pensions and annuities.
Deferred acquisition costs (DAC)
A method of accounting whereby the acquisition costs on
long-term business (eg sales commissions) are recognised over the
life of the contracts rather than up front at the time of sale. The
costs are deferred on the balance sheet as an asset and amortised
over the contract life.
Deferred annuity
An annuity due to be paid from a future date or when the
policyholder reaches a specified age. A deferred annuity may be
funded by the policyholder by payment of a series of regular
contributions or by a capital sum.
Earnings per share (EPS)
Earnings per Share (EPS) is calculated as post-tax adjusted
operating profit divided by the adjusted weighted average number of
shares (WANS) held by our investors. EPS is an indicator of our
profitability that measures how much we earn for each share
held.
Economic capital
Market value of assets minus fair value of liabilities. Used in
practice as a risk-adjusted capital measure; specifically, the
amount of capital required to meet an explicit solvency constraint
(eg a certain probability of ruin).
Embedded value (EV)
Life insurance contracts are usually long term and may involve
complex payment flows. This means it is difficult to measure the
value of a life insurance business or how much income it is likely
to generate over time. EV is a way of indicating what the
underlying business is worth, based on the total of the net assets
already invested in the business and the profits expected to emerge
in the future.
Experience variance
In calculating embedded value of life business, it is necessary
to make assumptions about items such as lapses or surrenders,
mortality experience, etc. In any period the actual result for
these items will differ from the assumed experience; this is known
as the experience variance.
Financial Groups Directive (FGD)
A financial regime applying to EU-based companies whose
activities span both the banking and investment sectors and the
insurance sector. It lays down requirements for the Company's
capital position and is intended to improve the stability of the
financial system, thereby protecting customers.
FGD surplus
This represents the amount of capital in the Company which is
surplus to the statutory solvency requirement for insurance groups
as laid down by the Financial Groups Directive.
Financial Services Authority (FSA)
The regulator of financial services in the United Kingdom.
Financial Services Board (FSB)
The regulator of financial services in South Africa.
Funds under management (FUM)
The total value at market prices of funds managed by a company
on behalf of shareholders and customers.
General insurance/property and casualty insurance (Short-term
Insurance)
Non-life insurance mainly concerned with protecting the
policyholder from loss or damage caused by specific risks. Examples
include motor, contents and buildings insurance. Property insurance
covers loss or damage through, for example, fire or theft. Casualty
insurance covers losses arising from accidents that cause injury to
other people or damage to their property.
In-force
An insurance policy is said to be in-force from its start date
until the date it is terminated.
Independent financial adviser (IFA)
In the UK an IFA is a person or organisation authorised to give
advice on financial matters and to sell the products of all
financial services providers. IFAs are regulated by the Financial
Services Authority.
Insurance
A contract taken out with an insurer to give financial
protection against loss from a perceived risk. The person taking
out the insurance is called the insured. Payments for the policy
are called premiums.
International financial reporting standards (IFRS)
Accounting regulations that all publicly listed companies in the
EU are required to use. They are designed to ensure companies
prepare their accounts in a similar way so that there is a common
basis for comparison.
Key risk indicator (KRI)
A metric that is indicative of the trend of risk exposures for a
particular risk or group of risks.
Lapses/withdrawals/surrenders
The voluntary termination of a policy by a policyholder before
the maturity date.
Life insurance
An insurance contract which promises the payment of an agreed
sum of money upon the death of the insured within a specified
period of time. Also known as life assurance.
Liquidity premium
A liquidity premium can be viewed as compensation for the lower
liquidity of corporate bonds compared to government debt and for
the risk that the market value of bonds will fall prior to maturity
due to increasing credit spreads.
Long-term business
A term used by the Group to describe its life, health and
pensions business and includes both covered and non-covered
business. The term is broadly used throughout the industry, for
example it is a UK regulatory expression broadly equivalent to life
insurance and pensions.
Long-term investment return (LTIR)
The long-term return that Old Mutual assumes can realistically
be earned on its investible shareholder assets when calculating
Adjusted Operating Profit. Long-term investment return rates are
reviewed annually and reflect the returns expected on the chosen
asset classes.
Loss data
Data regarding direct losses experienced by the organisation as
a result of events caused by a failure of people, process, systems
and/or external events.
Management action plan
An action or actions developed by management that are usually
triggered by one or more of the following:
- Risk exposure greater than risk appetite
- Control breakdowns or weaknesses
- Key risk indicator threshold breaches
- Loss events
- Audit findings
Market consistent embedded value (MCEV)
The standard of reporting for life insurance companies. It
provides a common set of principles and guidelines for use in
calculating embedded value. MCEV attempts to measure the value of
business in-force based on a set of best estimate assumptions,
allowing for the impact of uncertainty in future investment
returns. It is designed to provide an accurate reflection of the
performance of long-term savings business and a method of comparing
companies on a consistent basis.
Maturity
The date that an insurance policy or other financial contract
finishes or "matures" and the benefit becomes payable.
Minority interests
A percentage of ownership in a company that is significant, but
does not give the owner the ability to control the company. In
accounting, includes only the dividends from a minority interest on
a balance sheet, unless the owner has enough ownership to exert
influence (but not outright control) over the company's direction.
In that case, one includes both dividends and ordinary income on
the balance sheet.
Mutual fund/unit trust
Fund of shares, bonds and other assets held by a manager for the
benefit of investors who buy units in the fund, effectively pooling
their money with that of other investors. It enables investors to
achieve a more diversified portfolio than they might have done by
making an individual investment.
Net client cash flow (NCCF)
The difference between money received from customers (eg
premiums, deposits and investments) and money given back to
customers (eg claims, surrenders, maturities) during the
period.
Net risk (also known as 'Residual Risk')
A net risk is de?ned as the result of an assessment of the
potential impact and likelihood of a risk after taking account of
the design adequacy and operating effectiveness of the controls put
in place to manage the risk.
Non-profit policy
Insurance cover guaranteeing certain benefits, but where the
policyholder bears no investment risk and does not gain or lose if
returns differ from expectations. Pure risk business such as
annuities and health insurance is normally written on a non-profit
basis.
Open-architecture
Where a company offers investment products from a range of other
companies in addition to its own products. The advantage for
customers is that it gives them a wider choice of funds to invest
in and access to a larger pool of money management
professionals.
Operational risk scenarios
Foreseeable, hypothetical events relating to failure of people,
processes, systems and/or external events that potentially could
have a significant impact on an organisation's risk profile or
capital.
Pension
A regular payment received by an individual during their
retirement until their death. A pension is usually bought through
the payment of regular contributions during the individual's
working lifetime.
Platform
Online services used by intermediaries and consumers to view and
administer their investment portfolios. Platforms provide
facilities for buying and selling investments (including Individual
Savings Accounts (ISAs), Self-Invested Personal Pensions (SIPPs)
and life insurance) and for viewing an individual's entire
portfolio to assess asset allocation and risk exposure.
Premium
The payment a policyholder makes in return for insurance cover.
A single-premium contract involves a single lump sum payment made
at the start of the contract. Under a regular-premium contract the
policyholder agrees at the start to make regular payments
throughout the term of the contract.
Probability distribution
A mathematical description of a range of possible values for a
certain variable, identifying the likelihood of each possible value
occurring.
Quantitative impact studies (QIS)
The QIS exercises test the financial impact and suitability of
proposed Solvency II requirements on firms before the
implementation of the regulations.
Return on equity (RoE)
A measure calculated by dividing profit after tax by the average
amount of equity in the business. Equity indicates how much capital
is tied up in the business.
Risk
The threat of an event that will limit the organisation's
ability to achieve its business objectives. Risk is often expressed
in terms of a combination of the consequences of an event or a
change in circumstances and the associated likelihood of
occurrence.
Risk adjusted performance measures
A metric that measures returns based on the quantum of risk
taken to generate those returns. We use it to level the playing
fields between different business units all competing for the same
capital.
Risk appetite
The level of risk an organisation is willing to take in the
pursuit of profit.
Risk assessment
This is a forward-looking and subjective process whereby risks
are identified and exposure to risk is assessed or measured in the
context of the business objectives. There are typically two aspects
to the assessment of risk, one being the likelihood of risk
occurring and the second being the impact of the risk.
Risk-based capital
Risk-based capital is the minimum amount of capital that an
organisation needs to support its overall business operations.
Risk-based capital is used to set capital requirements considering
the nature, scale and complexity of the organisation.
Risk categorisation
A process for classifying risks possessing common qualities or
quantities. Risk categorisation is used to collate information in a
concise profile.
Risk exposure
Means the capital required to meet the business's current
exposure to risk.
Risk identification
The qualitative determination of risks that are material, ie
those that potentially can impact the organisation's achievement of
its financial and/or strategic objectives.
Risk management framework
A set of components that provide the foundations and
organisational arrangements for designing, implementing,
monitoring, reviewing and continually improving risk management
processes throughout the organisation.
Risk policies
Policies that set out the minimum, mandatory requirements that
businesses must follow to mitigate key Group risks.
Risk profile
The entire portfolio of risks organised by risk category that
are found within a particular organisation.
Risk quantification
Attaching a probability or impact to the happening of a negative
event. If it is certain that an event cannot occur, it is given a
probability of 0; if it is certain that it will occur, it is given
a probability of Risks are assigned a probability between 0 and
1.
Scenario
A predicted sequence of events.
Scenario analysis
Scenario analysis is a process of analysing possible future
events by considering possible outcomes (scenarios).
Solvency II
Solvency II is a fundamental review of the capital adequacy
regime for the European insurance industry. It aims to establish a
revised set of EU-wide capital requirements and risk management
standards that will replace the current solvency requirements.
Solvency Capital Requirement (SCR)
The SCR is the capital required to ensure that the (re)insurance
company will be able to meet its obligations over the next 12
months with a probability of at least 99.5%.
Standard formula
A non-entity-specific risk-based mathematical formula used by
insurers to calculate their Solvency Capital Requirement under
Solvency II, if the company is not using an internal model.
Statistical distribution
An arrangement of values of a variable showing their observed or
theoretical frequency of occurrence, eg frequency distribution - a
distribution of observed frequencies of occurrence of the values of
a variable.
Sum assured
The lump sum benefit payable under an insurance policy or
contract in circumstances which are defined within the policy; eg
the amount payable on the death of the policyholder.
Technical provisions
Amounts set aside on the basis of actuarial calculations to meet
forecast future obligations to policyholders.
Underwriting profit (general insurance)
A generally accepted non-life insurance term, also referred to
as underwriting result, representing earned premiums minus the cost
of claims and operating expenses. It indicates whether premiums
cover claims and expenses or not.
Unit-linked policy
A type of long-term savings plan where premiums are used to buy
units in an investment fund, such as a unit trust, and the benefits
will be linked to the value of the underlying units rather than
being fixed or guaranteed at the start of the plan.
Value of in-force business (VIF)
Part of the embedded value of a life insurance company. It
represents the discounted value of the profits expected to arise
from the in-force business. VIF is calculated using a set of
actuarial, economic and operational assumptions.
Value of new business (VNB)
The discounted value of the future profits expected to arise
from all new business sold during a reporting period. VNB is
calculated by using actuarial assumptions.
With-profit
A type of investment policy in which extra amounts (bonuses) may
be added to the sum assured to reflect profits earned during the
course of the contract. Regular bonuses are usually added each year
and, once declared, are usually guaranteed. A final or "terminal"
bonus may be added when the policy becomes payable.
Wrap account
An account in which a broker or fund manager executes investment
decisions on behalf of a client in exchange for a fee. These
decisions might include shareholdings, investment funds, pensions
and life insurance contracts.
Wrap platform
An investment platform which enables investment funds, pensions,
direct equity holdings and some life insurance contracts to be held
in the same administrative account rather than as separate
holdings.
