Glossary

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Term Explanation
1967 Act The Parliamentary Commissioner Act 1967, from which I derive my powers.
1982 Act The Insurance Companies Act 1982, which governed the prudential regulation of life insurance companies. Its provisions were repealed during 2000 and 2001, being replaced by the Financial Services and Markets Act 2000.
Admissible assets Assets that the applicable Regulations permit to be taken into account for the purposes of determining an insurance company’s solvency position.
Annuity An arrangement by which a life insurance company pays someone a regular income, usually for life, in return for a lump sum payment.
Appendix valuation The valuation produced by the Society within its regulatory returns to demonstrate that its chosen alternative valuation, the main valuation, produced a result at least as strong as that prescribed in the applicable Regulations.
Appointed Actuary

The actuary appointed by life insurance companies under section 18 of the 1982 Act.

Each life insurance company was required each year to cause the Appointed Actuary to undertake an investigation into the financial condition of that company. The abstract of the results of that investigation was included within the regulatory returns.

Asset shares The value of a life insurance policy, calculated as the accumulation of premiums paid with actual investment returns, net of expenses and charges for the cost of guarantees.
Available assets An insurance company’s free assets less any implicit items.
Benefits The amount paid by an insurance company when a claim is made.
Bonus The amount added to the guaranteed part of the sum insured of a with-profits insurance policy. It may be added during the term of the policy (i.e. yearly or reversionary) or when the policy matures (i.e. final or terminal), or both.
Commission The sum paid by an insurance company to a broker/intermediary/agent for selling policies.
Current annuity rate

The rate governing the amount that an insurance company would pay on an immediate retirement, expressed as a percentage of the fund converted to pension.

This was based on current conditions in the financial markets and the age and gender of the policyholder.

Differential terminal bonus policy

The policy whereby the Society reduced the terminal bonus paid to a policyholder who took benefits to which was applied a guaranteed annuity rate.

The benefits were reduced by such an amount as to make the resulting pension equal to that paid to a policyholder who opted to take benefits at the current annuity rate.

Dual role The holding by one person simultaneously of the positions of Chief Executive and Appointed Actuary.
Equities Shares in a company that entitle the owner to some of the profits or earnings the company makes. Equities may or may not be listed on the stock exchange.
Expenses Costs incurred in the running of the business, including any commission paid to sales staff.
Estate The balance of admissible assets over Mathematical Reserves held back from bonus distribution to with-profits policyholders as a buffer against major fluctuations in investment values or in underwriting experience or in the central costs of administration.
Form 9 A summary within the regulatory returns of the assets allocated towards the required minimum margin and including a statement of the company’s regulatory solvency position.
Free assets The excess value of assets and implicit items over the liabilities.
Free asset ratio The excess of the free assets and implicit items of an insurance company over the required minimum margin, expressed as a percentage of the total assets determined within the regulatory returns.
Freedom with publicity

The concept that, in return for putting detailed and prescribed information about an insurance company’s business and financial condition into the public domain, the commercial freedom of such a company would not be constrained by regulation.

The aim of this approach was to enable investors and potential investors to be provided with sufficient information about an insurance company to make informed choices about whether that company was an appropriate investment vehicle for that individual.

Future profits implicit item

An asset relating to an insurer’s ability to generate future profits that, if used, would count towards the required minimum margin of the insurer.

At the time covered by this report, such an asset could only be used by an insurance company if it had been granted a Section 68 Order by the prudential regulators.

Group personal pension An arrangement made for the employees of a particular employer to participate in a personal pension scheme on a group basis.
Guaranteed annuity rate The rate governing the amount that an insurance company would pay on an immediate retirement, expressed as a percentage of the fund converted to pension.
Unlike the current annuity rate, this was based on a rate specified within the policy and expressed as a guarantee.
Guaranteed investment return An amount by which basic benefits are guaranteed to increase each year before the addition of reversionary bonus. Also known as a guaranteed interest rate.
Guaranteed policy fund

The current accrued value of the fund guaranteed to be available to with-profits policyholders at vesting to purchase a pension.

This was shown in personalised annual bonus statements sent to the Society’s with-profits policyholders.

Until the vesting date, the guaranteed policy fund continued to grow each year with the addition of any guaranteed investment return and reversionary bonuses.

ICAS Regulations 1983

The Insurance Companies (Accounts & Statements) Regulations 1983.

These prescribed the information that had to be disclosed within the regulatory returns and set out the way in which that information had to be presented. These governed the returns submitted prior to 23 December 1996.

ICAS Regulations 1996

The Insurance Companies (Accounts & Statements) Regulations 1996.

These prescribed the information that had to be disclosed within the regulatory returns and set out the way in which that information had to be presented. These governed the returns submitted after 23 December 1996.

ICR 1981

The Insurance Companies Regulations 1981.

These made provision for how an insurance company was to value its assets and determine its liabilities and governed the period covered in this report prior to 30 June 1994.

ICR 1994

The Insurance Companies Regulations 1994.

These made provision for how an insurance company was to value its assets and determine its liabilities and governed the period covered in this report after 1 July 1994.

Income drawdown A way of taking regular income directly from a pension fund instead of buying an annuity straight away.
Interest rate differential The difference between the assumed gross bonus rate and the interest rate used for discounting the liabilities.
Investment reserve The net realised and unrealised appreciation in investments in the with-profits fund, after transfers to and from the longterm business fund.
Loading An extra premium charged in recognition of a higher risk, such as poor health or a dangerous job on the part of the person insured.
Life insurance Longterm policies which pay out on death or, in some cases, on earlier maturity of the policy, such as endowment, term, or whole life policies.
Maturity An agreed date when a life or pension policy comes to an end and the value is paid out.
Market value adjuster A reduction in the value of a claim on a with-profits policy in order to reflect fairly the movement of assets underlying the policy.
Mathematical Reserves

The provision made by an insurer to cover liabilities (excluding liabilities which have fallen due) arising under or in connection with contracts for longterm business.

Those provisions were determined by the Appointed Actuary in accordance with ICR 1981 and ICR 1994.

Mutual An insurance company which is owned by some or all of its policyholders.
Net premium A premium net of reinsurance ceded but gross of commission, and excluding premium tax.
New business strain The requirement for capital to support the writing of new business.
Policyholders’ reasonable expectations (PRE) An expression derived from the words ‘the reasonable expectations of policy holders or potential holders’ in the statutory grounds for the use of intervention powers by the prudential regulators, under section 37(2) of the 1982 Act.
Premium The amount paid by the policyholder for insurance.
Prudential regulation At the time covered in this report, the regulation of insurance companies with respect to their solvency position, whether they were acting soundly and prudently in line with the interests of their policyholders, and in such a manner as to be able to fulfil the reasonable expectations of their existing and potential policyholders.
Quasizillmer adjustment An adjustment made by the Society to its business to give the same effect as zillmerisation.
Recurrent single premium Life insurance policies which did not require regular premiums to be paid. This type of business accounted for the majority of the Society’s policies.
Regulatory returns The annual returns made by a life insurance company to the prudential regulators, as required by section 22 of the 1982 Act.
Regulatory solvency

Also sometimes known as technical solvency. Not to be confused with solvency in absolute terms.

Section 32 of the 1982 Act required insurance companies to hold assets which exceeded their liabilities by at least the margin prescribed by the applicable Regulations. Those were the ICR 1981 and, from 1 July 1994, the ICR 1994.

A failure to meet and maintain this requirement meant that a company was insolvent for regulatory purposes.

Reinsurance An arrangement whereby one party (the reinsurer), in consideration for a premium, agrees to indemnify another party (the cedant) against all or part of the risk assumed by the cedant under a policy or policies of insurance.
Required minimum margin The amount by which the value of a life insurance company’s assets was required by section 32 of the 1982 Act to exceed the amount of its liabilities in order to meet its regulatory solvency requirements.
Resilience reserves Reserves, calculated in accordance with ICR 1981 or ICR 1994, which relate to an insurance company’s ability to cover mismatches of assets and liabilities that adverse movements in asset values may disclose.
Reversionary bonus Bonus for with-profits policies, usually added at yearly intervals during the term of the policy.
Section 68 Order An Order under section 68 of the 1982 Act, made by the prudential regulators on the application of, or with the consent of, an insurance company, which directs that certain provisions of that Act would not apply, or would apply with modified effect, to that company.
Solvency

The ability of a company to pay its debts.

Under the Insolvency Act 1986, a company is deemed unable to pay its debts if it is proven to the satisfaction of the Court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

This is sometimes known as absolute solvency, which is not to be confused with regulatory solvency.

Surrender value

The amount available if a policyholder were to cash in an insurance policy, where that is possible, before it matures.

 

Subordinated loan A debt issued by an insurance company where both the interest and repayment obligations are subsidiary to the insurance company’s obligations to its policyholders.
Terminal bonus The bonus, additional to reversionary bonuses already declared, that may be paid for with-profits policies at maturity or if a claim is made.
Total policy fund

The current accumulated value of the total fund (including accumulated terminal bonuses) expected to be available to with-profits policyholders at vesting to purchase a pension.

This was shown in personalised annual bonus statements sent to the Society’s with-profits policyholders.

Until the vesting date, the total policy fund continued to grow at a rate allocated annually by the company. Other than in exceptional circumstances, when it could be zero or less, the rate of growth applying to the total policy fund was expected to be greater than the sum of any guaranteed investment returns and reversionary bonus.

To the extent that the total policy fund exceeded the guaranteed policy fund, it was not guaranteed.

Unitised with-profits Contracts where premiums are invested in units, either in the with-profits fund or in linked funds, or in a mix of both.
Unit-linked

Describes any plan where the value of the benefits goes up or down in line with the price of units in a fund.

 

Valuation

An investigation carried out by the Appointed Actuary under section 18 of the 1982 Act to place a value upon the long-term liabilities of an insurance company.

The resulting provision held by the insurance company for its longterm liabilities is called the Mathematical Reserves.

Vesting The taking of benefits under an insurance policy.
With-profits

Life insurance policies which receive their investment income in the form of bonuses, paid out of the total income earned by the insurance company on its pooled fund.

The value of the saver’s fund thus depends on the amount he or she has bought and the amount of bonuses added. Once added, bonuses cannot be taken away, making these policies generally less volatile than linked policies.

Zillmerisation A modification of the net premium method for valuing a life insurance policy which increases the future premiums valued to take account of acquisition costs incurred.

Notes:

  1. Terms italicised are defined elsewhere in this glossary.
  2. The definitions in this glossary have been derived from a number of sources, including the glossaries of insurance terms produced by the Association of British Insurers, the International Association of Insurance Supervisors, and the FSA, and other published reports on the Society.

Part one: main report xxvii

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