Glossary

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 defi nitions are not precise or technical: they should not be used as the basis for making investment or other decisions.

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 profi tability of new and existing business.

Annual premium equivalent (APE)

An industry measure of the level of new life, pensions and long term investment business. It enables comparisons between companies with a different mix of single and regular 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.

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.

Demutualisation

The process by which a mutual organisation owned by its members, such as a building society or insurance company, converts to a public limited company owned by its shareholders. Old Mutual demutualised in 1999.

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 profi ts 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 main regulatory body of the financial services industry in the UK, covering the savings, insurance and investment businesses.

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 & Casualty 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 fi nancial adviser (IFA)

In the UK an IFA is a person or organisation authorised to give advice on fi nancial 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.

Jaws ratio

The difference between the year-on-year rate of growth in income and the year-on-year rate of growth in costs. An increase in the ratio signifies increasing profitability.

Lapses/surrenders/withdrawals

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.

Long-term business

Collective term for life insurance, pensions, savings, investments and related business.

Mark-to-market adjustment

An accounting adjustment to the book value of an asset or liability to reflect its market value.

Market consistent embedded value (MCEV)

MCEV is 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.

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.

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.

Orphan assets/unclaimed assets

Funds held by financial institutions that have been left untouched by their owners for a considerable period of time - eg. dormant bank accounts or forgotten life insurance policies.

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 generally ISAs, 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.

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

The process of deciding which risks an insurance company will cover, the terms of acceptance and the premiums it will charge.

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 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 share holdings, 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.