Definitions of the insurance, actuarial and capital-management terms that come up most often across the Capitawise platform.
RAROC measures the return an investment or line of business generates relative to the regulatory or economic capital it consumes, rather than its raw yield. By expressing return per unit of capital at risk, it lets insurers compare opportunities on a capital-efficiency basis and identify where capital is working hardest.
Asset-liability management is the practice of coordinating an insurer’s investment assets with the timing and nature of its liabilities. It monitors how asset cashflows and durations align with expected claims and benefit payments, aiming to reduce the risk that assets must be sold at a loss, or reinvested on poor terms, to meet obligations.
The Solvency Capital Requirement is the amount of capital a Solvency II insurer must hold to withstand severe but plausible losses over a one-year horizon, calibrated to a 99.5% confidence level. It aggregates market, underwriting, credit and operational risk, and falling below it triggers supervisory intervention.
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The Bermuda Solvency Capital Requirement is the risk-based capital standard set by the Bermuda Monetary Authority for commercial insurers and reinsurers. Using a standardised model, it charges capital against insurance, market, credit and operational risks to produce a required capital level the insurer must hold to remain solvent.
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Risk-Based Capital is the NAIC framework used by US insurers to determine the minimum capital appropriate to their risk profile. It applies factors to asset, insurance, interest-rate and business risks (C-1 to C-4) with a covariance adjustment. The resulting ratio sets regulatory action levels if capital falls too low.
IBNR reserves cover claims that have occurred but have not yet been reported to the insurer, plus expected future development on claims already known. Because these liabilities are not yet visible in claims data, actuaries estimate them using loss-development techniques so that reserves reflect the full ultimate cost of the exposure period.
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Loss development is the way reported claim amounts for an accident or underwriting period change over time as claims are paid, re-estimated and newly reported. Actuaries study historical development patterns, often summarised as development factors, to project reported losses to their ultimate settled value and set adequate reserves.
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A cell captive is a captive insurance structure in which a single legal entity contains multiple ring-fenced cells, each with its own assets, liabilities and participant. Cells share the core entity’s infrastructure and governance while keeping their risks and capital legally segregated, giving participants captive benefits without forming a standalone company.
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A solvency ratio expresses an insurer’s available (eligible own-fund) capital as a percentage of its required capital, such as the SCR or RBC. A ratio above 100% indicates capital exceeds the regulatory requirement. Supervisors, boards and rating agencies track it as a headline measure of financial strength and resilience.
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The duration gap is the difference between the interest-rate duration of an insurer’s assets and that of its liabilities. A large gap means asset and liability values respond unevenly to rate changes, exposing surplus to interest-rate risk. Managing the gap is a central objective of asset-liability management.
The Bornhuetter-Ferguson method estimates ultimate losses by blending an a priori expected loss (often from a loss ratio) with claims experience to date. It weights the development-based estimate against the expectation using the proportion of losses still unreported, giving more stable results than the chain ladder for immature or volatile periods.
Related: Auditability in actuarial workflows
The chain ladder is a widely used reserving technique that projects ultimate claims by applying age-to-age development factors, derived from historical loss triangles, to the latest reported amounts. It assumes future development follows past patterns, making it transparent and straightforward, though sensitive to unusual experience in immature periods.
Related: Auditability in actuarial workflows