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ACHIEVED PROFITS
This is a methodology used to calculate embedded value. It was the
standard methodology used in the UK and Ireland prior to the
adoption of European embedded value (EEV) principles.
See Embedded Value
ANNUAL PREMIUM EQUIVALENT (APE)
Annual premium equivalent has traditionally been the common
industry sales measure in the UK and Ireland. APE for new business
is calculated as the annual premium amount for regular premium
contracts plus 10% of new single premiums. It gives a roughly
comparable measure of weighted sales across companies to allow for
differences in mix between regular and single premium business. In
measuring the new business margin it has been used as the
denominator in the calculation.
However the EEV methodology has redefined sales as the present
value of new business premiums [PVNBP] to be used for the purposes
of computing the new business margin.
See PVNBP
ASSETS HELD TO COVER LINKED LIABILITIES
These are the investments matching unit- linked business, where
policyholder benefits are expressed in units of an underlying
investment vehicle. Investment risk is borne by the
policyholder(s).
BANCASSURANCE
Bancassurance is the sale of life, pension and investment products
through the branch network of a bank.
COVERED BUSINESS
This represents the range of activities to which the EEV reporting
methodology is applied in the group. It applies to all of the Irish
Life & Permanent group's life assurance activities and its
supporting investment management business. It does not include any
part of the group's banking activities or the two subsidiaries -
Cornmarket , the life brokerage business or Irish Progressive
Services International (IPSI), the third party life administration
business.
DISCOUNTING
The reduction to present value at a given date of a future cash
transaction at an assumed date, using a discount factor reflecting
the time value of money. The choice of a discount rate will usually
greatly influence the value of insurance provisions, and may give
indications on the prudence of provisioning methods.
ECONOMIC ASSUMPTIONS
When calculating the embedded value of the in-force life assurance
business assumptions are made as regards interest rates, future
expense inflation and other economic factors which in turn
determine the risk discount rate and investment return assumptions
used. The effect of changes in these assumptions - which are
outside management control - is reported separately below the
operating profit line
EMBEDDED VALUE
The embedded value of the life assurance business is the sum of the
shareholder's net worth (SNW) in the life assurance company plus
the discounted value of distributable profits expected to emerge on
business already written - the value of the in-force business
(VIF). It excludes any value that may be attributed to future new
business. The SNW consists of the required capital to support the
business together with any surplus assets ("free surplus"). The VIF
is calculated on European Embedded Value (EEV) principles using a
set of best estimate actuarial, economic and operational
assumptions and is net of deductions for the cost of holding
required capital and for the cost of financial options and
guarantees.
See Group Embedded Value;
European Embedded Value
EUROPEAN EMBEDDED VALUE (EEV)
EEV is embedded value computed in accordance with the set of
principles agreed in May 2004 by the CFOs of the major insurance
companies in Europe, setting the new industry standard for embedded
value reporting.
EXPERIENCE VARIANCES
In computing the embedded value of the in-force book of life
business it is necessary to make assumption as to operating items
such as lapses or surrenders, expense levels, mortality experience,
taxation etc. In any period the actual operating result for these
items will differ from the assumed experience. The resultant
positive or negative experience variance is reported in operating
profit for the period.
FINANCIAL OPTIONS & GUARANTEES
(FOGs)
Under European EV principles allowance must be made in the embedded
value for the time value of financial options and guarantees where
a financial option exists which is exercisable at the discretion of
the policyholder. These impact the group's business are in relation
to some investment and death guarantees. In calculating the time
value of FOGs stochastic models are used calibrated on a market
consistent basis and in doing so an average risk free rate of
return on assets is assumed rather than allowing for market risk
premia.
FREE SURPLUS
Free surplus is the market value of assets in the covered business
less statutory liabilities less required capital. Effectively these
are the free assets available having provided for policyholder
liabilities and the required capital to support them.
GROUP EMBEDDED VALUE
The statutory reporting basis for the group is IFRS. However given
the significance of life assurance activities to the group we also
provide group results computed on an embedded value basis by way of
supplementary financial information. The group EEV results include
all life assurance activities on an EEV basis and banking and other
activities on an IFRS basis.
IN-FORCE BUSINESS
Insurance on which the premiums are being paid or have been fully
paid. In other words the portfolio of policies active at a given
point in time. In life assurance, the "value of business in-force"
(VIF) is the discounted value of the profits expected to accrue to
shareholders on in-force business.
INSURANCE CONTRACTS
Insurance contracts are defined under IFRS 4 as those life
assurance contracts which transfer significant insurance risk to
the group. All other life contracts are classed as investment
contracts under IFRS 4. Insurance contracts can continue to be
accounted for in IFRS statutory accounts using embedded value
methodology.
INVESTMENT CONTRACTS
Investment contracts are distinguished from other "insurance"
contracts under IFRS 4 and are to be accounted for as financial
instruments under IAS 39. The accounting basis for investment
contracts under IFRS is a form of accruals / matching
accounting.
LAPSE
Lapse occurs when the policyholder discontinues the payment of
premiums under a contract. The assumption as to the rate at which
policies will lapse is important in computing embedded value. It
determines how long policies are assumed to remain in-force (or
persist) and therefore the duration of the flow of policy fees and
charges to the shareholder.
LINKED
Linked or unit-linked refers to a life assurance policy where
benefits are expressed in a unit of account, usually an investment
fund. Benefits are effectively "linked" to the value of the
underlying units rather than fixed or guaranteed benefits set up at
inception.
MORTALITY TABLES
Actuarial tables displaying the frequency of death for an
individual, by sex and generation. The use of mortality tables is
often regulated and drives pricing and reserving in life insurance.
Adjustments to life insurance provisions are sometimes made to take
account of changes in life expectancy and the use of new mortality
tables. The mortality rates used by the group for reserving
purposes are disclosed in the annual report.
NEW BUSINESS SALES
New business sales reflect premiums arising from the sale of new
life assurance contracts in the reporting period and any increases
to existing contracts not included at the outset of the contract.
Under European embedded value these sales are expressed as the
present value of new business premiums (PVNBP) and this figure is
the denominator for the purpose of computing the new business
margin. PVNBP replaces the traditional measure of life sales being
annual premium equivalent or APE.
NEW BUSINESS MARGIN
The profit from new business sales, computed on an embedded value
basis, expressed as a percentage of the present value of new
business premiums (PVNBP) for the period. In the Irish Life &
Permanent group we separately report the life and the investment
management new business margins. The life margin relates to new
business generated by the Retail and Corporate divisions in Ireland
and by Irish Life International. The investment margin under EEV
relates to the inflows of institutional funds into ILIM, both
on-balance sheet and segregated.
NEW BUSINESS PROFIT
This is the contribution, computed on an embedded value basis,
arising from new business sales in the period. It is calculated on
the actuarial, economic and operational assumptions used in the
embedded value at the start of the financial period.
OPERATING PROFIT
The total embedded value profit for a period is broken into three
components for reporting purposes - the operating profit, the
impact of short-term investment fluctuations and the effect of
changes in economic assumptions. The latter items are "below the
line" as they are outside the control of management. The operating
profit consists of the profits from new business written in the
period and the return from the in-force book of business.
POLICYHOLDER
Traditionally this is the person, (or persons), whose risk of
financial loss from an insured peril - loss of life, illness etc -
is protected by a policy or contract of insurance. For investment
and savings business, where the insurance component may be minimal
and the life assurance contract merely a wrapper, the investor or
owner of the contract is also referred to as a policyholder.
PRESENT VALUE OF NEW BUSINESS PREMIUMS
(PVNBP)
This is the measure of sales under the EEV methodology. It is based
on the present value of premiums arising under the contract so the
full value of single premiums are included and a discounted value
is taken for recurring premium contracts. PVNBP is the denominator
in the calculation of the new business margin.
REGULAR PREMIUM
A regular premium contract is a contract where the policyholder
accepts to pay a premium at regular intervals over a number of
years. Also known as recurring or annual premium contract.
REINSURANCE
Reinsurance is the process by which an insurance company cedes some
of its business to another insurance company. The expressions
reinsurance inwards and reinsurance outwards are sometimes used to
qualify the direction of the risk transfer: the former is the
acceptance of risks, the latter the placing of risks under a
reinsurance contract. Under EU regulation, the use of reinsurance
lowers the required minimum margin of solvency and boosts solvency,
with limitations.
REQUIRED CAPITAL
The minimum required capital for a life company to transact
business is its regulatory EU solvency margin. In practice the
local regulator may, and in Ireland does, require an amount greater
than the minimum. In Ireland this requirement is set at 150% of the
minimum and this has also been taken as the group's required
capital for embedded value purposes.
Locking-in capital to protect policyholders creates a cost which is
reflected in a reduced embedded value and value of new business.
The cost arises as the discount rate used to value business cash
flows is higher than the assumed investment return on the assets
backing the required capital.
RISK DISCOUNT RATE
The risk discount rate is the rate used in calculating the embedded
value to obtain the present value of future cashflows accruing to
the shareholder. It is made up of a combination of a base risk-free
rate and a risk margin. The risk margin reflects the residual risks
inherent in the business after taking into account the prudence of
supervisory liabilities, the level of required capital and the
allowance made for financial options and guarantees.
SHORT TERM INVESTMENT FLUCTUATIONS
(STIFs)
In computing the group's embedded value assumptions are made as to
the expected rates of return on the different investments making up
the policyholders' funds of the life business. The assumptions as
to the future growth in the funds determine amongst other things
the expected future management fee income arising. The actual
investment return / fund growth in any year will be greater or
lesser than assumed. The impact on the embedded value of achieving
a greater or lesser return in any year is included as a STIF and is
reported separately below the operating profit line.
SINGLE PREMIUM
A single premium contract involves the payment of one premium at
inception with no obligation for the policyholder to make
subsequent, additional payments. It compares with regular or
recurring premium contracts, where the policyholder agrees at
inception to make a regular payment.
SOLVENCY MARGIN
The minimum level that a regulated insurance company needs to cover
with solvency capital to operate under normal conditions. The
regulator prescribes the definition: the required minimum solvency
margin is effectively a weighted average of the technical
provisions. In general the solvency margin required for unit-linked
products is significantly lower than that required for traditional
life (non-linked) business. In Ireland the regulator's expectation
is that a life company's capital would in practice be at or above
150% of the minimum.
TECHNICAL PROVISIONS
EU expression broadly equivalent to statutory insurance
liabilities, i.e. the value set aside to cover expected obligations
arising on a book of insurance policies.
UNIT-LINKED LIFE ASSURANCE
Policyholder benefits under such a contract are expressed in units
of an underlying investment vehicle, e.g. an investment fund. As a
result, they fluctuate with the value of the units and investment
risk is transferred to the policyholder. Solvency requirements
under EU regulation are much lower than for non-linked insurance
business. The insurer is compensated with explicit management
charges. "Separate account" and "variable annuity" are broadly
equivalent expressions used in the US.
VALUE OF IN-FORCE BUSINESS (VIF)
The value of the in-force business (VIF) is the discounted value of
distributable profits expected to emerge on business already
written, i.e. from life assurance contracts still in force. VIF is
calculated using a set of best estimate actuarial, economic and
operational assumptions and is net of deductions for the cost of
holding the required level of capital and for the cost of financial
options and guarantees.
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