Finance and Insurance Industry Terminology
Adverse Selection
A situation where higher-risk customers are more likely to buy insurance or a financial product than lower-risk customers, often because prices do not fully reflect risk.
Alpha
The excess return of an investment relative to a benchmark, after adjusting for market risk (beta). It reflects skill-based outperformance.
Anti-Money Laundering (AML)
Laws, regulations, and controls designed to prevent criminals from disguising illicit funds as legitimate income.
Asset Allocation
The process of distributing investments across asset classes (e.g., equities, bonds, alternatives, cash) to balance risk and return.
Bancassurance
Distribution of insurance products through banks, often via strategic partnerships or joint ventures.
Basel III
A global bank regulation framework that strengthens capital, liquidity, and risk management standards, including LCR, NSFR, and higher quality capital.
Beta
A measure of an asset’s sensitivity to market movements; the slope of its returns versus a market index.
Capital Asset Pricing Model (CAPM)
A model linking expected return to systematic risk: Expected Return = Risk-free Rate + Beta × Market Risk Premium.
Catastrophe Bond (Cat Bond)
Insurance-linked securities that transfer catastrophe risk (e.g., hurricane, earthquake) from insurers to capital markets investors.
Claim
A request by an insured or beneficiary for payment under an insurance policy after a covered loss.
Coinsurance
A cost-sharing arrangement where the insured pays a fixed percentage of covered costs, with the insurer paying the remainder.
Combined Ratio
In P&C insurance, the sum of the loss ratio and expense ratio; below 100% indicates underwriting profitability.
Credit Default Swap (CDS)
A derivative that transfers the credit risk of a reference entity; the buyer pays a premium and receives protection against default events.
Deductible
The amount the insured must pay out of pocket before insurance coverage pays for a covered loss.
Discounted Cash Flow (DCF)
A valuation method that estimates the present value of expected future cash flows using a discount rate.
Duration
A measure of a bond’s (or portfolio’s) price sensitivity to interest rate changes; also reflects weighted average time to cash flows.
Expected Shortfall (CVaR)
The average loss in the worst x% of cases (tail beyond VaR); a coherent risk measure emphasizing extreme losses.
Expense Ratio
In insurance, underwriting expenses divided by premiums; in funds, the annual operating costs as a percentage of assets.
Generally Accepted Accounting Principles (GAAP)
U.S. accounting standards governing financial reporting for public and private entities.
Gross Written Premium (GWP)
Total premiums written before deductions for cancellations or reinsurance ceded.
Hedging
Taking offsetting positions to reduce or manage risk exposures (interest rate, equity, credit, FX, commodities).
Incurred But Not Reported (IBNR)
Claims that have occurred but have not yet been reported to the insurer, requiring reserving estimates.
Indemnity
Compensation for loss intended to restore the insured to their financial position prior to the loss, subject to policy terms.
InsurTech
Technology-driven innovations that transform insurance product design, pricing, distribution, and claims.
Internal Rate of Return (IRR)
The discount rate that makes a project’s NPV equal to zero; a measure of investment return.
International Financial Reporting Standard 17 (IFRS 17)
The global accounting standard for insurance contracts, introducing consistent measurement, the Contractual Service Margin (CSM), and enhanced disclosures.
Know Your Customer (KYC)
Customer identity verification and due diligence processes to meet AML and counter-terrorist financing requirements.
Limit of Liability
The maximum amount an insurer will pay for covered losses as specified in the policy.
Liquidity Coverage Ratio (LCR)
A Basel III metric requiring banks to hold sufficient High-Quality Liquid Assets to withstand 30 days of net cash outflows.
Loss Given Default (LGD)
The percentage of exposure lost if a borrower defaults, after accounting for recoveries and collateral.
Loss Ratio
In insurance, claims incurred divided by earned premiums; a key measure of underwriting performance.
Moral Hazard
When protection from risk (e.g., insurance) changes behavior in a way that increases the likelihood or cost of a loss.
Mortality Table
A statistical table showing death probabilities by age, gender, etc., used for pricing, reserving, and risk management in life insurance.
Net Present Value (NPV)
The sum of discounted future cash inflows and outflows; positive NPV indicates value creation.
Net Stable Funding Ratio (NSFR)
A Basel III metric requiring sufficient stable funding relative to the liquidity characteristics of assets and off-balance-sheet activities over a one-year horizon.
Premium
The price paid by the insured to the insurer for coverage over a defined period.
Probability of Default (PD)
The likelihood that a borrower will default over a specified time horizon.
Quota Share Reinsurance
A proportional reinsurance agreement where the reinsurer assumes a fixed percentage of premiums and losses.
Reinsurance
Insurance for insurers; transfers risk from a primary insurer to a reinsurer to manage volatility, capacity, and capital.
Risk-Based Capital (RBC)
Regulatory capital requirements calibrated to the risk profile of insurers (U.S. framework), covering asset, underwriting, credit, and operational risks.
Sharpe Ratio
A measure of risk-adjusted performance: excess return per unit of volatility (standard deviation).
Solvency II
The EU’s risk-based regulatory framework for insurers, covering capital (SCR/MCR), governance, and disclosure.
Subrogation
The insurer’s right to step into the insured’s shoes to seek recovery from responsible third parties after paying a claim.
Term Life Insurance
Life insurance providing coverage for a specified term (e.g., 10–30 years) with no cash value accumulation.
Underwriting
The process of evaluating, selecting, pricing, and setting terms for insurance risks or securities issuance.
Unearned Premium Reserve (UPR)
A liability representing the portion of premiums written that applies to coverage not yet provided.
Value at Risk (VaR)
A statistical measure estimating the maximum expected loss over a given horizon at a specified confidence level.
Weighted Average Cost of Capital (WACC)
The average rate a company is expected to pay to finance its assets, weighted by the proportion of equity and debt.
Whole Life Insurance
Permanent life insurance with level premiums, guaranteed death benefit, and cash value accumulation.
Yield Curve
The relationship between interest rates (yields) and maturities for bonds of similar credit quality; the term structure of interest rates.
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