Consumers: Investment » Glossary

Rand hedging is another very good reason for investing offshore. Over the past few years the South African currency has shown landslide depreciation compared to the major currencies of the world, e.g. the British Pound and die US Dollar. By investing some of your money in these currencies you would have benefited from this decline in the value of the rand.

Method of buying shares or unit trust units by investing the same amount of money regularly, regardless of the market price. Rand-cost averaging helps investors to avoid timing the market, as a Rand buys more units when the price is down and fewer when the price is up.

With rand-denominated offshore investments the fund manager of your chosen investment portfolio uses the money that you invest (Rands) to purchase offshore investments by means of an asset swap with an offshore partner. It offers a choice of investment portfolios and offers excellent access to offshore investments for newcomers to the market. The returns are paid out in Rands.

An independent organisation which provides opinions on the claims paying ability of insurers.

Repeating the sale or purchase of a debt instrument because one of the parties to the original trade has been financially unable to carry out its part of the trade.

Inflation-adjusted measure of Gross Domestic Product.

The percentage return on some investments that has been adjusted for inflation.

An individual who is reinsured.

A practice that consists of granting to an insured, as an inducement to accept a policy, a part of the commission paid to the agent by the company.

The major issue now facing life offices is the question of AIDS. While the impact is difficult to predict, all life offices currently require HIV tests for cover in excess of R200 000 or automatically include an AIDS exclusion clause. For some life offices the HIV testing limit has already been reduced to R50 000. In addition, life offices have started to set aside additional reserves to meet expected AIDS claims. Some life offices have aimed at countering the effect of AIDS by introducing policies requiring HIV testing every five years up to a certain age. This is expected to eliminate the cross-subsidisation of HIV-infected people by other policyholders. As far as the products marketed by life insurers are concerned, the following trends have been evident since the mid-eighties: Most life offices have discontinued reversionary bonus policies in favour of universal life policies in terms of which the investment, expense and risk constituents of premiums are calculated separately and are easily identifiable. This has led to the development of policies with greatly enhanced flexibility that can be tailored to individual clients\' requirements (e.g. life cover at varying premiums can be provided with varying degrees of security). An ever-increasing amount of business is being placed with life offices for investment purposes. While this has always been the case for pension and provident funds, there is a strong trend towards life offices also managing assets on behalf of clients. With regard to life insurance policies, the major portion of premium income is now obtained in respect of investment type business. This has led to greater emphasis being placed on investment performance as a means of comparing life offices rather than premium rates and other factors. Life cover, in particular, is expected to become favoured as a means of estate planning. Increasing emphasis has been placed on cover against risks other than death or permanent disability, and the 1980s saw the introduction of "dread disease" policies that provide payment in respect of certain diseases such as cancer, heart disease, kidney failure, etc. Recently life offices have extended their product ranges into the health care market. Initially these policies provided daily cash on hospitalisation, but benefits have now been extended to cover major surgery, income replacement while incapacitated, and nursing. Given the situation with government health provision, this trend is expected to continue. With the risk pattern of AIDS becoming more known and predictable, life offices have begun to refocus attention on life and disability protection products, which cannot be offered by the banks and unit trusts. The logic of the statutory insistence that investment policies must be for a term of at least five years is increasingly being questioned by the industry. Structurally, investment business is leaving the confines of institutional boundaries and moving to conglomerates in the financial services industry. Hence the narrow regulatory focus on the demarcation between banking, insurance and other investment products is widening to cover investor protection at the marketing level. The need for a corporate structure which supports a wider financial services profile, locally as well as internationally, and the expansion of business with "non-members\', have caused the two major mutual societies to begin preparations for demutualisation. The liberalisation of foreign capital transactions for residents, and the international agreements concerning trade in financial services, are bringing pressure for the opening of the local insurance market to foreign firms operating on a branch basis.

An arrangement whereby reinsurances are placed one against another so that a ceding company will only place a share of its business with a reinsurer who is willing to provide a similar share of its own business. Reciprocity is normally confined to fire proportional business and is occasionally based on an equivalent profit exchange rather than on premium income

Correction of an insurance policy to state the intentions of the parties.

Re-issue of a policy to change the policy date. This happens most frequently in connection with reinstatement of a lapsed policy where the policy date is advanced to decrease the premium arrears.

Repayment of the face value of a debt instrument by its issuer (the borrower).

A term insurance policy where the sum insured is progressively reduced over the term of the policy (decreasing term).

In relation to a retirement fund, means registered or provisionally registered funds under Section 4 of the Pension Funds Act.

The Registrar of Short-term Insurance or Long-term Insurance as defined in the Insurance Acts.

The executive and deputy executive in terms of Section 1 of the Financial Services Board Act. The Registrar regulates the industry and requires fund reports regularly, on a variety of topics.

A practical guideline issued by the Financial Services Board which is binding.

This regulation within the Pension Funds Act outlines the limitations of investments for retirement funds.

Restoration or repair of damaged property. Settlement of a claim on a new for old basis.

The restoration of cover under a lapsed policy following payment in full (with or without an extra charge for interest) of all unpaid premiums.

The restoration of cover under an excess of loss treaty after its exhaustion, wholly or partly, following payment of claims. Where reinstatements are applicable, usually for fire catastrophe business, the number of reinstatements and the method of calculation of the extra premium payable are specified.

An agreement whereby an insurance company transfers part or all of its risk of loss under insurance policies it writes by means of a separate contract or treaty with another insurance company. The insurance company providing the reinsurance protection is the reinsuring company or reinsurer. The insurance company receiving the reinsurance protection is the ceding company. Reinsurance protection provided is known as reinsurance accepted. From the standpoint of the ceding company, reinsurance protection received is known as reinsurance ceded. Short-term reinsurance can be divided into: _ facultative reinsurance, which is the reinsurance of part or all of one specified risk; and _ treaty reinsurance, which is the reinsurance of part or all of a specified type of risk or class of business. Treaty reinsurance is a common method of reinsurance for all except particularly large or unusual risks. It is also more permanent and less costly to administer than facultative reinsurance. Treaty reinsurance may be either: – proportional (quota share or surplus); or – non-proportional (mainly variants of excess of loss). Life reinsurance is conducted on the coinsurance basis or the risk premium basis.

All premium (less return premium) arising from policies issued to assume the liability, in whole or in part, of another insurance company which is already covering the risk with a policy.

All premium (less return premium) arising from policies, or coverage, purchased from another insurance company for the purpose of transferring the liability, in whole or in part, assumed from direct or reinsurance-assumed policies.

See reinsurance assumed.

See reinsurance ceded.

The premium paid by the ceding company to the reinsurer in consideration for the liability assumed by the reinsurer. On a proportional treaty the premium is a pro-rata share of the ceding company’s gross premium less a ceding (or exchange) commission. On excess of loss treaties the premium is a percentage of the ceding company’s gross premium income for the class of business being reinsured. These premiums are usually calculated annually and are not subject to a ceding commission.

A company or underwriter which accepts the risks which a ceding company reinsures.

A charge or expense item provided for under some proportional treaties to make allowance for the diminution of the reinsurer’s profit due to its own management expenses. This includes any acquisition costs not otherwise debited in the commission statement.

A measure of performance relative to a benchmark or peer group.

Actual (absolute) return minus the return on an appropriate benchmark.

Also known as Active Risk. The risk or tracking error of relative performance.

A signed document accepting settlement for a loss.

Term life insurance providing the right to renew at the end of the term for another term or terms, without providing evidence of insurability. The premium rates increase at each renewal as the age of the life insured increases.

The continuation of an existing contract of insurance at a premium that may or may not be at the same rate as in the previous period.

A certificate issued by the insurance company to provide evidence that the original policy is in force for a further period.

Notice reminding the insured that the period of cover will shortly expire and inviting the insured to renew for a further period.

A premium relating to the extension of a policy for an additional period.

The replacement of one or more heart valves with artificial valves due to stenosis or incompetence, or a combination of those conditions.(valvotomy is excluded)

Insurance that is issued to cover the full replacement cost of property damaged or destroyed. Unlike indemnity value , it does not take into account the effects of depreciation.

The interest rate at which the South African Reserve Bank lends money to commercial banks. An increase or decrease in the Repo rate places pressure on banks to increase or decrease the prime rate.

The "sell" price of a unit trust.

The risk of underperformance by a manager relative to its peers or competitors.

The minimum expected yield by investors require in order to select a particular investment.

The minimum expected return you would need in order to purchase an asset, that is, to make the investment.

It is a product that can be purchased by the retail market, e.g. unit trusts.

The amount of ceded premiums withheld from the reinsurer by the ceding company in order to provide collateral security for the performance of the reinsurer’s obligations under the treaty. Also known as deposits withheld.

The portion of a risk retained by an insurer after ceding the remainder to a reinsurer.

The age at which a pension fund member is entitled to receive benefits.

An annuity that commences on retirement.

Any fund (other than a pension fund, provident fund or benefit fund) which is approved by the Commissioner of Income Taxes, or, in the case of any such fund established on or after 1 July 1986, is registered under the provisions of the Pension Funds Act. A fund recognised by the South African Revenue Services for tax purposes that provides individuals benefits similar to those provided by a pension scheme.

In 1996 the Tax on Retirement Funds Act was passed and levied a 9% tax annually on the interest and net rental income earned by a retirement fund. With effect from 1 March 2007 this tax has been scrapped and no longer applies to retirement funds.

To transfer liability in respect of all or part of a reinsurance portfolio, or reinsured risk, from one reinsurer to another. For example: A accepts from B and then in turn reinsures with C a whole or part of the reinsurance assumed from B. The reinsurance ceded to C by A is called a retrocession.

A reinsurer who retrocedes.

A cession of reinsurance by a reinsurer to another.

A reinsurer who accepts retrocession business.

An additional premium, determined after the expiration of he policy, based on the loss experience under the policy. The original premium charged on such policies is referred to as the standard premium.

A method used in arriving at the insurance or reinsurance or experience rating) rate and premium for a specified period on the basis of the loss experience for the same period.

The formula in an insurance or reinsurance contract for determining the premium for a specified period on the basis of the loss experience for the same period.

This enables a portfolio to be decomposed into the various sources of return and risk, from asset-allocation decisions, share selection, style, industry and market-timing decisions.

The difference in returns achieved by-the various market players, explained by differences in investment philosophy, asset allocation, style bias, industry/sector over- or under-weighting and share selection.

Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).

Indicator of profitability of the firm\'s capital investments. Determined by dividing Earnings Before Interest and Taxes by (capital employed plus short-term loans minus intangible assets). The idea is that this ratio should at least be greater than the cost of borrowing.

Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

Generally, book income as a proportion of net book value.

A premium refund due to the insured, arising from an endorsement or cancellation.

A feature incorporated in a regular life, endowment, or term policy providing that in addition to the regular insurance benefits in the policy, an amount equal to all premiums paid will be payable upon the death of the insured prior to the end of a specified period. The specified period is frequently 20 years.

International news and quotation service based in London.

The increase in the value of one currency relative to other currencies.

See bonus.

The so-called conventional contract that, like the non-profit contract, provides a guaranteed benefit (the sum insured) and then offers the benefit of this guaranteed sum insured being increased by participation in the surplus created by the insurer. This surplus is distributed by way of regularly declared "reversionary bonuses" that are added to the sum insured and paid in full when there is a claim on death or on maturity. The amount of surplus distributed at any given bonus declaration is subject to averaging out by the actuaries. The purpose of this averaging out is to avoid any drastic fluctuation within the reversionary bonus rates. Most life insurers do this, and it is expected by the public that significant movements - particularly downward movements - are avoided in the reversionary bonus rates. While bonus rates are in no way guaranteed, they have shown, since 1945 at least, an increasing tendency. These bonuses can build up policy benefits substantially. In recent years many life offices have offered another kind of bonus, aimed at sharing with the policyholder some of the capital appreciation of the underlying investments. These bonuses are called terminal or final bonuses, because the amount is payable only at the time of the policy becoming a claim or maturing. This bonus is payable only if there is a capital appreciation of the underlying investments. These bonuses can be eliminated or reduced if investment performance has been poor or below expectations.

A modification of the general terms of the policy. The modification may amount to an addition of new benefits, an elimination of certain benefits, or modification of existing terms of the policy.

A method of raising additional capital by offering shareholders a preferential right to take up new shares, in proportion to their shareholdings.

The hazard exposure, or chance of loss. The term ‘risk’ is used also in a general way to designate the subject matter of an insurance policy. It may also be used as a generic term for the insured. The risk that is transferredfrom the insured to the insurer under an insurance policy can consist of: _ underwriting risk – the uncertainty as to whether or not the loss event will occur and/or the ultimate amount of any claim payment in respect of the loss event; or _ timing risk – the uncertainty as to when claim payments will be made.

See any one risk cover.

A term used to describe policies where the insured and the insurer share in the losses under an insurance contract. Certain risk financing arrangements are entirely the responsibility of the insured, for example, own captive insurance company to the extent that reinsurance has not been placed. The term refers generally to self insurance plans placed with an insurance company. Also termed financial insurance or financial reinsurance.

A person willing to accept lower expected returns on prospects with higher amounts of risk.

The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.

Procedure to minimise the possibility of loss.

A concept used by life insurance enterprises in estimating the liability for future policy benefits relating to long-duration contracts. The risk of adverse deviation allows for possible unfavorable deviations from assumptions such as estimates of expected investment yield, mortality, morbidity, terminations and expenses. The concept is referred to as risk load when used by property and liability insurance enterprises.

A method of life reinsurance which is comparable to term life insurance. The ceding company cedes a proportion of the mortality risk only and the annual reinsurance premium is determined in the same manner as renewal term insurance. The risk premium basis of life reinsurance is attractive to small life offices who might otherwise be prevented from writing the occasional very large life policy (that is large sum insured) because of the risk of early death of the life insured.

Risk Type is associated with the degree of volatility and exposure to the market that an investment has. The possibility that an investment may fluctuate in value i.e. the degree of unpredictability in the return of the investment. Risk is generally defined as volatility in returns, in other words, the variance in the returns over a certain period. It can also be defined as the erosion of the real value of the investment due to inflation (inflation risk), the inability of income needs to be met from dividends and nterest (income risk) or the actual loss of capital (absolute risk).

Returns adjusted to take into account the risk involved in earning that return (see the Sharp ratio).

Describes an investor who, when faced with two investments with the same expected return but different risks, prefers the one with the lower risk.

Risky assets are all assets except those with no standard deviation, for example a fixed deposit.

This refers to investment-return measurement whereby the furthest periods are dropped off and the most recent periods added on for a period of analysis.

Payment for the right to use intellectual property or natural resources.

The rules of a fund outline the way business must be conducted by the fund and its officers. All rules must be registered with the Financial Services Board and the South African Revenue Services.

The development in aggregate money values of a group of claims in respect of a particular class of business to their final settlement. Claims may be grouped by accident year or by policy year. The term is also used to denote the progressive extinction of claim liabilities arising on a closed insurance portfolio. See also claim development.