Glossary
Acceleration Clause:
The part of a contract that says when a loan may be declared due and payable.
Accident insurance:
Insurance of individuals or groups against economic risks in the event of death or temporary or permanent disability by accident. A branch of non-life insurance.
Accidental Death Benefit:
In a life insurance policy, benefit in addition to the death benefit paid to the beneficiary, should death occur due to an accident. There can be certain exclusions as well as time and age limits.
Account Executive:
The individual who, either as employee of a reinsurer or a reinsurance intermediary, is responsible for all matters pertaining to the reinsurance account of a particular insurer.
Accumulation risk:
Risk that arises when a large number of individual risks are correlated such that a single event will affect many or all of these risks.
Acquisition costs:
Cost of acquiring, maintaining and renewing insurance business: it includes the intermediaries’ commission, the company’s sales expense, and other related expenses.
Acquisition Costs:
All expenses incurred by an insurance or reinsurance company which are directly related to acquiring insurance accounts (insured or reinsured) for the company.
Actual Cash Value:
Cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence. For example, a 10-year-old sofa will not be replaced at current full value because of a decade of depreciation.
Actuary:
An actuary is a business professional who deals with the financial impact of risk and uncertainty.
Actuaries have a deep understanding of financial security systems, their reasons for being, their complexity, their mathematics, and the way they work. They evaluate the likelihood of events and quantify the contingent outcomes in order to minimize losses, both emotional and financial, associated with uncertain undesirable events.
Adjuster:
A representative of the insurer who seeks to determine the extent of the insurer's liability for loss when a claim is submitted.
Admin ReSM:
Acquisition of a closed block of in-force life and health insurance business either through acquisition or reinsurance, typically assuming the responsibility to administer the underlying policies. Admin ReSM can also extend to the acquisition of an entire life insurance company.
Administration Expenses:
Costs incurred in conducting an insurance operation other than loss adjustment expenses, acquisition costs and investment expenses.
Admitted Assets:
Assets recognized and accepted by state insurance laws in determining the solvency of insurers or reinsurers.
Advance Deposit Premium:
An amount paid by a reinsured to a reinsurer which is held for the payment of the reinsured's losses. At some time in the future, any balance in the fund remaining after paying losses and any agreed reinsurance expenses will be returned to the reinsured. Also known as a Banking Plan.
Adverse Selection:
The conscious and deliberate submission by a reinsured company to a reinsurer of those risks, segments of risks, or coverages that appear less attractive for retention by the reinsured.
Agency Reinsurance:
1. A designation that identifies the reinsurance of one or more of an agent's policies, with the agent acting for the reinsured under its authority.
2. A contract of reinsurance between a policy-issuing insurer and a reinsurer that concerns or is confined to business produced by a named agent of the insurer, usually generated by that agent and administered directly with the reinsurer with permission of the insurer. While there are other reasons for the practice, the usual intent is to allow an agent to issue larger policies than the insurer would otherwise permit. Usually, agency reinsurance is written as proportional reinsurance on property or other first-party insurances.
Aggregate Excess:
The reinsurer indemnifies an insurance company (the reinsured) for an aggregate (or cumulative) amount of losses in excess of a specified aggregate amount. Can be written excess of a dollar amount (e.g., $500,000 in the aggregate excess of $500,000 in the aggregate) or excess of a percentage (loss ratio) amount (e.g., 50 loss ratio points excess of 75 loss ratio points). Can also be written with an interior deductible, i.e., to apply only to losses excess of a stated dollar amount (e.g., $500,000 in the aggregate excess of $500,000 in the aggregate applying only to losses greater than $50,000 per loss).
Aggregate Extension:
An extension of coverage permitting the aggregating of what would otherwise be two or more accidents or occurrences so that they are considered as one accident or occurrence for purposes of an excess of loss reinsurance. Thus, only one company retention and one reinsurer's limit of liability apply. Many variations may be used in further defining the term, e.g., the aggregating is usually tied to loss arising out of one policy during one policy period or, if not to one policy, then loss to one insured during a specified period.
Aggregate Extraction:
A provision permitting a portion of what would be considered as one loss to be extracted and included as part of a separate loss. Example: an aggregate policy, where the reinsurance contract considers all loss under such a policy to be one occurrence, when one of the losses under that policy is involved in the same loss as another policy(ies) of the reinsured company. The aggregate policy loss may be extracted and combined with the other policy(ies) loss to make a more favorable claim under the reinsurance contract.
Aggregate Limit:
Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents might occur.
Aggregate Stop-Loss Reinsurance:
A form of excess of loss reinsurance which indemnifies the reinsured against the amount by which the reinsured's losses incurred (net after specific reinsurance recoveries) during a specific period (usually twelve months) exceed either an agreed amount or an agreed percentage of some other business measure, such as aggregate net premiums over the same period or average insurance in force for the same period. This form of reinsurance is also known as stop-loss reinsurance, stop-loss-ratio reinsurance, or excess of loss ratio reinsurance.
Aggregate Working Excess:
A form of per risk excess reinsurance under which the primary company retains its normal retention on each risk and additionally retains an aggregate amount of the losses which exceed such normal retention.
Amortization Period:
Synonymous with payback period, this term is used in the rating of per occurrence excess covers and represents the number of years at a given premium level necessary to accumulate total premiums equal to the indemnity.
Anniversary:
The annual renewal date of a contract, whether the contract actually expires or is continuous. The date is usually twelve months after the effective date of the contract, but may be at some other time if the contract was written for other than one year. In provisions dealing with Run-off Cancellation, the anniversary referred to is that of the underlying policies, not the reinsurance contract.
As If:
A term used to describe the recalculation of prior years of loss experience to demonstrate what the underwriting results of a particular program would have been if the proposed program had been in force during that period.
Asset-backed securities:
Security backed by notes or receivables against assets such as auto loans, credit cards, royalties, student loans and insurance.
Asset-liability management (ALM):
Management of a business in a way that coordinates decisions on assets and liabilities. Specifically, the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and constraints.
Atttained Age:
Insured's age at a particular time. For example, many term life insurance policies allow an insured to convert to permanent insurance without a physical examination at the insured's then attained age. Upon conversion, the premium usually rises substantially to reflect the insured's age and diminished life expectancy.
Automatic Treaty:
An agreement between reinsured and reinsurer (usually for pro rata reinsurance, and usually for one year or longer), whereby the ceding company is obligated to cede certain risks as provided in the agreement and the reinsurer is obligated to accept.
Aviation insurance:
Insurance of accident and liability risks, as well as hull damage, connected with the operation of aircraft.
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Bad Faith:
The failure of an insurer to settle within policy limits when there was an opportunity to do so (and a court award in excess of the policy limits).
Balance:
A concept in surplus share reinsurance dealing with the relationship between written premium under the treaty and the maximum limit of liability to which the reinsurer is exposed. The precise relationship will vary from treaty to treaty, but if the ratio desired for a specific treaty is achieved, the treaty is referred to as "balanced."
Base Premium:
The reinsured company's premiums (written or earned), to which the reinsurance premium rate is applied to produce the reinsurance premium. Also known as Subject Premium, Premium Base and Underlying Premium.
Basic Limits:
The minimum amounts of insurance for which it is the practice to quote premiums in liability insurance. Additional amounts are charged for by the addition of certain percentages of the premium for the minimum (or basic) limits.
Benefit Period:
In health insurance, the number of days for which benefits are paid to the named insured and his or her dependents. For example, the number of days that benefits are calculated for a calendar year consist of the days beginning on Jan. 1 and ending on Dec. 31 of each year.
Binder:
A temporary or preliminary agreement which provides coverage until a policy can be written or delivered.
Binder (Reinsurance):
A record of reinsurance arrangements pending the issuance of a formal reinsurance contract (which then replaces the binder).
Boilerplate (Language):
Clauses employing generally accepted wording with little variation, considered to be common among most treaties as so-called standard language.
Buffer Layer:
Used in casualty insurance to describe a stratum of coverage between the maximum policy limit which the primary underwriter will write and the minimum deductible over which the excess or umbrella insurer will cover.
Burning Cost:
The ratio of actual past reinsured losses to a ceding company's subject matter premium (written or earned) for the same period. Used to analyze past reinsurance experience or to project the future.
Burning Ratio:
In primary insurance, the ratio of losses suffered to the amount of insurance in effect. Thus, not a "loss ratio," which is the ratio of losses incurred to premiums earned.
Business interruption insurance:
Insurance covering the loss of earnings resulting from, and occurring after, destruction of property; also known as “loss of profits” or “business income protection insurance”.
Buy-Back Agreement:
A negotiated contractual attempt by an insurer writing primary insurance or excess insurance to curtail further exposure to the insured for defense or indemnity by making a lump sum payment to the insured. Open questions exist as to how these agreements affect third-party beneficiaries of the original insurance policy.
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Capacity:
The measure of an insurer's financial strength to issue contracts of insurance, usually determined by the largest amount of insurance issuable for a given risk or, in certain other situations, by the maximum volume of insurance (or reinsurance) business it is prepared to accept.
Capacity Maximum:
amount of risk that can be accepted in insurance. One factor in determining capacity is government regulations that define minimum solvency requirements. Capacity also refers to the amount of insurance coverage allocated to a particular policyholder or in the marketplace in general.
Captive Agent:
Representative of a single insurer or fleet of insurers who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights on a sale. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as an extensive list of employee benefits such as pensions, life insurance, health insurance, and credit unions.
Captive Insurance Company:
An insurer which is wholly-owned by another organization (generally noninsurance), the main purpose of which is to insure the risks of the parent organization.
Carrier:
A company that issues, and assumes the risk of, an insurance policy
Cash Call:
A reinsurance contract provision, common in proportional contracts, which allows a reinsured company to make claims and receive immediate payment for a large loss without waiting for the usual periodic payment procedures to occur.
Casualty insurance:
Branch of insurance, mainly comprising accident and liability business, which is separate from property, engineering and life insurance. In the US this term is used for non-life insurance other than fire, marine and surety business.
Catastrophe bonds (cat bonds):
Insurance-linked securities that allow (re)insurance companies to transfer peak insurance risks, including natural catastrophes, to the capital markets in the form of bonds. Catastrophe bonds help to spread peak exposures.
Cedant:
A syndicate or company that transfers a risk exposure under a reinsurance contract.
Cede:
In pro rata reinsurance, to pass on to another insurer (the reinsurer) all or part of the financial interests of insurance policies written by an insurer (the ceding insurer) with the object of reducing the cedent's possible liability by sharing with the reinsurer the insurance liability, premiums, and losses from the reinsured business.
Ceding Commission:
Primarily in pro rata reinsurance, an allowance (usually a percentage of the reinsurance premium) made by the reinsurer for part or all of a ceding company's acquisition and other costs. The ceding commission may also include a profit factor for the reinsured.
Ceding Company:
Correctly used as the reinsured in pro rata reinsurance, where the reinsurer shares in the insurance liability, premium, and losses from the ceded policies of the reinsured.
Informally referred to as the reinsured in excess of loss reinsurance, where the reinsurer indemnifies the reinsured for losses in excess of the reinsured's retention.
Certificate of Reinsurance:
A short-form documentation of a reinsurance transaction, used especially for facultative reinsurance transactions.
Cession Insurance that is reinsured:
the passing of the insurer’s risks to the reinsurer against payment of a premium. The insurer is referred to as the ceding company or cedent.
Claim:
Demand by an insured for indemnity under an insurance contract.
Claim Expenses:
The costs incurred in processing claims: court costs, interest upon awards and judgment, the company's allocated expense for investigation and adjustments and legal expenses (excluding, however, ordinary overhead expenses of the company such as salaries, monthly or annual retainers and other fixed expenses which are defined as unallocated loss adjustment expenses). Also known as Loss Expenses or Loss Adjustment Expenses.
Claims handling:
Activities in connection with the investigation, settlement and payment of
claims from the time of their occurrence until settlement.
Claims incurred and claim adjustment expenses:
All claims payments plus the adjustment in the outstanding claims provision as well as expenses for evaluating and settling claims.
Claims ratio:
Sum of claims paid, change in the provisions for unpaid claims and claim adjustment expenses in relation to premiums earned.
Claims-Made Basis:
The provision in a contract of insurance or reinsurance that coverage applies only to losses which occur and claims that are made during the term of the contract (Losses occurring before the contract term are sometimes covered by the addition of "prior-acts" coverage to the contract, which may be subject to a retroactive date limiting the period in which the covered losses may have occurred. Losses reported after the contract term are sometimes covered by the addition of "tail" coverage, which may be subject to a sunset provision.). Once the policy period is over in claims-made covers, the approximate extent of the underwriter's liability is known. On the other hand, the traditional "occurrence" liability insurance method provides coverage for losses from claims which occurred during the policy period, regardless of when the claims are asserted. With the traditional "occurrence" liability coverage method, the underwriter may not discover the extent of liability for years to come from losses asserted to have occurred within the policy period. With claims-made covers which are renewed, however, losses which occurred during any period when the policy was in force are again covered if reported during the renewal term. In summary, the traditional method is similar to claims-made if the latter has added to it both "prior-acts" and "tail" coverage.
Clash Cover:
A reinsurance casualty excess contract requiring two or more coverages or policies, issued by the reinsured and involved in a loss, for coverage to apply. The attachment point of the reinsurance contract is usually above the limits of any one policy.
Coinsurance:
Arrangement by which a number of insurers and/or reinsurers share a risk.
Coinsurance:
In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20% health insurance coinsurance clause, the policyholder pays for the deductible plus 20% of his covered losses. After paying 80% of losses up to a specified ceiling, the insurer starts paying 100% of losses.
Combination Plan Reinsurance:
A form of quota share and excess of loss reinsurance combined which provides that, in consideration of a premium at a fixed percent of the ceding company's subject premium on the business covered, a) the reinsurer will indemnify the ceding company for the amount of loss on each risk in excess of a specified retention, subject to a specified limit, and b), after deducting the excess recoveries on each risk, the reinsurer will indemnify the ceding company for a fixed quota share percent of all remaining losses.
Combined ratio:
Sum of the non-life claims ratio and the expense ratio.
Commission:
Remuneration paid by the insurer to its agents, brokers or intermediaries, or by the reinsurer to the insurer, for costs in connection with the acquisition and administration of insurance business.
Commutation:
Transaction in which policyholders or insurers surrender all rights and are relieved from all obligations under an insurance or reinsurance contract in exchange for a single current payment.
Commutation Clause:
A clause in a reinsurance agreement which provides for estimation, payment, and complete discharge of all obligations, including future obligations between the parties for reinsurance losses incurred. This clause is often found in contracts reinsuring workers compensation and may be optional (which is usual) or mandatory.
Comprehensive Insurance:
Auto insurance coverage providing protection in the event of physical damage (other than collision) or theft of the insured car. For example, fire damage or a cracked windshield would be covered under the comprehensive section.
Contributing Excess:
A type of facultative excess of loss reinsurance wherein the reinsured company's policy applies in excess of other valid insurance, reinsurance, or self-insured retention, and the limit(s) of liability of the reinsurer(s) apply(ies) proportionately to all loss within said excess policy's limit, as in the percentage(s) set forth in the Declarations Page.
Counsel and Concur:
A phrase stating the reinsured company's obligation to obtain the counsel and concurrence of the reinsurer in making claims decisions. Most typically applied to claims decisions made in connection with extra-contractual obligations or judgments (loss) in excess of policy limits coverages.
Cover:
Insurance and reinsurance protection based on a contractual agreement.
Coverage:
The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed.
Credit insurance:
Insurance against financial losses sustained through the failure, for commercial reasons, of policyholders’ clients to pay for goods or services supplied to them.
Cumulative Liability:
The accumulation of liability of a reinsurer under several policies from several reinsureds covering similar or different lines of insurance, all of which are involved in a common event or disaster.
Cut-Through Endorsement:
An addition to an insurance policy between an insurance company and a policyholder which requires that, in the event of the company's insolvency, any part of a loss covered by reinsurance be paid directly to the policyholder or mortgagee by the reinsurer. The cut-through endorsement is so named because it provides that the reinsurance claim payment "cuts through" the usual route of payment from reinsured company-to-policyholder, followed by reinsurer-to-reinsured company, substituting instead the payment route of reinsurer-to-policyholder-or-mortgagee. The effect is to revise the route of payment only, and there is no intended increased risk to the reinsurer, although endorsement terms may provide otherwise. Similar to the Guaranty Endorsement, the cut-through endorsement is also known as an Assumption Endorsement.
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D&O Insurace:
Directors and Officers Liability Insurance is insurance payable to the directors and officers of a company, or to the corporation itself, to cover damages or defense costs in the event they are sued for wrongful acts while they were with that company.
Typical sources of claims include shareholders, shareholder-derivative actions, customers, regulators, competitors (for anti-trust or unfair trade practice allegations).
Directors and Officers Liability insurance is commonly referred to as D&O in the insurance industry.
Declaratory Judgment:
A decision by a court in a proceeding, which can be brought by either the insurer or the insured, to determine the rights of the parties. In insurance, for example, a court decision may be sought to determine whether an insurance company has an obligation to defend, indemnify or pay on behalf of its insured policyholder under a policy with regard to a particular loss or losses.
Deemed (Or So Deemed):
A condition which is said to exist by agreement between the parties even though it may not exist in fact (e.g., "all policy limits greater than $1,000,000 are to be reinsured on a pro rata facultative basis, or be so deemed."). To deem means to treat as if.
Deposit Premium:
When the terms of a treaty provide that the ultimate premium is to be determined at some time after the treaty has been written, the reinsurer may require a tentative or a deposit premium at the beginning. The tentative premium is readjusted when the actual earned charge has been determined.
Direct Writer:
An insurer whose distribution mechanism is either the direct selling system or the exclusive agency system.
Direct Written Premium:
The gross premium income (written instead of earned) of a primary company, adjusted for additional or return premiums but before deducting any premiums for reinsurance ceded, and not including any premiums for reinsurance assumed.
Directors' and officers' liability insurance (D&O):
Liability insurance for directors and officers of an entity, providing cover for their personal legal liability towards shareholders, creditors, employees and others arising from wrongful acts such as errors and omissions.
Disability insurance:
Insurance against the incapacity to exercise a profession as a result of sickness or other infirmity.
Diversification Risk:
reduction technique that limits the risk of accumulation by spreading an organisation’s risks across different geographical locations as well as across different lines of business, in order to increase the number of mutually independent risks.
Domestic Company:
An insurer conducting business in its domiciliary state from which it received its charter to write insurance, as opposed to a foreign company (which is an insurer conducting business in a state other than its domiciliary state), or an alien company (which is an insurer domiciled outside the U.S. while conducting business within the U.S.).
Drop-Down Coverage:
In reinsurance, a method of structuring the retention and limit of a particular layer of a property catastrophe excess reinsurance program so that, in the event that a loss (or losses) exhausts the reinsurance limit in a stated lower layer, the unexhausted limit of the highest upper layer would drop down to respond to subsequent loss(es) during the same contract period as a replacement for the lower layer. Such a method is often referred to as "top-and-drop" coverage. For example, if the first layer of $10 million xs (excess) $10 million in a program of $140 million xs $10 million were exhausted, the top layer (for this example, $10 million xs $140 million) will drop down and provide $10 million xs $10 million for a negotiated number of additional occurrences. Another use of drop-down coverage may occur within the first catastrophe layer, wherein the loss retention in a contract drops after the first loss and the layer limit then expands. For a different example, if the first layer coverage were $1 million xs $1 million and a loss in excess of $1 million occurred, provision would be made for the retention to drop to a lesser amount, such as $750,000, and for the limit to expand to $1,250,000 for the second and subsequent losses in the same period, but subject to the annual aggregate limit as negotiated.
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Embedded value:
Actuarially determined estimate of the economic value of the in-force life and health insurance operations of an insurance company (excluding any value attributable to future new business). Embedded value earnings, defined as the change in embedded value over the year (after adjustment for any capital movements such as dividends and capital injections), provide a measure of the performance of the life and health operations of an insurance company.
Employers' liability insurance:
Insurance taken out by employers covering employees against injuries arising out of their employment.
Encumbrance:
A claim on property, such as a mortgage, a lien for work and materials, or a right of dower. The interest of the property owner is reduced by the amount of the encumbrance.
Engineering insurance:
Insurance covering the construction and erection of objects, and the insurance of machinery in operating plants.
Errors and Omissions Clause:
A clause in a reinsurance treaty (requiring some affirmative act by the reinsured to activate the reinsurance protection) which stipulates that, in the event of inadvertent error or omission, the reinsured shall not be prejudiced in the fulfillment of the agreement, provided that such error or omission shall be corrected as soon as it is discovered.
European Medium Term Note (EMTN):
Vehicle for raising funds by borrowing from the capital markets or from private investors. The EMTN programme itself is effectively a platform, under a standard documentation framework, from which to launch such issues on an ongoing basis.
Event Loss Trigger:
An approach designed to deem that all loss from one occurrence had one date of loss, regardless of the type of coverage (i.e., occurrence or claims made), or the number of dates of loss thereunder, or the reinsurance contracts or periods involved. The opposite of an INTERLOCKING loss trigger.
Excess Limits Premiums:
In casualty insurance, premiums for limits or layers of liability added to basic limits, calculated as multiples of basic limits premium. Excess limits premiums were the original (and remain a popular) basis of premium paid for casualty excess of loss reinsurance.
Excess of Loss Reinsurance:
A generic term describing reinsurance which, subject to a specified limit, indemnifies the reinsured company against all or a portion of the amount of loss in excess of the reinsured's specified loss retention. The term is generic in deserving various types of excess of loss reinsurance, such as per risk (or per policy), per occurrence (property catastrophe or casualty clash), and annual aggregate. The loss retention in excess of loss reinsurance should not be confused with the policy retention in surplus share reinsurance, which always refers to a pro rata form of reinsurance in which, once a cession of insurance is made, the reinsured and reinsurer share insurance liability, premium and losses, beginning with the first dollar of loss.
Excess per Risk Reinsurance:
A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the reinsured company against the amount of loss in excess of a specified retention with respect to each risk involved in each loss.
Exclusions:
Those risks, perils or classes of insurance with respect to which the reinsurer will not pay loss or provide reinsurance, notwithstanding the other terms and conditions of reinsurance.
Expense ratio:
Sum of acquisition costs and other operating costs and expenses in relation to premiums earned.
Expiration:
The cessation of a reinsurance cover when the time period for which it was written has ended. A treaty written on a "continuous until cancelled" basis does not expire automatically but will contain a provision for termination.
Extraction Factor:
A fraction or percentage of a reinsured company's subject premium which is deducted from the reinsurance premium to recognize and measure that portion of any policies not covered by reinsurance when the policies are written by the reinsured on an indivisible premium basis. For example, if property excess reinsurance does not cover third-party liability or burglary in a reinsured company's Homeowners Policy, an extraction factor would adjust the reinsurance premium accordingly.
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Facultative reinsurance:
Reinsurance of the insurer’s risks on an individual basis. The reinsurance company looks at each individual risk and determines whether to accept or decline coverage.
Facultative Reinsurance:
In pro rata reinsurance, the reinsurance of part or all of the insurance provided by a single policy, with separate negotiation for each policy cession of insurance - for sharing liability, premium, and loss. In excess of loss reinsurance, the reinsurance of each policy, with separate negotiation for each - for indemnity of loss in excess of the reinsured's loss retention. The word "facultative" connotes that both the primary insurer and the reinsurer usually have the faculty or option of accepting or rejecting the individual submission (as distinguished from the obligation to cede and accept, to which the parties agree in most treaty reinsurance).
Financial reinsurance:
Reinsurance that combines risk transfer with elements of risk finance.
Financing Function:
A purpose of reinsurance in some cases, e.g., whenever the reinsurer relieves the primary company of all or part of the company's responsibility for carrying an unearned premium reserve and the reinsurer allows a ceding commission to the primary company. Because the cash or other statutorily recognized assets being transferred (causing a change in assets) are less than the unearned premium reserve change (causing a change in liabilities), the primary company's policyholder surplus is increased by the amount of the reinsurance commission allowance. The need for policyholder surplus relief is created when an insurance company wishes to write more policies, or larger policies, or both, than its policyholder surplus (assets minus liabilities) can finance. Put another way, the initial cost of writing primary insurance policies (which must be expended immediately) exceed the initial premium income (which is not avail-able to offset costs until it is earned over the policy period, usually twelve months as required by law), and the company is therefore limited in its policy writings by the amount of its net worth, or policy-holder surplus.
First Surplus Treaty:
A term exclusive to pro rata reinsurance treaties which defines the amount of each cession as the amount of gross (policy) liability which exceeds, or is "surplus" to, an agreed net liability retention, up to the limit of (reinsurance) liability. Often a maximum net retention is specified in the treaty, with the primary company having the option to choose a lesser retention on individual risks. The amount of first surplus reinsurance provided will be limited to a fixed multiple of the selected retention in each case. Larger policy surpluses are termed "second," "third," and so on, each being the amount of reinsurance afforded once the prior surplus reinsurance capacity plus the true net retention have been exceeded.
Follow the Fortunes:
A concept inherent in any reinsurance relationship which, when expressed in an agreement, generally runs to a statement that the reinsurer "shall follow the fortunes of the ceding company in all matters falling under this Agreement" or shall do so "...in all respects as if being a party to the insurance," or similar language. Expressed or not, the concept speaks to a relationship under which the reinsured's duty, to treat reinsured policy rights and obligations as if there were no reinsurance, is extended into a right. This right is not open ended: it cannot carry a reinsurer outside its agreement; neither is it fixed. Rather, it rests on mutual trust within the circumstances of each case. Accordingly, some reinsurers avoid "following-the-fortunes" clauses in their agreements, while those in use are normally found in pro rata treaties where the sharing nature of cessions makes proper implementation reasonably evident and self-controlling.
Historically, the "follow-the-fortunes" clause was designed to deal with "errors and omissions," particularly in the case of inadvertent omission by the ceding company of a specific risk on a bordereau, intending to permit the ceding company to include the risk on a bordereau upon discovery of the oversight with retroactive reinsurance. However, the courts have held that under the "follow-the-fortunes" language of a reinsurance treaty, the reinsurer adopts the language of the primary policy, and thus a third-party creditor of the primary insurer has a right of action against the reinsurer under a reinsurance contract. Such a holding is an exception to the general rule of law applicable to reinsurance agreements that such agreements operate solely between the reinsured and the reinsurer and create no privity between the reinsurer and any third party, and afford no right of action by any third party against the reinsurer on the reinsurance agreement. The historical objective of the clause can be achieved by inserting an "errors and omissions" clause in any reinsurance agreement which is not fully automatic. Neither a "follow-the-fortunes" nor "errors and omissions" clause is necessary in an automatic reinsurance agreement.
Franchise Covers:
A contractual provision, common in hail insurance but also used elsewhere, stating that no loss is payable until the loss exceeds a certain amount but, when that amount is exceeded, the whole loss is paid.
Fronting:
An arrangement whereby one licensed insurer issues a policy on a risk for and at the request of one or more other unlicensed insurers with the intent of passing the entire risk by way of reinsurance to the other insurer(s). Such an arrangement may be illegal if the purpose is to frustrate regulatory requirements.
Funded cover:
Reinsurance contract under which the ceding company pays premiums to build a fund from which to pay expected claims. The premium less the reinsurance charge is paid out to the ceding company in the future as claim payments, returned premiums, or contingent commissions.
Funded Cover:
A reinsurance contract under which the reinsured company pays a higher than normal premium intended to build a fund from which to pay expected losses. Because the higher premium reduces the reinsurer's risk (i.e., that losses will exceed the premium), the reinsurer agrees to accept a reduced reinsurance margin. All of the premium less the reinsurance charge will be returned to the ceding company at some time in the future as loss payments, returned premiums, or contingent comissions.
Funds Held Account (or Funds Withheld):
The holding by a ceding company of funds representing the unearned premium reserve or the outstanding loss reserve applied to the insurance business it cedes to a (usually unauthorized) reinsurer.
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Grace Period:
The length of time (usually 31 days) after a premium is due and unpaid during which the policy, including all riders, remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time. In Universal Life policies, it typically provides for coverage to remain in force for 60 days following the date cash value becomes insufficient to support the payment of monthly insurance costs.
Gross Line:
The amount of liability an insurer has written on a risk, including the amount it has reinsured. Net line plus reinsurance equals gross line.
Ground-Up Loss:
In insurance, the gross amount of loss occurring to an insured and subject to the insured's insurance policy, beginning with the first dollar of loss and prior to the application to the deductible or deduction, if any, required by the policy. In reinsurance, the term refers to the gross amount of loss occurring to the reinsured, beginning with the first dollar of loss and after the application of deductions required by the reinsurance agreement (which can be several in number): a) the reinsured's retention in excess of loss covers; b) other inuring reinsurance, such as quota share, surplus share, per risk excess, facultative, or common account coverage; or c) the uncollectibility of any reinsurances. For example, ground-up losses subject to a per risk excess treaty protecting the reinsured's net retention would equal the net loss beginning with the first dollar after reduction of the gross loss by recoveries from other treaties such as surplus covers and facultative placements, but before the application of the deductible in the per risk excess cover itself.
Guaranteed Minimum Death Benefit (GMDB):
Feature of variable annuity business. The benefit is a predetermined minimum amount that the beneficiary will receive upon death.
Guaranty Endorsement:
An addition to an insurance policy (between an insurance company and a policyholder covering the policyholder's mortgaged property) which requires that, in the event of the company's insolvency, the mortgagee and/or the policyholder be paid directly by the reinsurer either for any loss covered by reinsurance or (as is often provided) for the full insurance protection afforded by the insurance company. Since the full insurance protection afforded by the insurance company may be above the reinsurance which would be payable to the reinsured company, the reinsurer may be assuming an additional risk in such an endorsement. Similar to the cut-through endorsement, the guaranty endorsement is also known as a Mortgagee Endorsement.
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Hard Market:
A scarcity of a product or service for purchase, as opposed to a soft market, in which the product or service is available readily and easy to buy. In reinsurance, a hard market is characterized by prudent underwriting and adequate pricing, whereas a soft market reflects sloppy underwriting and deficient pricing.
Health insurance:
Generic term applying to all types of insurance indemnifying or reimbursing for losses caused by bodily injury or sickness or for expenses of medical treatment necessitated by sickness or accidental bodily injury.
Honorable Undertaking:
A clause used in some reinsurance treaties, the purpose of which is that the agreement not be defeated by a strict or narrow interpretation of the language in the treaty.
Hours Clause:
The colloquial term which limits the time period during which claims resulting from a given occurrence may be included as part of the loss subject to the cover. The time period is usually measured in consecutive hours and most often applies to property reinsurance, e.g., a windstorm, conflagration, or earthquake, and less frequently in occupational disease and other aspects of casualty.
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Impaired Insurer:
An insurer which is in financial difficulty to the point where its ability to meet financial obligations or regulatory requirements is in question.
Impairment charge:
Adjustment in the accounting value of an asset.
In-Force Business:
Insurance policies in effect (i.e., whose time of coverage is unexpired) as a reinsurance contract period of time begins, with or without reinsurance coverage.
Incedental Coverage:
Coverage for a risk, class or type of insurance that is primarily excluded from a reinsurance contract but is excepted from the exclusion because the risk presents only a minimal exposure to the excluded category. The underwriter judges the extent to which the minor (excluded) aspect of a risk might over-balance the larger exposure of the unexcluded portion of the risk.
Incurred but not reported (IBNR):
Provision for claims incurred but not reported by the balance sheet date. In other words, it is anticipated that an event will affect a number of policies, although no claims have been made so far, and is therefore likely to result in liability for the insurer.
Incurred But Not Reported (IBNR):
The liability for future payments on losses which have already occurred but have not yet been reported in the reinsurer's records. This definition may be extended to include expected future development on claims already reported. Thus, technically IBNR covers the field from a) those individual losses that have occurred but have not been reported to the insurer or reinsurer to b) that amount of loss that may arise from a known loss which has been reported as an event but which has not been recorded in full to its ultimate loss value (known as loss development).
Incurred Expense (Other than Loss Expense):
An expense which has happened but which may or may not have been paid.
Incurred Loss Ratio:
The relationship between incurred losses and earned premium, usually expressed as a percentage.
Incurred Losses:
1. In insurance accounting, an amount representing the losses paid plus the change (positive or negative) in outstanding loss reserves within a given period of time. In other words, loss reserves outstanding at the end of the accounting period, plus losses paid during the accounting period, minus loss reserves outstanding at the beginning of the accounting period. For example,
* A loss occurs when specific bodily injury or property damage is legally recognized.
* A loss is incurred when the amount of a loss is booked by the accountants in the financial records of the company.
* A loss occurrence is the accumulation of all loss incurred from the losses that occurred from the same cause.
2. Losses which have happened and which will result in a claim under the terms of an insurance policy or a reinsurance agreement.
Indemnity, Contract of:
In business or insurance, a contract to make a party whole from a loss already, or yet to be, sustained. In reinsurance, however, because a reinsurer is obligated to reimburse (indemnify) the reinsured only after the reinsured's payment of a loss, a reinsurance contract is a contract of indemnity rather than a contract of insurance.
Industry loss warranties (ILW):
Index-linked catastrophe contracts with a dual trigger that require a minimum industry loss to occur before the coverage responds to the individual company loss.
Insolvency Clause:
A provision now appearing in most reinsurance contracts (because many states require it) stating that the reinsurance is payable, in the event the reinsured is insolvent, directly to the company or its liquidator without reduction because of its insolvency or because the company or its liquidator has failed to pay all or a portion of any claim.
Insurance:
The transfer of risk (chance of loss) from one party (the insured) to another party (the insurer), in which the insurer promises (usually specified in a written contract) to pay the insured (or others on the insured's behalf) an amount of money (or services, or both) for economic losses sustained from an unexpected (accidental) event, during a period of time for which the insured makes a premium payment to the insurer.
Insurance-linked securities (ILS):
In risk securitisation, bonds for which the payment of interest and/or principal depends on the occurrence or severity of an insurance event. The underlying risk of the bond is a peak or volume insurance risk.
Intercompany Reinsurance:
Reinsurance entered into among the affiliated members of an insurance group. Often called an intercompany "pool," the practice is common among major insurance groups. The basic purpose is to spread the net (after outside reinsurance) writings and exposures of that group evenly across the group's entire policyholder surplus.
Interlocking Clause:
A clause in a reinsurance treaty designed to mesh and apportion loss from a single occurrence between two or more reinsurance contracts. The exact opposite is the event approach, designed to cause all loss from one occurrence to have one deemed date of loss, regardless of the number of dates of loss or reinsurance contracts involved.
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Lamfalussy Process:
The Lamfalussy Process is an approach to the development of financial service industry regulations used by the European Union. Originally developed in March of 2001, it is named after the chair of the EU advisory committee that created it, Alexandre Lamfalussy.
Law of Large Numbers:
A mathematical concept which postulates that the more times an event is repeated (in insurance, the larger the number of homogeneous exposure units), the more predictable the outcome becomes. In a classic example, the more times one flips a coin, the more likely that the results will be 50% heads, 50% tails.
Layer:
Section of cover in a non-proportional reinsurance programme in which total coverage is divided into a number of consecutive layers starting at the retention or attachment point of the ceding company up to the maximum limit of indemnity. Individual layers may be placed with different (re)insurers.
Layer:
The total amount of excess of loss reinsurance protection which a company needs to protect a given set of exposures is usually not written in one contract. Instead, the total amount is split into pieces or layers and separate contracts are written which fit on top of each other and have similar or identical terms but separate limits which sum to the total amount required. Each of the separate contracts in the series is called a layer or level in the total program.
Lead (or Leading) Underwriter:
The individual (or organization) with a major role in negotiating the terms and conditions of a reinsurance cover and whose reputation and standing are such that other underwriters respect his or her ability, skills and judgment and will often follow the terms and conditions set by the lead without further negotiation.
Leveraged Effect:
The disproportionate result produced by inflation on a reinsurer's liability in excess of loss reinsurance compared with the reinsured's liability. In other words, inflationary increases in average claim costs of a reinsured usually produce greater increases for the excess of loss reinsurer, since an increase affecting all losses (those within the retention limit and those above it) multiplies itself when affecting the excess of loss portion above that retention limit. The effect is leveraged in that such increases fall more on the reinsurer, proportionately at least, than the reinsured.
Liability insurance:
Insurance for damages that a policyholder is obliged to pay because of bodily injury or property damage caused to another person or entity based on negligence, strict liability or contractual liability.
Life insurance:
Insurance that provides for the payment of a sum of money upon the death of the insured. In addition, life insurance can be used as a means of investment or saving.
Line Guide:
A list of the maximum amounts of insurance which a company is prepared to write on various classes of risks. Within the primary company, a line guide will usually include a suggested net retention of liability for each class of risk and is used to instruct its agents and underwriters.
Lloyds:
Generally refers to Lloyd's of London, England, an institution within which individual underwriters accept or reject the risks offered to them. The Lloyd's Corp. provides the support facility for their activities.
Long-Tail Liability:
A term used to describe certain types of third-party liability exposures (e.g., malpractice, products, errors and omissions) where the incidence of loss and the determination of damages are frequently subject to delays which extend beyond the term the insurance or reinsurance was in force. An example would be contamination of a food product which occurs when the material is packed but which is not discovered until the product is consumed months or years later.
Loss Adjuster:
A loss adjuster is an impartial claims specialist responsible for investigating claims on behalf of insurance companies. The role involves examining the causes of loss or damage, confirming that they are covered by the insurance policy, and assessing the validity of the claim.
Loss in Excess of Policy Limit (XPL):
A loss sustained by a reinsured company when required by a court to pay an amount of loss in excess of the policy's limit (which loss would have been included in the policy's coverage if the policy limit were higher) and resulting from an error or omission by the reinsured company in defending its policyholder, thereby exposing the policyholder to a loss in excess of the policy limit.
Loss Loading "Multiplier":
A factor used to convert losses to premium and provide for the reinsurer's loss adjustment expense, overhead risk and profit margin. Also known as Loss Conversion Factor.
Loss Ratio:
Losses incurred expressed as a percentage of earned premiums.
Loss Reserve:
For an individual loss, an estimate of the amount the insurer expects to pay for the reported claim. For total losses, estimates of expected payments for reported and unreported claims. May include amounts for loss adjustment expenses.
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Mandatory convertible bond:
Bond that has a compulsory conversion or redemption feature. Either on or before a contractual conversion date, the holder must convert the mandatory convertible into the underlying stock.
Marine insurance:
Line of insurance which includes coverage for property in transit (cargo), means of transportation (except aircraft and motor vehicles), offshore installations and valuables, as well as liabilities associated with marine risks and professions.
MFL (Maximum Forseeable Loss):
The anticipated maximum property fire loss that could result, given unusual or the worst circumstances with respect to the nonfunctioning of protective features (firewalls, sprinklers, a responsive fire department). As opposed to PML (Probable Maximum Loss), which would be a similar valuation but under the assumption that such protective features function normally.
Minimum Premium:
The least premium charge applicable, frequently used in excess of loss reinsurance contracts (per risk or catastrophe covers) which contain a provision that the final adjusted premium may not be less than a stated amount.
Mortgage Insurance:
A specialty line among financial guarantees which indemnifies a mortgage lender for loss on real estate loans resulting from default by a borrower if liquidation of the property proves insufficient to cover the outstanding principal.
Motor insurance:
Line of insurance which offers coverage for property, accident and liability losses involving motor vehicles.
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Net Line:
The amount of insurance the primary company carries on a risk after deducting reinsurance from its "gross" line.
Net Loss:
The amount of loss sustained by an insurer after making deductions for all recoveries, salvage and all claims upon reinsurers - with specifics of the definition derived from the reinsurance agreement. Such net loss may or may not include claim expenses. As provided in the reinsurance agreement, net loss can be confined to the amount paid by the reinsured within applicable policy limits, or it can also include amounts paid by the reinsured for compensatory damages in excess of applicable policy limits because of failure of the reinsured to settle within applicable policy limits.
Net Loss Retention:
The amount of loss which an insurer keeps for its own account and does not pass on to another insurer (or reinsurer). In excess of loss reinsurance, the term "first loss retention" may be preferred.
Net reinsurance assets:
Receivables related to deposit accounting contracts (contracts which do not meet risk transfer requirements) less payables related to deposit contracts.
Non-proportional reinsurance:
Form of reinsurance in which coverage is not in direct proportion to the original insurer’s loss; instead the reinsurer is liable for a specified amount which exceeds the insurer’s retention; also known as “excess of loss reinsurance”.
Nonadmitted Assets:
Assets owned by an insurance company which are not recognized for solvency purposes by state insurance laws or insurance department regulations, e.g., premiums due and uncollected past ninety days, and furniture and fixtures, among others.
Nonproportional Reinsurance:
Reinsurance in which the reinsurer's response to a loss depends on the size of the loss, so named because the premium in non-proportional reinsurance is not proportional to limits of coverage.
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Occurrence:
1. In a non-insurance sense, an incident, event or happening. In insurance, the term may be defined as continual, gradual or repeated exposure to an adverse condition which is neither intended nor expected to result in injury or damage, as contrasted with an accident which is a sudden happening. In reinsurance, per occurrence coverage permits all losses arising out of one event to be aggregated instead of being handled on a risk-by-risk basis.
2. One basis or determinant for calculating the amount of loss or liability in insurance or reinsurance when an aggregation of related losses is to constitute a single subject of recovery. For example, in property catastrophe reinsurance treaties, occurrence is usually defined so that all losses within a specified period of time involving a particular peril are deemed to be an occurrence.
Operating Income or Profit:
The sum of the net investment income and net underwriting income in any reporting period.
Operating Ratio:
The arithmetic sum of two ratios: incurred loss to earned premium, and incurred expense to written premium. Considered the best simple index to current underwriting performance of an insurer.
Operating revenues:
Premiums earned plus net investment income plus other revenues.
Operational risk:
Risk arising from failure of operational processes, internal procedures and controls leading to financial loss.
Original Insurer:
The insurer which writes a policy for a policyholder (which may or may not create the need for reinsurance).
Overline:
The amount of insurance or reinsurance written which exceeds the insurer's or reinsurer's normal underwriting capacity, inclusive of automatic reinsurance facilities.
Overriding Commission:
1. A fee or percentage of money which is paid to a party responsible for placing a retrocession of reinsurance.
2. In insurance, a fee or percentage of money which is paid by the insurer to an agent or general agent for premium volume produced by other agents in a given geographic territory.
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Participate:
To share in the writing of a risk.
Participating Insurance:
A designated class of insurance that shares in the dividends declared by the primary insurer to policyholders. While mutual insurers issue participating policies mostly, and the stock insurers usually issue non-participating policies, either type of insurer may seek authorization from its domiciliary state insurance department to issue the other type of policy.
Participating Reinsurance:
The sharing of risks, as in quota share and surplus share reinsurance, in which the reinsured and the reinsurer participate pro rata in all losses beginning with the first dollar.
Per-Occurence Excess:
An excess of loss reinsurance where the reinsured company's loss retention and the reinsurer's limit of liability apply to the loss arising from a single occurrence, regardless of the number of risks or policies involved. May be casualty or property: if property insurance, the reinsurance would be called catastrophe excess; if casualty, which would require two or more coverages or policies to be involved in a given loss, the contract is called a clash cover.
Pool:
Any joint underwriting operation of insurance or reinsurance in which the participants assume a predetermined and fixed interest in all business written. Pools are often independently managed by professionals with expertise in the classes of business undertaken, and the members share in the premiums, losses, expenses, and profits. An "association" and a "syndicate" (excluding that of Lloyd's of London) are both synonymous with a pool, and the basic principles of operation are much the same.
Portfolio:
A defined body of a) insurance (policies) in force (known as a premium portfolio), b) outstanding losses (known as a loss portfolio), or c) company investments (known as a investment portfolio). (The reinsurance of all existing insurance as well as new and renewal business is therefore described as a running account reinsurance with portfolio transfer or assumption.)
Portfolio Reinsurance:
The transfer of a portfolio of premiums or outstanding loss reserves to a reinsurer; the reinsurance of a runoff. Only policies in force (or losses outstanding) are reinsured, and no new or renewal business is included. Commonly used by an insurer when retiring from an agency, a territory, or from the insurance business entirely.
Premium:
The payment, or one of the periodical payments, a policyholder makes for an insurance policy.
Premiums earned:
Premiums an insurance company has recorded as revenues during a specific accounting period.
Premiums written:
Premiums for all policies sold during a specific accounting period.
Present value of future profits (PVFP):
Intangible asset primarily arising from the purchase of life and health insurance companies or portfolios.
Product liability insurance:
Insurance of the liability of the manufacturer or supplier of goods for damage caused by their products.
Professional indemnity insurance:
Liability insurance cover which protects professional specialists such as physicians, architects, engineers, lawyers, accountants and others against third-party claims arising from activities in their professional field; policies and conditions vary according to profession.
Property insurance:
Collective term for fire and business interruption insurance as well as burglary, fidelity guarantee and allied lines.
Proportional reinsurance:
Form of reinsurance in which the premiums and claims of the insurer are shared proportionally by the insurer and reinsurer.
Protecting the Treaty:
Used to describe any action taken by an insurer to prevent heavy losses to its treaty reinsurer, which can lead to increased reinsurance rates or decreased participation in any profit-sharing arrangements with the reinsurer. An example is the ceding of any individual risk, which is expected to produce a loss large enough to endanger the cedent's favorable treaty experience to a facultative reinsurer.
Punitive Damages:
Damages awarded separately and in addition to compensatory damages, usually on account of malicious or wanton misconduct, to serve as a punishment for the wrongdoer and possibly as a deterrent to others. Sometimes referred to as exemplary damages when intended to make an example of the wrongdoer.
Pure Premium:
1. That part of the premium which is sufficient to pay losses and loss adjustment expenses but not other expenses.
2. Also the premium developed by dividing losses by units of exposure, disregarding any loading for commission, taxes, and expenses.
3. In crop-hail insurance, the ratio of incurred loss to liability, or the dollars of loss per $100 of insurance in force.
Pyramiding Surplus:
The consolidating of two or more insurer policyholder surpluses (net worths) by the consolidating parent insurer, as required by proper accounting, which can distort the parent's ability to write a larger premium volume than NAIC IRIS test ratios consider acceptable. The distortion is revealed by applying the IRIS test ratio to each insurer's policyholder surplus, independent of the consolidated total.
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Quota-share reinsurance:
Form of proportional reinsurance in which a defined percentage of all risks held by the insurer in a specific line is reinsured.
Quota-Share Reinsurance:
A form of pro rata reinsurance (proportional) in which the reinsurer assumes an agreed percentage of each insurance being reinsured and shares all premiums and losses accordingly with the reinsured. Quota share reinsurance is usually arranged to apply to the insurer's net retained account (i.e., after deducting all other reinsurance except perhaps excess of loss catastrophe reinsurance), but practice varies. A quota share reinsurer may be asked to assume a quota share of a gross account, paying its share of premium for other reinsurance protecting that gross account.
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Recovery:
In reinsurance, an amount received by the reinsured company from reinsurance, salvage of damaged property or subrogation against third parties. If the amount is receivable (due but not yet paid the company), the term used is recoverable, which is comparable to an account receivable.
Reinstatement:
The restoring of a lapsed policy to full force and effect. The reinstatement may be effective after the cancellation date, creating a lapse of coverage. Some companies require evidence of insurability and payment of past due premiums plus interest.
Reinsurance:
Insurance for insurance companies which spreads the risk of the direct insurer. Includes various forms such as facultative, financial, non-proportional, proportional, quota-share, surplus and treaty reinsurance.
Reinsurance:
1. The transaction whereby the reinsurer, for a consideration, agrees to indemnify the reinsured company against all or part of the loss that the company may sustain under the policy or policies that it has issued.
2. When referred to as "a reinsurance," the term means the reinsurance relationship between reinsured(s) and reinsurer(s).
Renewal:
The automatic re-establishment of in-force status effected by the payment of another premium.
Reserves:
Amount required to be carried as a liability in the financial statements of an insurer or reinsurer to provide for future commitments under outstanding policies and contracts.
Residual Benefit:
In disability insurance, a benefit paid when you suffer a loss of income due to a covered disability or if loss of income persists. This benefit is based on a formula specified in your policy and it is generally a percentage of the full benefit. It may be paid up to the maximum benefit period.
Retention:
Amount of risk which the policyholder or insurer does not insure or reinsure but keeps for its own account.
Retention:
The amount of insurance liability (in pro rata, for participation with the reinsurer) or loss (in excess of loss, for indemnity of excess loss by the reinsurer) which an insurer assumes (or retains) for its own account. In pro rata contracts, the retention of liability will be a percentage of the policy limit. In excess of loss contracts, the retention of loss is 1) a EURO amount of loss (comparable to a deductible used in primary insurance), 2) a percentage amount of each layer of insurance liability, 3) an amount of loss which exceeds the reinsurance in place, or 4) all three.
Retrocession:
Amount of the risk accepted by the reinsurer which is then passed on to other reinsurance companies.
Retrocession:
The reinsuring of reinsurance. Retrocession is a separate contract and document from the original reinsurance agreement between a primary insurance company (as the reinsured) and the original reinsurer. A retrocession is placed to afford additional capacity to the original reinsurer or to contain or reduce the original reinsurer's risk of loss, and is either specific or blanket. A specific retrocession may be a single risk only or a carefully defined group of risks, structured as pro rata or excess of loss reinsurance. A blanket retrocession covers the original reinsurer's entire net portfolio of reinsured business (i.e., net in being less any specific retrocession protection) and is normally structured as excess of loss reinsurance, arranged separately by major line of reinsured business (i.e., property, casualty, ocean marine, aviation, accident and health, among others).
Return on equity (ROE):
Net income divided by time-weighted shareholders’ equity.
Return on investments (ROI):
Investment result excluding result from assets held for linked liabilities divided by average invested assets. Invested assets include investments, funds held by ceding companies, net cash equivalents and net reinsurances assets. Average assets are calculated as opening balance plus one half of the net asset turnover at average foreign exchange rates.
Return on operating revenues:
Life and Health business operating result (operating income excluding non-participating realised gains and losses) divided by operating revenues (premiums earned, fee income, net investment income, and participating realised gains and losses).
Return on total revenues:
Financial Services operating result (operating revenues less the sum of acquisition costs, claims and claim adjustment expenses and operating costs) divided by operating revenues (premiums earned and net investment income plus trading revenues and fees and commissions).
Reversal Expenses:
Expenses incurred in the appellate process in an effort to reverse a trial court decision or to obtain a reduction of the damages award. Because appellate expense often inures largely to the benefit of the excess of loss reinsurer, it is customary for the reinsurer to share the corresponding burden of that expense in proportion to the benefit received from the appeal through a reduction in the amount of the court verdict.
Rider:
Usually known as an endorsement, a rider is an amendment to the policy used to add or delete coverage.
Risk:
Condition in which there is a possibility of loss; also used by insurance practitioners to indicate the property insured or the peril insured against.
Risk management:
Management tool for the comprehensive identification and assessment of risks based on knowledge and experience in the fields of natural sciences, technology, economics and statistics.
Run-off company:
An insurance company that is being wound up or otherwise not underwriting business in a particular line. It is thus letting its present insurance policies run to their expiration dates.
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Securitisation:
Financial transaction, in which future cash flows from assets (or insurable risks) are pooled, converted into tradable securities and transferred to capital market investors. The assets are commonly sold to a special-purpose entity, which purchases them with cash raised through the issuance of beneficial interests (usually debt instruments) to third-party investors.
Self-Insured Obligation:
An exposure of an insurance company within the classes of its reinsured business for which the company has issued its policy (or certificate) to itself, has made a premium declaration on its books, or has prepared an internal memorandum with details of the exposure, the purpose being to cover such self-insured obligation under its reinsurance contracts. Contrasts with an uninsured obligation, for which there would be no coverage. Some question the validity of this type of transaction because it violates the contract law principle that an entity cannot contract with itself.
Setoff (noun):
The reduction of the amount owed by one party to a second party under one agreement or transaction by crediting the first party with amounts the second party owes the first party under other agreements or transactions for the purpose of determining the amount, if any, the first party owes to the second. A person asserting a setoff does not seek to recover amounts owed to the person in excess of the amount offset. Under bankruptcy and insolvency statutes, the amounts which may be offset must be mutual debts. This requires that the debts must be owed to and from the same parties in the same capacity. A bankruptcy trustee or a liquidator of an insurer is a different party from the debtor or insolvent insurer. If the liquidator has a claim against a person under special statutory rights granted to the liquidator (such as the right to void preferential transfers or fraudulent conveyances), the claim by the liquidator is owed as a different party than a claim which the liquidator owes as a successor-in-interest to the insolvent insurer. If a party owes the liquidator a debt where the party was acting as a trustee or an equity owner of the insurer, the debt is not owed by the party in the same capacity as the debt the party owes the liquidator as the successor-in-interest to the insurer as a creditor. Some courts have held that salvage and subrogation proceeds held by a reinsured in a trustee capacity are not mutual debts with reinsurance proceeds owed by the reinsurer and therefore cannot be offset. In addition to the mutuality requirement, the insolvency statutes usually have other restrictions on setoffs. The restrictions may vary from state to state.
Settling Agent:
In marine insurance, a person authorized to pay losses out of funds provided by the marine underwriter. Such agents have broader powers than the claim agent, whose authority is limited to surveying and certification of losses.
Sliding Scale Commission:
A contractual formula used in pro rata treaty reinsurance under which the ultimate ceding commission payable varies inversely to the loss ratio, within stated parameters. In effect, a retroactive pricing mechanism for pro rata reinsurance.
Social Inflation:
The increasing of insurance losses caused by higher jury awards, increase in liberal treatment of claims by workers compensation boards, legislated rises in compensation benefit levels (in some cases retroactively) and new concepts of tort and negligence, among others.
Solicitor:
licensed employee of a fire and casualty agent or broker who may act for the agent or broker in some circumstances.
Solvency:
Having sufficient assets--capital, surplus, reserves--and being able to satisfy financial requirements--investments, annual reports, examinations--to be eligible to transact insurance business and meet liabilities.
Solvency II:
Initiative launched by the European Commission to revise current EU insurance solvency rules. Solvency II focuses on capital requirements, risk modelling, prudential rules, supervisory control, market discipline and disclosure.
Special Acceptance:
The extension of a reinsurance treaty to embrace a specific risk not automatically included within its terms (e.g., a different class of business, an inordinate size of obligation or an excluded risk). Once accepted, all other treaty terms apply. However, at least one arbitration has declared that a special acceptance required a termination notice separate from the notice canceling the treaty, otherwise the acceptance would lose its "special" nature.
Special Termination:
A clause in a insurance treaty providing that, if one or more conditions arise, the treaty or agreement can be canceled immediately. Some conditions could be: the acquisition, control or merger by or with another company; the loss of a significant part of the company's policyholder surplus; a sudden and substantial change in the company's management; the failure to remit premiums; and insolvency or liquidation. The clause should state which party may initiate the termination, the conditions necessary, the notice requirements and the method of terminating existing business (i.e., whether to cut off or to run off). Also known as Sudden Death Clause.
Spread Loss Reinsurance:
A type of excess of loss property reinsurance which provides for a periodic adjustment of the reinsurance premium rate based on the reinsured's experience for preceding years (usually five), plus a loading for the purpose of compensating the reinsurer for a) its expenses, b) the possibility of unusual losses, c) those losses occurring at the end of the period of the treaty which the reinsurer might not have a chance to recoup if the treaty is not renewed, d) a catastrophe possibility and e) the reinsurer's profit. In casualty reinsurance, adjustments to the above may be required for such other factors as economic and social inflation.
Stop Loss:
Any provision in a policy designed to cut off an insurer's losses at a given point.
Stop-loss reinsurance:
Form of reinsurance that protects the ceding insurer against an aggregate amount of claims over a period, in excess of either a stated amount or a specified percentage of estimated benefit costs. An example of this type of cover is Employer Stop Loss (ESL) which is used by US companies to cap losses on self-funded group health benefit programmes. The stop-loss can apply to specific conditions or aggregate losses.
Surety insurance Sureties and guarantees issued to third parties for the fulfilment of contractual liabilities.
Structured Settlement:
The loss payment by the insurer in the form of a lump sum to the claimant (or its attorney), plus a discounted dollar amount (the premium) to an annuity company (affiliated or not with the insurer), which annuity company agrees to pay the claimant (the annuitant) an amount per year for either a period of years or for the lifetime of the annuitant.
Stub Policy:
An insurance policy written for less than one year.
Sunset:
A provision in a contract limiting coverage to losses reported to the reinsurer within a certain number of years from a given point in time, such as the end of the contract year in which the loss occurs.
Surplus reinsurance:
Form of proportional reinsurance in which risks are reinsured above a specified amount.
Surplus Share Reinsurance:
A form of pro rata reinsurance indemnifying the ceding company against loss to the extent of the surplus insurance liability ceded, on a share basis similar to quota share. Essentially, this can be viewed as a variable quota share contract wherein the reinsurer's pro rata share of insurance on individual risks will increase as the amount of insurance increases, given the same reinsurer's retained line, in order that the primary company can limit its net exposure to one line, regardless of the amount of insurance written. First surplus is the amount of surplus on each risk (one or more multiples of the reinsured's line) that must apply first to the first surplus contract. Second surplus, third surplus, etc., reinsurances are the remaining portions of the surplus liability that must apply to each such respective contract after deducting the amount(s) ceded to the underlying surplus contract or contracts.
Surrender Charge:
Fee charged to a policyholder when a life insurance policy or annuity is surrendered for its cash value. This fee reflects expenses the insurance company incurs by placing the policy on its books, and subsequent administrative expenses.
Surrender Period:
A set amount of time during which you have to keep the majority of your money in an annuity contract. Most surrender periods last from five to 10 years. Most contracts will allow you to take out at least 10% a year of the accumulated value of the account, even during the surrender period. If you take out more than that 10%, you will have to pay a surrender charge on the amount that you have withdrawn above that 10%.
Syndicate:
An association of individuals or organizations to pursue certain insurance objectives. For example, individual underwriters in Lloyd's of London associate in separate syndicates to write marine insurance, reinsurance, life insurance, etc., entrusting the administrative details of each syndicate to a syndicate manager.
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Title Insurance:
Coverage for losses if a land title is not free and clear of defects that were unknown when the title insurance was written.
Treaty reinsurance:
Participation of the reinsurer in certain sections of the insurer’s business as agreed by treaty, as opposed to single risks.
Trending:
The necessary adjustment of historical statistics (both premium and losses) to present levels or expected future levels in order to reflect measurable changes in insurance experience over time which are caused by dynamic economic and demographic forces and to make the data useful for determining current and future expected cost levels.
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Uberrimae Fidei:
Literally, of the utmost good faith. A defining characterization or quality of some (contractual) relationships, of which reinsurance is universally recognized to be. Among other differences from ordinary relationships, the nature of reinsurance transactions is dependent upon a mutual trust and a lively regard for the interests of the other party, even if inimical to one's own. A breach of utmost good faith, especially in regard to full and voluntary disclosure of the elements of risk or loss, is accepted as grounds for any necessary reformation or redress, including rescission.
Underlying:
The amount of loss which attaches before the next higher excess layer of insurance or reinsurance attaches.
Underwriting Capacity:
The maximum amount of money an insurer or reinsurer is willing to risk in a single loss event on a single risk or in a given period. The limit of capacity for an insurer or reinsurer may also be imposed by law or regulatory authority.
Underwriting result:
Premiums earned less the sum of claims paid, change in the provision for unpaid claims and claim adjustment expenses and expenses (acquisition costs and other operating costs and expenses).
Unearned Premium Reserve:
The sum of all the premiums representing the unexpired portions of the policies or contracts which the insurer or reinsurer has on its books as of a certain date. It is usually based on a formula of averages of issue dates and the length of term.
Utmost Good Faith:
Firm adherence to promises made to another, including disclosure of all relevant facts and complete trust in the fidelity of the other. Black's Law Dictionary states: "The most abundant good faith, absolute and perfect candor, openness and honesty; the absence of any concealment or deception, however slight."
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Value at Risk:
Maximum possible loss in market value of an asset (or risk) portfolio within a given time span and at a given confidence level.
Some of the terms included in the glossary are explained in more detail in note 1 “Organisation and summary of significant accounting policies” in the Financial Statements.
Vicarious Liability:
The liability of one party which by law becomes the liability of another, such as the liability of an employer for the acts of an employee.
Voidable Preference:
A payment made by an insolvent debtor which, by statute, is recoverable by the debtor's estate because it was either made within a particular fixed period of time prior to commencement of insolvency proceedings or it was in payment of a noncontemporaneous debt, and had the effect of giving the particular creditor who received it more than that creditor's pro rata share of the debtor's assets.
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Warranted No Known or Reported Losses:
In ocean marine insurance, a statement made on application for excess or catastrophe reinsurance, which is being backdated, to protect the reinsurer from placement of reinsurance after a loss has occurred.
Written as Such:
Insurance written to cover a specific peril and specifically referred to as such, as opposed to insurance which may incidentally cover the peril, e.g., flood insurance written under a flood insurance policy v. a personal property floater, which would cover flood among a myriad of other perils.
