accident year experience: Incurred losses and
LAE for only those claims incurred (reported for claims-made policies) within a
specific calendar year period divided into the earned premium for that same
period. This loss amount is not final until all losses incurred (reported if
claims-made) are settled. The premium amount does not change.
accreditation: A process developed by the
National Association of Insurance Commissioners (NAIC) to review whether a state
has a sound regulatory infrastructure. It includes a periodic examination of an
insurance department's policies and procedures followed by issuance of a report.
An insurer domiciled in a nonaccredited state is more likely to be examined by
accumulation: In property and casualty
insurance, the total number of risks that could be involved in the same loss
event (involving one or more insured perils).
accumulation period: In life insurance, the
time during which an annuitant makes premium payments.
acquisition costs: All expenses incurred that
are directly attributable to acquiring accounts and issuing policies (e.g.,
commissions to producers, ceding commissions paid to fronting companies to cover
their profit and expense, premium taxes and other regulatory expenses such as
residual market loads).
actual cash value (ACV): The cost of
repairing or replacing damaged property with other of like kind, quality, and in
the same physical condition; replacement cost less physical depreciation based
on age, condition, time in use, and obsolescence.
actuarial report: An analysis intended to
project ultimate loss costs using probability theory and other methods of
statistical analysis. Used to determine the adequacy of a property and casualty
insurer's statutory loss reserves and a life insurer's unearned premium
(technical) reserves. May be the basis of rate development.
additional insured endorsement: Policy
endorsement to include coverage for additional insureds by name, e.g., mortgage
holders or certificate holders in general. (Rather than naming each additional
insured, a blanket additional insured endorsement can be attached to the
additional insureds: Names added to the
insuring clause of a policy, at the request of the insured, stating the
interests involved. Additional insureds may be affiliated with the named insured
and provided full coverage under the policy. Unaffiliated entities will have an
interest in the policy limited to a specific exposure or time period.
adhesive contract: Contract issued by one
party that does not require signature by the other party to be valid. The courts
will interpret contract conditions in favor of the party who accepted the
contract, rather than the one who constructed it.
adjuster: A person who settles claims for
insurers or self-insurance pools who may be either an employee of the insurance
company or an independent contractor engaged by the insurer or self-insured.
See also third-party
admitted/authorized reinsurance: Reinsurance
for which credit is given in the ceding company's annual statement because the
reinsurer is licensed or approved to transact business in the jurisdiction where
the risk is located. See also nonadmitted
admitted company: A company licensed or
authorized to sell insurance to the general public. In the United States,
admitted companies are licensed on a state-by-state basis and differentiated
from surplus lines insurers, which are authorized to sell insurance in a state
on a nonadmitted basis.
admitted insurance: The insurer is licensed
in the state or country where the risk is located.
adverse selection: A situation in which an
insurer or self-insurance pool fails to get an adequately broad cross section of
risks and the result is greater-than-average exposure.
affiliated risk: The risks of the owners of
the captive or their affiliates or of the participant in a captive cell when
describing risks insured in a captive. Can be either first-party or third-party
agent: Individuals working for the insurer to
sell insurance; therefore, they are compensated by the insurer. May be company
employees of independent contractors. Must be licensed in all states where the
insurance is written.
aggregate: The greatest amount recoverable
under a policy or reinsurance agreement from a single loss or all losses
incurred during the contract period. May be multiyear or annual.
aggregate excess: Short for aggregate excess
of loss. A method by which an insurer may recover excess losses after a policy
or reinsurance aggregate or underlying deductible has been exhausted.
aggregate stop loss: Insurance purchased to
attach excess of an aggregate loss limit. See
aleatory contract: A contract where
performance is in a future period. An insurance policy is aleatory—payment of
premium today for payment of future losses.
alien: An insurer domiciled outside the
United States. ("Foreign" in the U.S. insurance regulatory system means an
insurer domiciled in another state.)
allocated loss adjustment expenses (ALAE): Defense and cost containment expenses (e.g., legal defense costs,
investigations, external experts, surveillance, etc.). Typically external costs,
but can include internal costs. These costs may or may not be included within
the policy limits.
all risks insurance: A term used to refer to
any property or inland marine insuring form that insures against damage by "all
risks" of loss, except those that are specifically excluded (as opposed to
insuring against damage caused by specifically "named perils"). Also called
alternative risk financing mechanism: A legal
entity, such as a captive insurance company, which assumes from one or more
entities the liability to pay their future losses; used as an alternative to
alternative risk transfer (ART): Financing
risks outside of the commercial insurance regulatory system, which is designed
to protect unsophisticated insurance buyers. Also refers to transferring risk
using nontraditional methods, e.g., combining insurance and noninsurance
A.M. Best rating: An evaluation published by
A.M. Best Company of all life, property, and casualty insurers domiciled in the
United States and U.S. branches of foreign property insurer groups active in the
United States. The ratings are often used to determine the suitability, service
record, and financial stability of insurance companies. Other rating agencies
include Standard & Poor's.
annuitant: The person or persons (two or
more) that receive an income benefit for life or during a specified period (the
liquidation period) under an annuity contract.
arbitration clause: A provision found in many
reinsurance contracts whereby the parties agree to submit their disputes to an
unofficial tribunal of their own choosing rather than a court of law, generally
subject to selection criteria and procedures set out in the clause, which
produces an opinion ultimately enforceable by a court of law.
association captive: A captive insurance
company that has as its primary purpose the insurance of the risks of the
members of an association that either sponsors or owns the captive.
assumed premiums: Premiums received or
receivable for coverage provided under a reinsurance agreement.
assumed reinsurance: Insurance accepted from
another insurer, e.g., an admitted (policy-issuing) company.
assumption of liability endorsement (ALE): An
endorsement added to an insurance policy to provide that, in the event of
insolvency of the insurance company, the amount of any loss that would have been
recovered from the reinsurer by the insurance company will be paid instead
directly to the policyholder by the reinsurer. Also referred to as a cut-through
or assumption of risk endorsement.
attachment point: The dollar threshold or
loss and expense ratio above which the reinsurer or excess insurer pays
automobile liability insurance: Insurance
that protects the insured against financial loss because of legal liability for
automobile-related injuries to others or damage to their property by an
automobile physical damage insurance:
Automobile insurance coverage that insures against damage to the insured's own
vehicle. Coverage is provided for perils such as collision, vandalism, fire, and
back-to-back deductible: The deductible under
the policy equals the policy limits.
bankassurance: Use of bank capital to
underwrite and distribute insurance.
base premium: See subject
basic premium: The underwriting and
administrative expense component of premium; amounts required for adjusting of
expected losses (see unallocated loss
adjustment expenses (ULAE)). It is added to the pure premium to
produce the standard premium. In life insurance, the basic premium also includes
basis risk: The random variation in values
between a hedge instrument (i.e., the "hedge recovery") and the actual loss
experience of the hedger (investor).
basket aggregate: An annual aggregate loss
limit on a multiline basis.
binder: A temporary insurance contract
indicating coverage is in place pending execution of the actual contract.
Usually issued for a limited time period such as 30 or 60 days.
blanket limits: Property insurance limits
applying to multiple insured locations, stated as the sum of all exposures or a
fixed amount covering property wherever it is located.
blended finite risk: An insurance or
reinsurance agreement that combines risk transfer with financial insurance by
insuring against multiple causes of loss, one or more of which is underwritten
on a finite basis.
Blue Book: The regulatory report filed by
life, accident, and health insurers in the United States, named for its cover.
See also convention
boards and bureaus: As part of an insurer's
acquisition expense, the amount of premium allocated to pay for participation in
rating agencies and for filing policies for approval by regulators.
bond: A three-party contract under which the
insurer agrees to pay losses caused by criminal acts (e.g., fidelity bonds) or
the failure to perform a specific act (e.g., performance or surety bonds). The
principal (i.e., the party paying the bond premium) is also called the obligor,
i.e., the party with the obligation to perform. If there is a default, the
surety (i.e., the insurer) pays the loss of the third party (the obligee). The
obligor must then reimburse the surety for the amount of loss paid.
bordereau: A report provided periodically by
the reinsured detailing the reinsurance premiums and/or reinsurance losses with
respect to specific risks ceded under a treaty reinsurance agreement.
Bornhuetter-Ferguson technique: An actuarial
method of forecasting losses, using loss development and loss ratio.
broker: An intermediary who represents the
insured in the purchase of insurance or reinsurance. Therefore, the broker's
compensation should be from the insured, not the insurer, to prevent conflicts
buffer layer: The loss layer between an
insured's predictable working layer losses and the attachment point of excess
insurance. Losses are within the insured's or an insurer's retention capacity
but not predictable.
builders risk: A type of fire insurance that
indemnifies for loss of, or damage to, a building under construction; the loss
must be caused by specified or named perils.
bulk reserves: An amount of reserves
established using a formula or loss ratio, rather than specifically identified
case reserves. The insurer records movements in losses in aggregate for a
period. Used with a loss portfolio transfer.
burning cost: The maximum probable amount of
excess losses, used by excess of loss and catastrophe reinsurers as a method of
calculating amount of pure premium required over time to pay reinsured losses.
business interruption: Coverage generally
written as part of a property policy, providing protection against losses
resulting from a temporary shutdown because of fire or other insured peril,
e.g., computer virus. The insurance provides reimbursement for lost net profits
and necessary continuing expenses. Limits and deductibles are stated as amount
of days the business is interrupted.
business risks: Risks that are not "pure" but
speculative, i.e., the outcome could be loss, no loss, or profit.
calendar year experience: Incurred losses and
loss adjustment expenses (LAE) for all losses (regardless of when reported)
related to a specific calendar year divided into the accounting earned premium
for that same period. Once calculated and established, this amount does not
cancellation: (a) Runoff basis means that the
liability of the reinsurer under policies, which became effective under the
treaty prior to the cancellation date of such treaty, shall continue until the
expiration date of each policy. (b) Cutoff basis means that the liability of the
reinsurer under policies, which became effective under the treaty prior to the
cancellation date of such treaty, shall cease with respect to losses resulting
from accidents taking place on and after said cancellation date. Usually the
reinsurer will return to the company the unearned premium portfolio, unless the
treaty is written on an earned premium basis.
capacity: The largest amount of insurance or
reinsurance available from a company or the market in general. Capacity is
determined by financial strength and is also used to refer to the additional
amount of business (premium volume) that a company or the total market could
write based on excess (unused) capital, i.e., surplus capacity.
capital: The difference between a company's
assets and liabilities, often referred to as "net worth." The source of capital
can be amounts contributed by investors or the company's retained earnings. For
an insurance company, the assets used to calculate capital may be restricted as
to amount and type. For example, minimum paid-in capital may need to be in the
form of cash, and the captive statute will specifically define what constitutes
"cash." See also capital at
capital at risk: Capital that is available to
support the retention of risk by a self-insurer or underwriter of risk. Such
"risk capital" may be required in a captive insurance company for payment of
losses, in the event that premium collected is insufficient to pay losses and
expenses. Typically it is an amount in excess of statutory capital, and can
therefore be used as collateral to ceding companies. May also be referred to as
surplus funds or risk bearing capital. See
also risk capital;
captive: An insurance company that has as its
primary purpose the financing of the risks of its owners or participants.
Typically licensed under special purpose insurer laws and operated under a
different regulatory system than commercial insurers. The intention of such
special purpose licensing laws and regulations is that the captive provides
insurance to sophisticated insureds that require less policyholder protection
than the general public.
captive facility: An insurance or reinsurance
company, licensed under either commercial or captive insurance laws, used to
provide captive insurance to insureds that may share in the facility's ownership
or have no ownership position.
captive value added (CVA): The financial
benefit to an organization resulting from participation in a captive program as
a shareholder and/or an insured. One formulaic approach to calculating CVA uses
net present value (NPV) program cost comparisons to show a captive's
contribution to an organization's retention ability, i.e., the capacity creation
effect, as well as the lower after-tax cost, compared to self-insurance or
commercial insurance. The "value added" approach can also be used to recognize
subjective as well as objective benefits.
case reserves: Reserves for losses and
allocated loss adjustment expenses (ALAE) for specific claims reported to the
cash call: Provision whereby large losses can
be collected from reinsurers, rather than paid by the insurer on account or from
funds withheld or a loss escrow account.
cash flow underwriting: Rating a risk based
on an expectation that any incurred losses will pay out slowly providing for the
insurer to earn investment income on reserves adequate to cover any rate
deficiency. Common during "soft" markets when interest rates are high and
insurers are competing for market share.
casualty insurance: Insurance of losses
arising when an accident involving the insured's property (e.g., a boiler) or
actions (e.g., as an employer) cause injury or damage to third parties. Unlike
liability insurance, there is no requirement for negligence for a loss to be
covered. The casualty policy also covers loss to the insured's own property that
caused the loss.
catastrophe bond: A debt instrument where the
promise to pay interest on the loan and return of principal is contingent on
fortuitous events of a catastrophic nature, such as a natural disaster. May be
used instead of purchase of catastrophe reinsurance.
catastrophe reinsurance: Protects against
multiple losses under one policy class in one occurrence, e.g., a 72-hour period
of a natural disaster. Also known as "cat cover."
causes of loss: Used in casualty insurance to
identify an action or accident that, when combined with an exposure and hazard,
creates risk of loss. Can be direct (the action immediately precedes the loss)
or indirect (part of an uninterrupted chain of events leading to the loss).
cede: When a company reinsures its liability
with another, it "cedes" business.
ceded premiums: Premiums paid or payable by
the captive to another insurer for reinsurance protection.
cedent: The reinsured or ceding company.
ceding commission: A fixed percent of
original gross premium, or a flat dollar amount, paid by the assuming reinsurer
to a ceding company to cover acquisition costs and other policy expenses.
ceding company: The insurer that buys the
reinsurance (cedes the risk).
cell captive: A sponsored captive or
rent-a-captive, which maintains underwriting accounts separately for each
participant. May be called protected cell captive (PCC) or segregated cell
insurer. If the cells are legally segregated, it may be used to securitize
certificate holder: An additional insured, as
evidenced by issuance of a certificate of insurance.
certificate of compliance: Statement issued
by an insurance department or other regulatory authority confirming that an
insurer is in compliance with applicable statute and regulation.
certificate of insurance: Written
verification from an insurance company of the existence of insurance, the policy
amount, the insured(s), and the period for which coverage is effective. A
certificate may simply provide evidence of the named insured's insurance, or may
evidence coverage for additional insureds.
certificate of reinsurance: A record of
reinsurance coverage pending replacement by a formal reinsurance contract, which
is usually a facultative certificate. Opportunity is given for the ceding
company to acknowledge acceptance of terms, with the reinsurer's obligation
contingent on validity of key information stated in the certificate.
cession statement: A periodic statement of
subject premiums and the losses and expenses incurred under the reinsured
policies, provided by the ceding company to a reinsurer.
claims-made basis: A form of reinsurance
under which the date of the claim report is deemed to be the date of the loss
event. Claims reported during the term of the reinsurance agreement are
therefore covered, regardless of when they occurred. A claims-made agreement is
said to "cut off the tail" on liability business by not covering claims reported
after the term of the reinsurance agreement—unless extended by special
agreement. See also occurrence basis.
claims-made insurance: Insurance that
provides coverage for claims made against an insured within the policy period,
regardless of when the action or accident giving rise to the claim occurred. The
insured must have been notified of the claim after the retroactive date and must
report it to the insurer before the expiration of the policy or any extended
clash cover: Excess of loss reinsurance on a
per-event or accident basis to protect against losses in more than one class of
business in a single occurrence.
class of business: Types of insurance,
classified according to the perils insured and the exposure. The purpose is to
group homogeneous risks for purposes of rate development. See also line of
coinsurance: 1. A provision in a property
insurance policy under which the insured agrees to carry a certain amount of
insurance expressed as a percentage of the value of the property. It provides
for the full payment, up to the amount of the policy, of all losses if the
insurance carried is at least equal to the specified percentage. However, if the
insured fails to carry the necessary amount of insurance, he or she assumes a
proportionate share of each loss, regardless of the size of the loss, up to the
policy limit. 2. In health insurance and some casualty lines, the percentage
share of losses that an insured retains. It is a form of deductible.
collateral: Assets that are provided as
security to ensure satisfaction of a future liability. Often required by ceding
companies, to minimize their credit risk, or offset a nonadmitted balance. A
direct writing captive writing deductible reimbursement coverage may provide
collateral to the insurance company that has issued a deductible policy to the
captive's insureds. The most common form of collateral posted by captives or
captive insureds or captive shareholders is the bank letter of credit (LOC), but
insurance trust funds may be used. See also letter of
combined ratio: An insurer's incurred losses,
loss adjustment expenses (LAE), acquisition costs, and general and
administrative costs compared to earned premiums for the same period.
commercial multiple peril (CMP) policy: A
package type of insurance that includes a wide range of essential liability and
property coverages for businesses.
commercial risks: The risks arising from the
operations of for-profit and tax-exempt organizations (as opposed to the risks
of individuals and households).
commission: In reinsurance, the primary
insurance company usually pays the reinsurer its proportion of the gross premium
it receives on a risk. The reinsurer then allows the company a ceding or direct
commission allowance on such gross premium received, large enough to reimburse
the company for the commission paid to its agents, plus taxes and its overhead.
The amount of such allowance frequently determines profit or loss to the
commutation agreement: An agreement between
the ceding insurer and the reinsurer that provides for the valuation, payment,
and complete discharge of all obligations between the parties under particular
reinsurance contract(s). Used if an insurer is withdrawing from underwriting a
class of business.
commutation clause: Provision in a
reinsurance agreement that allows for payment of cash by one party to release
the other from all future obligations to pay claims after a certain period of
time. Common in long-term disability insurance, where the reinsurer wishes to
settle and discharge all future obligations for claims that have a very long
payment pattern. Also used in finite risk reinsurance.
compensatory damages: Payments to a plaintiff
to indemnify the plaintiff for actual losses sustained as a result of an
confidence level: The credibility attached to
loss projections in an actuarial analysis.
consequential loss: A loss not directly
caused by a peril insured against but instead resulting indirectly following a
loss caused by an insured peril.
consideration: The value received to bind a
contract; also, payment for an annuity.
consolidation: 1. financial—Combining the
financial results of a subsidiary company with its shareholder, resulting in the
elimination of intercompany accounting entries (transactions between affiliates
offset each other). 2. tax—The filing of a single income tax return for all
companies within a corporate group.
contingent commission: Commission based on
the profitability of the ceded risk. Can be fixed or sliding scale.
contingent liability: Coverage for losses to
a third party for which the insured is vicariously liable. Contingent liability
can be assumed, e.g., for losses arising from product or service failure, where
the insurer has assumed liability by providing a performance warranty. Also
written as a contingent business interruption form.
continuous contract: A form of reinsurance
contract for accepting new business that does not terminate automatically but
rather is intended to continue from year to year unless one of the parties
delivers notice of intent to discontinue, or termination is mutually agreed to
in accordance with the termination provisions of the contract.
contractual liability: An obligation assumed
by contract to pay damages for which another is legally liable; the liability
would not exist in the absence of the contract.
contributing excess: Where there is more than
one reinsurer sharing a line of insurance on a risk in excess of a specified
retention, each such reinsurer shall contribute toward any excess loss in
proportion to its original participation in such risk. Example: Retention
$100,000, Reinsurer A accepts one-half contributing share part of $1 million in
excess of said $100,000. Reinsurer B accepts remaining one-half contribution
share part of $1 million.
controlled unrelated business: Risks that are
not owned by the captive shareholder but, because of an existing business
affiliation, e.g., a franchise or joint venture relationship, the owner of the
captive exercises risk management control over the risk.
convention statement: The annual report
format developed by the National Association of Insurance Commissioners (NAIC)
and adopted by member states as the standard for all commercial insurers.
Convention statements are filed by an insurer in its domicile and copied to the
NAIC for Insurance Regulatory Information System (IRIS) ratios and risk-based
capital calculations to be published. See also Blue Book
convergence: In the financial services
industry, the coming together of credit institutions and insurance companies to
develop products that combine the elements of each industry sector.
core capital: The statutory capital of a
sponsored captive, as distinct from the capital and surplus available to support
the underwriting of risk in a captive cell.
corridor deductible: A deductible applied to
an excess loss layer, calculated as a percent of the loss above the attachment
point, or as a per occurrence or aggregate dollar amount.
cost of risk: The financial impact on an
organization of undertaking activities with an uncertain outcome. The cost of
managing risks and incurring losses.
countersignature: State insurance laws that
require an insurance policy to be signed not only by the insurer issuing the
policy but an agent residing in the state where the risk is located. Risk
retention groups (RRGs) have resisted compliance with countersignature laws,
since this increases the cost of policy issuance.
cover notes: A binding reinsurance
confirmation in the form of an "adhesive contract," i.e., not requiring
signature by the ceding company to be valid. Operates like a binder/declarations
page, providing details about the type of reinsurance, form of contract, lines
of business reinsured, effective date, cancellation provisions and territory,
commissions, and exclusions.
credibility: The weight assigned to
specifically analyzed data, compared to a broader set of data. A measure of the
relative predictive value of the data being reviewed. The weight assigned
generally increases with the increase in the number of risks in the data
analysis. A lower weighting (credibility factor) means higher levels of
variability in outcomes for the analyzed data.
credit for reinsurance: A statutory
accounting procedure permitting a ceding company to treat amounts due from
reinsurers as assets or reductions from liability based on the status of the
reinsurer. See also nonadmitted
credit insurance: Coverage against insolvency
of a customer, which provides protection against payment default on loan,
interest, or scheduled payments. Also known as "bad debts" insurance.
credit life insurance: Term life insurance
that pays off the balance of a loan if the creditor dies. Usually sold by banks
or finance companies to their customers at the point of sale.
credit wrap: A form of financial guarantee
insurance, covering not all debts of the creditor, but a specific loan, debt
issuance, or other financial transaction.
cut-through clause: Used with retrocessions.
The primary insurer has the ability to receive reinsurance payments directly
from the retrocessionaire if unable to recover from the reinsurer.
Copyright © 2014 International Risk Management Institute, Inc.