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 other states.
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 policy.)
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 administrator (TPA).
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 balance.
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 risk.
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 also stop loss.
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 "special risks."
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 commercial insurance.
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 techniques.
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.
assumed risk: In the context of business written by an insurer, see assumed reinsurance. In the context of self-insurance, risk retained by an insured.
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 losses.
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 auto.
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 theft.
back-to-back deductible: The deductible under the policy equals the policy limits.
bancassurance: Use of bank capital to underwrite and distribute insurance.
base premium: See subject premium.
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 agent's commissions.
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.
benefit plan: Under Employee Retirement Income Security Act (ERISA), a promise by an employer to provide benefits to employees, where the funds for payment of the benefits are transferred to a party unrelated to the employer, such as an insurance company.
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 statement.
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.
branch captive: A captive insurance company that registers to operate in a state or country other than its domicile state. For example, an offshore captive that qualifies under 953(d) to be taxed as a U.S. insurer might form a branch in an onshore captive domicile to write lines of business that it does not write in its offshore captive.
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 of interest.
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 change.
cancellation: 1. 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. 2. 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 risk; nonadmitted asset; paid-in capital; statutory capital; surplus.
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; surplus.
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. See also rental captive; cell captive.
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 insurer.
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 risk. See also captive facility.
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.
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 reporting period.
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 business.
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 credit; Regulation 114 Trust.
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 reinsurer.
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 insured's negligence.
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 foreign corporation (CFC): A foreign corporation where shareholders owning, by vote or value, more than 10 percent of the corporation collectively own more than 50 percent of the stock.
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; Yellow 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 balance.
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.
cyber liability: Liability for claims arising from negligent use of Internet and information technology infrastructure and activities. Typically excluded from traditional commercial general liability policies. See also Health Insurance Portability and Accountability Act (HIPAA).
cyber security: Measures required under federal and state regulations to protect consumers from misuse of personal information stored and transmitted electronically. See also Health Insurance Portability and Accountability Act (HIPAA).
declarations: Statements to the insured specifying information about the risks insured and the premium. Usually a part of the application in life insurance; in property and casualty policies, the declarations are the first page or pages of the policy.
deductible: The amount of loss deducted from the limit of insurance, not payable by the insurer.
deductible plan: In workers compensation, a policy form filed with state regulators that allows employers meeting certain financial strength or size criteria to have specified per-claim retentions. The insurer remains responsible for claim payment if the insured defaults. Also known as a filed deductible policy.
deferred acquisition cost (DAC): The amount of an insurer's acquisition costs incurred as premium is written but earned and expensed over the term of the policy. The unearned portion is capitalized and recognized as an asset on the insurer's balance sheet. Under statutory accounting all acquisition costs are 100 percent earned and expensed at inception of the policy, creating an immediate reduction in surplus. In life insurance, acquisition costs are recognized as premium is earned, creating a tax effect referred to as the DAC tax.
deferred tax asset: The amount of loss reserves or unearned premium that is not deducted from an insurer's income when calculating income taxes. The deferral in the tax deduction arises because of the requirement to discount loss and unearned premium reserves. The insurer records an asset equal to the expected future amount of the tax deduction.
Department of Labor (DOL): Federal governmental body with oversight over employment-related issues including employee benefits covered under the Employee Retirement Income Security Act (ERISA).
deposit: See funds withheld.
deposit accounting: The method of accounting for premium when the policy or reinsurance agreement does not qualify as insurance. The premium is not recognized as income but as a deposit or contribution to the insurer's surplus. Losses paid are not an expense but rather return of capital. Since premium does not flow though the income statement, the insurer cannot reduce income by the increase in loss reserves.
deposit premium: The amount of premium (usually for an excess of loss reinsurance contract) that the ceding company pays to the reinsurer on a periodic basis during the term of the contract. This amount is generally determined as a percentage of the estimated amount of premium that the contract will produce based on the rate and estimated subject premium. It is often the same as the minimum premium but may be higher or lower. The deposit premium will be adjusted to the higher of the actual developed premium or the minimum premium after the actual subject premium has been determined by audit or reporting of the actual exposures insured during the coverage period.
derivative contract: A financial contract (i.e., a promise to pay an amount to the holder of the contract at a specified time or under specified conditions) where the value of the contract is based on certain variables—e.g., an index of commodity prices.
development factor: The percentage amount by which reported losses for a given time period must be multiplied to adjust for claims development, which is the amount of loss unknown at the time the initial loss reserves were established.
difference-in-conditions (DIC): A policy that insures against perils excluded in a special risk policy or supplements coverages in a named perils policy. Often used to provide flood and earthquake cover.
difference-in-limits (DIL): A DIL policy provides additional loss limits for risks already covered under other policies. Captives may write combined DIC/DIL policies.
directors and officers (D&O) liability insurance: Protects directors and officers against suits arising from their actions. May or may not cover shareholder derivative actions.
direct loss: Loss resulting directly and immediately from the hazard insured against. A policy may insure direct loss or direct and indirect (consequential) loss. Also used sometimes by captives to identify losses under policies directly insured by the captive, as opposed to losses assumed from a front company.
direct premiums: The gross premium income for coverage under policies issued by the captive.
direct procurement: The purchase of insurance by an insured directly from an insurer, rather than accessing coverage through a broker. This procedure is commonly used by large commercial buyers of insurance that reside in states or countries that permit insureds to purchase nonadmitted insurance.
direct writer: An insurer or reinsurer that accepts business directly from insureds or reinsureds without requiring business to be submitted through a broker or intermediary.
direct writing: The insurance company issues the insurance policies to its named insureds.
direct writing captive: A captive that issues policies of insurance to its insureds. See also reinsurance captive.
discovery period: The time allowed the insured after termination of a policy to report a loss that occurred during the period covered by the contract and that would have been recoverable had the contract continued in force.
distributions: See policyholder dividend.
distribution system: The method by which an insurance company reaches its insureds—i.e., as direct writer, wholesaler, agency system, or broker market.
domicile: The state or country that licenses an insurance company, and has primary regulatory oversight over that insurer. A captive domicile may or may not have special purpose legislation under which it licenses special purpose insurers referred to as "captives."
dynamic financial analysis: Statistical modeling techniques that project an outcome not on a static basis—i.e., under one set of defined assumptions or the same assumption with one or two variables changed—but to project a range of possible outcomes assuming constant movements in interrelated variables.
dynamic risk: Risks that arise as a result of organizational change.
earned premium: The amount of premium covering the period a policy has been in force. Usually property, casualty, and health premium is earned in equal proportion to the amount of time elapsed since policy inception—i.e., 1/12 per month—but life insurance and some property and casualty policies insuring seasonal risks may earn in proportion to the amount of exposure.
effective date: The date and time at which an insurance binder, policy, or contract goes into effect.
effective tax rate: The sum of federal and state taxes applicable to an insured's income, taking into account loss carry forwards.
831(b) captive: A captive that may be taxed under Internal Revenue Code § 831(b), which provides that a captive qualifying to be taxed as a U.S. insurance company may pay tax on investment income only in any year that its written premium is at or below the threshold for the applicable tax year, which in 2017 was set at $2.2 million or less with the premium cap subject to inflation adjustments. Such captives are also known as "microcaptives."
Employee Retirement Income Security Act (ERISA) of 1974: Federal law that established rules and regulations to govern employer-provided pensions and other employee benefits provided to U.S. employees.
endorsement: An amendment to an insurance policy that in some way modifies the original contract provisions. May be attached to the policy at the time of issuance or added during the contract period. May or may not require premium adjustment.
engineering: See loss control.
enterprise risk management: A strategy for identifying, controlling, and financing of all sources of risk within an organization in a coordinated manner; an effort to provide insurance solutions to business risks not historically insured under property and casualty policies.
errors and omissions (E&O) insurance: Coverage protecting insureds for damages arising out of the insureds' acts, errors, or omissions when performing their duties, like professional liability coverage.
event: A loss occurrence where there are multiple claims with a single cause of loss. Could affect one or more insureds and one or more policy.
excess insurance: Insurance over a self-insured retention or a primary insurance policy. If the latter, it only raises the limit but does not provide wider coverage, as does an umbrella policy.
excess of loss: The reinsurance limit attaches above a per occurrence or aggregate limit.
excess point: The dollar attachment point for the reinsurer.
exclusions: Specific perils and exposures identified as not being covered under a particular policy.
exemplary damages: See punitive damages.
ex gratia payment: A payment made for which the company is not liable under the terms of its policy. Usually made in lieu of incurring greater legal expenses in defending a claim. Rarely encountered in reinsurance as the reinsurer by custom and for practical reasons follows the fortunes of the ceding company.
expediting expense: Costs to complete repairs to put the insured back in business as rapidly as possible, even if a temporary arrangement. Used chiefly with boiler and machinery insurance.
expense load: The amount of acquisition and other costs included in premium in addition to the pure premium. This factor provides for overhead expense and profit margin included in the gross premium (or rate).
expense ratio: The percentage of premium used to pay all the costs of acquiring, writing, and servicing insurance and reinsurance.
experience: The loss record of an insured, including all incurred losses, whether insured or not.
experience modifier ("mod"): Factor based on loss experience by which insurance premiums are adjusted. Used in calculating workers compensation rates.
experience rating (loss or merit rating): A method of rating under which the rate is based on the insured's own experience, rather than on industry statistics or filed rates for an underwriting class as a whole. See also prospective rating; retrospective rating.
exposure data: Information about an insured's operations—e.g., revenues, property values, payroll, vehicle, or employee head count; the number by which rates are multiplied to calculate premium.
exposure rating: A method of rating, usually applied to excess of loss reinsurance, under which the rate is determined based on an analysis of the exposure inherent in the business to be covered and not on the loss experience the business has demonstrated in the past. Both exposure rating and loss rating can be used by the reinsurance underwriter to determine the price that is quoted.
exposures: A measurable unit by which premium is to be calculated (e.g., revenues, payroll, vehicles, property values).
extended coverages: Additional coverages added to a fire policy. Protection for the insured against property damage caused by windstorm, hail, smoke, explosion, riot, strike, civil commotion, vehicle, and aircraft. Provided in such package policies as commercial multiperil.
extended reporting period (ERP): A provision contained in most claims-made policies that provides coverage under an expired claims-made policy for claims first made after the policy has expired. The period of time allowed to report claims is often limited. Additional premium may be required to extend the reporting period.
extra contractual obligations (ECOs): The requirement under a policy that the insurer pay certain losses or expenses not arising from the insuring agreement but from externally imposed obligations—e.g., fines from a court or regulatory body. If ECOs are covered under a reinsurance agreement, the reinsurer pays punitive damages imposed on the insurer.
extra expense insurance: Coverage that pays for extra costs to maintain vital operations after a loss. Business interruption insurance also covers such expense, but only up to the point that the costs reduce loss of profits.
facultative reinsurance: Per risk reinsurance—i.e., the reinsurer underwrites each risk (insured location) separately and retains the right to decline a specific piece of business.
Federal Liability Risk Retention Act: Preempts some state functions. For example, the Act does not allow a state insurance regulator to prohibit risk retention groups domiciled in other states from operating within the regulator's state, thus eliminating the need for a fronting company.
fidelity bond: A bond that guarantees honesty of an employee.
fiduciary: A person entrusted to act for another, which includes having the responsibility for protection of another's assets.
field service advice (FSA): Information provided by the Internal Revenue Service to field agents to guide them in conduct of tax audits. The IRS also issues the Technical Advice Memorandum (TAM).
filed forms: Insurance policies that have been approved by the state insurance department and that are required in a state where the risk is located for certain types of coverage.
Financial Accounting Standards Board (FASB): Promulgates Financial Accounting Standards (FAS) for generally accepted accounting principles (GAAP).
financial consolidation: 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).
financial guarantee insurance: Insurance against losses arising from the bankruptcy of the insured. The insurer guarantees the performance of the insured—e.g., for debt repayment.
financial reinsurance: The contract is multiyear and the reinsurance has an aggregate limit over the entire contract period. Premium will be equal to the ultimate net loss and discounted to net present value, so the reinsured pays all losses over a stated time period and recovers the underwriting and investment income. Contract may restrict loss settlements to specified times and amounts to reduce the reinsurer's timing risk and will contain a commutation clause to end the coverage period.
financial responsibility: The legal requirement for an insured to evidence ability to pay losses, either through purchase of insurance or by providing other proof of financial strength. Used to ensure that drivers carry adequate auto liability insurance.
finite risk: An insurance or reinsurance program where the period of insurance is fixed; all premium and losses will be paid within that period. A contract may contain sufficient underwriting risk to qualify as insurance but has the same objective as financial insurance, which is to enhance the current presentation of the insured's or reinsured's financial condition.
first-party risk: Insurance of the income or assets of the named insured (e.g., property insurance).
flat rate: In reinsurance, a percentage rate applied to a ceding company's premium writings for the classes of business reinsured to determine the reinsurance premiums to be paid the reinsurer.
floater: A property insurance policy covering articles that do not necessarily have a fixed location—e.g., jewelry and cameras.
follow form policies: Insuring (coverage) terms, conditions, and exclusions are as stated in a lead policy. The policy that follows has only its own limits, deductible, and premium and issues a declarations page with the lead policy form attached.
follow the fortunes: The reinsurer must agree to the adjusted loss amount as determined by the reinsured.
forced placed: Insurance that must be purchased to comply with terms of a contract—e.g., a mortgagee can purchase insurance on mortgaged properties and charge the premium to the mortgagor.
foreign: A U.S.-domiciled insurer that is domiciled in a state other than the jurisdiction where the risk is located. See also alien.
Foreign Account Tax Compliance Act (FATCA): The Foreign Account Tax Compliance Act of 2009 establishes rules for the reporting of foreign financial assets held by U.S. taxpayers in a foreign financial institution (FFI) or a nonfinancial foreign entity (NFFE). FATCA imposes a 30 percent FATCA withholding tax on withholdable payments made to an FFI or an NFFE unless the FFI or the NFFE meets certain stipulated conditions.
front company: An insurer that issues a policy and reinsures all or a substantial part of the risk to another insurer. Certain types of statutory coverages requiring evidence of insurance from admitted insurers are fronted and reinsured to captives. A "pure front" is one that delegates underwriting and claims handling authority to the reinsurer or a managing general agent (MGA). Most insurers that front for captives are not pure fronts.
fronted captive: See reinsurance captive.
fronting: Most commonly refers to the practice of a nonadmitted insurer (or an insured with a captive insurance company) contracting with a licensed insurer to issue an insurance policy for regulatory or certification purposes.
fundamental risk: A risk intrinsic to the state of being, or an absolute hazard producing no uncertainty about whether the loss will occur, making the risk commercially uninsurable.
funded covers: Also known as "time and distance"—i.e., no real underwriting risk to the reinsurer, only a credit risk, timing risk, or investment risk. The lump sum prepaid premium equals the reinsurance recoverable, recognizing the time value of money.
funds withheld: A provision in a reinsurance treaty under which some or all of the premium due the reinsurer, usually an unauthorized reinsurer, is not paid but rather is withheld by the ceding company either to enable the ceding company to reduce the provision for unauthorized reinsurance in its statutory statement or to be on deposit in a loss escrow account for purposes of paying claims. The reinsurer's asset, in lieu of cash, is "funds held by or deposited with reinsured companies."
futures contract: An agreement made by a seller to deliver a stated amount of product to a buyer at a future date for an agreed price.
General Adjustment Bureau (GAB): A national loss adjusting agency supported by property insurers that do not have their own nationwide loss adjusting capability.
generally accepted accounting principles (GAAP): Accounting method designed to match revenue and expense on a "going concern" basis—i.e., assuming an entity continues in business. The principles are developed by the Financial Accounting Standards Board (FASB). For insurers, the American Institute of Certified Public Accountants (AICPA) publishes Audit and Accounting Guides, applying GAAP to an insurance entity.
gross loss reserves: Case reserves and incurred but not reported (IBNR) before reinsurance credits or offsets.
gross written premium (GWP): The total premium (direct and assumed) written by an insurer before deductions for reinsurance and ceding commissions. Includes additional and/or return premiums. Written does not imply collected, but the gross policy premium to be collected as of the issue date of the policy, regardless of the payment plan.
group captive: A captive that insures the risks of a heterogeneous or homogenous group of unrelated insureds. Could be a stock captive, a mutual captive, or a reciprocal. In the case of a stock captive, shares could be owned by some or all of the insureds, or by noninsureds, subject to the captive domicile's license classification.
group-owned captive: A captive owned by more than one shareholder, or with more than one member, in the case of a mutual or reciprocal form of organization.
guaranty fund: A state fund available to pay losses of an insurer that is liquidated, funded by assessments on all licensed insurers, in proportion to its business written in that state. Captive insureds are not protected by state guaranty funds.
hard market: In the insurance industry, the upswing in a market cycle, when premiums increase and capacity for some of all types of insurance decreases. Can be caused by a number of factors, including falling investment returns for insurers, increases in frequency or severity of losses, and regulatory intervention deemed to be against the interests of insurers.
hazard: The insured's condition (e.g., financial, morale) or environment (e.g., regulatory, or geographic location) which makes a loss more likely to occur.
Health Insurance Portability and Accountability Act (HIPAA) of 1996: Legislation that required national standards for the privacy and security of health information, including the collection and exchange of electronic protected health information (e-PHI), for purposes of identifying and prevent cyber-security risks.
hedge instrument: A derivative contract used to reduce (offset) volatility in asset values.
hold harmless clause: See indemnification agreement.
hurdle rate: The internal rate of return established in an organization as necessary to justify investment in an operation, based usually on the short-term cost of borrowing. Often used as the discount rate in a net present value cost analysis.
incurred but not enough (IBNE): Loss reserves to allow for the increase to an existing reserve because there was "not enough reported"; also called incurred but not enough reserved (IBNER) or reserved but not enough (RBNE).
incurred but not reported losses (IBNR): Estimates of amounts to be paid for losses incurred prior to a financial closing date and not reported to the insurer as of that closing date. Also should include estimates for development on case reserves. For claims-made policies, IBNR is only for reported claims.
incurred losses: Paid losses, plus paid LAE, plus the net change in case and IBNR reserves.
incurred loss ratio: The percentage of losses incurred to premiums earned. See also experience.
indemnification agreement: An agreement by one party to compensate another, regardless of fault, if losses arise from a specified activity. Often inserted as a hold harmless clause in a contract, to protect one party from the legal consequences of actions required under the contract.
index: A number derived from a formula calculated from a set of data. See also risk index.
indexed deductible: The amount deducted from each loss payment is not fixed in relation to the policy limit but determined by variables (the index) impacting the insured's retention ability.
industrial insured: A commercial insurance buyer presumed by virtue of its financial size to be able to negotiate insurance contracts with insurers without the protection of insurance regulators. Restrictions may apply on the ability of the insured to recover from a state's guaranty funds. Under some state insurance laws, an industrial insured must meet size criteria (net worth and number of employees) to be eligible to purchase nonadmitted insurance.
industrial insured captive insurance company: Any company that insures risks of the industrial insureds that comprise the industrial insured group and their affiliated companies.
industrial insured group: A group of commercial insureds in the same industry or involved in the same risk-taking activity.
inflation factor: A loading to provide for increased medical costs and loss payments in the future due to inflation.
inland marine insurance: A broad form of insurance generally covering articles that may be transported from one place to another, including items normally covered on floater policies.
insolvency clause: A contractual provision, generally required by statute or regulation as a prerequisite to receiving credit for reinsurance, under which the reinsurer agrees, in the event of the ceding insurer's insolvency, to pay its reinsurance obligations under the contract whether or not the insurer has paid its obligations.
inspection fees: Fees for statutory boiler inspections. Fully earned when paid (not part of property policy premium or routine engineering expenses).
insurable interest: A business or other relationship between the named insured and the exposure. Must be present for an insurance contract to be issued.
insurance line: A type of insurance business, grouped according to the reporting categories used when filing an insurer's statutory reports. See also monoline.
insurance-linked securities (ILS): A derivative such as a catastrophe bond with value influenced by insured loss event(s) underlying the security.
Insurance Regulatory Information System (IRIS): The mechanism developed by the National Association of Insurance Commissioners (NAIC) to assist states in overseeing the financial condition of insurance companies. The IRIS ratios are a set of ratios designed to measure solvency and liquidity. They are calculated from insurers' annual statements that are filed with the NAIC, and insurers that fail one or more tests can be placed under the supervision of their domicile regulator.
insurance risk: The possibility of the insurer experiencing a loss under an insurance or reinsurance contract. Under FAS 113, insurance risk is explained as the presence of underwriting risk in addition to timing and investment risk.
Insurance Services Office (ISO), Inc.: An insurer member organization that files rates and forms for insurance companies. See also filed forms. Nonmember insurers may use ISO rates, endorsements, and certificate and binder formats, etc.
insurance to value: In property insurance, the requirement that premium is based on the full amount of exposure.
insured: Person or organization covered by an insurance policy, including the "named insured" and any additional insureds for whom protection is provided under the policy terms.
insuring clause: The section of a policy that follows the declarations and states what risks are insured—i.e., the covered perils and exposures and the amount of insurance. Limitations of coverage will be identified in the policy exclusions.
integrated disability management (IDM): Adjusting claims for both occupational (workers compensation) and nonoccupational (employee benefits-related) accidents and absence.
integrated risk: Insuring more than one type of risk in a single policy; may be part of an enterprise risk management program. See also blended finite risk.
intermediary: A third party in the design, negotiation, and administration of a reinsurance agreement. Intermediaries recommend to cedents the type and amount of reinsurance to be purchased and negotiate the placement of coverage with reinsurers.
intermediary clause: A contractual provision, generally required by statute or regulation as a prerequisite to receiving credit for nonadmitted reinsurance, in which the parties agree to effect all transactions through an intermediary licensed in the insurer's domicile, and the credit risk of the intermediary, as distinct from other risks, is imposed on the reinsurer.
investment risk: The possibility that investment income earned on unearned premium or loss reserves will be lower than expected when calculating rates.
joint and several liability: Liability for actions both as an individual and as a member of a group or organization. The organization is responsible for the actions of its members; the member is responsible for its own actions.
layer: A horizontal segment of the liability insured—e.g., the second $100,000 of a $500,000 liability, is the first layer if the cedent retains $100,000 but a higher layer if it retains a lesser amount.
lead reinsurer: The "lead" sets the rates, terms, and conditions that other reinsurers follow. Also known as lead underwriter.
letter of credit (LOC): Within the context of insurance, a promise by a financial institution to pay the losses of a self-insurer or a reinsurer. If issued on a noncancelable ("evergreen") by an acceptable financial institution and unconditional basis, an LOC is an acceptable form of collateral to secure recoverables from nonadmitted reinsurers and enables the ceding company to reduce the provision for unauthorized reinsurance in its statutory statement.
liability limits: The stipulated sum or sums beyond which an insurance company is not liable for payments due to a third party. The insured remains legally liable above the limits.
limit: The total amount of losses to be paid under an insurance policy or reinsurance agreement, expressed either on a per occurrence basis (e.g., per accident or event) or on an aggregate basis (e.g., all losses under a single policy, or for all policies during an underwriting period).
limitation of risk: The maximum amount an insurer or reinsurer must pay in any one loss event.
line: The retention limit (stated as a dollar amount) retained by the ceding company under a surplus share agreement. Limits of liability for the reinsurer may be stated as a multiple of the line reinsured. For example, a five-line treaty is five times the net retained.
line of business: Classes of insurance that are grouped into one line for statutory reporting purposes. Also, the types of business an insurer is licensed to underwrite, such as personal lines.
line slip: The net line and reinsured multiple—i.e., the capacity of a reinsurance treaty.
liquidity ratio: A measurement of key financial variables that impact an insurer's ability to pay claims. In the Insurance Regulatory Information System (IRIS), liabilities to liquid assets and agent's balances to surplus are monitored.
loan-backs: A loan of assets from a captive to a shareholder or affiliated entity.
long duration contract: A guaranteed renewable insurance policy, used most often in life, accident, and health insurance, and noncancelable by the insurer except for nonpayment of premium or fraud.
long-tail: In certain lines of insurance, the late reporting of claims or losses that pay out very slowly, with loss development.
long-term disability (LTD): Insurance to provide income to a person permanently unable to work because of accident or illness not work-related; usually terminated at age 65.
long-term insurance: In certain captive domiciles, long-duration contracts such as life insurance.
loss: The destruction, reduction, or disappearance of value of tangible or intangible property; bodily or emotional injury; or reduction in income.
loss adjustment expenses (LAE): All costs related to settling claims.
loss carry forward: A provision in the income tax code that allows a taxpayer to spread a loss over more than one tax year.
loss control: Reducing or eliminating preventable losses. Under property policies, loss control inspections may be performed by fire protection or boiler inspectors and are accounted for as engineering expense. In workers compensation, loss control is called safety expense.
loss development: The difference between the estimated amount of loss(es) as initially reported to the insurer and the amount of an evaluation of the same loss(es) at a later date or the amount paid in final settlement(s).
loss event: The total losses to the ceding company or to the reinsurer resulting from a single cause such as a windstorm.
loss loading or "multiplier": Also known as loss conversion factor. A factor applied to the incurred losses under workers compensation retrospectively rated policies to calculate the amount to be paid to the insurer to offset loss adjustment expense.
loss payout curve: A series of factors showing the percentage of an incurred loss paid in the year incurred and each year thereafter.
loss portfolio agreements: Retroactive reinsurance undertaken for "surplus relief" or "spread loss"—i.e., the intent is either to transfer premiums from the primary company to a reinsurer as a means to increase policyholders surplus or to improve cash flow and stabilize income, without actually transferring risk.
loss portfolio transfer (LPT): Sale of loss reserves by an insurer or reinsurer to another insurer.
loss rating: Developing premiums from the historical loss experience of an insured.
loss ratio: A percentage derived by dividing the dollar amount of losses experienced by an insured risk by the premium collected. (Also called loss and loss adjustment expense (LAE) ratio.)
loss reserve: An estimate of the value of a claim or group of claims not yet paid.
loss triangle: Loss history showing incurred losses in the year incurred and the incurred amount of the claim at periodic intervals thereafter until the claims are paid. The maturity of the losses is shown across the top of the table, and each new line is used for a new year's incurred loss figure. Triangles can be prepared on a paid claim basis also.
managing general agent (MGA): A licensed individual or company to whom the direct writing insurer has delegated underwriting authority, rating, premium collection, and policy issuance.
manual rates: Rates that have been developed and filed for an underwriting class rather than a specific insured (see rating).
marine insurance: Can be ocean, offshore, or inland; also available for aviation risks. Insures first-party risks (property insured is the hull or owned cargo), carrier liability (nonowned cargo), and third-party liability (damage caused by the vessel to property of others).
market conduct: The way an insurer operates in relation to its customers and suppliers. Regulated strictly, to ensure no rebating, for example.
market conduct exam: Investigation by insurance regulators to determine if an insurer has followed laws relating to the distribution of products to consumers and settlement of claims.
market cycles: Fluctuations in insurance and reinsurance rates and surplus capacity.
master policy: An insurance policy insuring a group of insureds, each of which receives a certificate evidencing their coverage under the master policy.
maturity: The age of a claim, expressed as the amount of time in months from the beginning of an occurrence year. Used to measure the development of a group of claims incurred in the occurrence year.
maximum foreseeable loss (MFL): Used in property insurance to identify the largest amount of loss likely to occur for an exposure, usually based on inspections and reports of exposure values by the insured.
mean reserve: The average of the initial and ending reserve, used in life insurance reserve estimating.
medical payments insurance: A coverage, available in various liability insurance policies, in which the insurer agrees to reimburse the insured and others, without regard for the insured's liability, for medical or funeral expenses incurred as the result of bodily injury or death by accident under specified conditions.
microcaptive: A small captive operating with annual written premium that qualifies it, in the United States, to be taxed under Internal Revenue Code § 831(b), which provides that a captive qualifying to be taxed as a U.S. insurance company and meeting all requirements of § 831(b) may pay tax only on investment income.
minimum and deposit (M&D): Feature of excess of loss reinsurance; it requires initial premium payment in advance, adjusted annually in arrears, based on exposure audits. See also deposit premium.
model act: Legislation drafted by the National Association of Insurance Commissioners (NAIC) to become a standard for adoption by states.
modification factor (the "mod"): The factor by which a standard workers compensation premium is multiplied to reflect an insured's actual loss experience.
monoline: An insurer licensed to write only one type of risk; common with surety or financial guarantee insurance.
mortgage insurance: Insurance to protect the bank from default by mortgagees.
mutual insurer: An insurance company that is not owned and controlled by shareholders but by its policyholders. See also stock captive.
named insured: The individual or legal entity that contracts to buy the insurance, the one responsible for premium payment.
named perils: A policy issued specifically listing the perils insured against. Compare to special risks.
National Association of Insurance Commissioners (NAIC): A trade association of state's insurance commissioners that issues model insurance acts that can be adopted by the states. The NAIC accredits states that have enacted specific insurance legislation and demonstrate adequate regulatory oversight over the insurers they license.
net loss: The amount of loss sustained by an insurer after deducting all applicable reinsurance, salvage, and subrogation recoveries.
net loss reserves: Reserves for losses within the risk limitation. Gross loss reserves net of reinsurance credits and offsets.
net present value: The discounted value or current cost of an amount to be paid in the future, taking into account anticipated investment income and the timing of tax deductions.
net retained liability: The amount of insurance that a ceding company keeps for its own account and does not reinsure in any way (except in some instances for catastrophe or clash reinsurance).
net risk (risk limitation): The per occurrence policy limit retained by the captive after purchase of reinsurance.
net written premium: Direct premiums written, plus premiums assumed, less premiums ceded.
nexus: The coming together of parties in a transaction. Used by insurance regulators to determine if an insurer is writing business in its state.
nonadmitted asset: An asset that may be accounted for in an insurance company's balance sheet, but not allowed to be counted for purposes of calculating statutory capital or compliance with solvency ratios.
nonadmitted balance: Reinsured liabilities on an insurer's balance sheet (loss reserves and unearned premium reserves) for which no credit is given in the ceding company's statutory statement. This creates a reduction in surplus, unless the reinsurer provides acceptable collateral in the amount of the unauthorized balance.
nonadmitted insurer: A company that is not licensed or authorized to transact business in the state or country where the insured risk is located. Under many state or country insurance laws, a large commercial buyer may purchase insurance from a nonadmitted insurer.
nonadmitted reinsurance: A company is "nonadmitted" when it has not been licensed and thereby recognized by appropriate insurance governmental authority of a state or country. Reinsurance is "nonadmitted" when placed in a nonadmitted company and therefore may not be treated as an asset against reinsured losses or unearned premium reserves for insurance company accounting and statement purposes.
noncontrolled foreign corporation (NCFC): A company that is owned in such a way that its financial results are not consolidated with any of its shareholders, and the shareholders are not allocated any portion of the company's income for tax purposes. If the NCFC is located in a jurisdiction that does not have an income tax, this creates income tax deferral, meaning no tax until such time as income is repatriated to its owners.
noncorrelated risks: Losses to an exposure caused by different perils and hazards.
nonfinancial foreign entity (NFFE): A defined term in Foreign Account Tax Compliance Act (FATCA) legislation, used to denote any foreign entity that is not a financial institution.
nonproportional reinsurance: Also known as excess of loss reinsurance. Losses excess of the ceding company's retention limit are paid by the reinsurer, up to a maximum limit. Reinsurance premium is calculated independently of the premium charged to the insured. The reinsurance is frequently placed in layers. Contracts may be continuous or for a specific term.
nonqualified benefits: Under Employee Retirement Income Security Act (ERISA) rules, employee benefits that are not part of a benefit plan and are, therefore, not under ERISA jurisdiction.
nonsubscriber workers compensation plan: A nonsubscriber is an employer that elects, by filing appropriate notices required by state insurance authorities, to pay work-related injury loss through some method other than statutory workers compensation. Three states—Texas, New Jersey, and Oklahoma—allow such an election. Note that the purchase of workers compensation insurance is elective in Texas. In New Jersey, employers are required to purchase either workers compensation coverage or employers liability coverage. In Oklahoma, employers must either purchase workers compensation coverage or become a qualified employer under the Oklahoma Employee Injury Benefit Act (OEIBA).
novation: An agreement to replace one party to an insurance policy or reinsurance agreement with another company from inception of the coverage period. The novated contract replaces the original policy or agreement. Also known as cancel and rewrite.
occurrence: An accident or incident, including continuous or repeated exposure to conditions that result in a loss neither expected nor intended from the standpoint of the insured, or an act or related series of acts that result in the same.
occurrence basis: For coverage to be provided, the act giving rise to a claim needs to occur within the policy period. The claim does not need to be reported during the policy period. Used with liability policies. Compare to claims-made basis.
offset (setoff): The reduction of the amount owed by one party to a second party by crediting the first party with amounts owed it by the second party. The existence and scope of offset rights may be determined by reinsurance contract language as well as statutory, regulatory, and judicial law.
offshore captive: A special purpose insurance company domiciled outside of the country where the insured risk is located. The motives for using an offshore captive may include tax planning. Regulatory differences between onshore and offshore have become significantly less as the offshore captive industry has matured. Offshore domiciles popularly used for North American source business include Barbados, Bermuda, British Virgin Islands, and Grand Caymans. Offshore domiciles for European source business include Dublin, Guernsey, Isle of Man, and Luxembourg. Asian source business may use Hong Kong, etc.
onshore captive: A special purpose insurance company domiciled in the country within which its insured risks are located. There are approximately 20 onshore domiciles actively competing for U.S. source business—e.g., Vermont, South Carolina, Hawaii, and Washington DC. British Columbia is an example of an onshore domicile for Canadian source risks. European countries (with the exception of Dublin and Luxembourg) do not actively promote themselves as captive domiciles—i.e., have not passed special purpose legislation to facilitate the formation of captives.
operating cash flow: Underwriting cash flow plus investment income, and plus or minus other income statement cash flows.
operational risk financing securities (ORFS): A debt or credit instrument designed to provide liquidity or income to offset changes in cash flows resulting from an occurrence relating to an entity's operations.
option instruments: A derivative such as a put, call, swap, or floor designed to manage basis risk by allowing the hedger to determine when to liquidate the contract. If an option expires, it has no further value.
organizational documents: The legal documents used to incorporate or form a company. In the United States they will include articles of incorporation and bylaws. In domiciles operating under English law, the same documents may be called "memorandum of association" and "articles of association," or, collectively, the "corporate charter."
organizational risk: The business, treasury, and pure risks of an organization—i.e., all exposures, hazards, and perils—whether traditionally the subject of insurance or not, which collectively create uncertainty as to the financial outcome of an enterprise. See also enterprise risk management.
original gross premium (OGP): Premium written for the entire risk. May include excess premium not subject to an excess of loss reinsurance agreement; therefore, is not necessarily the same as gross written premium (GWP).
original insurer: Insurer that issues the policy to the insured. May also be called "primary company," "direct company," or "front company."
other underwriting income: Ceding commissions or profit commissions earned from reinsurers.
overall operating ratio: A ratio to show the insurer's pre-income tax profitability, taking into account investment income. It includes total expenses as a percent of total income, before adjustments for federal taxes.
overriding commission: An allowance paid to the ceding company over and above the acquisition cost to allow for overhead expenses and often including a margin for profit.
owners and contractors protective liability (OCP) insurance: An endorsement, which covers contractors and subcontractors, to commercial general liability insurance purchased by the owner of a business with premium paid by the owner.
paid-in capital: Capital acquired by a corporation from sources other than its business operations. The most common source of paid-in capital is the sale of the corporation's own common and preferred stock. The amount of paid-in capital becomes part of the stockholders' equity shown in a balance sheet.
paid losses: Losses and allocated loss adjustment expenses (ALAE) paid to claimants during a financial reporting period.
participant: An insured that utilizes a captive insurance company through a participant contract specifying the terms of participation, rather than through a shareholder or member contract.
participating policy: An insurance policy that allows the insured to receive policyholder dividends, not taxable distributions—i.e., return of profits not treated as income by the Internal Revenue Service (IRS) but instead as return of premium.
participating reinsurance: Includes quota share, first surplus, second surplus, and all other sharing forms of reinsurance under which the reinsurer participates pro rata in all losses and in all premiums. See also pro rata reinsurance.
passive foreign investment company (PFIC): Under current U.S. tax code, defined as a company with more than 70 percent passive (investment) income or more than 50 percent of its assets generating passive income. Subject to payment of PFIC tax. Insurers are exempt from PFIC tax if their loss reserves and loss adjustment expenses are greater than 25 percent of assets.
pass-through entity: A corporation that is disregarded for purposes of calculating taxable income. The income earned in a pass-through entity is attributed to its shareholder or ultimate parent, and taxed at that level.
payout profile: The rate at which a reported claim is paid out, usually expressed as percentages paid each year. See also loss payout curve.
payroll audit: A yearly comparison of the estimated payroll reported for workers compensation purposes at the beginning of the policy year with the actual payroll for that period, determined at the close of the policy year.
performance bond: A bond to guarantee proper execution of job functions.
performance ratio: A test of an insurer's or reinsurer's financial strength—e.g., Standard & Poor's solvency ratios, which track net premium to adjusted shareholder funds, and liquidity ratio, which looks at technical reserves to liquid assets.
perils: The cause of loss—e.g., fire, accident, negligence.
per-risk excess: Also known as specific, working layer, or underlying excess of loss reinsurance. A method by which an insurer may recover losses on an individual risk in excess of a specific per-risk retention. Has both property and casualty applications.
personal injury: Damage to a person caused by the wrongful conduct of the insured; covers libel, slander, etc., as well as bodily injury. Insured under liability policies.
personal lines: Insurance purchased by an individual (as opposed to an organization) to protect against personal risks.
personal risks: Losses arising from ownership of personal property; also loss of health and income.
placement slips: A general understanding of the terms and conditions of a reinsurance transaction—not a binding contract. Terms and conditions should be confirmed in a reinsurance confirmation or cover note.
policy conditions: A section of a policy that identifies the duties of the insured to keep coverage in effect.
policyholder dividends: Return of premium, under the terms of the policy, resulting from income in excess of losses and expenses.
policyholder surplus: The net worth of the insurer as reported in the annual statement or statutory financial statements. The amount by which assets exceed liabilities.
policy registers: A historical listing of all policies issued by an insurer, showing reinsurance.
policy year experience: Incurred losses and loss adjustment expenses (LAE) for those claims incurred within a policy effective period, regardless of when the claim was reported, divided into the earned premiums for all policies issued during that same period. The loss amount is not final until all losses incurred (reported if claims-made) are settled. The premiums earned amount is derived from all policies incepting during the defined period, and may be earned over more than one financial reporting period.
pool: Any joint underwriting operation of insurance or reinsurance in which the participants assume a predetermined and fixed interest in all business written.
portfolio: The book of business of an insurer or reinsurer, including all policies in force and open reserves.
portfolio reinsurance: In transactions of reinsurance, it refers to all the risks of the reinsurance transaction. For example, if one company reinsures all of another's outstanding automobile business, the reinsuring company is said to assume the "portfolio" of automobile business and it is paid the total of the unearned premium on all the risks so reinsured (less some agreed commission).
portfolio runoff: The opposite of return of portfolio—permitting premiums and losses in respect of in-force business to run to their normal expiration upon termination of a reinsurance treaty.
portfolio transfer: The cession of a book of business—e.g., for an insurer withdrawing from writing a certain class of risk. Since the business has already been written, it is retroactive insurance, so it is a balance sheet only transaction (transfer of assets and liabilities). See also commutation agreement; loss portfolio transfer (LPT); novation.
premium: The sum paid for an insurance policy or consideration in the insurance contract. As income to the insurer, it is therefore the basis for taxes on the insurer.
premium audit: A survey of the insured's payroll, sales, or vehicle count records to determine premium and premium taxes due.
premium, deposit: When the terms of a policy provide that the final earned premium be determined at some time after the policy itself has been written, companies may require tentative or "deposit" premiums at the beginning that are readjusted when the actual earned charge has been later determined.
premium, pure: The portion of the premium calculated to enable the insurer to pay losses and, in some cases, allocated claim expenses or the premium arrived at by dividing losses by exposure and in which no loading has been added for commission, taxes, and expenses.
premiums earned: The portion of the written premium allocable (usually pro rata) to the time already elapsed under the policy period.
premium tax: A tax, imposed by each state, on gross premium written by insurers allocable to risks located in that state. Gross written premium (GWP) means before reinsurance ceded but after salvage and subrogation.
premium, unearned: Premium for a future exposure period is said to be unearned premium for an individual policy; written premium minus unearned premium equals earned premium. Earned premium is income for the accounting period, while unearned premium will be income in a future accounting period.
principle of indemnification: A defining characteristic of insurance, providing that a loss payment will replace what is lost, putting the insured back to where it was financially prior to the loss without rewarding or penalizing the insured for its loss.
Private Letter Ruling: A ruling by the Internal Revenue Service (IRS) regarding how a specific transaction will be taxed.
producer-owned reinsurance company (PORC): A captive or a rent-a-captive cell owned or used by a broker or managing general agent (MGA) for reinsurance of selected risks that it produces for the purposes of retaining the underwriting income. May be set up by insurance companies to circumvent state laws regarding the amount of commissions that can be paid to their producing agents.
product liability insurance: Protection against financial loss arising out of the legal liability incurred by an insured because of injury or damage resulting from the use of a covered product or out of the liability incurred by a contractor after a job is completed (completed operations cover).
professional reinsurer: A term used to designate a company whose business is confined solely to reinsurance and the peripheral services offered by a reinsurer to its customers as opposed to primary insurers who exchange reinsurance or operate reinsurance departments as adjuncts to their basic business of primary insurance. The majority of professional reinsurers provide complete reinsurance and service at one source directly to the ceding company.
profit center captives: A captive that has the primary function of earning underwriting income by writing unrelated risk.
profit commission: A provision found in some reinsurance agreements that provides for profit sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurer's expenses, and the cedent's share of such profit after expenses.
program business captive: A captive that insures or reinsures a "program"—i.e., a group of homogenous risks, none of which is individually underwritten. It may or may not be owned by the program business agency or producer.
prohibited transaction exemption (PTE): A ruling by the Department of Labor (DOL), based on specific facts and circumstances, that a transaction is allowable under Employee Retirement Income Security Act (ERISA) regulations. Required by pure captives insuring shareholders' employee benefit risks.
proportional liability: Members of a group are held responsible for the financial results of the group in proportion to their participation. Compare to joint and several liability.
proportional reinsurance: The premium and losses are calculated on a pro rata basis. The reinsurer has a fixed percentage of premium and the same percentage of losses.
pro rata cancellation: Provides for the return of all unearned premium, without the penalty associated with short-rate cancellation.
pro rata reinsurance: The reinsurer receives a percentage of premium and pays a proportional share of losses, above the ceding company's retention.
prospective aggregates: Spread loss program giving accident year reinsurance for long-tail risks with premiums paid annually over the expected life of the policy. (Any adjustments in pricing resulting from adverse loss development occur prospectively.)
provisional notice of cancellation (PNOC): Notice is given to allow the option of withdrawing from the reinsurance treaty if renewal terms are unacceptable. Issued with continuous contracts.
punitive damages: Damages awarded to the plaintiff over and above what will compensate for the loss. Intended to solace the plaintiff for mental anguish or to punish and make an example of the defendant. Not included in policy limits.
pure captive: A captive insurance company that has as its primary business purpose the insurance of the risks of its shareholders and affiliates.
pure loss cost: The ratio of the retained losses incurred to the insurer's retained premium. Also known as burning cost ratio.
pure premium: The amount of premium calculated for the risk to be insured, net of policy expenses. The amount of premium available to pay losses and allocated loss adjustment expenses (ALAE).
pure risk: The possibility that a loss may or may not occur, but with no possibility of a gain.
qualified self-insurer: An employer meeting state financial and size criteria and approved to self-insure workers compensation. Each state has its own retention limits, filing, and security requirements.
quota share: A fixed percent of all written premiums are ceded. The reinsurer pays the same proportion of all losses and loss adjustment expenses (LAE).
rate: The pricing factor per unit of exposure upon which the basic premium is based. Usually stated as $x per $100.
rated insurer: An insurance company that has received a financial size and strength rating from a rating agency such as A.M. Best or Standard and Poor's.
rate making: The process of using underwriting information to calculate a premium for the exposure. See also rating methodology.
rate-on-line (ROL): The pricing for a proportional reinsurance share–e.g., a 10 percent ROL for a $2 million limit would be $200,000.
rating: Determining the amount of premium to be paid to insure or reinsure a risk. Guaranteed cost rates are fixed during the policy period. Loss sensitive rates are those that can be adjusted after the end of a policy period, based upon the insured's actual loss experience. (See also retrospective rating.)
rating experience: Computing a premium based on the loss experience of the risk itself. Essentially a comparison of actual losses with expected losses. If actual losses are lower than expected, a premium credit to the manual rate or prior-year premium results. If actual losses are greater than expected, a premium surcharge results.
rating methodology: The method used by an underwriter when calculating premiums. Principal methods are manual, experience (retrospective or prospective), burning cost, or judgment.
rebating: Returning a portion of the premium to the insured or other inducements to place business with a specific insurer. Rebating is illegal for an agent or broker. Insurers must use filed rate credits or have supporting methodology.
reciprocal: An unincorporated group of individuals or organizations (subscribers) that agree to pool risks for the purpose of paying the cost of retained losses and purchasing reinsurance. Also known as interinsurance exchanges, they are managed by an attorney-in-fact. Subscribers have contingent liability (several and proportionate) for paying the losses of the reciprocal, but if adequate capital exists, nonassessable policies may be issued. Under federal tax law, subscribers' surplus is not taxed; income is taxed when distributed.
redomiciling: Changing the insurer's domicile. Requires permission from the existing domicile and a new license to be issued. Does not require formation of a new company if the new domicile has redomestication laws allowing a license to be issued to an existing insurer.
registered agent: In the United States, the person or firm legally appointed to accept service of process. Alien insurers must appoint (by filed proxy) the insurance commissioner as their agent, in states where they do business, to assure protection of policyholder rights.
registers: See policy registers .
Regulation 114 Trust: A trust fund established to secure payment of future losses, in a format prescribed by New York State Regulation 114.
reimbursement policies: The payment provisions in the policy require the insured to first pay the loss and then be reimbursed by the insurer. In reinsurance agreements, the insurer typically pays the loss and seeks reimbursement from the insurer but some agreement may require reinsurance to be paid before the insured is reimbursed.
reinstatement: A provision in an excess of loss reinsurance contract, particularly catastrophe and clash covers, that provides for reinstatement of a limit that is reduced by the occurrence of a loss or losses. The number of times that the limit can be reinstated varies, as does the cost of the reinstatement.
reinstatement premium: A pro rata reinsurance premium is charged for the reinstatement of the amount of reinsurance coverage that was reduced as the result of a reinsurance loss payment under a catastrophe cover. reinsurance: Insurance protection purchased by an insurance company, either for a group of policies (treaty reinsurance) or for a specific risk (facultative reinsurance).
reinsurance agreement: Agreement by which one insurance company transfers risk to another (buys reinsurance). Unlike an insurance policy, a reinsurance agreement is signed by both parties.
reinsurance assumed: The insurer accepts risk from another insurer or reinsurer.
reinsurance captive: A special purpose insurer that operates only on a fronted basis, assuming risk from a ceding company. The reinsurance captive does not issue policies directly to insureds, and typically operates on a nonadmitted basis.
reinsurance ceded: The insurer transfers its risk to another insurer or reinsurer.
reinsurance commission: 1. Percentage of premium paid to the reinsurance intermediary; a ceding company expense. Compare to ceding commissions, which are an expense to the assuming reinsurer. 2. A profit commission paid to the cedent or the intermediary by the retrocessionaire; see also contingent commission.
reinsurance confirmation: Evidence of pro rata or excess of loss reinsurance. A contract of adhesion, issued by the reinsurer confirming acceptance of risk. To be attached to the master facultative reinsurance certificate (cover note) issued by the intermediary.
reinsurance intermediary: A broker licensed to place reinsurance.
reinsurance pool: A risk financing mechanism used by insurance companies to increase their ability to underwrite specific types of risks. The insurer cedes risk to the pool under a treaty reinsurance agreement. The insurer may be a part owner of the pool and may assume a quota share of the pool risk. A captive reinsurance pool may be owned by the original insureds. Some pools are operated by states to provide capacity for hard-to-place risks.
reinsurance recoverable: Amount of an insurer's incurred losses that will be paid by reinsurers. May require collateralization if cedent is to record the recoverable as an asset for statutory reporting purposes.
reinsurance treaty: An agreement between an assuming and ceding company to cede and assume all risks within a class. See also treaty reinsurance.
reinsurer: The company to whom risk is transferred or ceded.
reinsurer's margin: The "profit and administration" factor of the reinsurer, generally calculated on gross cession.
related risk: The risks of insureds owned by or affiliated with the owner(s) of or participant(s) in a captive.
rental captive: A captive insurance company that allows unrelated parties ("participants") to use the captive for a fee, thereby eliminating the need for formation and operation of a new company. The participant may or may not be required to contribute capital, and may or may not be a preferred shareholder in the rental captive. Provided such use is permitted in a domicile, rental captive participants may be insureds or noninsureds such as insurance agents. See also segregated cell captive.
replacement cost: The actual cost of replacing property that has been damaged or destroyed with new property of like kind and quality without regard to physical depreciation.
reporting lag: The amount of time between the occurrence of a loss and when it is reported to an insurer.
reporting policy: A policy that states premium based on the actual reported exposures. The insurer must report values to the insurer periodically.
reservation of rights: An acknowledgment by an insurer to a claimant that it has received notice of loss and so has the right to investigate it, but that by accepting the claim, the insurer has not agreed that the loss is covered by its policies.
reserve: 1. An amount set aside to cover the expected amount of loss or a fund set up as a contingency to cover future losses. Case reserves are reserves on particular claims, while supplemental reserves are for incurred but not reported (IBNR) claims. 2. The amount of premium collected but not earned, which would have to be returned if the insurance was canceled. (See also unearned premium (UEP).)
residual market loads (RMLs): A charge to an insurer for its share of losses and expenses incurred by a state's residual market pool (a mechanism for insuring "bad risks"). Also known as assigned risk charges. RMLs are assessed based on the amount of premium the insurer writes in that state. Insurers add the expense load to the premium paid by "good risks."
retention: Retained risk not deducted from policy limits for loss payment purposes but contributing to underlying limits for attachment of umbrella coverage. Also known as a self-insured retention (SIR).
retention ability: The amount of aggregate incurred losses that an insured can retain in any one financial reporting period without creating an adverse impact on cash flow or earnings.
retroactive date: In claims-made insurance, the policy inception or an earlier specified date. To be covered under the policy, the insurer must be put on notice of the claim after the retroactive date.
retroactive insurance: Providing insurance coverage for losses incurred prior to inception of the insurance period. Assumption by the insurer of an unknown amount of risk arising from incurred losses, whether known or unknown.
retrocedent: Ceding reinsurance company.
retrocession: Reinsurance of reinsurance.
retrocessionaire: Assuming company under a retrocession agreement.
retrocessional pools: Treaty reinsurance where the cedent or retrocedents are also retrocessionaires of the same treaty, with the objective of achieving improved risk distribution. The premiums and losses in the pool are retroceded based on the fraction of the total reinsurance written by each cedent. Usually a surplus share agreement.
retrospective aggregates: Transfer of a portfolio of retroactive insurance risk or self-insured balances–insuring the incurred but not reported (IBNR) and incurred but not enough (IBNE)–all risks ceded for an agreed price.
retrospective rating: Determining the final amount of premium to be paid after the close of the policy period, rather than before. A formulaic approach developed for rating workers compensation based on paid or incurred losses during and after the policy period. See also experience rating and prospective rating.
rider: An attachment to an insurance contract expanding the coverage provided by the contract. (See alsoendorsement.)
right of offset: A provision in a reinsurance agreement whereby balances due under a reinsurance agreement may be netted out against recoverables under the same agreement.
risk: A specific combination of exposures, perils, and hazards.
risk assumption: See assumed risk .
risk-based capital (RBC): A recommended amount of capital, based on an assessment of factors such as the amount of reinsurance purchased and an insurer's investment policy. May be higher or lower than the amount of capital required under a solvency ratio.
risk capital: See capital at risk .
risk concentration: The underwriting of a number of like risks, where the same or similar loss events could involve multiple subjects of insurance insured by the same insurer.
risk distribution: The sharing of loss costs between insureds in a risk pool.
risk gap: The difference between the net premium plus capital and surplus and net retained insurance or reinsurance limits.
risk index: Average losses for a homogeneous group of risks, used for risk pricing purposes.
risk management: The process of identifying, analyzing, assessing, and controlling loss exposures; using physical and human resources to minimize the impact of loss through methods of risk reduction, risk financing, or risk avoidance.
risk pool: Multiple subjects of insurance insured or reinsured by a single insurer, where to avoid risk concentration and improve risk distribution, different combinations of exposures, perils, and hazards will be underwritten.
risk purchasing group (RPG): A group of unrelated insureds jointly purchasing liability insurance pursuant to the terms of the federal Risk Retention Act of 1986.
risk reduction: Measures to reduce the frequency or severity of losses, also known as loss control. May include engineering, fire protection, safety inspections, or claims management.
risk retention: A conscious or unconscious decision by an individual or organization not to transfer its risk of loss to another party using an insurance or noninsurance risk transfer technique.
risk retention group (RRG): An insurance company formed pursuant to the federal Risk Retention Act of 1981, which was amended in 1986 to allow insurers underwriting all types of liability risks to avoid cumbersome multistate licensing laws. An RRG must be owned by its insureds. Most RRGs are formed as captives and must be domiciled onshore, except for those grandfathered under the 1981 Act.
risk securitization: The use of a debt or equity instrument (security) to finance risk, using a risk index to value the security and/or a specified loss event as a determinant of the interest or repayment date. Risk securities are issued by a special purpose vehicle (SPV).
risk shifting: Transferring risk to an insurer to distribute the cost of losses between the members of a risk pool.
risk smoothing: Financing risk in such a way that the financial impact of incurred losses is distributed between members of the risk pool over more than one financial reporting or policy period. Also known as chronological stabilization plans.
risk tolerance: The willingness of an organization to incur risk to gain future reward. In insurance, risk tolerance may be evidenced by a willingness of the insured to increase deductibles or self-insured retentions (SIRs), but alternative risk transfer is used by insureds with low risk tolerance–i.e., a desire to reduce the uncertainty arising from purchase of commercial insurance. Compare to retention ability.
rolling policy limits: The amount of insurance stated at inception of the policy period is an aggregate limit over a multiyear period, with premium adjusted at each annual anniversary to provide a continuous multiyear limit and an extended notice period for cancellation based not on the annual anniversary but the end of the multiyear policy period.
salvage: An amount recovered by the insurer from sale or disposal of insured property following a loss.
schedule: A list of coverage or amount concerning things or people insured.
security requirements: Obligation to provide acceptable security to cover self-insurance or reinsurance liabilities. May be based on the ceding company's statutory requirement to secure nonadmitted balances or on the cedent's or regulatory authority's concern regarding the self-insured or reinsurer's credit risk. Also known as collateral.
segregated cell captive (SCC): A special purpose insurer (typically operating as a rental captive) that establishes legally segregated cells or underwriting accounts. The objective is to ensure that assets in one underwriting account may not be used to satisfy liabilities in another underwriting account, nor the general (noncellular) liabilities of the SCC. Noncellular assets may or may not be available to satisfy cellular liabilities. May also be called a segregated portfolio company (SPC), protected cell company (PCC), or a separate account company (SAC).
self-insurance: 1. Retaining risk through the maintenance of internal reserves. See also qualified self-insurer.2. "Going bare"—i.e., no purchase of insurance and no recognition of incurred losses until they are paid.
self-insurance pool: A legal entity regulated by the states that allows unrelated insureds to retain their own risks and collectively purchase claims administration services and excess insurance to meet statutory coverage requirements.
self-insured retention (SIR): 1. The amount of losses that an insured must pay before their excess insurance policy attaches. Unlike a deductible, the SIR is not a deduction from the limit paid by the insurer. The losses paid in satisfaction of the SIR must be losses that would be covered under the excess policy, in the absence of an SIR. 2. Uninsured losses—see also risk retention.
series business unit (SBU): A self-governing and protected company formed under the umbrella of a series limited liability company (series LLC), currently permitted in Delaware. The SBU is an independent insurance company capable of issuing policies directly or policies fronted by a commercial insurer to the insured company and third parties. Each SBU has a unique business purpose and an independent tax identification number. The SBU's business purpose, taxpayer election, and coverage offerings are specified. Unlike the protected cells or segregated accounts of rent-a-captives, SBUs have greater flexibility offered by self-governance. A series business unit is protected from the financial obligations of other SBUs by Delaware statute.
service fulfillment insurance: Insurance to protect against losses arising from the requirement to perform services within a specified time period. Can be sold separately or as part of a product warranty.
settlement lag: The time between the first report of a claim and the date the claim is closed (fully paid).
short-duration contract: Annually renewable or multiyear policy (e.g., 3 years) with an annual premium payment and no guaranty of renewal following the end of the policy period.
short-rate cancellation: A financial penalty incurred when the insured cancels an insurance contract prior to the expiration date of the contract. The insurer keeps a percentage of unearned premium (UEP) to cover costs.
single-owner captive: A captive with a single shareholder. May be refereed to as a "single parent" captive. The single-owner captive is not necessarily a "pure" captive since it may be used primarily to insure or reinsure nonshareholder risks. See also group captive; profit center captives.
sliding scale commission: A ceding commission that varies inversely with the loss ratio under the reinsurance agreement. The scales are not always one to one; for example, as the loss ratio decreases by 1 percent, the ceding commission might increase only 5 percent.
slip: A binder often including more than one reinsurer. At Lloyd's of London, the slip is carried from underwriter to underwriter for initialing and subscribing to a specific share of the risk.
solvency margin: The insurer's unimpaired surplus as a percent of outstanding loss reserve (OLR).
solvency ratio: The ratio of net premium written to surplus, or surplus to reserves.
sophisticated insured: An insured not requiring the same level of protection under insurance laws as an average insurance consumer. See also industrial insured.
special purpose vehicle (SPV): A bankruptcy remote company used to assume specified assets and liabilities. May be used to issue debt or equity instruments. For securitizing risk, a protected cell captive is used as the SPV, since it can first assume the risk through an insurance contract and keep assets secured from other liabilities of the captive.
special acceptance: The facultative extension of a reinsurance treaty to embrace a risk not automatically included within its terms.
special risks: Property insurance policy that insures against all perils unless they are excluded. Formerly called an "all risks" policy.
specialty risks: Term used by commercial insurers to describe unusual coverage features or types of risks they typically do not underwrite.
specific loss limit: The amount of risk retained by an insured or an insurer on a per-occurrence basis.
sponsor: The legal entity that contributes statutory capital to form a sponsored or association captive.
sponsored captive: A single-owner or group-owned rental captive, typically formed as a segregated cell company. The sponsor(s) may or may not have capital at risk. In some domiciles, the sponsor has to be an insurance or reinsurance company.
spread loss: A form of reinsurance under which premiums are paid during good years to build up a fund from which losses are recovered in bad years. This reinsurance has the effect of stabilizing a cedent's loss ratio over an extended period of time.
spread of risk: The pooling of risks from more than one source. Can be achieved by insuring in the same underwriting period either a large number of homogeneous risks or multiple insured locations or activities with noncorrelated risks.
standard premium: Premium established by using rates believed by underwriters to reflect the standard or average risk for the class, before application of retrospective rating formulas. When debits and credits based on the insured's loss history or exposure are applied, the standard premium equals the pure premium.
statement blank: See convention statement.
static risk modeling: Using specified assumptions to illustrate the financial impact of losses. A static risk model is useful to project financial results for one type of risk in a stable operating environment. Integrated risk modeling (noncorrelated risks within the same organization) may require a dynamic approach.
statutory accounting principles (SAP): Rules for insurance accounting codified by the National Association of Insurance Commissioners (NAIC) or as promulgated by a domicile as rules to be used in reporting an insurer's results to regulators.
statutory capital: The amount of capital and/or surplus required in order for an insurance company to obtain and retain a license to do business. May be stated as a minimum dollar amount or by reference to a solvency ratio or a solvency margin. See also capital.
statutory coverages: Lines of insurance required by law, such as workers compensation, auto liability, and pollution liability (for underground storage tanks and waste disposal sites).
statutory inspections: In boiler and machinery insurance, the requirement for inspection of pressure vessels as a condition of insurance. See also inspection fees.
statutory insurance: Insurance that the insured is required to buy, under a country, state, or federal law.
stock captive: A special purpose limited liability insurer that raises capital by selling shares to shareholders, and is controlled by its shareholders.
stop loss: Protection against an accumulation of losses for all or certain risks written in any one year. Retention expressed as a loss ratio or factor of underwriting income. See also aggregate stop loss.
subject of insurance: One or more units of exposure potentially involved in a single loss event.
subject policies: Policies issued by the original insurer (the "original policies") subject to the terms of a treaty reinsurance agreement.
subject premium: The amount of original policy premium to be paid under an excess of loss reinsurance agreement or subject to pro rata terms under a proportional treaty. Subject premium is a gross number, used for calculating taxes due. The amount ceded may be net (after deductions for front fees, commissions, and excise tax, if applicable).
subrogation: The right of an insurer to recover from a third party an amount paid on a loss when the third party is at fault.
supplementary employee retirement plan (SERP): A nonqualified retirement program—i.e., not subject to ERISA. Usually for highly compensated employees, allowing for deferral of income.
surety insurance: The insurer (surety) agrees to pay losses caused by a bond default. See also bond.
surplus: In a stock insurer, the amount of equity of an insurer in excess of statutory capital, earned or paid in by shareholders. In a mutual, the contributions of members or retained earnings. May or may not be part of capital at risk.
surplus debenture: a debt instrument accounted for as equity under statutory accounting rules, used when investors loan surplus to an insurer rather than posting a letter of credit. (Also referred to as a subordinated debenture.)
surplus lines broker: Licensed on a state-by-state basis to sell surplus lines. Responsible for collecting and paying the premium tax for nonadmitted business sold by a surplus lines insurer. Responsible to consumer if the surplus lines insurer defaults on claims.
surplus lines insurance: Nonadmitted insurance sold by surplus lines brokers, who are responsible for determining the financial condition of the insurer, and collecting and remitting premium taxes. Surplus lines insurers that have met certain financial strength criteria can be "white listed" by the National Association of Insurance Commissioners (NAIC).
surplus relief: Reinsurance or loss portfolio transfer (LPT) undertaken to allow the ceding company to comply with solvency ratios limiting the amount of loss reserves retained in proportion to equity.
surplus share: Treaty reinsurance that allows the cedent to reinsure a varying percent of risk. The cedent retains a fixed dollar amount and cedes any risk excess of that amount.
tax acceleration: Taking a tax deduction in the period an expense is incurred, rather than when it is paid in a subsequent period, resulting in an immediate temporary decrease in tax expense and a permanent increase in after-tax income, on a net present value basis, by an amount determined by the length of the acceleration period.
tax harmonization: A euphemistic term for tax increases, promoted by governments in high-tax jurisdictions, in an effort to encourage other jurisdictions to follow their taxing policies, so eliminating "tax havens" for internationally mobile businesses.
Tax Reform Act of 1984: Included two sections that increased the tax bill of an offshore captive insurer defined as a controlled foreign corporation. One section redefined income related to the insurance of U.S.-based risks as U.S.-source income instead of foreign-source income. Another section made income from the insurance of related risks in foreign countries taxable in the current year. The net effect of these two changes was to eliminate most tax advantages for an offshore single-parent captive.
Tax Reform Act of 1988: The major change imposed by this Act affected offshore group captives in that the definition of a U.S. shareholder was changed from an ownership interest of 10 percent or more to any shareholding interest.
third party: Someone other than the insured and the insurer. In liability insurance, the insurance provides defense against claims or suits brought by third parties, hence the term "third-party insurance."
third-party administrator (TPA): A licensed claims adjuster that is not an employee of the insurer or the insured. See also adjuster.
third-party risk: Insurance to protect the named insured from liability to unrelated parties.
time element loss: Loss resulting from inability to use a property. Examples are business interruption, extra expense, rental income, etc.
timing risk: Uncertainty surrounding the timing of a loss occurrence and its payout profile.
tort: A noncriminal and noncontractual wrong; a negligent action that is the proximate cause of resulting injury or harm to a third party.
transfer pricing: Payments for goods or services exchanged between affiliated companies, where the payment is not "market rate" and the intention is to transfer revenues on a pretax basis from one taxation jurisdiction to another, to earn income in the country with the lowest effective tax rate.
treaty reinsurance: An automatic or "obligatory" contract; all risks are assumed or ceded within a defined underwriting class. Usually a continuous until canceled contract.
trend analysis: Tracking incurred and paid losses over multiple time periods to determine the rate of increase or decrease in average paid claims.
trending factor: The percentage by which average paid claims increase or decrease over time.
ultimate loss: The amount of loss paid over time from a single occurrence. See also incurred loss. Funding to ultimate means establishing a reserve in the year the loss is incurred in an amount sufficient to pay the claim in full in a future period.
ultimate net loss: This term usually means the total sum that the assured, or any company as its insurer, or both, become obligated to pay either through adjudication or compromise, and usually includes hospital, medical, and funeral charges; all sums paid as salaries, wages, compensation, fees, charges, and law costs; premiums on attachment or appeal bonds; interest; expenses for doctors, lawyers, nurses, and investigators and other persons; and for litigation, settlement, adjustment, and investigation of claims and suits that are paid as a consequence of the insured loss, excluding only the salaries of the assured's or of any underlying insurer's permanent employees.
umbrella coverage: Covers losses in excess of amounts covered by other insurance policies and/or self-insured retentions; often providing broader coverage than primary policies.
unaffiliated business: Also known as unrelated or open market risk. Insurance of noncontrolled entities—i.e., insureds not in the same corporate organization (less than 50 percent ownership) or not under common management control.
unallocated loss adjustment expenses (ULAE): All external, internal, and administrative claims handling expenses, including determination of coverage, that are not included in allocated loss adjustment expenses (ALAE).
unbundling: When an insurer agrees to allow a third party to adjust claims and provide other services usually provided by the insurer such as engineering or safety inspections.
underwriter: A person with the responsibility of selecting and rating risks to insure.
underwriting: The selection of risks to be insured.
underwriting capacity: The risk assumption and/or retention ability of an insurer, or of the insurance industry as a whole. Determined by the amount of surplus. See also risk capital.
underwriting cash flow: Net collected premiums (net of reinsurance premiums) less losses, loss adjustment expenses (LAE), and underwriting expenses paid.
underwriting class: All risks with a specified risk profile—e.g., age, location, and occupation. Risks are classified using characteristics likely to produce the same or similar loss experience for each risk over time.
underwriting cycle: See market cycles.
underwriting expenses: All expenses for the insurer related to policy acquisition, maintenance, and general overhead of the company.
underwriting profit: Insurer profit before investment income and income taxes. See also combined ratio.
underwriting risk: Uncertainty about whether or when a loss will occur and its amount.
unearned premium reserve (UPR): The amount of unexpired premiums on policies or contracts as of a certain date (the total annual premium less the amount earned).
unimpaired surplus: A stock insurer's equity that is over and above statutory minimum capital and is not used for collateralization of assumed risk or otherwise pledged in support of the insurer's or an affiliate's business activities. For a mutual insurer, it is funds not allocated as collateral, loss, or premium reserves nor intended for distribution to members.
unrelated business income tax (UBIT): Tax paid on income earned in an affiliate. Could be paid by a tax-exempt entity as a result of receiving income earned by a profit-making entity, also called unrelated business taxable income (UBTI).
valuation clause: Policy provision that states how losses will be valued (actual cash value or replacement cost).
value of risk (VOR): The contribution to shareholder value or other stakeholder interests resulting from a risk-taking activity. Like the "captive value added" concept, VOR looks at components of the cost of risk as an investment required to further organizational objectives.
valued policy: The policy pays a predefined loss amount not related in any way to the actual incurred loss. Used mostly in life and death insurance.
values: The exposure data that must be submitted by an insurer as part of its underwriting submission, to allow for premium calculation.
vanishing premium: Policies where future premiums are paid by the buildup in cash value or the experience account of the insured. Used mostly in life insurance but can be a feature of policies of indemnity written on a finite risk basis.
variable interest entity (VIE): An affiliated or nonaffiliated entity in which a company is deemed to have a financial interest, even if such interest is not evidenced contractually. Typically used to hold or transfer tangible and intangible assets and liabilities.
vicarious liability: Responsibility for the actions of another as a result of a particular relationship—e.g., employer and employee, parent and child, business and independent contractor. Also known as contingent liability.
Voluntary Employees' Beneficiary Association (VEBA): Established by employers under the U.S. tax laws as a pretax method of funding certain employee benefits. Like a trust, once money is in a VEBA, it cannot be withdrawn, except to pay benefits.
waiver: Voluntary surrender of a right or privilege known to exist; for example, waiver of subrogation rights by the insurer in favor of the insured in a back-to-back deductible policy; waiver of the right to sue in a hold harmless clause.
wholesale broker: A broker for independent agents. Can be a managing general agent (MGA) or surplus lines broker. All business submitted to a certain insurer or for a certain type of business goes through this broker, which may have an exclusive arrangement with an insurer or a syndicate of reinsurers.
working layer: The first layer above the cedent's retention wherein moderate to heavy loss activity is expected by the cedent and reinsurer. Working layer reinsurance agreements often include adjustable features to reflect actual underwriting results.
wrap-up: Insurance for a number of unrelated insureds involved in the same subject of insurance. Used in construction projects for independent contractors.
written premium: See gross written premium (GWP) .
Yellow Book: The annual reporting form for property and casualty insurers in the United States. See also convention statement. Also known as Yellow Peril, for its size and complexity, although with the advent of computerized work sheets, electronic filings, and some of the information in this text, much less of a peril than in the days of typewriters and calculators.