Captive Insurance Glossary A-C

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

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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).

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