Captive Insurance Glossary D-J

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

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

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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance explores the challenges presented by today's business and economic upheaval, as well as the hardening insurance market, and what it means for the captive insurance industry.

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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.

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