Abstract
A summary of key terms and conditions of reinsurance agreement used as reference material to process reinsurance transactions.
Accident Year
The actual calendar year during which an accident or occurrence takes place which gives rise to an insurance and/or a reinsurance claim.
Accident Year Experience
Profit or loss which results from a matching of premiums and losses applicable to the calendar year during which the losses took place.
Adjustment Premium – The additional premium, payable to an excess reinsurer, determined by applying the contract rate to the subject premium and deducting the deposit premium previously paid.
Administration Expenses – Costs which are commonly referred to as “overhead”, and which generally include expenses other than acquisition costs and allocated loss adjustment expenses. Such expenses may include salaries, rent, travel, etc.
Admitted Assets – Assets which have been recognized and approved by regulatory authorities in evaluating the financial condition of an insurance and/or reinsurance company.
Admitted Company – An insurance or reinsurance company which has been approved by regulatory authorities, and which is authorised to conduct business in a given jurisdiction.
Affiliated Companies – Companies which are related by common ownership (in whole or in part).
Agency Reinsurance – Facultative or treaty reinsurance placed by an insurance agent who originally produced the subject business on behalf of an insurance company.
Agent – An individual or firm which has been authorised to produce insurance business on behalf of a specific carrier. Such authorization may include a narrow or broad range of authority, depending on the terms and conditions of the agent’s agreement with the carrier, and the requirements imposed by state regulatory authorities.
Aggregate Deductible or Retention – The amount or percentage of loss generated from multiple events which must be accumulated prior to cession under a reinsurance agreement. Normally, such retention is applicable to an aggregate excess reinsurance contract, but such retention may also be required under a risk or occurrence excess which specifies that the carrier must bear a certain number of losses before the attachment of the contract involved.
Aggregate Excess Reinsurance – A form of excess reinsurance which generally applies to an accumulation of losses during a specified period of time and which arise from more than one loss event or occurrence.
Aggregate Extension Clause – A provision in an occurrence excess reinsurance contract which may allow a cedant to add together claims (which are not necessarily related to one and the same cause/event) from original policies with aggregate limits, and provide an extension of the reinsurance coverage until the expiration date of such policies.
Alien Insurer – An insurance company which is chartered outside the U.S., which is differentiated from a “foreign” insurer domiciled in a state other than the state in which it is doing business.
Allocated Loss Expenses– See Loss Adjustment Expenses.
Amortisation Period – See Payback Period
Amount Subject – The maximum policy limit and/or loss which would involve the application of a reinsurance agreement. Also see Subject Loss.
Annual Statement – The financial reporting form which is required by state regulators for licensed companies which are authorised to do business in those jurisdictions. Also see Convention Blank/Statement.
Annual Report – A booklet or presentation which sets forth a company’s financial statements, including narrative comments which explain the company’s performance during the preceding year. A company is not obligated to adhere to any specific requirements concerning such a report which is generally prepared for a company’s policyholders and other interested parties.
Are– See Associate in Reinsurance.
Arbitration – A form of dispute resolution which relies on the decision of one or more arbitrators and takes place in a private hearing where the result is only binding on the parties to the proceeding.
Arbitration Clause – A contract provision which sets forth the arbitration procedure designed to resolve disputes arising from a reinsurance contract.
Asbestos Claim Facility (ACF) – An organisation of insureds and insurers whose primary purpose was to serve as a clearing house for gathering amid disseminating claim and coverage data, in an effort to streamline the process and economise the costs associated with settlement of asbestos related claims. ACF was succeeded by the Centre for Claims Resolution. Also see Centre for Claims Resolution and Wellington Agreement.
Associate in Reinsurance (ARe) – A professional designation which is awarded by the Insurance Institute of America upon completion of an educational curriculum for reinsurance practitioners.
Assume – To accept reinsurance under a reinsurance agreement.
Assumed Portfolio – An in-force block of insurance or reinsurance business which has been accepted by a company under a reinsurance agreement.
Assumed Reinsurance – The insurance-related risks and obligations which have been accepted by a reinsurer from a ceding company.
Assumption – The process by which a company accepts reinsurance business.
Assumption Endorsement– A policy document whereby a reinsurer accepts direct liability to a company’s policyholder upon the insolvency of that policy-issuing company. Such endorsements are normally required by mortgagees and policyholders who are concerned about the security of the policy issuing company. Also referred to as a Cut-Through Endorsement.
Attachment Point – See Retention.
Attorney Client Privilege – A law of evidence which protects certain communications between a lawyer and his client from disclosure. Also see Privileged.
Authorised Reinsurance – A reinsurance agreement approved by regulatory authorities and/or placed with reinsurance companies which have been admitted to do business in a given jurisdiction. Also see Obligatory Treaty.
Automatic Facultative Agreement – Sec Facultative Obligatory Treaty.
Automatic Reinsurance – A reinsurance agreement, which allows a company to cede, and obligates a reinsurer to accept insurance coverage applicable to a block or portfolio of business.
Bar Date – A court-established deadline for the filing of claims against an insolvent company.
Base Premium – See Subject Premium.
Basic Limits – Minimum limits of bodily injury and property damage liability written by a company, the premiums for which are determined from published or manual rates.
Binder – A reinsurer or broker’s written confirmation which sets forth the agreed terms of an insurance or a reinsurance placement. Also see Cover Note.
Binding Authority – The power or authority granted to another party or agent to accept business on an insurer’s or a reinsurer’s behalf.
Blanket Reinsurance – A reinsurance contract which provides coverage for one or more lines of business.
Book of Business – See Portfolio.
Bordereau – A detailed accounting statement which contains a list of premiums and losses generally ceded under a pro-rata reinsurance treaty.
BRMA– See Brokers and Reinsurance Markets Association.
Broker- See Intermediary.
Broker Cover – A Facultative Obligatory arrangement, common to the London market, which enables a broker to accept risks within the terms of a contractual agreement with companies participating as insurers or reinsurers in that facility.
Broker Market – A reinsurer which derives most of its business through the services of a reinsurance intermediary. Such term may also be applied to a collection of reinsurers which do business on the aforementioned basis.
Broker of Record Letter – A document which serves as evidence of a company’s appointment of an intermediary to place reinsurance protection on its behalf.
Brokers and Reinsurance Markets Association (BRMA) – A trade association of large broker markets and intermediaries in the U.S.
Brokerage – The compensation which a reinsurer pays to a reinsurance intermediary. Such compensation is generally a percentage of premium and varies in accordance with the type of reinsurance contract placed on behalf of the ceding company.
Brokerage Commission– See Brokerage.
Buffer Layer – A term, generally applicable to casualty coverages, which describes an intermediate level of coverage between an underlying policy or contract which is subject to frequency of loss, and a top or higher level of coverage which is exposed to a severity of loss.
Bulk Reinsurance – See Portfolio Reinsurance.
Burning Cost– An experience rating formula which is determined by the ratio of losses above a given retention in relation to the subject premium applicable to the contract involved. Such “burning cost” is generally established for a specified period of time, normally three to five years, and is generally used as a pricing mechanism for spread loss reinsurance or a working cover.
Calendar Year Experience– The matching of premiums and losses which are entered into a company’s records during twelve calendar months.
California Earthquake Authority – A residual market concept which would envision a pooling arrangement, financed by private and public sources. to provide earthquake coverage in California.
Cancellation Ab Initio – Termination of a contract retroactive to the inception of the agreement. Also see Rescission.
Capacity – The extent of a company’s commitment and/or financial ability to accent given levels of insurance or reinsurance business.
Capital Market – A term used to describe a source of financing which may be applied as an alternative and/or supplement to coverage provided by a reinsurance market.
Captive – An insurance company which has been formed by a non-insurance company or association for the primary purpose of insuring the risks and exposures of the parent organisation.
Carpenter Plan – See Spread Loss Reinsurance.
Casualty Catastrophe Cover – See Clash Cover.
Catastrophe Number – The numeric designation assigned by Property Claims Services (PCS), a division of American Insurance Services Group, to a catastrophe occurrence which generates an industry loss above a certain magnitude. Lloyd’s uses a similar description which combines the year and a letter of the alphabet for world-wide catastrophes; e.g. 87J, 90A etc.
Catastrophe Reinsurance – A form of property excess of loss reinsurance which indemnifies a ceding company in excess of a retention applicable to a combined loss involving multiple risks and which arises from one event.
Catastrophe Risk Exchange (Catex) – A marker designed to facilitate the “swapping” of units of one catastrophe exposure; e.g. hurricane, with units of another exposure; e.g. earthquake to improve a company’s spread of risk.
Cedant – Another term for Ceding Company. Also see Reinsured.
Cede – To transfer a portion of a company’s insurance exposure to another party under a reinsurance agreement.
Ceded Reinsurance – The portion of risk which is transferred from an insurance company to a reinsurer.
Ceding Commission – The percentage of the amount of premium paid by the reinsurer to compensate the cedant for the acquisition costs and overhead expenses related to the ceded business.
Ceding Company – The company which transfers (cedes) a portion of its insurance risk to another party commonly known as a reinsurer. (Also known as the ‘reinsured”). Also see Reinsured.
Centre for Claims Resolution (CCR) – The successor organisation to the Asbestos Claims Facility
(ACF) which is comprised of asbestos producers who seek to arrange global elements of their liabilities. Also see Asbestos Claim Facility and Wellington Agreement.
CERCLA – See Comprehensive Environmental Response, Compensation, and Liability Act.
Cession – The transfer of insurance risks from a ceding company to a reinsurer which may describe an individual risk or a book of business ceded as a whole.
Cession Profile – A summary of individual risks ceded under a reinsurance contract, including such information as the name of insured, policy term, limit, etc., which may be listed in certain categories, such as by types of insureds, limits, etc. This information is often requested by reinsurers to evaluate their exposure under a reinsurance treaty.
Chicago Board of Trade – A commodities exchange located in Chicago, Illinois which offers derivative products designed as alternatives and/or supplements to traditional reinsurance arrangements.
Claims Cooperation Clause – A contract provision which requires that reinsurers be notified of claims and invited to participate with the cedant in the defence of those claims.
Claim Expenses – Sec Loss Adjustment Expenses.
Claims Made Coverage – A basis of insurance or reinsurance protection which provides coverage for claims reported during a designated period, normally 12 months, regardless of the actual date of loss.
Clash Cover– Casually excess coverage in excess of retention which is greater than the limit of any one insurance policy subject to the contract. The agreement is thus only exposed to loss when two or more policies are involved in a common occurrence; e.g., general liability policy and an auto policy, for a total amount greater than the retention level under the clash cover. Such agreement may also be referred to as a casualty catastrophe cover.
Clean-Cut – See Cut-Off.
Combination Plan Reinsurance – See Combination Pro Rat/Excess Reinsurance.
Combination Pro Rata/Excess Reinsurance – A reinsurance agreement which combines pro rata coverage (quota share and/or surplus reinsurance) with an excess of loss form of coverage within a single contract. In addition to excess coverage above a fixed retention, the reinsurer also assumes a fixed percent of the ceding company’s retention under the agreement. The premium for such combination reinsurance is generally a fixed percentage of the ceding company’s subject premium. This type of coverage may also be referred to as combination plan reinsurance.
Combined Ratio – The arithmetic sum of two ratios: namely, incurred loss to earned premium, plus acquisition/administrative expenses to written premium. Such combined ratio is commonly used to measure the profit (extent to which the combined ratio is less than 100%) of loss (portion of the combined ratio above 100%) of an insurance or reinsurance operation.
Commission Ceding – See Ceding Commission.
Commission Profit – See Profit Commission.
Commission Sliding Scale – See Sliding Scale Commission.
Common Account Reinsurance – Reinsurance coverage arranged by a cedant to protect both itself and its pro rata reinsurers, and for which premiums are paid and losses recovered according to the extent of benefit derived by each party from such reinsurance.
Commutation – A process by which all future abilities are finalised with respect to a reinsurance relationship. A commutation normally involves payment by the reinsurer of an amount which would reflect a “present value” calculation of all future liabilities which may be anticipated under the agreement, in exchange for a release of liability from the cedant with respect to any future obligations.
Commutation Clause – A provision in a reinsurance agreement which specifies the terms and conditions for a commutation of a reinsurer’s liability under that agreement. Such clauses are often found in contracts which involve reinsurance for workers compensation exposures.
Commute – See Commutation.
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) – A federal law passed in 1980 und modified in 1986 by the Superfund Amendment and Reauthorization Act
(S. A R.A.). The Act created a special tax that goes into a trust fund, commonly known as Superfund, to investigate and clean up abandoned or uncontrolled hazardous waste sites.
Concurrent Terms – The provisions of a reinsurance agreement which apply uniformly to all reinsurers participating in the same contract of reinsurance. Non-concurrent terms are provisions which may be different from one reinsurer to another.
Consent Decree – In the context of Environmental Protection Agency (EPA) actions, a court approved agreement between the EPA and potentially responsible parties (PRPs) where PRPs clean up all or part of a Superfund Site. The Consent Decree describes actions that PRPs are required to perform, and is subject to public comment.
Conservation – The regulatory process by which an insurance company’s affairs are administered to preserve the company’s assets.
Conservator – The individual appointed by the court and/or regulatory authority to assume responsibility for the activities of an insurance company which is deemed to be in a hazardous financial condition.
Contingent Commission – See Profit Commission.
Convention Blank/Statement – Another name for the Annual Statement form to be filed with the various state insurance departments, as required by the National Association of Insurance Commissioners. Also see Annual Statement.
Corporate Capital – A term used to describe newly formed investment vehicles participating in Lloyd’s of London.
Corridor Deductible – A provision which may be found in certain pro rata reinsurance agreements and which may require the reinsured to assume additional liability for losses ceded above an agreed loss ratio. Generally, reinsurers will reassume liability when such losses exceed the agreed “corridor”.
Cover Note– A written summary prepared by the reinsurer of the intermediary setting out the terms and conditions of a reinsurance agreement, and which is normally provided to the reinsured prior to preparation of the actual contract wording or facultative certificate.
Also see Binder.
Coverage Trigger-The event or occurrence which results in a loss under an insurance or reinsurance agreement.
Cut-Off – A method of terminating a reinsurance agreement whereby the reinsurer has no obligation for losses which may occur subsequent to an agreed date. Normally such provision would be found in a pro rata agreement and would specify a return of the ceded unearned premiums as of the cut-off date. (Also known as a “Clean-Cut” Provision).
Cut-through Endorsement – See Assumption Endorsement.
Declaratory Judgment (DJ) Action – A suit initiated by an insured, an insurer, or a reinsurer seeking a judicial declaration as to the extent of coverage provided under an insurance policy or reinsurance agreement.
Deductible – See Retention.
Deep Pockets – A social theory which suggests that claims should be recovered from those parties which demonstrate an ability to pay, rather than based on a determination of factual elements of a disputed situation.
Department of Trade and Industry (DTI) – The governmental authority responsible for the regulation of the insurance industry in the United Kingdom.
Deposit Accounting – A method of recording ceded premiums and losses which, due to the absence of acceptable risk transfer, do not otherwise qualify for reinsurance accounting methods.
Deposit Premium– The agreed reinsurance premium which is billed at the inception of a treaty (normally an excess of loss contract) and at periodic intervals during the term of such treaty. The deposit premium may be subject to adjustment at the conclusion of a treaty, based on the actual developed premium during such period.
Derivatives – Financial instruments whose values are determined by underlying assets, and which may be used as a hedge against interest rate fluctuations.
Direct Writer – A reinsurer which markets its products “directly” to reinsureds without the use of an intermediary or a reinsurance broker.
Direct Written Premium – The original premium arising from a reinsured’s policies, adjusted for additional or return premiums, but without deduction for premiums paid under reinsurance agreements.
DJ (Declaratory Judgement) Costs – Legal expenses incurred by a ceding company to determine coverage issues, and which may be unrelated to the defence of a particular claim.
Domestic Company – Description of an insurer conducting business in the state where it received its original charter to write insurance (as may be differentiated from a “foreign” company conducting business in a state other than its original state of origin; or an “alien” company which obtained its charter in a country outside the U.S. but which is conducting business within the U.S.).
Domiciliary State – The state of a company’s incorporation.
Early Warning Tests – Financial ratio and performance criteria designed by the National Association of Insurance Commissioners to identify insurance companies which may require close supervision by state insurance departments.
Earned Premium – The written premium which is applicable on a pro-rata basis to the policy period from inception up to the date under consideration. In determining the earned premium ceded to reinsurers under a pro rata insurance treaty for an annual period, the unearned premium reserve at the beginning of such period is added to the written premium during the period, less the unearned premium reserve at the end of the period.
Eco Clause – See Extra Contractual Obligations.
Environmental Claims – Claims arising from damage to the environment.
Environmental Protection Agency (EPA) – A U.S. government agency which is responsible for the enforcement of laws and regulations pertaining to the environment.
Equitas – A company formed by Lloyd’s of London to assume the open obligations of underwriting syndicates, and to administer the run-off of such obligations.
Errors and Omissions Clause – A reinsurance contract provision which provides that, in the event of inadvertent error or omission by the reinsured, the reinsurer is not relieved from liability, provided that such error or omission is rectified upon discovery.
Escrow Account – A segregated bank account which contains assets held in trust, pending the resolution of a dispute or some other manner. Also see Trust Account.
Excess Judgments – The amounts of loss for which an insurer may be liable in excess of a company’s policy limits, and which may be caused by the insurer’s failure to sequel a claim for an amount within such policy limits.
Excess Limits Premium – The premium charged for liability policy limits above the underlying or “basic” limits and which are generally expressed as a multiple of the basic limits premium. Such excess limits premium is often the basis for the premium paid under casualty excess of loss contracts which apply to those policies with higher limits.
Excess of Line Reinsurance – See Surplus Reinsurance.
Excess of Loss Reinsurance – See Excess Reinsurance.
Excess of Policy Limits Clause – The provision which sets forth a reinsurer’s obligation for losses in excess of a policy limit and which are occasioned by faulty claim handling on the part of the cedant.
Excess Reinsurance – A form of reinsurance which provides a specified limit of coverage above an amount of loss which is retained by the reinsured company from a specified loss occurrence. The premium and rate for such reinsurance is specifically negotiated between the reinsured company and the reinsurer. Such coverage contrasts with pro rata or proportional reinsurance which involves the cession of a specified percentage of coverage and premium in exchange for the corresponding recovery of a similar percentage of loss. Also see Non-Proportional Reinsurance.
Excess per Risk Reinsurance-A form of excess of loss reinsurance which applies in excess of a specified retention applicable to single policy or risk.
Exclusion – A risk, peril, class of insurance, etc., which is not included within the scope of an insurance policy or a reinsurance agreement.
Ex-gratia Payments – Voluntary payments which do not result from a legal or contractual obligation.
Expense Ratio-The percentage relationship which a company’s administrative and acquisition expenses bear to a company’s written premium. Such a ratio does not generally include allocated loss adjustment expenses which are normally released in a company’s loss ratio.
Experience – The financial results of a company’s portfolio of insurance or reinsurance business, or a portion thereof, started in terms of premiums and losses.
Experience Accident Year – See Accident Year Experience.
Experience Rating – A pricing mechanism which adjusts the premium for an insurance or reinsurance agreement based on a matching of premiums and losses applicable to such agreement.
Exposure Theory – A concept of liability which holds that the insurer(s), which provided the policy(ies) at the time of exposure to a condition, must provide coverage for resulting claims. Such theory is prevalent with respect to the treatment of asbestos and environmental claims.
Extended Discovery– An option allowed to an insured, who has purchased a claims-made policy, to extend the period within which a claim may be reported upon cancellation or expiry of such policy.
Extra Contractual Obligations (ECO) – Liability imposed by a court against an insurance company arising from a company’s misconduct or bad faith in handling a claim under its policies. Under normal circumstances, such a claim would not be subject to coverage under a reinsurance treaty unless specifically agreed by wording to that effect.
Extraction Factor – A specified fraction or percentage of an indivisible policy premium which is applicable to certain lines of business or portions of coverage subject to cession under a reinsurance agreement.
Facultative Obligatory Treaty (Fac Oblig) – A reinsurance contract under which the reinsured company has the option to cede certain risks to the reinsurer which is obligated to accept such risks for coverage under the agreement.
Facultative Reinsurance – A type of reinsurance coverage which applies to a single risk and is negotiated on an individual basis. Such reinsurance is different from treaty reinsurance which applies to multiple risks and/or a specified portfolio of business.
Facultative Treaty – This is a unique, and rarely used form of treaty reinsurance which provides for optional cessions by the insured company, but unlike a facultative obligatory or semi-automatic treaty, the reinsurer has the right of rejection with respect to the risks offered by the reinsured company. Also see semi-Automatic Treaty.
Financial Accounting Standards Board (FASB) – A private sector organisation formed in 1973 to develop generally accepted accounting principles (GAAP) in the United States.
FASB 113 – A pronouncement by the Financial Accounting Standards Board which addresses the accounting and reporting for reinsurance of short-duration and long-duration contracts, and sets out the basis for treatment of reinsurance oriented transactions.
Financial Reinsurance – A form of reinsurance coverage which provides coverage with greater emphasis on timing and investment risk rather than the traditional coverage for risk of loss from a company’s underwriting activities.
Financing Function – A feature of pro rata reinsurance which enables a company to recover the expenses related to unearned premium reserves which are ceded to a pro rata reinsurer. As a result, the reinsured company is relieved of the penalty against its surplus which would result without the benefit of such contribution from the reinsurer.
Finite Risk Reinsurance – A description of financial reinsurance which limits a reinsurer’s exposure to underwriting loss.
First Surplus Treaty – A form of pro rata reinsurance enabling a company to cede a variable amount of its subject business over and above its retention and/or the amount which may be ceded under a quota share agreement. The cession to a first surplus is normally expressed as a multiple of the company’s net retention, but subject to a maximum dollar limit specified under the first surplus agreement. Also see Surplus Reinsurance.
Flat Rate – A fixed percentage of a company’s premium charged by the reinsurer for the coverage provided under an excess reinsurance agreement. Such percentage is not subject to further adjustment, and is differentiated from the excess limits premium, and adjustment premium referenced carer in this glossary.
Florida Hurricane Catastrophe Fund (FHCF) – A pooling mechanism which provides catastrophe excess reinsurance to Florida companies, and includes provision for deficit funding by way of assessments and access to the bond market.
Follow the Fortunes – A concept which requires a reinsurer to accept a reinsurer’s actions which pertain to the business ceded under a reinsurance agreement even if not strictly bound to do so. Such concept is typically utilised by a cedant to ensure it can recover “ex gratia” claim sentiment from its reinsurers. Reinsurers are generally reluctant to include such provision under reinsurance agreements which may be misconstrued as providing a blanket acknowledgment of a reinsurer’s conduct which was not otherwise intended, nor covered under the reinsurance agreement.
Following Reinsurer – A reinsurance company which accepts a percentage of a reinsurance contract based on the terms set by another reinsurer designated as the “lead” reinsurer.
Foreign Reinsurer – Generally, a reinsurance company which is domiciled outside a given country, but which may be conducting business within that country. The use of the term “foreign” in the U.S. may also refer to a reinsurer which is a U.S. company writing business in jurisdictions other than its domiciliary state.
Formula Rating – The pricing of a reinsurance agreement based on loss experience plus a loading for reinsurer’s expenses and profit.
Fronting – An arrangement whereby an insurance company retains little, if any, of the risk in an original policy or contract, and which cedes the bulk of its liability to insurers under a reinsurance agreement. Most often, fronting is arranged to enable unlicensed companies to participate in risks underwritten by an agent on behalf of a licensed fronting company.
Fronting Company – A policy-issuing company which retains little, if any, risk from its policies and which is generally paid a fee for the use of its name (and licence) by the reinsurers which assume such business.
Funds Held (or Withheld) – Cash retained by a ceding company as collateral to secure the future obligations of unauthorised reinsurers.
GAAP Accounting – See Generally Accepted Accounting Principles.
Generally Accepted Accounting Principles– (GAAP) – A set of established guidelines intended to generate a consistent reporting of financial transactions. A key element of GAAP accounting is the matching of income and expenses in which acquisition costs are charged to earnings over the term of a policy, which differs from more conservative treatment of disbursements required under Statutory Accounting Principles (SAP).
GNEP – See Gross Net Earned Premium.
GNWP – See Gross Net Written Premium.
Gross Line – The amount of liability assumed by a reinsured company prior to the deduction of any amount ceded under a reinsurance agreement.
Gross Net Earned Premium (GNEP) – A company’s earned premium volume which has been reduced by returns and cancellations and by the amount of premium ceded under reinsurance contracts. Such GNEP is generally the accounted premium prior to the deduction at any expense allowance or commission.
Gross Net Written Premium (GNWP) – A company’s written premium volume which has been reduced by returns and cancellations and by the amount of premium ceded under reinsurance contracts. Such GNWP is generally the accounted premium prior to the deduction of any expense allowance or commission.
Gross Premium– The amount of premium which is derived from the company’s business, including returns and cancellations, but calculated prior to any further deduction for either coded reinsurance or commission allowances.
Gross Loss – The term generally applied to the total amount of loss sustained by a reinsured company before cessions or recovery under a reinsurance agreement. Also referred to as Ground up Loss.
Ground-up Loss – See Gross Loss.
Guarantee Endorsement – See Assumption Endorsement.
Guarantee (Guaranty) Fund – A facility established by individual states to provide a limited amount of coverage for policyholders and claimants of an insolvent company operating in their state. Such facilities are funded by assessments levied against insurance companies writing business in those states.
Health Maintenance Organization (HMO) – A company which provides health care for a prepaid fee and which emphasises preventive medicine. HMO’s are usually authorised and regulated by insurance departments and may purchase reinsurance protection.
Hold Harmless Agreement – A contractual agreement whereby one party relieves another of certain liability which may be inherent in a given situation, and who often undertakes to indemnify the second party for third party claims arising as a result of the relationship between them.
Honourable Undertaking – A term often contained in a reinsurance agreement which specifies that the interpretation of such agreement is not to be governed by strict rules of law.
IBNR (Incurred But Not Reported) – A term used to describe loss reserves for potential claims which have occurred but which have not yet been reported to either an insurer or a reinsurer. An IBNR reserve is also designed to provide for future development of losses which may have already been reported but where the established reserves may ultimately prove to be inadequate.
Incurred Losses – Losses which have taken place during a given time period, including future development which may be applicable to those claims.
Indemnity – As used in an insurance or reinsurance context, indemnity refers to the payment of loss to a claimant and/or policyholder and which, in turn, serves as the basis for a claim against the reinsurer. As a result, reinsurance agreements are often referred to as contracts of indemnity which require cedants to make payment to the claimant before reinsurers will remit payment for such claims.
Indexing – A formula contained in reinsurance contracts which may be used to adjust the limit and retention of an Excess of Loss contract to reflect fluctuations measured by published indicators such as a Wage Index, Price Index, Cost of Living Index, exchange rate movements or some other economic indicator.
In-Force -The designation of business and/or premium which applies to existing insurance or reinsurance coverage.
Insolvency – A company’s financial condition reflected by an excess of liabilities over the available assets required to meet those liabilities; i.e., a company’s inability to pay its debts.
Insolvency Clause – A contractual provision which specifies that, in the event of a reinsurer’s insolvency, reinsurers will continue to be liable for their obligations under a reinsurance agreement, and that payment of such obligations is to be made to the company’s liquidator or statutory successor. Furthermore, such payments are to be made based on the liability of the insolvent company, but which may not have been actually paid by the company and will be without diminution due to the company’s insolvency.
Intermediary – The party which negotiates and handles reinsurance transactions between a company and its reinsurers. An intermediary is generally deemed to be the agent of the reinsured company but whose compensation is generally paid by the reinsurers. Also known as a reinsurance broker.
Intermediary Clause – The provision in a reinsurance contract which specifies that all communications must flow through the intermediary and, in the United States, provides that a cedant’s payments to the intermediary will be deemed received by reinsurers; however, all claim payments made by the reinsurers to the intermediary are not deemed to be received by the reinsured company until the reinsured company actually receives those funds.
Intermediate Excess – An excess reinsurance contract which generally attaches above an underlying agreement and which is generally subject to a lower loss frequency than such underlying contract. Such a contract may also provide an element of occurrence or catastrophe protection.
International Association of Insurance Receiver’s (IAIR) – An organisation which encourages the interaction and exchange of information among its members who are responsible for the rehabilitation and/or liquidation of troubled companies in the U.S. Formally known as Society of Insurance Receivers (SIR).
Inuring Reinsurance – Other reinsurance coverage which reduces the loss which might otherwise be claimed under a specified reinsurance contract.
Inward Reinsurance – See Assumed Reinsurance.
Joint and Several Liability – A legal concept by which any one defendant may be held responsible for the actions of other defendants.
Key person insurance – A policy crafted to shield a business from financial setbacks arising due to the death or incapacity of a vital individual within the company. Key person insurance ensures that in the unfortunate event of the passing of a crucial employee, upon whom the business relies for ongoing profitability or even its existence, a specified sum is granted. This financial provision can be utilized to cover the expenses associated with identifying and training a suitable replacement. Additionally, it may offer compensation for any decrease in profitability that may arise.
Latent Claims – The designation given to claims for injury and/or damage which lie dormant for extended periods of time, often well after the date of occurrence, before manifestation of the injury or damage.
Layers – Consecutive levels of excess insurance or reinsurance above a cedant’s retention.
Lead Reinsurer – Generally, the reinsurer primarily responsible for establishing the terms and conditions of a reinsurance agreement and which has the largest share of that contract. Although there may be occasional exceptions, the lead reinsurer is not empowered to bind the other “following” reinsurers unless specifically authorised by those reinsurers under an agreement to that effect.
Letter of Credit (LOC) – A financial instrument which serves as collateral to secure the obligations of another party and which enables the beneficiary of the LOC to draw such collateral in the event the issuing party has not lived up to its obligations under a separate agreement. Normally, such LOC’s are required to secure the obligations of an unauthorised reinsurer and include an “evergreen clause” which requires notice to the beneficiary if the issuing party intends to terminate the LOC and where there are conditions preventing the beneficiary from drawing on the LOC.
Line – A term which may be used to describe 1) the class of business written by a company; 2) the percentage or amount of a reinsurer’s participation in a contract; or 3) a reinsured company’s net retention, a multiple of which may be used to determine the cession under a Surplus reinsurance agreement.
Line Guide – A general listing or outline of the amounts of insurance or reinsurance which a company may write on certain classes of business and/or risks.
Line Slip – An underwriting facility, common to the London market, by which an agent submits risks to a lead reinsurer for acceptance under the facility which, in turn, are automatically shared among the companies which participate as insurers/reinsurers in the facility.
Liquidation – The statutory process by which the affairs of an insolvent company are finalised and the company’s remaining assets are distributed to policyholders and other creditors.
Liquidator – The individual appointed by a court to manage the liquidation of an insolvent company.
Liquidity – The ease with which assets may be converted to cash in payment of a company’s obligations.
Lloyd’s of London – An organisation of underwriting syndicates comprised of individuals and corporate entities who have pledged their capital resources as collateral to support the insurance and/or reinsurance business assumed by such syndicates. Also see Syndicate.
Lloyd’s (U.S.) – A form of insurance organisation loosely modelled after Lloyd’s of London. The use of “Lloyd’s” in a U.S. charter is generally a misnomer, as such organisations do not reflect the historical characteristics of their namesake. Also see Syndicate.
LMX Spiral – The phenomenon by which the exchange of reinsurance among companies and syndicates writing London Market Excess (LMX) business produces an industry claim which is a multiple of an original insured loss.
Long Tail – A term used to describe the lengthy period of development for claims emanating from certain casualty lines of business.
Loss Adjustment Expense – The cost to adjust and process insurance or reinsurance claims. Such costs may be designated as “allocated”, and relate to individual claims, or “unallocated” and relate to the company’s normal business and/or operating expenses necessary to support a claim operation.
Loss Corridor – See Corridor Deductible.
Loss Cost – See Burning Cost.
Loss Development– The extent to which the value of claims has changed, or is anticipated to change during certain periods of time. The extent of anticipated development is normally reflected in a company’s reserves for IBNR (Incurred But Not Reported) Losses.
Loss Development Factor – The formula elements generally used by actuaries to determine the ultimate value of a portfolio of claims, based on paid and outstanding reserve values of those losses at given points in time. Such factors are used as significant elements in determining a company’s IBNR.
Losses Incurred – See Incurred Losses.
Loss Loading – A factor used in determining the reinsurance premium for an excess contract which is generally subject to a frequency of claim activity. Such factors include provision for the reinsurer’s expenses and a reasonable margin of profit.
Loss Portfolio– A segmented block or grouping of claim reserves on business subject to transfer, normally on a discounted basis, under a reinsurance agreement. Also see Portfolio Reinsurance.
Loss Ratio- The percentage value which incurred losses bear to earned premium for a given portfolio of business during a given period of time.
Loss Reserve – An estimate of a company’s or reinsurer’s future liability with respect to insurance or reinsurance claims. Although a reinsurer may normally be guided by the reinsured company’s estimates of loss, the reinsurer may assign an additional case reserve to the loss to reflect the reinsurer’s own estimate of potential liability. A loss reserve may also include an estimate for loss adjustment expenses, as well as incurred but not reported losses (IBNR). Also see Reserve.
Managing General Agent (MGA) – A person or company which is authorised to produce, underwrite, and/or manage a portfolio of business on a company’s behalf. An MGA may also be responsible for placing a reinsurance to protect the portfolio. The exact extent of an MGA’s authority will normally be reflected in a written agreement. Usually, the MGA is paid an overriding commission which is related to premium volume, and which may or may not be adjusted to reflect the experience of the business accepted by the MGA.
Manifestation Theory – A concept of liability which holds that the insurer(s) which provided the policy(ies) at the time injury or damage becomes known must provide coverage.
Mediation – A form of dispute resolution which involves the use of a third party (a mediator) to resolve an issue in dispute. This process is usually non-binding and is meant to facilitate a meeting of the minds in a less expensive and more expeditious manner than arbitration or litigation.
MGA -See Managing General Agent
Minimum Premium– The lowest amount of premium required by a reinsurer under an excess of loss contract even if the subject premium is lower than estimated by the cedant.
Misrepresentations – Statements which mislead an insurer or reinsurer relative to a significant aspect of risk assessment.
Mortgage Assumption Endorsement – A form of assumption endorsement which specifies a mortgage (bank or lending institution) as the beneficiary of reinsurance payments.
Multiple Employer Welfare Arrangement (MEWA) – An organisation which is established by an employer or a group of employers, to offer health and welfare benefits to their employees. Such MEWA’S are often specifically authorised and regulated by state insurance departments and may be empowered to purchase their own reinsurance protection. May also be referred to as Multiple Employer Trust (MET0).
National Association of Insurance Commissioners (NAIC) – An association of state insurance commissioners formed for the purpose of exchanging information and developing uniformity in the regulatory practices of states through the drafting of model legislation and regulations.
National Priorities List (NPL) – A list, prepared by the Environmental Protection Agency (EPA), of the most serious hazardous waste sites identified for possible long term remedial response and which require contributions from Superfund. The list is based primarily on the rating which a site receives from the Hazard Ranking System (HRS) which the EPA is required to update at least once а уеаг.
Natural Disaster Coalition – A task force comprised of the insurance industry and other groups dedicated to reducing property losses and injuries from natural disasters.
Net and Treaty – The amount of risk or loss retained by a cedant for its own account plus the amount ceded to a priority treaty for purposes of establishing the retention level for another reinsurance treaty covering the same portfolio of business.
Not Line – The amount of insurance which is retained by a company after deduction of all reinsurance. Also See Net Retention.
Net Loss – A term which is similar to “net line” but which refers to a company’s retained loss after taking into account all salvage and subrogation, plus all recoveries under other reinsurance agreements, including catastrophe protection
Net Premium – The premium which remains after deduction of returns, cancellations and acquisition costs. Such a phrase may also include deduction for other reinsurance, depending on the definition contained in a reinsurance agreement.
Net Retention – The armour of risk or exposure to loss which a company will keep for its own account and which is not reinsured elsewhere.
Non-admitted Assets – Assets which are not recognized by state regulators or insurance departments for reporting purposes. Examples of such assets would be furniture, fixtures, and accounts more than 90 days overdue.
Non-admitted Company – An insurer or reinsurer which has not been licensed nor approved to write business in a given state or country.
Non-admitted Reinsurance – Amounts due under a reinsurance agreement for which no credit is allowed in a ceding company’s annual statement. The term may also be used to refer to a reinsurance contract which has not been approved by the state regulatory authority.
Non-proportional Reinsurance – A form of reinsurance providing coverage only once a loss exceeds a specified amount, as compared to a proportional sharing of loss under a pro rata contract. Also see Excess Reinsurance.
Obligatory Treaty – A reinsurance agreement which requires the company to cede and the reinsurer to accept business in accordance with the terms and conditions of the agreement. Also see Automatic Reinsurance.
Occurrence – An event or series of events arising from a particular cause which gives rise to an insured or reinsured loss. Depending on the wording of the reinsurance agreement, such “event” may also include continuous exposure to conditions giving rise to losses which may be generated under certain forms of casualty insurance coverage. For coverage purposes, particularly under catastrophe excess agreements, the definition of occurrence may be restricted or expanded to include claims within a certain period of time (e.g. 72 hours) as one occurrence.
Occurrence Coverage – A description of coverage for an event which “occurred” within a specified period of time under a reinsurance agreement, regardless of the date the claim is actually submitted. Such coverage is in contrast to a claims-made form of coverage.
Occurrence Excess – A form of excess reinsurance which applies to loss generated from multiple risks and which arises from an event or series of events.
Offset – A legal right to reduce an amount due one party by an amount due from the other party in the context of the overall relationship between such parties. The existence and scope of offset rights may be determined by contract language, as well as statutory, regulatory and judicial law.
Open Cover – A reinsurance agreement which facilitates the cession of designated risks over a period of time.
Option Product – A derivative instrument by which a buyer acquires the right to buy or sell an underlying commodity or instrument under specific conditions, and which has been suggested as a product to replace or supplement a traditional reinsurance contract.
Outward Reinsurance – See Ceded Reinsurance.
Overline – The amount of insurance or reinsurance which exceeds company’s guidelines and/or the amount of coverage provided by a company’s reinsurance facilities.
Overriding Commission (Override) – An allowance or fee which may be paid by the reinsurer to cover a ceding company’s overhead expenses plus a margin of profit applicable to the business ceded under the reinsurance agreement. Such override may also refer to the compensation paid to a Managing General Agent (MGA).
Participating Reinsurance – See Pro Rata Reinsurance.
Payback Period – A reinsurance pricing term which refers to the period of time necessary to repay a total loss under an excess reinsurance contract. Otherwise known as the amortisation period. Also see Rate On Line.
Per Risk Reinsurance – A form of reinsurance which provides coverage on either a proportional or an excess basis, and which is applicable to a single policy or risk in contrast to coverage on an occurrence or aggregate basis.
PML – See Probable Maximum Loss.
Policy Profile – A summary of policy information, generally including term, location, limit, etc., for use in determining reinsurance coverage and for underwriting purposes. Similar to a cession profile.
Policy Year Experience – The measurement of premium and losses applicable to the annual periods during which the insurance policies are in force. For that purpose, “policy year” is defined as the calendar year during which the policy was issued, including the allocation back to such year, of any written premiums or losses which may arise during a subsequent year and which pertain to the same policy period. Also see Risks Attaching.
Policyholders Surplus – The net worth of an insurance company which is represented by the difference between assets and liabilities, and which includes the company’s capital contribution and retained earnings.
Pollution – Contamination of property or the environment e.g. air, (ground) water, soil.
Pool – An organisation or collection of insurance and/or reinsurance companies which have joined together for a common purpose, most often to exchange business or to participate in a portfolio of business which might not otherwise be available to each participant on an individual basis. A pool is generally managed by an independent agency which is not owned nor controlled by any one of the individual members. Another characteristic of a pool is the sharing of the exposure, premium, and loss of each risk in accordance with the participant’s percentage of the maximum capacity provided by the pool. Occasionally synonymous with association and/or syndicate which involve the same basic principles of operation. Also see Syndicate.
Portfolio – A block or grouping of a company’s business into various categories. Most often used in reference to a particular segment of a company’s business.
Portfolio Reinsurance – A reinsurance arrangement which involves a 100% cession of a company’s block of business at a certain point in time. Such transfer generally includes a cession of unearned premiums and may also include outstanding loss reserves which would relieve the ceding company of any future obligations with respect to such portfolio, subject to the terms and conditions of the reinsurance arrangements. Also see Loss Portfolio and Unearned Premium Portfolio.
Portfolio Return – The process by which a ceding company recaptures a portfolio of premiums and losses ceded under a reinsurance agreement.
Portfolio Run-Off – The administrative process to finalise a company’s expired and/or discontinued book of business.
Potentially Responsible Party (PRP) – Any individual(s) or company(s) such as owners, operators, transporters, or generators potentially responsible for, or contributing to, the contamination at a Superfund Site. Whenever possible, the Environmental Protection Agency (EPA) requires PRPs, through administrative and legal actions, to clean up hazardous waste sites they have contaminated.
Prejudice – A legal term which refers to a waiver of, or detriment to a legal right or privilege.
Premium – The price for coverage afforded under an insurance or reinsurance agreement.
Premium Base – See Subject Premium.
Premiums Earned – See Earned Premium.
Premium Gross – See Gross Premium.
Premium Net – See Net Premium.
Premium Unearned – See Unearned Premium.
Primary Coverage – Generally, a term used to describe the first level of insurance coverage, as distinct from a policy or coverage which applies on an excess basis.
Privileged – Term used to describe documents or other communications which are protected by law from forced disclosure. Also see Attorney-Client Privilege.
Probable Maximum Loss (PML) – The largest individual loss which might be anticipated from a single risk/policy under normal circumstances. Most often used in evaluating fire exposure under property insurance/reinsurance, but which may also be applied to the assessment of catastrophe exposures.
Professional Reinsurer – A company whose main operation is the assumption of reinsurance business.
Profit Commission – An additional percentage or amount which the reinsurer may return to the cedant, based on the profit generated by the ceded business. Such allowance may be payable immediately upon termination of the treaty or deferred for a period of time to allow for additional loss development. This type of commission is also commonly known as a contingent commission.
Proof of Claim – The form required by a rehabilitator or receiver of an insolvent company to support a claim against the estate. The form may require details relative to a creditor’s claim which would be subject to evaluation in determining the estate’s ultimate obligation to the creditor.
Proof of Loss – The document required by an insurer and reinsurer to support a claim under an insurance policy or reinsurance contract.
Pro Rata Reinsurance – A form of reinsurance which provides for a proportional sharing of premiums and losses by the reinsurer in contrast to excess reinsurance which provides coverage above an agreed loss retention by the ceding company. Also known as participating Insurance or proportional reinsurance.
Proportional Reinsurance – See Pro Rata Reinsurance.
Prospective Rating – A form of experience rating which is modified to establish an agreed price (rate) for a subsequent contract period. Such a rating plan contrasts with a “retrospective” arrangement which requires an adjustment at the conclusion of a rating period.
Provisional – A term applied to premium, rate, or commission which indicates that such values are subject to adjustment at some future time; most normally, at the end of a contract period.
Quota Share Reinsurance – A form of pro rata reinsurance which involves a fixed percentage sharing of premiums, and losses which relate to the subject business reinsured. Unlike surplus reinsurance, a quota share percentage is not determined by the type of risk nor size of the policy limit subject to cessation under the treaty.
Rate – The percentage factor applied to a company’s subject premium to generate the level of premium desired by the reinsurer, generally applicable to the coverage provided under an excess reinsurance agreement.
Rate on Line – The Traction determined by dividing the reinsurance premium by the limit of an excess contract which is often used to describe the pricing level of the contract. Also see Payback Period.
Reassured – See Ceding Company.
Recapture – Another phrase to describe a return of business previously ceded under a reinsurance agreement.
Receiver – An agent of the court which is responsible for the rehabilitation and/or liquidation of an insolvent company. The receiver also has the duty as a court-appointed trustee to represent the court and all parties having an interest in the estate.
Receivership– The legal status of an insolvent company which involves a court-appointed receiver to administer the affairs of such a company.
Reciprocal Exchange – An unincorporated association created for the purpose of establishing a mutual insurance relationship, with each company assuming a designated share of each risk. A reciprocal is also another form of a pooling arrangement for which an attorney in fact is appointed as the administrator of the exchange.
Reciprocity – The characteristic of a relationship which involves the agreed exchange of business between two parties.
Rehabilitation – A legal process by which a court-appointed individual is assigned the responsibility to conserve the assets of an insolvency company and attempt to restore such company to a solvent condition.
Reinstatement – The restoration of the limit of an excess of loss contract following the exhaustion of such limit by a loss event. Although reinstatements of underlying contracts may be automatic and generally without charge, reinstatements applicable to catastrophe reinsurance contracts are generally quite restricted and require additional reinsurance premium.
Reinstatement Cover – A catastrophe excess of loss contract which responds only after one or more loss occurrences fully exhaust the coverage afforded by a given contract. Also see Second Event Cover.
Reinsurance – The process by which, for consideration, a reinsurer agrees to indemnify a ceding company for a portion of insurance risk transferred to the reinsurer under a contractual agreement.
Reinsurance Association of America (RAA) – A trade association comprised of professional reinsurers principally engaged in writing property and casualty reinsurance. All members are either domestic United States companies or domesticated branches of foreign censurers.
Reinsurance Assumed – See Assumed Reinsurance.
Reinsurance Broker – See Intermediary.
Reinsurance Ceded – See Ceded Reinsurance and/or Cession.
Reinsurance Commission – See Ceding Commission.
Reinsurance Premium – The price or consideration required by a reinsurer to assume reinsurance coverage on behalf of a ceding company.
Reinsurance Treaty – The written contract which sets forth the terms and conditions of a reinsurance agreement covering more than one risk.
Reinsured – The insurance entity which cedes or transfers risk under a reinsurance agreement. Also see Ceding Company and Cedant.
Reinsurer – The insurance entity which assumes or accepts risk under a reinsurance agreement.
Representation – A statement made by one party so another to describe circumstances which may be material to a reinsurer’s underwriting decision.
Rescission – The retroactive cancellation of a contract, most often the result of a disagreement or material dispute as to the true nature of the agreement. Also see Cancellation Ab Initio.
Reserve – An amount which is set aside to provide for payment of a future obligation. Also see Loss Reserve.
Reservation of Rights – A legal process which enables an insurer or reinsurer to preserve a future
option or cause of action. Quite often, such reservation is invoked to preserve the possibility for denial of a claim which may be paid pending a formal disposition of an issue, as well as to avoid creating a precedent as to liability by making such payment.
Resource Conservation and Recovery Act (RCRA) – Federal law which established a regulatory system to track hazardous substances from the time of generation to disposal. The law requires safe and secure procedures to be used in treating, transporting, storing, and disposing of hazardous substances. RCRA is designed to prevent new, uncontrolled hazardous waste sites.
Response Costs – Costs of a CERCLA-authorised action at a Super fund site involving either a short term removal action or a long term remedial action.
Retention – The amount of co-participation, or the portion of loss which a cedant must keep prior to application of the reinsurance agreement.
Retroactive Date – The original effective date of a policy which qualifies for coverage under a “claims made” policy or reinsurance agreement.
Retrocedant – A ceding company whose subject business consists of assumed reinsurance.
Retrocession – The transfer of assumed reinsurance to another reinsurer, in contrast with a cession which is the transfer of insurance risk from an insurer to a reinsurer.
Retrocessionnaire– A reinsurer which accepts reinsurance risk from a retrocedent whose subject business is a portfolio of assumed reinsurance.
Retrospective Rating Plan – A reinsurance pricing formula which is determined by the loss experience of the contract, and which may result in an adjustment in the provisional rate established at the beginning of the period.
Return Portfolio – The loss and/or premium reserves which are returned by the insurer to the cedant upon the termination of a reinsurance agreement.
Ring Fence – In the context of Lloyd’s of London and the formation of Equitas, the term used to describe the elimination of loss development from old underwriting years (prior to 1993) from impacting the results of subsequent underwriting years.
Risk – A term generally used to refer to uncertainty, or exposure to loss. Can also be used to signify an insurance policy.
Risk Transfer – The term which refers to the cession of potential underwriting loss to a reinsurer, and which is a factor in determining the appropriate accounting treatment of the related transactions under a reinsurance agreement.
Risks Attaching – The basis for the application of a reinsurance agreement which provides coverage for new or renewal policies which become effective during the term of the reinsurance agreement. Also see Policy Year Experience.
Run-Off – A method by which a reinsurance agreement is terminated and which requires a continuation of a reinsurer’s obligations until the subject business expires or has been otherwise cancelled by the cedant, and until all liability has been settled.
Schedule F – The section of a company’s Annual Statement which lists the obligations due to and from a company’s cedants and reinsurers.
Second Event Cover – A form of catastrophe excess of loss reinsurance which does not respond until a reinsured company suffers a second occurrence of a nature which would otherwise be covered by such contract. Also see Reinstatement Cover.
Second Surplus – A pro rata surplus reinsurance agreement which provides a further limit of coverage in addition to a first surplus treaty.
Secured Claim – A company’s obligation which is backed by collateral specifically allocated to that obligation.
Securitisation – In the context of insurance, the transfer or sale, in the form of an investment security, of the underwriting and timing risks related to a portfolio of insurance policies.
Semi-Automatic Treaty – A reinsurance treaty which provides for optional cessions of individual risks by the cedant and which allows the reinsurer the option to reject such cessions. Contrast with an “automatic treaty” which requires the reinsurer to accept all cessions. Also see Facultative Treaty.
Set-off – See Offset.
Share Reinsurance – See Pro Rata Reinsurance.
Single Risk Reinsurance – See Facultative Reinsurance.
Sliding Scale Commission – A ceding commission which is adjustable based on varying levels of profit and/or loss generated from the experience of the treaty involved. Subject to certain minimum and maximum levels, the commission adjustment is determined by a percentage of the points of loss ratio which are greater than or less than the loss rarest originally contemplated under the agreement.
Slip – A summary of contract terms and conditions prepared by an intermediary and presented to an underwriter in the placement of a reinsurance risk.
Society of Insurance Receivers (SIR) – See international Association or insurance Receiver’s.
Special Acceptance – A reinsurer’s agreement to waive a contract exclusion, to permit the cession of a particular risk.
Specific Reinsurance – See Facultative Reinsurance.
Spread Loss Reinsurance– A form of excess of loss reinsurance which is characterised by an expected frequency of claims which are repaid over a fixed period of time based on a formula rating approach.
Standstill Agreement – See Tolling Agreement.
Statute of Limitations – A state or federal regulation which establishes the period of time during which legal action may be brought by one party against another.
Statutory – A term which reflects the legal or regulatory characteristic of an item.
Statutory Accounting Principles (SAP) – The regulatory accounting rules which govern the reporting of a company’s financial information to state insurance departments. Such “principles” are different from Generally Accepted Accounting Principles (GAAP) in various respects, most notably, in that acquisition costs must be recorded immediately and not spread over the period during which the related premium is earned.
Stop Loss Reinsurance – See Aggregate Excess Reinsurance.
Sub-Broker – An intermediary which places business on behalf of another intermediary.
Subject Business – The insurance or reinsurance portfolio which is covered by a reinsurance agreement.
Subject Loss – The amount of loss watch determines the application of a reinsurer ascomata.
Subject Premium – A subject premium is the amount insurance companies charge their customers for coverage. Reinsurance companies use it to calculate the premium for their policies.
Subsidiary – a company which is owned by another company.
Summary Judgment – A legal procedure which enables a court to decide an issue of coverage or a question of law and which does at require a resolution of all the factual elements pertaining to a dispute.
Superfund – The common reference to the trust fund established by Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), to facilitate the clean-up of hazardous waste sites.
Surplus – A pro-rata cession above that portion of a risk which a cedant retains for its own account. Also see Policyholders Surplus.
Surplus Lines – All or a portion of insurance coverage for which there is no licensed market in a given jurisdiction. As a result, such coverage may be placed with a non-admitted, non-regulated carrier.
Surplus Notes – Debt securities issued by insurance companies, usually mutuals, which cannot raise capital through stock offerings, and can be treated as equity rather than debt for statutory accounting purposes.
Surplus Reinsurance – A form of pro rata reinsurance involving a flexible limit expressed as a multiple of the cedant’s net retention and based on the size and nature of risk subject to cessation under the agreement. Also see First Surplus Treaty.
Surplus Relief – The nature or purpose of a special type of pro-rata treaty by which a reinsurer allows the cedant a commission to offset the penalty which would otherwise result if the cedant had retained the ceded business. Such “relief” is normally required if a cedant has written an excessive amount of premium in relation to its financial resources.
Syndicate – An association of individuals or firms which have banded together for a specific purpose. Also see Lloyd’s and Pool.
Target Risks – High valued exposures such as certain bridges, tunnels, farms, etc., which are generally excluded from treaty reinsurance agreements to minimise the possibility that a reinsurer may unknowingly be exposed to the same risk under similar agreements with other cedants.
Third Party Administrator (TPA) – A firm which provides various administrative services on behalf of a risk taking entity, particularly with respect to an employers’ self-insured program involving policies issued to groups of employees.
Time and Distance – The term used to describe a financial reinsurance agreement designed to transfer a cedant’s or retrocedant’s obligations to reinsurers in exchange for a discounted premium. May also be referred to as a loss portfolio transaction.
Tolling Agreement – An arrangement suspending the rights and obligations of the parties in order to facilitate the resolution of open issues during an agreed time frame. May also be referred to as a standstill agreement.
Treaty – See Reinsurance Treaty.
Treaty Reinsurance – The process by which insurance or reinsurance exposures covering a specific portfolio of business are transferred from the originating party (the reinsured or cedant) to another (the reinsurer).
Trigger – See Coverage Trigger.
Triple Trigger – Theory of liability which holds that all insurers, which provided policies from the time of exposure to injury or damage through the time the injury or damage becomes known, must provide coverage.
Trust Account – A segregated bank account which is administered by a trustee responsible for the disposition of such an account in accordance with the terms of a specific “trust” agreement.
Uberrima Fides – A Latin phrase meaning “utmost good faith” which has been used to characterise the nature of an insurance or reinsurance relationship.
Ultimate Net Loss – The amount of a cedant’s loss which remains after recovery from reinsurance, and which is generally the amount subject to the application of catastrophe excess protection.
Unallocated Loss Adjustment Expenses – See Loss Adjustment Expense.
Unauthorised Reinsurance – Reinsurance coverage placed with a reinsurer which has not been approved by regulatory authorities to do business in a given jurisdiction, and for which no credit is allowed by regulatory authorities in the absence of appropriate security or collateral.
Unauthorised Reinsurer – A reinsurer which has not been approved by regulatory authorities to do business in a given jurisdiction.
Underlying – Insurance or reinsurance coverage which applies prior to the attachment of a subsequent layer of coverage.
Unearned Premium – That portion of premium which applies to the unexpired term of insurance or reinsurance coverage.
Unearned Premium Portfolio – A segmented block or grouping of unearned premium reserves on business subject to transfer under a reinsurance agreement. Also see Portfolio Reinsurance.
Unearned Premium Reserve – The reserve which must be established to provide for a return of unearned premium caused by an early termination of occurrence of reinsurance coverage.
Underwriting Capacity – See Capacity.
Voidable Contract – A contract that can be nullified by either party at their discretion. For instance, an insurer has the option to nullify a policy from its commencement if there is misrepresentation or non-disclosure of significant information during the negotiation of the placement, renewal, or modification of coverage. Additionally, an insurer can choose to void a policy from the moment a fraudulent claim is submitted.
Void Policy – A contract lacking legal validity and, consequently, not enforceable in a court of law. An illustration of such a contract is an insurance agreement where the policyholder lacks an insurable interest.
Valued Policy – An insurance agreement wherein the predetermined value is established in advance and is not tied to the actual amount of the loss incurred by the insured.
Waiver – An express or implied exception to a previously agreed understanding of a contractual nature.
Wellington Agreement – An agreement signed by 32 asbestos producers and 16 insurers in June 1985, and which led to the creation of the Asbestos Claim Facility. The Wellington concept completed pre-agreed shares of defence and indemnity costs, as well as a negotiated resolution of coverage issues between policyholders and their insurers. Also see Asbestos Claim Facility and Centre for Claims Resolution.
With Prejudice – A legal term which signifies that a party is bound by a course of action which is deemed to be a final determination of the matter.
Without Prejudice – A legal term which signifies that a party’s rights are not affected by a course of action and that such action may not be a final determination of the matter
Working Cover – An excess of loss reinsurance agreement which is characterised by a frequency of loss and is generally subject to a formula rating approach.
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Year of Account – The year designated for accounting purposes in which premiums and claims related to an insurance or reinsurance contract underwritten by a syndicate are recorded. Typically, insurance or reinsurance contracts are assigned to specific years of account based on the calendar year of their inception. For example, a contract initiated in 2005 would typically be associated with the 2005 year of account. Historically, syndicates have employed a three-year accounting system, leaving each calendar open for an additional two years before determining the profit or loss. A year of account is typically concluded through reinsurance at the conclusion of 36 months. This can be contrasted with an open year of account and a run-off account.
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