Chapter 0 Glossary

Question 1

Act of God

Answer 1

An event, such as a storm or flood, that is unexpected and outside human control. From the perspective of insurers, it is a cause of insurance losses.

Question 2

Catastrophe

Answer 2

In the context of general insurance a catastrophe is a single event that gives rise to an exceptionally large aggregation of losses.

Question 3

Catastrophe reserve

Answer 3

This is a form of aggregate excess of loss reinsurance providing coverage for very high aggregate losses arising from a single event, that may be spread over a number of hours; 24 or 72 hour periods are commonly used.

Question 4

Claim

Answer 4

The word claim has a variety of meanings. The most common are:

• as a noun: an assertion by a policyholder that an insurer is liable to make a payment in accordance with the terms of a policy
• as a verb: to make a request for payment from an insurer.

Question 5

Claims equalisation reserve

Answer 5

An equalisation reserve is a reseve built up (generally from profitable years) as a cushion against periods with worse than average claims experience.

Question 6

Claims handling expenses

Answer 6

The expenses incurred in handling and settling claims are known in some countries, including South Africa and the UK, as claims handling expenses, the equivalent term in the USA (and increasingly elsewhere) being “loss adjustment expenses”.

Question 7

Claims incurred

Answer 7

Incurred claims refers to the total amount paid on a cohort of claims up to a specified valuation date plus the total of all case estimates on these claims as at the valuation date.

It is used in contrast to paid claims, which refers only to the amounts paid up to the valuation date.

Incurres claims usually include ALEA (claims handling expenses).

Question 8

Claims reported

Answer 8

Claims incurred that have been reported to the insurer. The term is often used in relation to those claims reported during the accounting period. It may refer to the number of claims themselves or the cost of claims that have been reported.

Question 9

Cover note

Answer 9

A note issued by an insurance company to confirm the existence of insurance cover pending the issue of formal policy documentation.

Question 10

Earned premiums

Answer 10

The total premiums attributable to the exposure to risk in an accounting period; they can be gross or net of adjustment for acquisition expenses and gross or net of reinsurance.

Question 11

Event

Answer 11

An occurrence that may lead to one or more claims.

Question 12

Free reserves

Answer 12

The excess of the value of an insurer’s assets over its technical reserves and current liabilities. Also known as the solvency margin and sometimes, in the case of a proprietary insurer, referred to as shareholders’ funds or net asset value.

Question 13

Inception date

Answer 13

This is the date from which the insurer assumes cover for a risk. This may or may not coincide with the premium collection date.

Question 14

Insurance certificate

Answer 14

A certificate provided by an insurer to confirm that the policyholder has insurance cover.

Question 15

Insured

Answer 15

The person, group or property for which an insurance policy is issued.

Question 16

Lapse

Answer 16

When a policyholder, having been invited to renew the policy, does not do so, the policy is said to lapse.

Question 17

Loss

Answer 17

This may signify:

• the financial loss suffered by the policyholder
• the amount of the insurance claim
• the opposite of “profit” in relation to accounts

Question 18

Loss expense reserve

Answer 18

Another expression for any type of claims handling expense provision.

Question 19

Loss reserve

Answer 19

Another name for claims reserve.

The expression is also often used in association with the reserve deposited by a reinsurer with the cedant to cover in part outstanding claims. Terms would indicate which party receives the investment income.

Question 20

Minimum Solvency Margin

Answer 20

The Short Term Insurance Act, 1998, sets a statutory minimum level that all companies must adhere to. This minimum level is called the Minimum Solvency Margin.

Question 21

Outstanding claims reserve

Answer 21

The reserve set up in respect of the liability for all outstanding claims, whether reported or not, including reserves for future payments on claims that are currently regarded as settled but may be reopened.

Question 22

Period of unexpired risk

Answer 22

For a policy in force on an accounting date, the period from the accounting date to the expiry date.

Question 23

Rating (verb)

Answer 23

The process of arriving at a suitable premium for an insurance risk. The term is sometimes synonymous with underwriting, though rating is strictly just one part of the underwriting process.

Question 24

Recoveries

Answer 24

Amounts received by insurers to offset directly part of the cost of a claim. Recoveries may be made from several different sources, for example, reinsurers, other insurers, salvage and liable third parties.

Question 25

Reinsurance

Answer 25

The insurance of insurers.

Question 26

Reinsurer

Answer 26

An insurer providing reinsurance cover. Some reinsurers do not write any direct or primary insurance business.

Question 27

Re-opened claim

Answer 27

A claim formerly deemed settled, but subsequently re-opened because further payments may be required.

Question 28

Solvency margin

Answer 28

Another term for free reserves

Question 29

Solvency ratio

Answer 29

The free reserves divided by the net (of reinsurance) written premiums.

Question 30

Technical reserves

Answer 30

The accounting entries in the balance sheet that represents the insurer’s liabilities from the business that has been written.

Question 31

Unearned premium reserve

Answer 31

The amount set aside from premiums written before the accounting date to cover risks incurred after that date.

Question 32

Unearned premiums

Answer 32

The portion of premiums written in an accounting period that is deemed to relate to cover in one or more subsequent accounting periods. It can be calculated in at least two ways:

• Net of deferred acquisition cost (DAC); that is by deducting acquisition expenses before proportioning the written premium.
• Gross of DAC; that is, proportioning the full written premium without any deduction for DAC.

First approach is consistent with going concern basis, whilst the second is consistent with a break-up basis. However, the second approach can also be used for a going concern basis by including DAC as an asset in the balance sheet.

Question 33

Unexpired risks reserve

Answer 33

This term is often used in two ways:

• The reserve required to cover the claims and expenses that are expected to emerge from an unexpired period of cover.
• The reseve required to cover the excess of the above over the UPR. This is sometimes known as the additional reserve for unexpired risk. (AURR)

Question 34

Written premium

Answer 34

The amount of premium, either gross or net of reinsurance, for which cover commenced in an accounting period.