Chapter 4 Glossary Flashcards
24ths method
A method of estimating unearned premium reserve, based on the assumption that annual policies are written evenly over each month and risk is spread evenly over the year. For example, policies written in the first month of the year are assumed to contribute 1/24th of the months written premium to the unearned premium reserve at the end of the year.
365ths method
A method of estimating unearned premium reserve, based on the assumptions that the risk is spread evenly over the 365 days of the year of cover. For example, where a policy was written 100 days ago, 265/365ths of the premium is taken as being unearned.
Accident year
An accident year grouping of claims means that all the claims relating to loss events that occurred in a 12-month period (usually calendar year) are grouped together, irrespective of when they are actually reported or paid and irrespective of the year in which the period of cover commenced.
Acquisition costs
Costs arising from the writing of insurance contracts, such as commission.
Additional reserve for unexpired risk
The reserve held in excess of the unearned premium reserve, which allows for any expectation that the unearned premium reserve will be insufficient to cover the cost of claims and expenses incurred during the period of unexpired risk.
Annual basis for accounting
Annual accounting is one of two statutory bases of accounting, the other being fund accounting. Annual accounting is based on the cover provided during the accounting period, regardless of when the contracts of insurance start and end. Fund accounting is based on the contracts starting during the accounting period, regardless of the periods of cover provided.
This is also known as one-year accounting.
Claim ratio (loss ratio)
The ratio of the cost of claims to the corresponding premiums, either gross or net of reinsurance. An alternative term, especially in SA and the USA, is loss ratio.
Closed year
In the case of fund accounting a closed year is an underwriting year that is older than the prescribed limit for the class in question. In the Lloyd’s market, a closed year is one that has been closed by reinsurance to close (RITC).
Combined ratio
The sum of the claim ratio and the expense ratio (and thus not a ratio itself, unless the two separate ratios have the same denominator. Also called the operating ratio or underwriting ratio. The fact that the denominators for the claims and expense ratio may be different can give rise to anomalies.
Deferred acquisition costs
Acquisition costs relating to contracts in force at the balance sheet date. They are carried forward as an asset from one accounting period to subsequent accounting periods in the expectation that they will be recoverable out of future margins within insurance contracts after providing for future liabilities.
Eighths method
A method of estimating unearned premium reserve, based on the assumption that annual policies are written evenly over each quarter and the risk is spread evenly over the year.
Expense ratio
The ratio of management expenses plus commission to premium (usually calendar accounted expenses to written premium, or sometimes to earned premium). In practice it is common for the expense ratio to refer to management expenses alone (excluding commission) and be specified as a percentage of gross written premium.
Fund accounting
A method of accounting whereby premiums, claims and associated expenses are related to the underwriting year in which the policies start. The recognition of any underwriting profit is deferred until a subsequent accounting period but provision is made for losses as soon as they are foreseen.
One-year accounting
A basis of accounting that presents, at the end of each year of account, the estimated technical account for business exposed during the year.
Open year
Under fund accounting an open year is one that has not yet reached the stipulated period for closure. In the Lloyd’s market, an open year is one that has not yet been closed by RITC.
