Chapter 6 Glossary Flashcards
Adverse development cover
A reinsurance arrangement whereby a reinsurer agrees, in return for a premium, to cover the ultimate settled amount of a specified block of business above a certain pre-agreed amount.
Aggregate excess of loss reinsurance
A form of excess of loss reinsurance that covers that aggregate of losses, above an excess point and subject to an upper limit, sustained from a single event or from a defined peril (or perils) over a defined period, usually one year.
Balance of a reinsurance treaty
The ratio of the total premiums receivable by a reinsurer under a surplus treaty to the reinsurer’s maximum liability for any one claim, based on estimated maximum loss.
Catastrophe reinsurance
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.
Direct business
This term has two meanings:
- Business acquired without the intervention of an intermediary
- The cover provided by an insurer to an original policyholder, as opposed to any reinsurance cover provided for the insurer.
Excess of loss reinsurance
A form of reinsurance whereby the reinsurer indemnifies the cedant for the amount of a loss above a stated excess point, usually up to an upper limit. The excess point and upper limit may be fixed, or indexed in a stability clause. Usually this type of reinsurance relates to individual losses, but it can be a form of aggregate excess of loss reinsurance covering the total of all losses in a period and subject to a total aggregate claim limit.
Experience account
Often a feature of multi-year financial engineering contracts, this is an account that tracks the performance of the business reinsured by the treaty so that the profitability or otherwise of the treaty can be determined.
Financial engineering
Financial engineering contracts can generally be characterised as ones that attempt to improve a company’s balance sheet, but with little or no transfer of risk.
Financial risk reinsurance, finite risk insurance or reinsurance
This is a form of reinsurance (or insurance) involving less underwriting risk transfer and more investment or timing risk transfer from the cedant than is customary in reinsurance.
Hours clause
A clause within a catastrophe reinsurance treaty that specifies the limited period during which claims can be aggregated for the purpose on the renisurance contract. Commonly 24 or 72 hours are used.
LMX on LMX
Excess of loss reinsurance provided for syndicates or companies operating in the London Market in respect of LMX written by them. This is a form of retrocession business.
London Market Excess of Loss (LMX)
Excess of loss reinsurance provided for syndicates or companies operating in the London Market.
Loss portfolio transfer
An arrangement whereby the total liabilities in respect of a specified book of business is passed in its entirety from one insurance entity to another. Policyholders will be informed of this “novation”.
Original gross premium income (OGPI)
The gross premium income received by an insurer in relation to business that is covered by a non-proportional reinsurance treaty. The reinsurance premium is calculated as a percentage of this OGPI. Similar abbreviations, such as OGWP, OGEP, GWPI and GEPI
Overriding commission
Additional commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit. The term is often used on primary business written through agents or brokers and refers to any addition to basic commission rates either for volume or for profitable business.
Profit commission
Commission paid by the reinsurer to a cedant under a proportional reinsurance treaty that is dependent upon the profitability of the total business ceded during each accounting period. Also, commission paid by an insurer to a broker or insured that is dependent upon the profitability of the business written.
Quota share reinsurance
A form of proportional reinsurance where the proportions used in apportioning claims and premiums between the insurer and reinsurer are constant for all risks covered by the treaty.
Rate on line
For non-proportional reinsurance, the total premium charged (ignoring reinstatement premiums) for the reinsurance divided by the width of the layer covered.
Reinstatement
The restoration of full cover following a claim. For example, non-proportional reinsurance often require a reinstatement premium following a claim that breaches the deductible on the reinsurance treaty. There may be a certain number of free reinstatements,
Normally, the number of reinstatements, and the terms upon which they are made, will be agreed at the outset. Once agreed, they are automatic and obligatory on both parties.
Return commission
Commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit. Also called overriding commission.
Risk excess of loss reinsurance
Excess of loss reinsurance that relates to individual losses affecting only one insured risk at any one time.
Stability clause
A clause that may be included in a non-proportional reinsurance treaty, providing for the indexation of monetary limits (that is, the excess point and/or the upper limit) in line with a specified index of inflation.
Stop loss reinsurance
An aggregate excess of loss reinsurance that provides protection based on the total claims, from all perils, arising in a class or classes over a period. The excess point and the upper limit are often expressed as a percentage of the cedant’s premium income rather than in monetary terms; for example, cover might be for a claims ratio in excess of 110% up to a limit of 140%
Surplus reinsurance
A form of proportional reinsurance where the proportions are determined by the cedant for each individual risk covered by the treaty, subject to limits defined in the treaty.
Sometimes known as surplus lines insurance, but should not be confused with the USA definition above.
Time and distance reinsurance
A type of financial reinsurance that had widespread use in the London Market and Lloyd’s, whereby an insurer pays a single premium in return for a fixed schedule of future payments matched to the estimated dates and amounts of the insurer’s claim outgo. The purpose of such contracts was to achieve the effect of discounting in arriving at the reserves for outstanding claims. Since Lloyd’s changed its rules so that the credit allowed for time and distance policies in a syndicate’s accounts was limited to the present value, such policies have become less popular.
Working layer
A layer of excess of loss reinsurance where the deductible is at a low enough level for it to be likely to experience a fairly regular flow of claims.
