Glossary Flashcards
Syndicate (Lloyd’s)
A group of Lloyd’s Names who collectively co-insure risks.
The syndicates often specialise in particular types of insurance. Individual Names will usually spread their exposure by belonging to many different syndicates.
However, some corporate members only underwrite through a single syndicate. There are also some syndicates that underwrite exclusively on behalf of a single corporate member.
Technical Account – General Business
For insurance companies in the UK and South Africa, the Technical Account – General Business is part of the Profit and Loss Account.
It is made up of:
- earned premiums
- less incurred claims (both adjusted for reinsurance as appropriate)
- less expenses (with an allowance for deferred acquisition costs as appropriate),
- plus any part of the investment income that may be allocated to the technical account.
Technical reserves (provisions)
The accounting entries in the balance sheet that represent the insurer’s liabilities from the business that has been written.
365ths method
A method of estimating Unearned Premium Reserve, based on the assumption that the risk is spread evenly over the 365 days of a year of cover.
For example, where a policy was written 100 days ago, 265/365ths of the premium is taken as being unearned.
Time and distance reinsurance
A type of financial reinsurance, which 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.
Treaty reinsurance
Reinsurance that a reinsurer is obliged to accept, subject to conditions set out in a treaty.
Twenty-fourths 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 month’s written premium to the Unearned Premium Reserve at the end of the year.
Uberrima fides
Latin for “utmost good faith”.
This honesty principle is assumed to be observed by the parties to an insurance, or reinsurance, contract.
An alternative form is uberrimae fidei: “of the utmost good faith”.
Underinsurance
There is said to be underinsurance when the sum insured is less than that required under the terms of the contract.
Depending on the policy conditions, where underinsurance is proved to exist, insurers may be able to claim that the policy is null and void. Alternatively, average may be applied to claim amounts.
Underwriter
An individual who assesses risks and decides the premiums, terms and conditions on which they can be accepted by the insurer.
Underwriting
The process of consideration of an insurance risk.
This includes assessing whether the risk is acceptable and, if so, the appropriate premium, together with terms and conditions of the cover. It may also include assessing the risk in the context of the other risks in the portfolio.
The more individual the risk (e.g. most commercial lines), the more detailed the consideration.
The term is also used to denote the acceptance of reinsurance and, by extension, the transacting of insurance business.
Underwriting agent
An organisation at Lloyd’s providing management services for syndicates and/or advice for Names.
Underwriting Management Agency (UMA)
Is the authorised agent of a particular Insurer or Insurers to act for the Insurer/s in receiving proposals, accepting them, issuing Policies on their behalf, and handling claims under the Policies.
They are remunerated by means other than commission. See Section 48(2) in the STIA. An insurer may enter into a UMA agreement for a particular kind of insurance with only one UMA. A UMA may not accept applications directly from a policyholder. A UMA may not hold shares in a broker from which it receives an application.
Underwriting factor
Any factor that is used to determine the premium, terms and conditions for a policy. It may be a rating factor or some other risk factor that is accounted for in a subjective manner by the underwriter.
Unearned premiums
The portion of premium 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:
(1) Net of deferred acquisition costs (DAC), i.e. by deducting acquisition expenses before proportioning the written premium
(2) Gross of DAC, i.e. by proportioning the full written premium without any deduction for DAC.
The first approach is consistent with a going-concern basis, while 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.
A typical balance sheet includes values gross and net of reinsurance also.
Unearned Premium Reserve (UPR) or Provision for Unearned Premiums
The amount set aside from premiums written before the accounting date to cover risks incurred after that date.
Unexpired Risks Reserve (URR) or Provision for unexpired risks
This term is often used in two ways:
(1) The reserve required to cover the claims and expenses that are expected to emerge from an unexpired period of cover
(2) The reserve required to cover the excess of (1) over the UPR. This is sometimes known as the additional reserve for unexpired risk (AURR).
Working layer
A layer of excess of loss reinsurance at a level where there is likely to be a fairly regular flow of claims.
Written premiums
The amount of premium, either gross or net of reinsurance, for which cover commenced in an accounting period.
Accident year
An accident year grouping of claims means that all the claims relating to events that occurred in a 12-month period are grouped together, irrespective of when they are actually reported or paid and irrespective of the year in which the period of cover commenced.
Accounting classes
The different classes of insurance business for the purpose of statutory returns.
There are currently ten different UK accounting classes (e.g. accident and health, motor vehicle, general liability) which cover the eighteen different classes of business for which insurers may be authorised. In South Africa there are eight different classes of business.
Accumulation of risk
An accumulation of risk occurs when a portfolio of business contains a concentration of risks that might give rise to exceptionally large losses from a single event.
Such an accumulation might occur by location (property insurance) or occupation (employers’ liability insurance), for example.
Acquisition costs
Costs arising from the writing of insurance contracts including:
- direct costs, such as acquisition commission or the cost of drawing up the insurance document or including the insurance contract in the portfolio
- indirect costs, such as advertising costs or the actuary’s/underwriter’s expenses connected with the establishment of the premium-rating table.
Actual total loss
A form of total loss, defined by the Marine Insurance Act 1906. Actual total loss is deemed to occur in one of three ways:
(1) where the insured item is totally destroyed
(2) where it is so damaged that it can no longer be classed as the type of object
originally insured
(3) where the insured is irretrievably deprived of the insured item.
Additional reserve (provision) for unexpired risk
The reserve held in excess of the Unearned Premium Reserve, to allow 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.
Adjustment premium
The adjustment premium is a further premium payable at the end of a period of cover. This may result from the use of retrospective experience rating or from a situation where the exposure cannot be adequately determined at the start of the period of cover.
Adverse development cover
This is 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.
Agents’ balances
Moneys, typically premiums, that belong to an insurer but are held by an agent.
Aggregate excess of loss reinsurance
A form of excess of loss reinsurance that covers the 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.
All risks
A term used where the cover is not restricted to specific perils such as fire, storm, flood, etc.
The cover is for loss, destruction or damage by any peril not specifically excluded.
The exclusions will often be inevitabilities such as wear and tear.
The term is sometimes loosely used to describe a policy that covers a number of specified risks, though not all.
Annual basis of accounting
The usual basis of accounting for general insurance business. A result is determined at the end of the accounting period reflecting:
• the profit or loss from providing insurance cover during that period (including the anticipation of losses arising from cover to be provided in subsequent periods in respect of business written prior to the end of the accounting period)
• any adjustments to the profit and loss from business written during earlier accounting periods.
Anti-selection
An insurer is exposed to the risk of anti-selection if a policyholder can make use of information not available to the insurer to obtain insurance cover that would not have been granted if the insurer had had the information, or to obtain cover on more favourable terms than would have been granted by the insurer.
An insurer may also be exposed to the risk of anti-selection by failing to make use of available, relevant information.
Atafs
Age to Age Factors
Used by the CAS in triangulation reserving methods to refer to selected development period link ratios between year of development y-1 to y.
Atufs
Age to Ultimate Factors
Used by the CAS in triangulation reserving methods to refer to the grossing up factor to get from year y of development to ultimate.
Average
(1) In non-marine insurance, the term relates to the practice of scaling down the amount of a claim by applying the ratio of the actual sum insured to the amount deemed to have been the appropriate sum insured.
(2) In marine insurance, the term is generally used to describe damage or loss.
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 EML.
Benchmark
A benchmark is any statistic derived from external sources, e.g. loss ratio, expense-related measure, claim reporting or claim payment development pattern.
Bonus Hunger
The reluctance of policyholders under an NCD or bonus-malus system to notify claims or claim amounts when faced with a potential increase in premiums. Also known as hunger for bonus.
Bonus-malus
A bonus-malus system is ano-claim discount (or no-claim bonus) system in which the premium level reached after a policyholder has made claims may be higher than that corresponding to the point of entry. The term is used throughout Continental Europe and elsewhere.
Bordereau
A detailed list of premiums claims and other important statistics provided by ceding insurers to reinsurers, so that payments due under a reinsurance treaty can be calculated.
Break-up basis
A valuation basis that assumes that the writing of new business ceases and cover on current policies is terminated. Current policyholders would normally be entitled to a proportionate return of the original gross premium and deferred acquisition costs would probably have to be written off.
Also known as a wind-up basis.
Broker
One who acts as an intermediary between the seller and buyer of a particular insurance contract without being tied to either party. A reinsurance broker is similarly defined where reinsurance contracts are bought and sold.
mandated intermediary
In South Africa “a mandated intermediary” means an independent intermediary that holds a written mandate from a potential policyholder or policyholder that authorises that intermediary, without having to obtain the prior approval of that potential policyholder or policyholder to:
• Terminate the policy of that policyholder or
• Perform any act, in relation to a policy, that legally binds that potential policyholder or policyholder.
non-mandated intermediary
A “non-mandated intermediary” means a representative or an independent intermediary, other than a mandated intermediary or an underwriting manager.
Very simply put, a mandated intermediary acts on behalf of the client and a non-mandated intermediary needs written consent from the client before approving any act.
Burning cost
The actual cost of claims paid or incurred during a past period of years expressed as an annual rate per unit of exposure. This is sometimes used, after adjustment for inflation, IBNR, etc. as a method of calculating premiums for certain types of risks or monitoring experience, e.g. motor fleets and non-proportional reinsurance.
Business interruption insurance
Insurance cover for financial losses arising following damage (e.g. a fire) to business premises. Also called loss of profits or consequential loss insurance.
Cancellation
A mid-term cessation of a policy, that may involve a partial return of premium.
Capacity
The amount of premium income that an insurer is permitted to write or the maximum exposure that could be accepted. It could refer to an insurance company, a Lloyd’s Name, a Lloyd’s syndicate or a whole market.
Cape Cod method
A reserving method, similar to the Bornhuetter Ferguson method where, instead of an a priori loss ratio, it uses weights proportional to a measure of exposure and inversely proportional to claims development.
Captive
An insurer wholly owned by an industrial or commercial enterprise and set up with the primary purpose of insuring the parent or associated group companies and retaining premiums and risk within the enterprise. Some insurers are set up with the primary purpose of selling insurance to the clients of the parent. These are often known as captives but, as they write third party business, should not properly be so called. If the word captive is used without qualification it precludes this interpretation.
Case by case estimation
A method of determining the reserve for outstanding reported claims. Each outstanding claim is individually assessed to arrive at an estimate of the total payments to be made. The shorter term “case estimation” is often used and the estimates are referred to as case estimates.
Casualty insurance
Specifically the term is used in the USA, and to a lesser extent in the UK, as an alternative to liability insurance. In a wider context, casualty insurance may be used as a phrase to cover all non-life insurance.
Catastrophe
In the context of general insurance, a catastrophe is a single event that gives rise to exceptionally large losses. The exact definition often varies and is often dependent on excess of loss wordings, e.g. it might mean all losses incurred in a 72-hour period from a single event such as a wind storm.
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.
Catastrophe reserve
A reserve built up over periods between catastrophes to provide some contingency against the risk of a catastrophe.
Ceding company (cedant)
An insurance or reinsurance company that passes (or cedes) a risk to a reinsurer. The term “cedant” may also be applied to a Lloyd’s syndicate.
Central fund (Lloyd’s)
A contingency reserve built up from contributions by Lloyd’s Names and held by Lloyd’s as a layer of protection for policyholders.
Chain ladder method
A statistical method of estimating outstanding claims, whereby the weighted average of past claim development is projected into the future. The projection is based on the ratios of cumulative past claims, usually paid or incurred, for successive years of development. It requires the earliest year of origin to be fully run-off or at least that the final outcome for that year can be estimated with confidence. If appropriate, the method can be applied to past claims data that have been explicitly adjusted for past inflation.
Claim
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.
Claim amount distribution
A statistical frequency distribution describing the total amount of claims.
Claim cohort
A group of claims with a common period of origin. The period is usually a month or a quarter or a calendar year. The origin varies but is usually defined by the date of occurrence of a claim, by the date of reporting of a claim, or by the date of payment of a claim or by the date on which the period of cover to which a claim attaches commenced.
Claim cost inflation
The rate of increase in the cost of claim payments. It is likely to be influenced by many different types of inflationary force, e.g. general or specific earnings inflation, general or specific price inflation or court award inflation. The term can apply to the general escalation of the average claim cost within a class of business or more specifically to the increase in settlement of a particular claim event (e.g. a broken windscreen).
Claim frequency
The number of claims in a period per unit of exposure, such as the number of claims per vehicle year for a calendar year or per policy over a period.
Claim frequency distribution
A statistical frequency distribution for claim frequency.
Claim ratio
The ratio of the cost of claims to the corresponding premiums, either gross or net of reinsurance. The claim ratio could, for example, be:
- the ratio of the incurred claims cost to the written premium for a given underwriting year
- the ratio of the estimated ultimate claims cost to the estimated ultimate premium for a given underwriting year
- the ratio of the incurred claims cost to the earned premium for a given accounting year or year of exposure, or
- the ratio of the estimated ultimate claims cost to the earned premium for a given accounting year or year of exposure.
In the latter two examples the numerator could also include the estimated change in the cost of claims that occurred in earlier years. Similarly, the denominator could include changes in earned premium in respect of earlier years.
Claim ratios may relate to periods other than a year. An alternative term, especially in the USA, is loss ratio.
Claim size distribution
A statistical distribution describing the size of individual claims.
Claims handling expenses
The expenses incurred in handling and settling claims are known in some countries, including the UK, as claims handling expenses, the equivalent term in the USA being “loss adjustment expenses”. In motor insurance claim handling, expenses may include assessment fees, investigator fees, salvage and release fees, towing and storage fees and upliftment fees. They may be classified as either:
(1) external and internal claim handling expenses, or
(2) expenses (both external and internal) that are allocated to individual claims, plus expenses (both external and internal) that are not allocated to individual claims but are spread over the claims as a whole. In the USA, the terms “allocated loss adjustment expenses (ALAE)” and “unallocated loss adjustment expenses (ULAE)” are used.
The reserves (provisions) required for the future expenses that will be incurred in respect of outstanding claims (whether reported or not) may be correspondingly divided into those that are allocated to individual claims and those that are not. The reserves for the former category are normally included in the reserves for outstanding claims and hence form part of the estimated cost of incurred claims. Those for the other category form part of the estimated incurred expenses.
Claims made policy
A policy that covers all claims reported to an insurer within the policy period irrespective of when they occurred. The type of cover provided by such a policy is known as claims made Cover.
Claims reported
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 claims themselves or their cost.
Claims run-off analysis
A tabulation showing the speed of reporting or settlement for cohorts of claims. Also called a delay table or, since it is usually triangular in form, a run-off triangle. The analysis may be in terms of claim numbers or claim amounts. It is often presented as an intermediate step in a chain ladder method projection.
Clash cover
Excess of loss cover for liability business, obtained by insurers to limit their exposure to the risk that one event gives rise to claims on more than one policy, where otherwise the insurer might be liable for claims up to any retention limit for each individual policy.
Closed year
A year for which reserves (provisions) for all future claims arising in the year have been established. Under the system of funded accounting an underwriting year is closed at the end of the period, e.g. at the end of three years from the start of the underwriting year at which point the results for the underwriting year are determined and a profit (or loss) is struck. The underwriting years not closed are “open”. In the company market, the accounting convention is to carry any outstanding liabilities into the next open underwriting year as a notional reinsurance transfer premium. In the case of a Lloyd’s syndicate, any outstanding liabilities are dealt with by an actual premium payment called a Reinsurance to Close (RITC).
In some cases, where the outcome of a year of account is highly uncertain at the point when it would normally close, or in certain other circumstances, it may be left open until greater certainty allows it to be closed.
Co-insurance
An arrangement whereby two or more insurers enter into a single contract with the insured to Cover a risk in agreed proportions at a specified premium. Each insurer is liable only for its own proportion of the total risk. It is frequently applied to individual “slip” business in the London Market where a lead insurer takes a major share of the risk and manages the outturn, while others subscribe on fixed terms.
The term is also used in certain excess of loss contracts to refer to the proportion of claims retained by the cedant.
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 claim and expense ratio may be different can give rise to anomalies.
Commercial lines
Classes of insurance for businesses. Those for individuals are usually referred to as personal lines.
Committee of Lloyd’s
A committee that is responsible for administrative matters within Lloyd’s under delegation from the Council of Lloyd’s. Prior to the establishment of the Council of Lloyd’s by the Lloyd’s Act 1982, the Committee had sole responsibility for the overall direction of Lloyd’s.
Commutation
The finalisation of an outstanding liability by payment of an agreed amount in settlement. This process is sometimes used to enable an insurance or reinsurance company to discharge all future obligations in respect of a particular contract or book of business in return for the payment of a settlement amount to the insured or cedant.
Commutation clause
Common in Financial Engineering contracts, this is a clause allowing the contract to be commuted under certain conditions. They often work in conjunction with Commutation Accounts, which are used to calculate the relevant numbers.
Composite insurer
A single insurance company writing both life and non-life business.
Constructive total loss
Typically found in marine insurance. Constructive total loss is where the insured abandons the insured item because an “actual total loss” is unavoidable or because the costs of preventing a total loss exceed the value saved.
Council of Lloyd’s
The governing body responsible for the overall direction of Lloyd’s. It was established as a result of the Lloyd’s Act 1982 and consists of six working members, six external members and six nominated members whose appointment must be confirmed by the Governor of the Bank of England. One of the nominated members is the chief executive.
Cover note
A note issued by an insurance company to confirm the existence of insurance cover pending the issue of formal policy documentation.
A Cover note is particularly useful where the policyholder is under a statutory obligation to be covered by insurance and may be required to show evidence of cover, for example, third party motor insurance.
Credibility
A statistical measure of the weight to be given to a statistic. This often refers to the claims experience for a particular risk (or class) as compared with that derived from the overall experience of a corresponding parent or larger population. The measure is used to determine a premium when using experience rating.
For example, a company may give full credibility to any motor fleet expected to give rise to 1 000 claims in a period (i.e. use a burning cost approach alone) but would only give partial credibility or weight to the burning cost experience of smaller schemes, and may use weighted averages in rating. The weight applied to the actual burning cost in that case would be referred to as the “credibility measure” or “weight”, following a Bayesian type approach to risk evaluation.
Deductible
The amount which, in accordance with the terms of the policy, is deducted from the claim amount that would otherwise have been payable and will therefore be borne by the policyholder. Suppose that, under the terms of the policy, the sum insured is S and there is a deductible of D. Then the maximum liability of the insurer is S - D.
In the event of a loss L that exceeds S, the loss borne by the insured is L-S+D.
In the event of a loss L that does not exceed S, the insurer is liable to pay L-D and the loss borne by the insured is D.
Deep pocket syndrome
A situation where claims are made based on the ability of the defendant to pay rather than on share of blame.
An injured party will try to blame the party with the greatest wealth (i.e. deepest pocket) where there is more than one potential defendant.
Deferred acquisition costs (DAC)
Acquisition costs relating to contracts in force at the balance sheet date, which 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.
Deposit premium
This occurs in cases where all relevant exposure or rating information is not known at the start of the period of cover, or the premium to be paid is dependent on the claims experience during the policy term. An initial premium is paid at the start of the period of cover, followed by an adjustment at the end when the information required is known.
Where this latter adjustment is stipulated at the outset as being upwards only, the term “Minimum and Deposit Premium” applies.
Where it is found in cases relating to retrospective experience rating, the term “swing rated premium” is often applied.
Development factors
The factors emerging from a chain ladder calculation that are the ratios of claims in successive development years. Sometimes known as link ratios.
Direct business
This term has two meanings:
(1) Business acquired without the intervention of an intermediary
(2) The cover provided by an insurer to an original policyholder, as opposed to any reinsurer cover provided for the insurer. The meaning intended is usually clear from the context in which the term is used.
Discovery period
A time limit, usually defined in the policy wording or through legislative precedent, placed on the period within which claims must be reported. It generally applies to classes of business where several years may elapse between the occurrence of the event or the awareness of the condition that may give rise to a claim and the reporting of the claim to the insurer, e.g. employer’s liability or professional indemnity.
Earned premiums
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.
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.
Policies written in the first, second, third and fourth quarter of each year are assumed to contribute one-eighth, three-eighths, five-eighths and seven-eighths respectively of the quarters’ written premium to the Unearned Premium Reserve at the end of the year.
Endorsement
Some change to the policy wording, usually following a change in the risk covered, that takes effect during the original period of insurance and is usually, but not necessarily, accompanied by an alteration in the original premium.
Equalisation reserve and equalisation provision
An equalisation reserve, sometimes called a claims equalisation reserve, is a reserve built up (generally from profitable years) as a cushion against periods with worse than average claims experience.
Escalation clause
A policy clause that permits the insurer to raise automatically the level of benefits or sum insured (and therefore the premium) in line with some form of inflation index.
Estimated (or expected) maximum loss (EML)
The largest loss that is reasonably expected to arise from a single event in respect of an insured property. This may well be less than either the market value or the replacement value of the insured property and is used as an exposure measure in rating certain classes of business. See also the two terms probable and possible maximum loss (PML).
Event
An occurrence that may lead to one or more claims.
Excess
The sum, specified in the policy, that the insured must bear before any liability falls upon the insurer.
Suppose that, under the terms of the policy, the sum insured is S and there is an excess of E. In the event of a loss L that exceeds S+ E, the loss borne by the insurer is S and the loss borne by the insured is L- (S + E) +E, i.e. L-S.
In the event of a loss L that exceeds E but does not exceed S + E, the insurer is liable to pay L-E and the loss borne by the insured is E.
Thus, in the case of a policy with a specified sum insured, the operation of an excess differs from that of a deductible where l exceeds S.
Excesses are widely used in personal lines of insurance such as motor insurance. They may be compulsory, in that they apply to all claims of the types specified, or voluntary to secure lower premiums.
Excess of loss (XL) 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 as specified 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.
