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 month’s 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 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.
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 a 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.
Accumulation of risk
An accumulation of risk occurs when a single event can give rise to claims under several different policies. 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, such as commission
Act of God
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
Additional reserve (provision) 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.
Adjustment premium
The adjustment premium is an additional 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
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
Cover that is not restricted to specific perils such as fire, storm, flood and so on. The cover is for loss, destruction or damage by any peril not specifically excluded. The exclusions will often be inevitabilities like wear and tear. The term is sometimes loosely used to describe a policy that covers a number of specified risks, though not all.
Allocated loss adjustment expenses (ALAE)
Claims handling expenses
Annual basis of 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.
Anti-selection
The preference of some insurance applicants for policies whose underwriting requirements are less stringent than others.
Anti-selection occurs when a more profitable business is attracted away from an insurer by a competitor who has found a way of identifying the more profitable segment and offers more attractive terms.
Asset liability modelling
A form of actuarial projection which analyses future flows of investment income against liability outgo
Atafs - Age to age factors
Used by the CAS to refer to link ratios or development factors
Atufs - Age to ultimate factors
Used by the CAS in triangulation reserving methods to refer to the grossing-up factor to get from an intermediate period of development to ultimate
Average
- In non-marine insurance, the term relates to the practice of reducing the amount of a claim in proportion to the extent of underinsurance.
- In marine insurance, the term is generally used to describe damage or loss.
Average cost per claim method
A method of reserving which relies on the average cost of claims paid or incurred.
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 (or expected) maximum loss (EML).
Benchmark
A benchmark is any statistic derived from external sources; for example, loss ratio, expense-related measure, claim reporting or claim payment development pattern.
Binding authority
Contractual agreements setting out the scope of delegated authority, allowing cover holders to enter into contracts of insurance and to issue insurance documents on behalf of Lloyd’s managing agents.
Bonus hunger
The reluctance of policyholders under a no-claim discount (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 rating system in which the base premium level can be discounted or loaded in response to the policyholder’s claims experience
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 (or delegated authority schemes in direct insurance) can be calculated.
Bornhuetter Ferguson (BF) method
A reserving method which uses weights based on an a priori loss ratio and claim development.
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.
See also going-concern basis.
Broker
An intermediary between the seller and buyer of a particular insurance contract who is not tied to either party.
A reinsurance broker is similarly defined where reinsurance contracts are bought and sold.
See also Lloyd’s broker
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, incurred but not reported (IBNR) claims and so on) as a method of calculating premiums or monitoring experience for certain types of risks, for example, motor fleets and non-proportional reinsurance.
Business interruption insurance
Insurance cover for financial losses arising following damage (for example, by 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 (possibly based on capital limitations).
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.
Capitive
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 customers 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.
Lighter regulatory capital requirements for captive reinsurers only apply if the purpose of the captive is to provide cover exclusively for the risks of the undertaking or group to which it belongs and so does not provide cover for third parties.
CAS
The Casualty Actuarial Society (CAS) is a professional society of actuaries based in the USA. Its members are mainly involved in the property and casualty areas of the actuarial profession.
Case by case estimation
A method of determining the reserve for outstanding reported claims, where each outstanding claim is individually assessed to arrive at an estimate of the total payments to be made.
The sum of all case estimates is often referred to as the outstanding claims reserve (OCR) or reported but not settled reserve (RBNS).
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 as in the phrase “property/casualty insurance”.
Catastrophe
In the context of general insurance a catastrophe is a single event that gives rise to an exceptionally large aggregation of losses
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.
See hours clause.
Catastrophe reserve
A reserve built up over periods between catastrophes to smooth the reported results over a number of years. The purpose of a catastrophe reserve is smoothing, not solvency.
Ceding company (cedant)
An insurer or reinsurer that passes (or cedes) a risk to a reinsurer.
The insurer or reinsurer may be a company or 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.
A central fund held by Lloyd’s to demonstrate overall solvency to the regulator.
This capital is in addition to members’ capital resources held as Funds at Lloyd’s.
See Funds at Lloyd’s
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.
Further variations on this original theme are now in wide usage
Claim
The word “claim” has a variety of meanings. The most common ones 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.
Care is often needed to discover the precise meaning in a given context; for example, whether a reference to “claims” is to the number of claims or their cost
Claim amount distribtuion
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, a quarter or a calendar year.
The origin varies but is usually defined by the date of a claim, the date of reporting of a claim, the date of payment of a claim, or the date when the period of cover to which a claim attaches commenced
Claim cost inflation
The rate of increase in the cost of like-for-like claim payments.
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 perio
Claim frequency distribution
A statistical frequency distribution for claim occurrence
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 South Africa and the USA, is loss ratio.
Claim size distribution
A statistical distribution describing the size of individual claims.
Claims equalisation reserve
Equalisation reserve and equalisation provision
Claims handling expenses
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”.
In the USA the terms allocated loss adjustment expenses (ALAE) and unallocated loss adjustment expenses (ULAE) are used.
Claims incurred
Incurred claims
Claims made policy
A policy that covers all claims reported to an insurer within the policy period irrespective of when the incident 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 the number of claims themselves or the cost of claims that have been reported.
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 projection.
Clash cover
Excess of loss reinsurance cover, limiting an insurers’ exposure to the risk that one claim incidence gives rise to claims on more than one policy insured by the insurer.
Coinsurance
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.
See slip system.
The term is also used in direct insurance and reinsurance to describe an arrangement in which the insured or cedant retains a proportion of their own risk.
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)
