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.
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.
Accident year
An accident year grouping of claims means that all claims relating to loss 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.
Accumulation 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 or occupation.
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
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. In return for a premium.
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.
Annual basis of 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
based on the contracts starting during the accounting period, regardless of the periods of cover provided.
2 Statutory bases of accounting
- Annual accounting
- Fund accounting
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 (non-marine insurance)
The practice of reducing the amount of a claim in proportion to the extent of underinsurance.
Average (marine insurance)
Generally used term to describe the 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 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.
Benchmark
Any statistic derived from external sources; for example loss ratio, expense-related measure, claim reporting or claim payment development pattern.
Binding authorities
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.
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 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.
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.
Burning cost
The actual cost of claims incurred during a past period of years expressed as an annual rate per unit of exposure.
This is sometimes used as a method of calculating premiums or monitoring experience for certain types of risks, eg motor fleets and non-proportional reinsurance.
Business interruption insurance
Insurance cover for financial losses arising following damage 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 weight 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.
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
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.
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.
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.
Claim (noun)
an assertion by a policyholder that an insurer is liable to make a payment in accordance with the terms of a policy
Claim (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, 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 period.
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 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 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.
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).
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.
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.
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 commercial and business policyholders
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 process of prematurely terminating a reinsurance contract by agreeing an amount to settle all current and future claims.
Commutation account
A register of the inflows and outflows to the treaty after the commutation has taken place.
Commutation clause
A clause in an insurance or reinsurance contract that allows the contract to be commuted under certain conditions. The clause works in conjunction with commutation accounts, which are used to calculate the relevant numbers.
Composite insurer
A single insurance company that writes both life and non-life business.
Co-reinsurance
Similar to co-insurance, but referring to reinsurance of a risk rather than insurance.
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.
Credibility
A statistical measure of the weight to be given to a statistic.
CRESTA zones
The Global Catastrophe Risk Evaluating and Standardising Target Accumulations (CRESTA) zone data set helps brokers and reinsurers assess and present risk, based on the zoning system established by the world’s leading reinsurers. Based primarily on the observed or expected seismic activity (although drought, flood and wind storms are also considered) within a country, CRESTA zones consider the distribution of insured values within a country as well as administrative or political boundaries for easier assessment of risks.
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.
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 (that is, 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. 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.
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 (link ratios)
The factors emerging from a chain ladder calculation that are the ratios of claims in successive development periods. Sometimes known as link ratios.
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.
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, for example, employers’ liability or professional indemnity.
Dynamic financial analysis (DFA)
A phrase given to any form of actuarial modelling in financial services.
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.
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 (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.
Event
An occurrence that may lead to one or more claims.
Events not in data (ENIDs)
Reserving methods that project from historical data are unlikely to satisfy any requirement for a probability-weighted average of future cashflows (often required by regulators), since not all possible future cashflows - or the events that cause them - may be represented in the data. Although these events are sometimes referred to as “binary events” or “extreme events”, such terms suggest that events not found in the data are necessarily extreme or rare, which is not the case.
Excess
The amount of a claim, specified in the policy, that the insured must bear before any liability falls upon the insurer.
Excess and surplus lines insurance
Excess and surplus lines insurance is a segment of the insurance market that allows consumers to buy property and casualty insurance through the state-regulated insurance market, where policyholders, agents, brokers and insurance companies all have the ability to design specific insurance coverages and negotiate pricing based on the risks to be secured.
Excess of loss (XL or XoL) 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.
Exclusion
An event, peril or cause defined within the policy document as being beyond the scope of the insurance cover.
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
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.
Experience rating
A system by which the premium of each individual risk depends, at least in part, on the actual claims experience of that risk (usually in an earlier period, but sometimes in the period covered). The latter case is sometimes referred to as swing rated or loss sensitive, and there are often upper and lower limits defining a “collar”.
Expiry date
The date on which the insurance cover for a risk ceases.
Exposure (3)
This term can be used in three senses:
- the state of being subject to the possibility of loss
- a measure of extent of risk
- the possibility of loss to insured property caused by its surroundings
Exposure rating
A method of calculating the premium that is based on external data or benchmarks. The risk profile (exposure) of every insured from the products in question is examined. Scenarios of losses of various sizes are analysed and the impact on the policies is determined. The premium of each individual insured does not depend on the actual claims experience of that insured. Instead, the amount of exposure that the insured brings to the insurer and the experience for comparable risks is used to calculate a premium rate.
Exposure unit/measure
The basic unit used by the insurer to measure the amount of risk insured, usually over a given period and usually used directly in rating, with premiums expressed as the rate per exposure unit of exposure times the number of units of exposure for the risk.
Facultative-obligatory reinsurance
A reinsurance facility where the cedant has the option to reinsure the risk, but the reinsurer is obligated to accept the risk if the insurer chooses to reinsure the risk.
Facultative reinsurance
A reinsurance arrangement covering a single risk as opposed to a treaty arrangement; commonly used for very large risks or portions of risk written by a single insurer.
Fidelity guarantee insurance
Insurance covering the insured against financial losses caused by dishonest actions of its employees (fraud or embezzlement).
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.
