Glossary Flashcards
1
Q
24ths method
A
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.
2
Q
365ths method
A
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.
3
Q
Accident year
A
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.
4
Q
Accumulation risk
A
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.
5
Q
Acquisition costs
A
Costs arising from the writing of insurance contracts, such as commission.
6
Q
Act of God
A
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.
7
Q
Additional reserve (provision) for unexpired risk
A
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.
8
Q
Adjustment premium
A
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.
9
Q
Adverse development cover
A
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.
10
Q
Agents’ Balances
A
Moneys (typically premiums) that belong to an insurer but are held by an agent.
11
Q
Aggregate excess of loss reinsurance
A
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.
12
Q
All risks
A
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.
13
Q
Annual basis of accounting
A
Annual accounting is based on the cover provided during the accounting period, regardless of when the contracts of insurance start and end.
14
Q
Fund accounting
A
based on the contracts starting during the accounting period, regardless of the periods of cover provided.
15
Q
2 Statutory bases of accounting
A
- Annual accounting
- Fund accounting
16
Q
Anti-selection
A
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.
17
Q
Asset liability modelling
A
A form of actuarial projection which analyses future flows of investment income against liability outgo.
18
Q
Atafs - Age to age factors
A
Used by the CAS to refer to link ratios or development factors
19
Q
Atufs - Age to ultimate factors
A
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.
20
Q
Average (non-marine insurance)
A
The practice of reducing the amount of a claim in proportion to the extent of underinsurance.
21
Q
Average (marine insurance)
A
Generally used term to describe the damage or loss
22
Q
Average cost per claim method
A
A method of reserving which relies on the average cost of claims paid or incurred.
23
Q
Balance of a reinsurance treaty
A
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.
24
Q
Benchmark
A
Any statistic derived from external sources; for example loss ratio, expense-related measure, claim reporting or claim payment development pattern.
25
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.
26
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.
27
Bonus-malus
A rating system in which the base premium level can be discounted or loaded in response to the policyholder's claims experience.
28
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.
29
Bornhuetter Ferguson (BF) Method
A reserving method which uses weights based on an a priori loss ratio and claim development
30
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.
31
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.
32
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.
33
Business interruption insurance
Insurance cover for financial losses arising following damage to business premises.
Also called loss of profits or consequential loss insurance.
34
Cancellation
A mid-term cessation of a policy that may involve a partial return of premium
35
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.
36
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.
37
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.
38
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.
39
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.
40
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”.
41
Catastrophe
a single event that gives rise to an exceptionally large aggregation of losses.
42
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.
43
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.
44
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.
45
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.
46
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.
47
Claim (noun)
an assertion by a policyholder that an insurer is liable to make a payment in accordance with the terms of a policy
48
Claim (verb)
to make a request for payment from an insurer.
49
Claim amount distribution
A statistical frequency distribution describing the total amount of claims.
50
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
51
`Claim cost inflation
The rate of increase in the cost of like-for-like claim payments.
52
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.
53
Claim frequency distribution
A statistical frequency distribution for claim occurrence.
54
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.
55
Claim size distribution
A statistical distribution describing the size of individual claims
56
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.
57
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.
58
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.
59
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.
60
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.
61
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).
62
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.
63
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.
64
Commercial lines
Classes of insurance for commercial and business policyholders
65
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.
66
Commutation
The process of prematurely terminating a reinsurance contract by agreeing an amount to settle all current and future claims.
67
Commutation account
A register of the inflows and outflows to the treaty after the commutation has taken place.
68
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.
69
Composite insurer
A single insurance company that writes both life and non-life business.
70
Co-reinsurance
Similar to co-insurance, but referring to reinsurance of a risk rather than insurance.
71
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.
72
Cover note
A note issued by an insurance company to confirm the existence of insurance cover pending the issue of formal policy documentation.
73
Credibility
A statistical measure of the weight to be given to a statistic.
74
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.
75
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.
76
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.
77
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.
78
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.
79
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.
80
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.
81
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.
82
Dynamic financial analysis (DFA)
A phrase given to any form of actuarial modelling in financial services.
83
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.
84
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.
85
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.
86
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.
87
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.
88
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.
89
Event
An occurrence that may lead to one or more claims.
90
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.
91
Excess
The amount of a claim, specified in the policy, that the insured must bear before any liability falls upon the insurer.
92
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.
93
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.
94
Exclusion
An event, peril or cause defined within the policy document as being beyond the scope of the insurance cover.
95
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
96
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.
97
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”.
98
Expiry date
The date on which the insurance cover for a risk ceases.
99
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
100
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.
101
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.
102
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.
103
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.
104
Fidelity guarantee insurance
Insurance covering the insured against financial losses caused by dishonest actions of its employees (fraud or embezzlement).
105
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.
106
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.
107
Financial Services Board (FSB)*
The body responsible for, among other things, the supervision of insurance activity in South Africa.
108
First loss
A form of insurance cover in which it is agreed that the sum insured is less than the full value of the insured property, and average will not be applied.
109
Fleet
A group of vehicles, ships or aircraft that are insured together under one policy.
110
Fleet rating
The process of determining premium rates for fleets.
111
Franchise
A minimum percentage or amount of loss that must be attained before insurers are liable to meet a claim. Once it is attained the insurers must pay the full amount of the loss.
This feature distinguishes a franchise from a deductible or excess.
112
Free reserves
The excess of the value of an insurer’s assets over its technical reserves and current liabilities. Also known as the solvency margin and sometimes, in the case of a proprietary insurer, referred to as shareholders’ funds or net asset value.
113
From the ground up
A statement of an original insurer’s experience of a class of business offered for reinsurance is said to be from the ground up when it shows the number and distribution by amount of all claims however small, even though reinsurance is required for large claims only (above retention levels or other contract lower limits).
114
Functional costing
A process used within an expense analysis to split the expenses of each line department between the different classes of business covered by that department. The process usually relies upon fixing relative unit costs for each of the processes carried out by the department and counting the number of times that each of the processes is carried out over the period in question.
115
Fund (or funded) 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. See also annual basis of accounting.
116
Funds at Lloyd’s
Each member of Lloyd's is required to provide capital as security to support their total Lloyd’s underwriting business. This is known as Funds at Lloyd’s. The level of Funds at Lloyd’s determines the amount of insurance business that a member can underwrite.
117
Generalised linear model (GLM)
In statistics, the generalised linear model (GLM) is a flexible generalisation of ordinary least squares regression. The GLM generalises linear regression by allowing the linear model to be related to the response variable via a link function and by allowing the magnitude of the variance of each measurement to be a function of its predicted value.
118
Going-concern basis
The accounting basis normally required for an insurer’s published accounts, based on the assumption that the insurer will continue to trade as normal for the long term future.
119
Grossing-up factor
A factor used to adjust an immature or incomplete figure to an ultimate or complete one. For example, a factor to adjust claims paid to date from a specific accident year to the full ultimate claim amount for that accident year
120
Hard premium rates
High, profitable premium rates.
121
Hours clause
A clause within a catastrophe reinsurance treaty that specifies the limited period during which claims can be aggregated for the purpose of one claim on the reinsurance contract. Commonly 24 or 72 hours are used.
122
Inception date
This is the date from which the insurer assumes cover for a risk. This may or may not coincide with the premium collection date.
123
Increased limit factors
These are factors which estimate the cost for a new limit as a multiple of the basic (original) limit.
124
Incurred but not enough reported (IBNER) reserve
A reserve reflecting expected changes (increases and decreases) in estimates for reported claims only (that is, excluding any “true” or “pure” IBNR claims). The abbreviation is sometimes stated as “incurred but not enough reserved”. The two terms can be regarded as identical in meaning
125
Incurred but not reported (IBNR) reserve
A reserve to provide for claims in respect of claim events that have occurred before the accounting date but still to be reported to the insurer by that date. In the case of a reinsurer, the reserve also needs to provide for claims that, although already known to the cedant, have not yet been reported to the reinsurer as being liable to involve the reinsurer.
126
Incurred claims (or claims incurred)
Incurred claims refers to the total amount paid on a cohort of claims up to a specified valuation date plus the total of all case estimates on these claims as at the valuation date.
In this sense it is used in contrast to paid claims, which refers only to the amounts paid up to the valuation date. Incurred claims usually include ALAE. Other terms for incurred claims when used in this sense are outstanding report claims and incurred to date claims.
127
Principle of indemnity
The principle whereby the insured is restored to the same financial position after a loss as before the loss. This is typical of most types of insurance. This contrasts with the new-for-old basis of settlement, often used in home contents insurance, under which the insured is entitled to the full replacement value of the property without any deduction for depreciation or wear and tear. It is important to note that the sum insured under the new-for-old basis of settlement is equal to the value of the new (replacement) item.
128
Insurance certificate
A certificate provided by an insurer to confirm that the policyholder has insurance cover
129
Insurance cycle
The observed tendency of insurance prices and hence profitability to vary over a period of several years.
130
Insured
The person, group or property for which an insurance policy is issued.
131
Integrated Lloyd’s Vehicles (ILVs)
Syndicates in which the entire participation has been bought by insurance groups.
132
Inwards reinsurance
Reinsurance business accepted or written by an insurer or reinsurer, as opposed to outwards reinsurance which is ceded to a reinsurer.
133
Knock-for-knock agreement
An agreement between two insurers specifying how claims costs are shared between them when vehicles insured by each of them are involved in the same accident. It specifies that each insurer meets the cost of the damage to the vehicle it has insured without any investigation or allocation of legal liability.
134
Lapse
When a policyholder, having been invited to renew the policy, does not do so, the policy is said to lapse.
135
Lapse rate
Usually defined as the ratio of the number of lapses in a defined period to the corresponding number of renewal invitations, but could be another ratio associated with lapses.
136
Latent claims
Strictly, latent claims are those claims that result from perils or causes that the insurer is unaware of at the time of writing a policy, and for which the potential for claims to be made many years later has not been appreciated.
137
Lead underwriter
An underwriter who takes the lead in setting premium rates and agreeing policy conditions under a system of coinsurance (for example, in the Lloyd’s market). A lead underwriter may, or may not, be the lead claims handler depending on market practice and agreements for the class of business.
138
Letter of credit
A financial guarantee issued by a bank that permits the party to which it is issued to draw funds from the bank in the event of a valid unpaid claim against another party.
139
Liability insurance
Insurance against the risk of being held legally liable to pay compensation to a third party.
140
Line
Three different meanings arise - the context usually makes it clear which is intended:
-- the ceding office’s retention under a surplus reinsurance treaty
-- the percentage allocated to an insurer under coinsurance arrangements
-- a class of business may also be referred to as a line of business (or LOB).
141
Line slip
A facility under which underwriters delegate authority to accept a pre-determined share of certain coinsured risks on their companies’ behalf. The authority may be exercised by the leading underwriter on behalf of the following underwriters; or it may extend to the broker or some other agent authorised to act for all the underwriters.
142
Link function
A link function provides the relationship between the linear predictor and the mean of the distribution function in a generalised linear model (GLM).
143
Lloyd’s
A society, incorporated by the Lloyd’s Act 1871, that provides a market place and regulatory framework within which individual and corporate members may participate in the underwriting of insurance risks on their own account.
144
Lloyd’s broker
An agent approved by the Committee of Lloyd’s to place business with Lloyd’s underwriters. There are Lloyd’s brokers in many countries around the world to facilitate the process of individuals, companies and insurers insuring risk through Lloyd’s.
145
Lloyd’s deposit
Wholly owned, non-assigned assets that must be lodged in trust with the Committee of Lloyd’s before a member can write any business. The amount of the Lloyd’s deposit, together with the Names’ deposit, when added to individual Names’ deposits or to incorporated Names’ capital, determines the maximum limit of premium income that may be written on their behalf.
146
Lloyd’s managing agent
A company appointed to manage the affairs of an underwriting syndicate, appoint an underwriter, and provide technical and administrative services.
147
Lloyd’s members' agent
A company that looks after the interests of individual Lloyd's Names. The members’ agent will introduce Names to syndicates, and advise Names on how to spread their capital between different syndicates. The members’ agent will also be responsible for the regular audit of a Name’s wealth, and for submitting all financial statements to Lloyd’s.
148
Lloyd’s special reserve fund
A contingency reserve of limited size that may be built up by individual Lloyd’s Names out of pre-tax income.
149
LMX on LMX
Excess of loss reinsurance provided for syndicates or companies operating in the London Market in respect of LMX business written by them. This is a form of
retrocession business.
150
LMX spiral
The concentration of risk that occurred prior to the mid-1990s when, through the writing of retrocession business (particularly LMX on LMX business), insurers unwittingly ended up reinsuring themselves.
151
London Market
The part of the insurance market in which insurance and reinsurance business is carried out on a face-to-face basis in the City of London. Sometimes known as the London Reinsurance Market although not all business transacted is reinsurance.
152
London Market excess of loss (LMX)
Excess of loss reinsurance provided for syndicates or companies operating in the London Market.
153
Long-tailed business
Types of insurance in which a substantial number of claims take several years from the date of exposure and/or occurrence to be notified and/or settled.
154
Loss (3)
This may signify:
- the financial loss suffered by a policyholder, as distinct from the amount of any insurance claim that may be payable in respect of that financial loss
- the amount of the insurance claim, as in the expression “loss reserve” which means the same as the reserve (or provision) for outstanding claims
- the opposite of “profit” in relation to accounts. In this case, the word needs to be appropriately qualified; for example, underwriting loss or operating loss.
155
Loss expense reserve
Another expression for any type of claims handling expense provision.
156
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”.
157
Loss reserve
Another name for claims reserve. The expression is also often used in association with the reserve deposited by a reinsurer with the cedant to cover in part outstanding claims (exact terms would indicate which party received the investment income on associated assets).
158
Losses-occurring (losses occurring during or LOD) policy
A reinsurance policy providing cover for losses occurring in the defined period no matter when they are reported, as opposed to a claims-made policy or a risks-attaching policy.
159
Minimum Solvency Margin
The Short Term Insurance Act, 1998, sets a statutory minimum level that all companies must adhere to. This minimum level is called the Minimum Solvency Margin.
160
Model uncertainty
When modelling data for the purpose of reserving, the risk that an inappropriate model has been used is known as model uncertainty. The quantification of model uncertainty is difficult to assess, but by using alternative models the risk can be minimised and hence the level of uncertainty can be assessed by comparing the outputs of alternative models.
161
Moral hazard
The risk that an insured may behave in a less risk averse manner when they are insured.
162
Mutual insurer
Owned by policyholders to whom all profits (ultimately) belong.
163
Names (Lloyd’s)
The members of Lloyd’s who accept the liability for (and profits from) the risks underwritten in their name. Names may be individuals or corporate entities.
164
Net premium
Usually, the premium net of the cost of reinsurance, although it could mean net of premium tax, or net of acquisition expenses and/or commission. Premium net of both reinsurance and acquisition expenses is sometimes referred to as net net premium.
165
Nil claim (3)
A claim that results in no payment by the insurer, because, for example:
- the claim is found not to be valid
- the amount of the loss turns out to be no greater than the excess
- the policyholder has reported a claim in order to comply with the conditions of the policy but has elected to meet the cost in order to preserve any entitlement to no-claim discount.
166
No-claim discount (NCD)
A form of experience rating in which an individual policyholder may be granted a discount from the relevant base premium depending on his or her claims experience.
167
Non-proportional reinsurance
Reinsurance arrangements, where the claims are not shared proportionately between the cedant and reinsurer. An excess of loss contract is an example.
168
Novation*
The transfer of the rights and obligations under a contract from one party to another.
169
Office premium
This is the total premium charged for the period of cover. This premium will contain the risk premium, commission, an allowance to cover all other types of expenses, an allowance for any premium tax and a profit loading.
170
Ogden tables
These are a set of tables used to help in the calculation of special damages and the present value of loss of earnings or annual expenses in personal injury and fatal accident cases. The tables provide multipliers which take account of life expectancies and a range of discount rates and are prepared by the Government Actuaries’ Department of the UK. The discount rate is set by the Government of the UK.
171
On level premium
In order for historical premium to be useful in projecting future premium, it must first be brought to current rate level. The policies underlying the experience period may
have been written using rates that are no longer in effect. Adjustments need to be made to the historical premium for rate increases (decreases) that occurred during or after the historical experience period or the projected premium will be understated (overstated). This is referred to as adjusting the premium “to current rate level” or putting the premium “on-level.”
172
One-year (accident 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.
173
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.
174
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.
175
Outstanding claims reserve (OCR) or outstanding claims provision
The reserve set up in respect of the liability for all outstanding claims, whether reported or not, including reserves for future payments on claims that are currently regarded as settled but may be reopened.
The reserve set up in respect of the liability for all reported outstanding claims, including reserves for future payments on claims that are currently regarded as settled but may be reopened. It is important to note that this definition does not give the complete reserve, which should include an allowance for IBNR (pure IBNR and IBNER).
176
Outwards reinsurance
Reinsurance ceded by an insurer or reinsurer, as opposed to inwards reinsurance, which is reinsurance accepted.
177
Over-riding 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.
178
Parameter uncertainty
When a model is fitted based upon historic data, certain parameters are selected, for example, development factors and associated tail distributions or average cost assumptions. There is the possibility that parameters do not accurately reflect the underlying statistical process. This uncertainty is known as parameter uncertainty. A goodness of fit test using these parameters can quantify this element of uncertainty.
179
Partial payment
- Partial claim settlement paid on account, before a claim is finalised or closed.
- Any claim for less than the full sum insured.
180
Per-claim basis
A per-claim basis means that original loss curves are based on the amounts that will be paid to each individual claimant (plaintiff) for losses that arise from one incident.
181
Per-occurrence basis
A per-occurrence basis means that original loss curves are based on the total amounts paid to all plaintiffs for losses that arise from one incident.
182
Peril
A type of event that may cause a loss that may or may not be covered by an insurance policy. An insured peril is one for which insurance cover is provided as opposed to an excluded peril for which insurance cover is not provided
183
Period of unexpired risk
For a policy in force on an accounting date, the period from the accounting date to the expiry date.
184
Persistency
A measure of the probability that a policy will remain in force at renewal, rather than lapse.
185
Personal lines
Types of insurance products offered to individuals, rather than to groups or business entities. Products include private motor, domestic household, private medical, personal accident and travel insurance.
186
Points rating system
A system for calculating the office premium by relating it to points associated with each cell within a rating factor; the higher the risk associated with the cell, the higher the points and the higher the premium. For example, a driver aged 20 would be associated with many more points and, all other things being equal, a higher premium, than a driver aged 40.
187
Pooling
Arrangements where parties agree to share premiums and losses for specific types of class or cover in agreed proportions. To some extent all insurance is pooling but specific pooling arrangements often apply particularly where the risks have very large unit size (for example, atomic energy risks) or via mutual associations, such as P&I clubs, catering for an industry.
188
Portfolio claims*
Used in proportional and other forms of reinsurance. The outstanding claims that, together with the portfolio premiums (see below), make up the reinsurance premium
required for a portfolio transfer; usually used to transfer obligations from one year of account to the next and hence enable a result for the year to be struck. Can also apply to the body of claims transferred in a portfolio transfer.
189
Portfolio premiums*
The premiums that together with the portfolio claims make up the reinsurance premium required for a portfolio transfer.
190
Portfolio transfer*
The reinsurance of an entire portfolio at a premium relating to the estimated outstanding claims (including IBNR) and unexpired risk under that portfolio. Usually used when an insurer has decided to discontinue writing a particular class, or by a reinsurer wanting to close a treaty year and pass on the liability to the following year for administrative reasons.
191
Premium income limit
The amount of premium that a Lloyd’s Name may write in a given year, determined by the size of the Name’s wealth, the Name’s Lloyd’s deposit and whether or not incorporated.
192
Premiums trust fund (PTF)
A fund into which all premiums for a Lloyd’s syndicate in a given underwriting year are paid. No moneys may be released from the fund other than any profit on closure and on-going claims and expenses.
193
Primary insurer
An insurer providing cover directly to the insured policyholder, as distinct from a reinsurer.
194
Probable (possible) maximum loss (PML)
The term “probable maximum loss” represents an attempt to quantify exposure, used in rating or to judge requirements for outwards reinsurance. It may be used as another term for estimated maximum loss, depending on the class of business. The term “possible maximum loss” implies the consideration of more remote scenarios than those for probable or estimated maximum loss and therefore carries a higher value. The fact that the same abbreviation, PML, may be used for both is a source of possible (and, indeed, probable) confusion.
195
Process uncertainty
Process uncertainty is the risk inherent in writing business and settling claims in general insurance. The modelling of number and amount of claims will vary from the true value owing to random variation. Process uncertainty is represented by a probability density function. For example, claims in the coming year may take on a range of values with associated likelihood.
196
Product costing
Product costing is the calculation of the theoretical office premium to be charged for a particular class of business.
197
Product pricing
Product pricing is the determination of the actual office premium. This will take account of current market conditions.
198
Profit commission
Commission paid by a 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.
199
Profit testing
A term used for estimating the economic value of contracts using net present value techniques; that is, proposed premium rates are tested by projecting possible levels of future business, claims, expenses, investment experience and profit. The process may be extended to include all business and so form a model office akin to those used in life companies.
200
Proportional reinsurance
A reinsurance arrangement where the reinsurer and cedant share the claims proportionally. Usually, premiums follow the same proportions but commission rates may differ. Two types commonly arise: quota share and surplus.
201
Proprietary insurer
An insurance company owned by shareholders; that is, not a mutual insurer. See also mutual insurer.
202
Protected NCD
A modification to an NCD system whereby a policyholder who has attained a high level of NCD may elect to pay an extra premium in order to be able to make claims without losing future entitlement to discount. There may be a specified limit to the number of claims that can be made without affecting the discount, or the insurer may simply reserve the right to withdraw the policyholder’s option to continue on protected NCD.
203
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.
204
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.
205
Rating
The process of arriving at a suitable premium for an insurance risk. The term is sometimes synonymous with underwriting, though rating is strictly just one part of the underwriting process.
206
Rating basis
The collection of assumptions used to associate the risk premium with the characteristics of the risk being insured.
207
Rating factor
A factor used to determine the premium rate for a policy, which is measurable in an objective way and relates to the intensity of the risk. It must, therefore, be a risk factor or a proxy for a risk factor or risk factors.
208
Realistic Disaster Scenarios
Lloyd’s maintains a set of mandatory Realistic Disaster Scenarios (RDS) to stress test
both individual syndicates and the market as a whole. The event scenarios are regularly
reviewed to ensure they represent material catastrophe risks.
209
3 sets of Realistic Disaster Scenarios
- the compulsory scenarios, for which all syndicates report estimated losses to Lloyd’s; these represent events to which most of the market would potentially be exposed, and for which Lloyd's monitors the total of all syndicate losses.
- There is a set of more specialist scenarios, which need only be reported if estimated losses exceed a threshold.
- Finally, there are two events which syndicates must define for themselves as representing material potential losses not captured in other scenarios.
210
Reciprocity
An arrangement between two insurers who agree to reinsure risks with each other. Commonly used with quota share reinsurance to diversify the insurers’ overall portfolios.
211
Recoveries
Amounts received by insurers to offset directly part of the cost of a claim. Recoveries may be made from several different sources, for example, reinsurers, other insurers, salvage and liable third parties.
212
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.
213
Reinsurance
An arrangement whereby one party (the reinsurer), in consideration for a premium, agrees to indemnify another party (the cedant) against part or all of the liability assumed by the cedant under one or more insurance policies, or under one or more reinsurance contracts.
214
Reinsurance to close (RITC)
An agreement under the Lloyd’s system of three-year accounting. Underwriting members (the reinsured members) for one year of account (the closing year) of a syndicate agree with another party (the reinsuring party) that the reinsuring party will assume
responsibility for handling and paying all known and unknown liabilities of the reinsured members arising out of insurance business underwritten by the syndicate and allocated to the closing year.
The reinsuring party will usually be the subsequent open year of the same syndicate but could also be a later open year, an open year of another syndicate or a reinsurer outside Lloyd’s.
215
Reinsurer
An insurer providing reinsurance cover. Some reinsurers do not write any direct or primary insurance business.
216
Re-opened claim
A claim formerly deemed settled, but subsequently re-opened because further payments may be required.
217
Replacement basis
A basis of cover under which the insurer pays the cost of replacing the insured item with a similar but new item. Also referred to as “replacement as new” or “new for old” and contrasts with “the principle of indemnity”.
218
Reporting year
A reporting year grouping of claims will combine all the claims that are reported within a given calendar year, irrespective of the date on which the relevant policy commenced, irrespective of when the claims are actually paid and irrespective of the year in which the incident actually arose.
219
Retention
The amount (or proportion) of risk retained by the cedant under a reinsurance arrangement or the insured under an insurance arrangement.
220
Retroactive date
Used for claims made cover. It is the date after which claims must have occurred in order to be covered.
221
Retrocession
Reinsurance purchased by a reinsurer in relation to its inwards reinsurance liabilities
(that is, reinsurance of reinsurance).
222
Retrocessionaire
A reinsurer that accepts reinsurance from another reinsurer.
223
Return commission
Commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit. Also called overriding commission.
224
Risk-attaching basis
A basis under which reinsurance is provided for claims arising from policies commencing during the period to which the reinsurance relates, irrespective of when the claims are incurred or reported.
225
Risk-based capital (RBC)
The assessment of the capital requirement for a general insurer by considering the risk profile of the insurance business written and of any other operations. Regulation around the world, including SAM in South Africa and Solvency II in the EU, are moving toward a risk-based regime, where insurers’ capital requirements are dependent on the risk inherent in their businesses operation.
226
Risk excess of loss reinsurance
Excess of loss reinsurance that relates to individual losses affecting only one insured risk at any one time.
227
Risk factor
A factor that is expected, possibly with the support of statistical evidence, to have an influence on the intensity of risk in an insurance cover.
228
Risk group
The rating cell or risk segment into which particular policies are categorised, within a type of insurance cover. The objective is to achieve a group of policies or risks that have homogeneous characteristics and hence a similar risk of claims.
229
Risk premium
The amount of premium required to cover claims expected for a risk; that is, average claim amount times average claim frequency. It may alternatively be expressed as a rate per unit of exposure.
230
Run-off basis
A valuation basis that assumes an insurer will cease to write new business, and continue in operation purely to pay claims for previously written policies. Typically expenses
and reinsurance arrangements change after an insurer ceases to write new business.
231
Run-off triangle
The development or run-off triangle may be of paid or incurred claims by amount or number (for determining the development of claims), or of premiums (to determine the earning pattern of written premiums).
232
Salvage
Amounts recovered by insurers from the sale of insured items that had become the property of the insurer by virtue of the settling of a claim.
233
Self-insurance
The retention of risk by an individual or organisation, as distinct from obtaining insurance cover.
234
Short-tailed business
Types of insurance in which most claims are usually notified and/or settled in a short period from the date of exposure and/or occurrence.
235
Signing down
The process of reducing the proportion of risk that each coinsurer has accepted for a given risk where the slip has been more than 100% subscribed.
236
Slip system
The face-to-face system used within the London Market to coinsure risks. Proposed risks are described by a broker on a standard form (slip); terms and the premium rate are added after negotiation with a lead underwriter (who also signs for a certain proportion of the risk), before the slip is circulated by the broker amongst other underwriters who sign the slip to confirm the proportion of risk that they will accept.
237
Soft premium rates
Premium rates with significantly reduced margins due to the competitive state of the market.
238
Solvency ratio
The free reserves divided by the net (of reinsurance) written premiums.
239
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.
240
Statutory returns*
Annual statements and accounts that an insurance company is obliged to file under the Short Term Insurance Act and Regulations. The purpose is to enable the supervisory authorities to monitor the financial condition of the insurer and decide what action, if any, may be needed to prevent insolvency.
241
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%.
242
Subrogation
The substitution of one party for another as creditor, with a transfer of rights and responsibilities. It applies within insurance when an insurer accepts a claim by an insured, thus assuming the responsibility for any liabilities or recoveries relating to the claim. For example, the insurer will be responsible for defending legal disputes and will be entitled to the proceeds from the sale of damaged or recovered property.
243
Sunset clause
Clause defining the time limit within which a claim must be notified, if it is to be valid
244
Suretyship
Insurance to provide a guarantee of performance or for the financial commitments of the insured. In the UK this is known as financial guarantee insurance.
245
Surplus lines insurance
Specialised property or liability coverage in the USA provided by an unlicensed insurer in instances where it is unavailable from insurers licensed in the state in question.
246
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.
247
Syndicate (Lloyd’s)
A group of Lloyd’s Names who collectively coinsure risks. The syndicates often specialise in particular types of insurance.
248
Technical reserves (provisions)
The accounting entries in the balance sheet that represent the insurer’s liabilities from the business that has been written.
249
Three-year accounting
The usual form of funded accounting, in which the underwriting profits are first recognised at the end of the third accounting year from the start of the underwriting year.
250
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.
251
Treaty reinsurance
Reinsurance that a reinsurer is obliged to accept, subject to conditions set out in a treaty.
252
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”.
253
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.
254
Underwriter
An individual who assesses risks and decides the premiums, terms and conditions on which the risks can be accepted by the insurer.
255
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 (for example, most commercial lines), the more detailed the consideration.
256
Underwriting agent
An organisation at Lloyd’s providing management services for syndicates and/or advice for Names.
257
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.
258
Underwriting year
An underwriting year grouping of claims will combine all the claims relating to loss events that can be attributed to all policies that commenced cover within a given calendar year, irrespective of when they are actually reported or paid and irrespective of the year in which the incident actually arose.
259
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.
260
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:
- Net of deferred acquisition costs (DAC); that is, by deducting acquisition expenses before proportioning the written premium.
- Gross of DAC; that is, by proportioning the full written premium without any deduction for DAC.
The first approach is consistent with a going-concern basis, whilst 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.
261
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).
262
Value at Risk (VaR)
In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading) is the given
probability level. VaR can be applied to various quantities, including the profit level of an insurer in order to determine capital requirements.
263
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.
264
Written premiums
The amount of premium, either gross or net of reinsurance, for which cover commenced in an accounting period.
