Reinsurance Terms

Question 1

Accident Year Experience

Answer 1

A method of tracking reinsurance contract experience by matching all losses occurring during a given twelve-month period with all premium earned during the same period. The dates that losses are reported and premium written are disregarded. The total value (losses paid, plus loss reserves) of all losses occurring during the defined twelve-month period is divided by the earned premium for the same period to calculate an accident year loss ratio. As the experience is developing, foss reserves are used in the calculation, but the ultimate result for a given accident year cannot be finalized until all losses are settled. While any 12-month period can be used to define the exposure period, the year beginning January 1 is normally used.

Question 2

Accounting Period Earned Premium

Answer 2

Earned premium equals the unearned premium reserve at the beginning of an accounting period added to the premium written (booked) during the period, less the unearned premium reserve at the end of the period. Accounting period earned premium is the method used in the Annual Statement. [See Calendar Year Experience.]

Question 3

Accounting Period Earned Premium

Answer 3

Earned premium equals the unearned premium reserve at the beginning of an accounting period added to the premium written (booked) during the period, less the unearned premium reserve at the end of the period. Accounting period earned premium is the method used in the Annual Statement. [See Calendar Year Experience.]

Question 4

Acquisition Costs

Answer 4

Internal costs incurred in conducting an insurance operation other than loss adjustment expenses, acquisition costs, and investment expenses.

Question 5

Admitted Assets

Answer 5

Assets recognized and accepted by state insurance laws as admissible for the purpose of determining the solvency of insurers or reinsurers.

Question 6

Admitted Company

Answer 6

1. An insurer licensed to conduct business in a given state.

2. A reinsurer licensed or approved to conduct business in a given state.

Question 7

Admitted Paper

Answer 7

Policies issued by an admitted insurer.

Question 8

Adverse Selection

Answer 8

risks, segments of risks, or coverages that appear less attractive for retention by the ceding company.

In primary insurance, adverse selection occurs when policies are
written on risks most likely to sustain a loss. This may occur due)  to lack of adequate underwriting risk selection, the failure to establish proper selection criteria or overly aggressive (competitive) pricing. It may also occur when a company raises its rates causing the better risks within a class to leave in favor of lower rates with another carrier.

Question 9

Affinity Group

Answer 9

Purchasers of insurance (or other goods or services) with common characteristics.

Question 10

Agency Reinsurance

Answer 10

(1) A designation that identifies the reinsurance of one or more of an agent’s policies, with the agent acting for the ceding insurer under its authority.
(2) A contract of reinsurance between an insurer and a reinsurer that is limited to business produced by a specific agent of the ceding insurer. The policies are usually generated by that agent and administered directly with the reinsurer with permission of the insurer. While there may be other reasons for the practice, the usual intent is to allow an agent to issue policies of a class or size that the insurer would otherwise not permit the agent to issue.

Question 11

Agent Commission

Answer 11

In primary insurance, an amount paid an agent for insurance placement services.

Question 12

Aggregate Excess of Loss Reinsurance

Answer 12

A form of excess of loss reinsurance that indemnifies the (reinsured against the amount by which the reinsured’s losses incurred exceed either an agreed monetary amount or an agreed loss ratio percentage or some other business measure.

Usually, reinsurance recoveries (net of specific reinsurance) are measured over a twelve-month period as an aggregate percentage of net premiums over the same period or average insurance in force for the same period. This form of reinsurance is also known as Stop-Loss Reinsurance, or Excess of Loss Ratio Reinsurance.

Question 13

Aggregate Deductible

Answer 13

An additional retention (usually) incorporated into a form of per risk or per occurrence excess reinsurance. The primary company retains its normal retention on each risk or occurrence, and additionally retains an aggregate amount of the loss which exceeds its normal retention up to a designated aggregate amount. This may be expressed as either a monetary amount or percentage of premium.

Question 14

Alien Company

Answer 14

An insurer or reinsurer domiciled outside the U.S. but conducting an insurance or reinsurance business within the U.S. [See Foreign Company and Domestic Company.)

Question 15

Allied Lines

Answer 15

Insurance coverage usually written in conjunction with fire insurance which applies to a number of other causes of loss to property including wind, hail, explosion, riot or civil commotion, aircraft, vandalism and smoke damage.

Question 16

All-Risk Insurance

Answer 16

Insurance that is written to cover all perils not specifically excluded. (As opposed to named perils coverage which applies only to losses resulting from the perils specifically named in the policy.)

Question 17

Allocated Loss Adjustment Expense

Answer 17

Expenses allocable to the adjustment of a specific claim; investigation expenses, court costs and salaries of outside adjusters. Generally, claim department salaries and overhead expenses are not included.[NB: Effective January 1, 1997, the FASB proposes to institute a change to include all internal and external claim adjustment services, including overhead -but excluding fees and expenses of adjusters and settling agents.]

Question 18

Alternative Market

Answer 18

Captive insurers, risk retention groups and other risk transfer mechanisms which provide protection as opposed to traditional insurance company policies.

Question 19

Amortization Period

Answer 19

This term is synonymous with payback period and is encountered in the rating of per occurrence excess reinsurance covers. It represents the number of years necessary at a given premium level to accumulate total premiums equal to the indemnity.[See also Rate on Line.)

Question 20

Annual Statement

Answer 20

A summary of an insurance company’s (or reinsurer’s) financial operations for a particular year. It includes a balance sheet supported by detailed exhibits and schedules, and is filed with the state insurance department of each jurisdiction in which the company is licensed to conduct business. It is also known as the Convention Blank.[See Convention Blank and Statutory Accounting Principles.]

Question 21

Arbitration Clause

Answer 21

A provision in reinsurance contracts in which the parties agree to submit any dispute or controversy to an arbitration panel. Usually it is a condition precedent to any right of action on the contract. Although the wordings vary significantly, they normally provide for the appointment of two arbitrators, one selected by each party, who in turn select an umpire. The decision of a majority of the arbitrators is often binding on the parties to the treaty.

Question 22

Assume

Answer 22

To accept reinsurance (or a retrocession) of a ceding company’s insurance (or assumed reinsurance) on a risk or exposure.

Question 23

Assumption Endorsement

Answer 23

[See Cut-Through Endorsement.]

Cut-Through Endorsement

A cut-through endorsement is an addition to an insurance policy which requires that, in the event of the insurance company’s insolvency, any part of a loss covered by reinsurance be paid directly to the policyholder and/or mortgage company by the reinsurer. The cut-through endorsement is so named because it provides that the reinsurance claim payment shall be made directly from the guaranteeing reinsurer to the original insured. It “cuts through” the usual route of payment from company-to­ policyholder followed by reinsurer-to-company. Similar to the guarantee endorsement, the cut-through endorsement is also known as an assumption endorsement. [Compare to Guaranty Endorsement.]

Question 24

Attachment Point

Answer 24

The point at which excess insurance or reinsurance protection becomes operative; the retention under an excess reinsurance contract.

Question 25

Authorized Reinsurance

Answer 25

Reinsurance placed with a licensed reinsurer and for which the reinsured company may take credit on its statutory annual statement for any recoverables as an admitted asset.

Question 26

Automobile Insurance Plan

Answer 26

The plans provide a market for automobile insurance for those unable to obtain insurance in the voluntary market. There is considerable variation among the states but generally such business is shared by all companies writing automobile business in each state. [See Voluntary Market.]

Question 27

Bordereau

Answer 27

A detailed report made by a reinsured company listing reinsurance premiums and/or reinsurance losses.

A premium bordereau contains a detailed list of policies (or bonds) reinsured during the reporting period. It sets forth such information as the name and address of the insured, the amount and location of the risk, the effective and termination dates of the insurance policy, the amount reinsured and the applicable reinsurance premium.

A loss bordereau contains a detailed list of claims and claim expenses both outstanding and paid by the reinsured during the reporting period, and the applicable amount of reinsurance indemnity.

Bordereau reporting is primarily applicable to pro rata reinsurance arrangements and to a large extent has been replaced by reporting in summary form

Question 28

Bornhuetter - Ferguson Method

Answer 28

A bulk reserving technique used to establish IBNR reserves.

Question 29

Buffer Layer

Answer 29

A term used in casualty insurance to describe a layer of coverage
between the maximum amount to which the primary company underwriter will expose the company and the minimum retention or deductible over which the excess or umbrella insurer or reinsurer will readily write coverage.

Question 30

Burning Cost / Loss Cost

Answer 30

The percentage of a company’s subject (written or earned) premium base that consists of incurred losses to a reinsurance contract.

Question 31

Calendar Year Experience

Answer 31

A method of tracking experience by matching all losses incurred (regardless of when they occurred) within a given twelve-month period, usually beginning on January 1, with all premium earned within the same period. Incurred losses will include the change in IBNR. Losses incurred are equal to the sum of losses paid during the period, plus the outstanding loss reserves at the end of the period, less the outstanding loss reserves at the beginning of the period. Once calendar year experience is calculated for a given period, it never changes. This is the method used by companies to report experience for annual statement purposes.

Question 32

Capacity

Answer 32

The largest amount accepted on a given risk or, sometimes, the maximum volume of business a company is prepared to accept.

Question 33

Capacity- Large Line

Answer 33

The amount of insurance a company is able to furnish on a single risk (exposure).

Question 34

Capacity- Premium

Answer 34

The aggregate amount of premium an insurance company is able to write.

Question 35

Captive Insurance Company

Answer 35

An insurance company that is organized primarily to provide insurance or reinsurance to protect its owner’s exposure to financial loss. The captive may be a “pure captive” with one owner or a “group captive” whose stockholders are corporations unrelated to each other.

Question 36

Carpenter Plan

Answer 36

A form of excess of loss reinsurance in which a ceding company spreads its losses over a multiple-year period, first introduced in the U.S. by a broker of that name [See Spread Loss Reinsurance.]

Question 37

Carry Forwards

Answer 37

In reinsurance accounting or claims, a carry forward occurs when a balance (either positive or negative) is carried into the next accounting period

Question 38

Case Reserves

Answer 38

Reserves established on specific, reported claims that are the company’s best estimate of the amount ultimately to be paid out
on the claim and the loss adjustment expense incurred in so doing. Case reserves do no include IBNR.

Question 39

CATALYST

Answer 39

Registered trade mark of E. W. Blanch Co for a catastrophe modeling tool developed in the mid-1980s. This stochastic (conjectural) modeling tool was originally developed to evaluate windstorm exposures. Since its beginning, the model has added other perils including an earthquake model and tornado model. Risk data are fed into the model and analyzed with the objective of more accurately determining loss exposure.

Question 40

Catastrophe Number

Answer 40

Whenever a catastrophe occurs which produces losses within a prescribed period of time in excess of a certain amount (currently, an estimated industry loss of $25 million), the amount of such losses is recorded separately from non-catastrophe losses. The catastrophe is numbered by Property Claims Services and may be treated differently in the statistical experience records of the state used in setting rate levels.

Question 41

Catastrophe Reinsurance, Casualty

Answer 41

Reinsurance that is not exposed on a policy limit basis, i.e., the reinsured company’s retention on the treaty is equal to or exceeds the reinsured’s maximum net exposure on any one policy. Therefore, such treaties protect against the infrequent loss involving two or more insureds or multiple policies in the same
loss occurrence. Frequently, Extra Contractual and Excess of
Policy Limits coverages are also provided.

Clash (Contingency) Cover
[See Catastrophe Reinsurance, Casualty.]

Contingency Cover
Reinsurance protection against an unusual combination of losses
[See Catastrophe Reinsurance, Casualty.]

Question 42

Catastrophe Reinsurance, Property

Answer 42

A form of excess of loss reinsurance that indemnifies the ceding company for the amount of loss in excess of a specified retention with respect to an accumulation of losses arising out of a catastrophic event or series of events up to a specified limit.

Conflagration (Excess) Cover
[See Catastrophe Reinsurance, Property.]

Question 43

Cede

Answer 43

To cede is to transfer all or part of the insurance written by an insurer (the ceding insurer) to another insurer (the reinsurer). The object is to reduce the liability or potential liability of the ceding insurer. [See Cession.]

Question 44

Ceding Commission

Answer 44

A commission allowance made by the reinsurer for part or all of a ceding company’s acquisition and other costs. The ceding commission may also include a profit factor for the ceding company.

Question 45

Ceding Company

Answer 45

A reinsured.

Question 46

Certificate of Reinsurance

Answer 46

A short-form of documentation of a reinsurance transaction.

Question 47

Cession

Answer 47

(1) The transfer of insurance risk to a reinsurer from a primary company that issued a policy to the original insured. A cession may be the whole or a portion of a single risk, defined policies, or defined classes of business, all as agreed in the
reinsurance contract.
{2) The act of ceding where such act is necessary to invoke the reinsurance protection.

Question 48

Claims-Made Basis

Answer 48

A form of contract of insurance or reinsurance coverage that applies to losses which occur and for which claims are reported during the term of the contract. (Losses occurring before the contract term are sometimes covered by the addition of “prior acts” coverage to the contract. Losses reported after the contract
term are sometimes covered by the addition of extended reporting period or “tail” coverage.) Once the coverage period has ended in claims-made covers, the approximate extent of the underwriter’s liability is known.

The traditional “occurrence” liability insurance method provides coverage for losses from claims that occurred during the policy period, regardless of when the claims are asserted. The underwriter may not discover the extent of liability for years to come from losses occurring within the policy period

Question 49

Coinsurance Obligation/Co-participation (or Contribution)

Answer 49

The portion of a reinsured layer that is retained net by a reinsured company.

Question 50

Combined Ratio

Answer 50

[See Operating Ratio and Trade Ratio.]

Operating Ratio

This is the arithmetic sum of two ratios: incurred loss to earned premium, and incurred expense to written premium. It is considered the best simple index to the current underwriting performance of an insurer

Trade Ratio

The combination of the loss incurred to earned premium ratio and incurred expense to written premium ratio. Also known as Combined Ratio and Operating Ratio.

Question 51

Common Account Coverage

Answer 51

Reinsurance coverage that protects both the ceding company and the reinsurer. The premium paid for coverage that is protected by a common account cover will first be reduced by the reinsurer’s
applicable portion of the common account premium. [See also Inuring Reinsurance.]

Question 52

Commission

Answer 52

(1) Agent Commission: In insurance, the portion of the policy premium paid to an agent for the sale and servicing of an insurance policy.
(2) Brokerage Commission: The amount paid a broker for insurance or reinsurance placement services.

(3) Ceding Commission: In reinsurance, an allowance (usually a percentage of the reinsurance premium) made by the
reinsurer to offset part or all of a ceding company’s acquisition and other costs.

(4) Contingent Commission: The commission allowance by the reinsurer to the reinsured based on a predetermined percentage of the profit realized by the reinsurer on the business ceded by the reinsured. It is also known as Profit Commission.
(5) Overriding Commission

(a) An additional commission paid to a reinsurer when it
retrocedes to a retrocessionaire.

(b) An additionalcommission amount allowed an insurer or an MGA to cover expenses other than direct commissions.
(6) Reinsurance Commission: The same as Ceding Commission.

Question 53

Commutation Clause

Answer 53

A clause in a reinsurance agreement that provides for estimation, payment, and complete discharge of all obligations including future obligations between parties for reinsurance losses incurred.
This clause is often found in contracts reinsuring workers’ compensation

Question 54

Conflagration

Answer 54

A massive fire which destroys many contiguous properties.

Question 55

Conflagration Area

Answer 55

A geographic territory in which many properties are subject to damage by a single fire.

Question 56

Convention Blank

Answer 56

Another name for the specific form of Annual Statement required by the National Association of Insurance Commissioners (NAIC).

Question 57

Cooperative Insurers

Answer 57

An insurance entity owned by its policyholders

Question 58

Council of Lloyd’s

Answer 58

A governing body of Lloyd’s of London.

Question 59

Cover Note

Answer 59

A written statement issued by an intermediary, broker, or a direct reinsurer, indicating that coverage has been effected [See Binder.)

Question 60

Credibility

Answer 60

The measure of credence or belief that is attached to a particular body of statistical experience for rate making purposes. Generally, as the number of observations is increased, the corresponding credibility also increases. This term would frequently be defined in terms of specific mathematical formulas. [See Law of Large Numbers.]

Question 61

Cumulative Liability

Answer 61

The accumulation of liability of a reinsurer under several reinsurance contracts arising from separate ceding companies covering similar or different lines of insurance, all of which are involved in a common event or disaster. Sometimes this is referred to as “double-up” or “spiraling.”

Question 62

Cut-Through Endorsement

Answer 62

A cut-through endorsement is an addition to an insurance policy which requires that, in the event of the insurance company’s insolvency, any part of a loss covered by reinsurance be paid directly to the policyholder and/or mortgage company by the reinsurer. The cut-through endorsement is so named because it provides that the reinsurance claim payment shall be made directly from the guaranteeing reinsurer to the original insured. It “cuts through” the usual route of payment from company-to­ policyholder followed by reinsurer-to-company. Similar to the guarantee endorsement, the cut-through endorsement is also known as an assumption endorsement. [Compare to Guaranty Endorsement.]

Question 63

Cutoff

Answer 63

A type of termination provision in a reinsurance contract which stipulates that the reinsurer shall not be liable for losses arising out of occurrences taking place after the date of termination or after an agreed date following termination. If the reinsurance is based upon written premium, a cutoff normally involves return of unearned premium in force at the cutoff date. [Compare to Runoff.]

Question 64

Daily Report

Answer 64

A copy of a policy that is kept in the insurance company’s files as a record of issuance. Commonly this is referred to simply as a “Daily.”

Question 65

Deficit

Answer 65

As used in reinsurance, a deficit is any excess of charges over credits at the end of an accounting period. Often, such a deficit is carried forward as a charge in the computation of the contingent commission for the succeeding accounting period or in computing various sliding scale commission adjustments or retrospectively
adjusted premium transactions