Study 3 Key Terms

Question 1

Define unearned premium reserve

Answer 1

A reserve fund of an insurance company or reinsurance company, representing the unearned premiums.

Question 2

Define outstanding loss reserves

Answer 2

Funds set aside to pay for losses that have been incurred but not yet paid.

Question 3

Define mutual insurance company

Answer 3

An insurance company that is owned and operated by its policyholders, who assume the risks of profit and loss and establish a corporation for the purposes of insuring one another against the possibility of fortuitous loss. Each policyholder pays a premium for his or her own insurance policy. If at the end of the fiscal year the mutual insurance company declares a profit, the profit is shared amongst all the policyholders. If the company declares a loss, there is also provision for the policyholders to be assessed a levy to make up for this shortfall.

Question 4

Define factory mutuals

Answer 4

Insurance companies of the mutual type (as distinct from stock companies) that specialize in industrial risks and in loss prevention.

Question 5

Define captive insurance company

Answer 5

An insurance company that provides insurance to, and is controlled by, its owners

Question 6

Define subscribed capital

Answer 6

The amount of stock sold by a corporation.

Question 7

Define paid up capital

Answer 7

Represents that part of subscribed capital that has been paid in full by shareholders.

Question 8

Define underwriting profit

Answer 8

The amount of money an insurance company gains as a result of its insurance operations. Excess of earned premiums collected over loss payments and expenses.

Question 9

Define reserve

Answer 9

Funds that are set aside by an insurance company for the purpose of meeting obligations as they fall due. Such obligations would include liabilities for unearned premiums and the estimated costs of unpaid claims.

Question 10

Define loss reserve

Answer 10

An amount carried as a liability in an insurer’s balance sheet representing, in respect of each claim, an amount equal to the estimated final settlement cost less any amounts already paid.

Question 11

Define commission

Answer 11

Compensation based upon the amount of production; for example, independent insurance agents are compensated on the basis of a percentage of the premium. The percentage varies with different lines of insurance.

Question 12

Define actuary

Answer 12

One who specializes in the mathematics of insurance, mortality rates, and the like.

Question 13

Define ratemaking

Answer 13

The process of compiling and analyzing data to establish rates that accurately reflect the level of risk. Usually performed by actuaries.

Question 14

Define underwrite

Answer 14

To insure. More commonly, to scrutinize a risk and then decide on its eligibility for insurance.

Question 15

Define underwriter

Answer 15

(1) The insurance company or group that underwrites or insures a particular risk.
(2) The individual within an insurance company whose responsibility it is to accept or reject business in the particular line in which she specializes and, in this way, choose the risks her principals are prepared to underwrite.

Question 16

Define claim

Answer 16

The assertion of a demand made by one party against another for indemnity or restitution for personal injury or property damage arising out of negligence or a contractual right.

Question 17

Define independent adjuster

Answer 17

One who adjusts losses on behalf of the insurance companies but is not employed by any one insurance company.

Question 18

Define insurer

Answer 18

The insurance company that undertakes to indemnify for losses and perform other insurance-related operations.

Question 19

Define law of large numbers

Answer 19

The mathematical premise that states that the degree of uncertainty is reduced as the number of events increases.

Question 20

Define reinsurance

Answer 20

Insurance purchased by an insurance company from another insurance company (reinsurer) to provide it protection against large losses on cases it has already insured. Essentially, insurance for insurance companies. A transaction in which one party, the “reinsurer,” in consideration of a premium paid to it, agrees to indemnify another party, the “reinsured,” for part or all of the liability assumed by the reinsured under a policy of insurance that it has issued. The reinsured may also be referred to as the “original” or “primary” insurer or the “ceding company.”

Question 21

Define cede

Answer 21

An insurer’s transferral or signing over part of an insurance risk to a reinsurer.

Question 22

Define cession

Answer 22

That which is ceded; for example, a reinsurance term.

Question 23

Define retain (retention)

Answer 23

The portion of a risk that is kept by the insurer, while the remainder is ceded to a reinsurer.

Question 24

Define reinsurer

Answer 24

An insurance company that reinsures primary insurance companies.

Question 25

Define retrocede (retrocession)

Answer 25

To cede a part of a risk to another insurer or reinsurer.

Question 26

Define retrocessionaire

Answer 26

The reinsurance company that accepts a retrocession from another company.

Question 27

Define capacity

Answer 27

The measure of an insurer’s ability to issue contracts of insurance. Measured usually by the largest amount it will accept on a given risk or, in certain situations, by the maximum volume of business that the company is prepared to accept.

Question 28

Define underwriting loss

Answer 28

The amount of money that an insurance company loses as a result of its insurance operations. It excludes investment transactions and income taxes.

Question 29

Define proportional reinsurance

Answer 29

A type of reinsurance where the company shares loss payments in the same proportion that it shares premium and policy amounts.

Question 30

Define pro rata reinsurance

Answer 30

A type of reinsurance where the reinsurer shares a proportional portion of the losses and premiums of the ceding company.

Question 31

Define non-proportional reinsurance

Answer 31

Reinsurance in which the reinsurer’s portion of loss depends on the size of the loss and the dollar level at which the reinsurance attaches.

Question 32

Define excess of loss reinsurance

Answer 32

Reinsurance covering the insurance company against losses larger than a certain amount. This term can also refer to reinsurance that covers the ceding company from the part of the loss that comes from a single occurrence that exceeds the first loss, a previously stated amount.

Question 33

Define treaty

Answer 33

An agreement between an insurance company and a reinsurer. The reinsurer automatically accepts a portion of the ceding company’s liability for a specified class or classes of business. Terms of the agreement are set forth therein; for example, premium payment, loss limits, etc.

Question 34

Define facultative reinsurance

Answer 34

Reinsurance of risks on an individual case-by-case basis subject to acceptance or rejection by the insurer.