Study 3 Key Terms Flashcards
Define unearned premium reserve
A reserve fund of an insurance company or reinsurance company, representing the unearned premiums.
Define outstanding loss reserves
Funds set aside to pay for losses that have been incurred but not yet paid.
Define mutual insurance company
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.
Define factory mutuals
Insurance companies of the mutual type (as distinct from stock companies) that specialize in industrial risks and in loss prevention.
Define captive insurance company
An insurance company that provides insurance to, and is controlled by, its owners
Define subscribed capital
The amount of stock sold by a corporation.
Define paid up capital
Represents that part of subscribed capital that has been paid in full by shareholders.
Define underwriting profit
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.
Define reserve
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.
Define loss reserve
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.
Define commission
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.
Define actuary
One who specializes in the mathematics of insurance, mortality rates, and the like.
Define ratemaking
The process of compiling and analyzing data to establish rates that accurately reflect the level of risk. Usually performed by actuaries.
Define underwrite
To insure. More commonly, to scrutinize a risk and then decide on its eligibility for insurance.
Define underwriter
(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.
Define claim
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.
Define independent adjuster
One who adjusts losses on behalf of the insurance companies but is not employed by any one insurance company.
Define insurer
The insurance company that undertakes to indemnify for losses and perform other insurance-related operations.
Define law of large numbers
The mathematical premise that states that the degree of uncertainty is reduced as the number of events increases.
Define reinsurance
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.”
Define cede
An insurer’s transferral or signing over part of an insurance risk to a reinsurer.
Define cession
That which is ceded; for example, a reinsurance term.
Define retain (retention)
The portion of a risk that is kept by the insurer, while the remainder is ceded to a reinsurer.
Define reinsurer
An insurance company that reinsures primary insurance companies.
Define retrocede (retrocession)
To cede a part of a risk to another insurer or reinsurer.
Define retrocessionaire
The reinsurance company that accepts a retrocession from another company.
Define capacity
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.
Define underwriting loss
The amount of money that an insurance company loses as a result of its insurance operations. It excludes investment transactions and income taxes.
Define proportional reinsurance
A type of reinsurance where the company shares loss payments in the same proportion that it shares premium and policy amounts.
Define pro rata reinsurance
A type of reinsurance where the reinsurer shares a proportional portion of the losses and premiums of the ceding company.
Define non-proportional reinsurance
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.
Define excess of loss reinsurance
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.
Define treaty
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.
Define facultative reinsurance
Reinsurance of risks on an individual case-by-case basis subject to acceptance or rejection by the insurer.
