This glossary of insurance terms has been provided for use on this website by Paragon Reinsurance Risk Management Services, Inc.

Accident Year Experience

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, loss 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.

Accounting Period Earned Premium

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.]

Acquisition Costs

Expenses incurred by an insurance or reinsurance company which are directly related to acquiring business; primarily agents' commission.

Administration Expenses

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

Admitted Assets

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

Admitted Company

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

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

Admitted Paper

Policies issued by an admitted insurer.

Adverse Selection

In reinsurance, the conscious and deliberate cession of those 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.

Affinity Group

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

Agency Reinsurance

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.

Agent Commission

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

Aggregate Excess of Loss Reinsurance

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.

Aggregate Deductible

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.

Alien Company

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.]

Allied Lines

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.

All-Risk Insurance

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.)

Allocated Loss Adjustment Expense

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.]

Alternative Market

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

Amortization Period

This term is synonymous with pay back 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.]

Annual Statement

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.]

Arbitration Clause

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.

Assume

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

Assumption Endorsement

[See Cut-Through Endorsement.]

Attachment Point

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

Authorized Reinsurance

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.

Automobile Insurance Plan

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.]

Balance

Balance refers to the relationship between the premium generated under a treaty and the maximum limit of liability to which the reinsurance is exposed. The term is used to describe the relative volatility of the loss ratio.

Basic Limits

The minimum amounts of insurance for which it is the practice to quote premiums in liability insurance. Premiums for larger amounts of insurance are determined by the application of increased limit percentage factors to the basic limit premiums.

Binder (Reinsurance)

A written record of the terms of a reinsurance agreement pending the issuance of a formal reinsurance contract (which then replaces the binder). [See Cover Note.]

Bordereau

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.

Bornhuetter-Ferguson Method

A bulk reserving technique used to establish IBNR reserves.

Broker

A reinsurance intermediary who negotiates contracts of reinsurance between a reinsured and reinsurer on behalf of the reinsured, receiving commission for placement and other services rendered. [See Intermediary Clause.]

Brokerage Commission

An amount paid a broker for insurance or reinsurance placement and other services rendered.

Brokerage Market

A collective reference to those reinsurers which transact business primarily through reinsurance intermediaries.

Buffer Layer

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.

Burning Cost / Loss Cost

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

Calendar Year Experience

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.

Capacity

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

Capacity - Large Line

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

Capacity - Premium

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

Captive Insurance Company

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.

Carpenter Plan

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.]

Carrier, Reinsurance

A company assuming insurance liability of another insurer.

Case Reserves

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 not include IBNR.

Catastrophe Number

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.

Catastrophe Reinsurance, Casualty

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.

Catastrophe Reinsurance, Property

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.

Cede

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.]

Ceding Commission

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.

Ceding Company

A reinsured.

Certificate of Reinsurance

A short-form of documentation of a reinsurance transaction.

Cession

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.

Claim Expenses

[See Allocated Loss Adjustment Expense.]

Claims-Made Basis

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.

Clash (Contingency) Cover

[See Catastrophe Reinsurance, Casualty.]

Coinsurance Obligation/Co-participation (or Contribution)

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

Combined Ratio

[See Operating Ratio and Trade Ratio.]

Common Account Coverage

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.]

Commission

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 additional commission amount allowed an insurer or an MGA to cover expenses other than direct commissions.

6. Reinsurance Commission: The same as Ceding Commission.

Commutation Clause

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.

Conflagration

A massive fire which destroys many contiguous properties.

Conflagration (Excess) Cover

[See Catastrophe Reinsurance, Property.]

Conflagration Area

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

Contingency Cover

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

Contingent Commission

[See Commission, Contingent.]

Convention Blank

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

Cooperative Insurers

An insurance entity owned by its policyholders.

Council of Lloyd's

A governing body of Lloyd's of London.

Cover Note

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

Credibility

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.]

Cumulative Liability

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."

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.]

Cutoff

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.]

Daily Report

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."

Deficit

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..

Demutualization

The process of converting a mutual insurance company into a capital stock company.

Deposit Premium

When the terms of a treaty provide that the final premium is to be determined at some time after the treaty itself has been written, the reinsurer may require a provisional or a deposit premium at the inception (and/or at stated intervals during the term) of the treaty. The tentative premium is then adjusted when the actual earned charge has been determined.

Deviation

A change from the standard policy form or the standard or published rates on a particular class of business.

Direct Writer

1. In reinsurance, a reinsurer which negotiates with a ceding company without benefit of an intermediary or broker.

2. In insurance, a primary insurer that sells insurance through licensed agents who produce business essentially for no one else.

Discovery Period

A period of time during which a claim must be reported under the terms of a claims made policy form.

Domestic Company

An insurer conducting business in the state in which it is domiciled and from which it received its charter to write insurance. [Compare to Alien and to Foreign company/reinsurer.]

Early Warning Tests

Financial ratio and performance criteria designed by the National Association of Insurance Commissioners to identify insurance companies which may need close surveillance by state insurance departments with respect to solvency. [See IRIS tests.]

Earned Premium

The portion of written premium equal to the expired portion of the time for which an insurance or reinsurance is in effect. Unearned premium is the reciprocal, unexpired portion of written premium. [See Accounting Period Earned Premium.]

Errors and Omissions Clause

A clause in a reinsurance treaty which stipulates that, in the event of inadvertent error or omission, neither party shall be prejudiced in the fulfillment of the agreement, provided that the error or omission is corrected as soon as it is discovered.

Excess and Surplus Lines (E&S) Insurance

Insurance written by a company not licensed by a state to transact business on an admitted basis. Such business is referred to as "non-admitted" or E&S business and generally provides insurance coverage not readily available from admitted (licensed) companies. The E&S insurer has greater freedom from regulatory restrictions on policy forms and rates than an admitted company.

Excess of Policy Limits Loss (XPL)

The amount paid by a liability insurer in excess of the policy limits but otherwise within the terms of the policy which has been occasioned by the insurer's negligent (or bad faith) failure, to settle a claim for an amount within the policy limits.

Excess Limits Premiums

In liability insurance, the premium for increased limits of liability over and above the basic limits premium. The excess limits premium is calculated as a multiple of basic limits premium. Excess limits premiums were the original (and remain a popular) basis of premium paid for casualty excess of loss reinsurance.

Excess of Loss Ratio Reinsurance

[See Aggregate Excess of Loss Reinsurance]

Excess of Loss Reinsurance

A generic term describing reinsurance that, subject to a specified limit, indemnifies the ceding company against all or a portion of the amount of the loss in excess of a specified retention. The term includes various types of excess reinsurance, such as catastrophe reinsurance, per risk reinsurance, per occurrence reinsurance and aggregate excess of loss reinsurance. In any of its forms, it may also be referred to as Non-Proportional Reinsurance.

Excess Per Risk Reinsurance

A form of excess of loss reinsurance that indemnifies the ceding company against the amount of loss in excess of a specified retention with respect to each risk involved in each loss, subject to a specified limit.

Exclusions

Those risks, perils, or classes of insurance with respect to which the reinsurer will not pay a loss or provide reinsurance notwithstanding the other terms and conditions of reinsurance.

Expense Ratio

Expenses (other than loss adjustment expenses) incurred during a specific period of time divided by premiums written during the same period.

Experience

The loss history of an insured, a reinsured, or a particular class of business.

Experience Rating

A generic term for Prospective Rating and Retrospective Rating. [See Prospective Rating and Retrospective Rating.]

Expiration

The date and time at which coverage ceases. A reinsurance, when written on a "continuous until canceled" basis, does not expire but will contain a provision for termination.

Exposure Unit

The criterion used as an index of an insurer's exposure to loss, and against which a rate is applied to determine the insured's premium (e.g., each $100 of the employer's payroll for Workers Compensation, or $1,000 of product sales volume for Product Liability or $100 of property value exposed to loss in Fire insurance).

Extra Contractual Damages (Extra Contractual Obligations, ECO)

A monetary award required by a court of law payable by an insurer to its insured because of the insurer's negligent behavior towards the insured. Such payments required of an insurer to its insured are extra-contractual in that they are beyond the insurance contract between insurer and insured. A reinsurance treaty may cover these damages and, if so, will specify covered situations, the percentage of coverage applicable, and the required premium charge.

Extraction Factor

A percentage factor that is used to reduce the reinsured company's subject base premium. This is usually necessary when the primary policies are written on a multiple peril basis with an indivisible premium but some of the perils insured are not covered under the reinsurance. For example, if a reinsurance treaty does not cover the third party liability or burglary in a reinsured company's (indivisible premium) Homeowners policy, an extraction factor would adjust the subject premium accordingly.

Facultative Certificate of Reinsurance

A document formalizing a facultative reinsurance cession.

Facultative Reinsurance

The reinsurance of part or all of the insurance provided by a single policy. Each cession is negotiated individually. The word "facultative" connotes that both the primary insurer and the reinsurer have the faculty or option of accepting or rejecting the individual submission. (As compared to treaty reinsurance in which there is an obligation to cede and accept.)

Facultative Semi Obligatory Treaty

A reinsurance contract under which the ceding company may or may not cede exposures or risks of a defined class to the reinsurer that is obligated to accept the cession. [See also Facultative Treaty]

Facultative Treaty

A reinsurance contract under which the ceding company has the option to cede and the reinsurer has the option to accept or decline individual risks. The contract describes how individual facultative reinsurances shall be handled. [See also Facultative Semi Obligatory Treaty.]

(Note: The distinction between these two terms may not be universally agreed within the industry. The extent of each party's obligations to cede and accept may need to be clarified when these terms are used.)

FAIR Plans

Plans that make property insurance available to urban property owners. (Fair Access to Insurance Requirements.)

File and Use Laws

Legislation that permits insurers to implement rate changes immediately upon filing the changes with regulators without prior consent. [Compare to Flex-Rating and Prior Approval.]

Financial Accounting Standards Board (FASB)

An organization that establishes financial and accounting reporting standards. (Pronounced "FAZBEE.")

Finite Risk Reinsurance

A reinsurance arrangement the principle purpose of which is to provide a financial benefit to the reinsured and which is characterized by (1) a limited amount of risk transferred to the reinsurer, (2) the reinsurer sharing profits with the reinsured company and (3) the reinsured company benefiting from the cash flow provided the reinsurer.

Financing Function

A function of reinsurance that results when a reinsurer relieves the reinsured company of its responsibility for carrying an unearned premium reserve liability in exchange for cash being transferred to the reinsurer. The reinsurer allows a ceding commission to the primary company on the transferred assets. The company has therefore reduced its liabilities by the gross amount of the cession, but the net reduction of assets is equal to the gross cession, less the commission. Thus the primary company's statutory surplus is increased by the amount of ceding commission paid by the reinsurer.

First Loss Retention

The amount of loss sustained by the reinsured before the liability of the excess of loss reinsurer attaches, often referred to as Net Retention. [See Attachment Point.]

First Loss Scale

A rating scale commonly used to determine pricing of excess layers of property insurance (sometimes referred to as the Salzman scale after its creator). Such tables are analogous to excess limits tables in casualty insurance.

First Surplus Treaty

A type of pro rata reinsurance that defines the amount of each cession as the amount of gross (policy) liability which exceeds or is "surplus" after an agreed net retention up to the limit of (reinsurance) liability. Often a maximum net retention is specified in the treaty, with the primary company having the option to choose a lesser retention on individual risks. The amount of first surplus reinsurance to be provided will be limited to a fixed multiple of the selected retention in each case. When the capacity and net retention of the first surplus treaty have been exhausted, second or even third surplus treaties may afford additional capacity. [See Surplus Reinsurance.]

Flat Commission

A fixed commission percentage paid to the reinsured company by the reinsurer, which is not subject to further adjustment under a profit sharing or sliding scale commission provision. This is common in pro rata facultative reinsurance.

Flat Rate

1. A fixed rate not subject to any subsequent adjustment.

2. A reinsurance premium rate applicable to the entire premium income derived by the ceding company from the business ceded to the reinsurer (as distinguished from a rate applicable to excess limits).

Flex-Rating Laws

Legislation that permits insurers to implement rate changes within certain parameters. If a rate change exceeds the parameters, prior approval is required. (Compare to File and Use and Prior Approval.)

Follow the Fortunes

A concept inherent in any reinsurance relationship which, when expressed in an agreement, generally runs to a statement that the reinsurer "shall follow the fortunes of the ceding company in all matters falling under this Agreement" or shall do so "...in all respects as if being a party to the insurance," or similar language. Expressed or not, the concept speaks to a relationship under which the reinsured's duty - to treat reinsured policy rights and obligations as if there were no reinsurance - is extended into a right. This right is not open-ended: it cannot carry a reinsurer outside its agreements; neither is it fixed. Rather, it rests on mutual trust within the circumstances of each case. Accordingly, some reinsurers avoid "following the fortunes" clauses in their agreements, while those in use are normally found in pro rata treaties where the sharing nature of cessions makes proper implementation reasonably evident and self-controlling.

Historically, the "follow the fortunes" clause was designed to deal with "errors and omissions," particularly in the case of inadvertent omission by the ceding company of a specific risk on a bordereau. The intent was to permit the ceding company to retroactively include the risk on a bordereau upon discovery of the oversight. However, the courts have held that under the "follow the fortunes" language of a reinsurance treaty, the reinsurer adopts the language of the primary policy, and thus a third party creditor of the primary insurer has a right of action against the reinsurer under a reinsurance contract. Such a holding is an exception to the general rule of law applicable to reinsurance agreements that such agreements operate solely between the reinsured and the reinsurer and create no privity between the reinsurer and any third party, and afford no right of action by any third party against the reinsurer on the reinsurance agreement. The historical objective of the clause can be achieved by inserting an "errors and omissions" clause in any reinsurance agreement which is not fully automatic.

Following Reinsurer

A reinsurer that follows the lead reinsurer on a cover being placed, accepting or rejecting the terms as presented.

Foreign Reinsurer

This is the designation given a U.S. reinsurer when conducting business in a state other than its state of domicile. It is known as a domestic company in its state of domicile. An alien reinsurer is one that is domiciled outside the U.S. but conducting business within the U.S.

Franchise Deductible Covers

A contractual provision, common in hail insurance but also used elsewhere, which stipulates that no loss is payable unless a loss exceeds a deductible amount but, when that amount is exceeded, then the entire loss is paid.

Fronting

The practice of issuing policies by an insurer that then cedes all, or nearly all, of its risk to another insurer which has requested the issuance of the policies. This is frequently done to enable a company to have policies issued in by admitted carrier in jurisdictions in which it is not licensed. Such an arrangement may be illegal if done for the purpose of circumventing rate and form regulatory restrictions.

Funds Held Account (or Funds Withheld)

The holding of funds by a ceding company which represents the unearned premium reserve or the outstanding loss reserve applicable to the business it cedes to a reinsurer.

GAAP (Generally Accepted Accounting Principles)

A method of reporting the financial results of an insurer more in accordance with the going-concern basis used by other businesses. GAAP assigns income and expense to their proper period, as distinguished from the more conservative, regulatory requirements of statutory accounting affecting insurers. [See also Statutory Accounting Principles.]

GNEPI (Gross Net Earned Premium Income)

The usual rating base for excess of loss reinsurance. It represents the earned premiums of the primary company for the lines of business covered net; after adjusting for cancellations, refunds, and premiums paid for any reinsurance protecting the cover being rated, but gross, meaning before deducting the premium for the cover being rated. [See Subject Premium]

GNWPI (Gross Net Written Premium Income)

Written premiums of the primary company for the lines of business covered; net after adjusting for cancellations, refunds, and premiums paid for any reinsurance protecting the cover being rated, but gross, meaning before deducting the premium for the cover being rated. [See Subject Premium.]

Graded Surplus Treaty

A surplus share treaty under which the capacity is expressed as a number of lines (i.e., multiples of the primary company retention). The capacity varies according to class and/or the net retained line of the ceding insurer.

Gross Line

The amount of liability an insurer has written on a risk including the amount it has reinsured. The net line plus the reinsurance ceded equals gross line.

Ground-Up Loss

The total amount of loss sustained before any deductions are applied for reinsurance recoveries. This may also be referred to as the gross loss from the ground. (Note: the use of this term may not be uniformly applied. Care should be taken to determine the exact basis upon which loss data are presented.)

Guarantee Endorsement

An addition to an insurance policy which requires that, in the event of the insurance company's insolvency, a mortgagee and/or the policyholder be paid directly by the reinsurer either for any loss covered by reinsurance or for the full insurance protection afforded by the insurance company. Since the full insurance protection afforded by the insurance company may be greater than the reinsurance that would be payable to a reinsured company, the reinsurer will likely be assuming an additional risk by issuing such an endorsement. Similar to the cut-through endorsement, the guarantee endorsement is also known as a Mortgagee Assumption Endorsement. [Compare to Cut-Through Endorsement.]

Hazards

A hazard is a condition that increases the chance a loss will occur and/or the severity of the loss will be affected. (Compare to "Peril")

1. Physical hazards are the tangible characteristics of the property or operations insured which affect the frequency and/or severity of losses.

2. Moral hazards exist when it might be to the insured's advantage to sustain a loss under the policy.

3. Morale hazards are evidenced by an attitude of carelessness or indifference to loss (e.g., carelessness with valuable property or disregarding reasonable and prudent safety precautions).

Highly Protected Risk (HPR)

A building of superior construction designed to be less susceptible to loss than standard construction and because of other loss prevention or reduction features.

Honorable Undertaking

A clause now only rarely found in reinsurance treaties, the purpose of which is that the agreement not be defeated by a strict or narrow interpretation of the language in the treaty.

Increased Limits Factors

In liability insurance, the factors derived from statistics collected from many insurance companies that are widely used to determine premium for increased limits of liability over and above the basic, minimum limits of coverage.

Incurred But Not Reported (IBNR)

The liability for future payments on losses which have already occurred but have not yet been reported to the insurer. This definition is sometimes ambiguously extended to include future development on claims already reported. [See Loss Development.]

Incurred Expense (Other Than Loss Expense)

An expense which has happened but which may or may not have been paid.

Incurred Loss Ratio

The percentage resulting from dividing incurred losses by earned premium.

Incurred Losses

1. In insurance accounting, an amount representing the losses paid plus the increase or decrease in outstanding loss reserves within a given period of time.

2. Losses which have happened and which will result in a claim under the terms of an insurance policy or a reinsurance agreement.

Independent Agency System

The distribution of insurance through agents who are independent contractors representing more than one insurance company. This is also called the "American Agency System."

Indexing

A procedure that adjusts the provisions of a treaty in accordance with the fluctuations of a published economic index such as wage, price, cost-of-living, or other indices. A stipulation sometimes used in an excess of loss reinsurance to adjust the limit and/or retention.

Insolvency Clause

A provision now appearing in most reinsurance contracts (because many states require it) stating that, in the event the reinsured company becomes insolvent, the reinsurance is payable directly to the company or its liquidator without reduction because of its insolvency or because the company or its liquidator has failed to pay all or a portion of any claim.

Insurance Service Office (ISO)

An insurance industry advisory organization that promulgates standard policy forms and provides loss cost data to property and casualty insurance companies.

Intermediary

A reinsurance broker who negotiates contracts of reinsurance on behalf of the reinsured, receiving a commission for placement and other services rendered.

Intermediary Clause

A provision in a reinsurance contract that identifies the specific intermediary or broker involved in negotiating the contract, communicating information and transmitting funds.

Under the terms of the most widely used intermediary clause, the credit risk arising from an insolvent intermediary is borne by the reinsurer. It provides that premiums paid to a broker by a reinsured are considered paid to the reinsurer, but loss payments and other funds (such as premium adjustments) paid to a broker by a reinsurer are not considered paid to the reinsured until actually received by the reinsured.

Intermediate Excess

Used in property reinsurance to describe a cover exposed to both catastrophe (occurrence) losses and to policy limit exposures, in excess of the probable maximum loss.

Inuring

Reinsurance that reduces the amount otherwise recoverable under a particular reinsurance cover. Premium for inuring reinsurance is deducted from the subject base premium for the cover it protects (i. e., to which it inures).

Investment Income

Money earned from invested assets. This may also include realized capital gains, or be reduced by capital losses, over the same period.

IRIS Tests

A collection of eleven published ratios intended to reflect the relative financial health of insurance and reinsurance companies. Originally designed as an "early warning system" for the benefit of setting regulator's priorities in financial examinations, the ratio tests are now considered to be only partially valid due to the absence of certain important but more subjective criteria.

Joint Underwriting Association (JUA)

An association of insurance companies in a given state, usually governmentally mandated, which has been formed to write a class of business for which there is only limited capacity in the voluntary market. Losses and expenses are shared on a pro rata basis.

Kenney Rule

This is a rule-of-thumb ratio used to approximate an insurer's premium capacity. Roger Kenney, an early authority on insurance company finances, recommended a ratio of $2 of net premium writings for each $1 of policyholder surplus for companies writing only fire insurance and $3 of premium to $1 of surplus for multiple line companies.

Law of Large Numbers

A mathematical concept which postulates that the more times an event is repeated (or, in insurance, the larger the number of homogeneous exposure units), the more predictable a given outcome becomes. In a classic example, the more times one flips a coin, the more likely that the results will be 50% heads, 50% tails.

Layer Rating

The assignment of rates within a given layer (or band) of insurance or reinsurance based upon expected loss to the layer.

Lead Reinsurer

The reinsurer recognized as the one among the several reinsurers on a contract responsible for negotiating the initial terms of the contract. There may be joint leaders on a contract. Also, the contract may specifically permit the lead reinsurer to bind others to limited changes in, exceptions to or enhancements of, the contract during its term.

Leveraged Effect

In excess of loss reinsurance, the disproportionate result produced by inflation (economic or social) on a reinsurer's liability when compared to the ceding company's liability. Inflationary increases in average claim costs of a reinsured usually produce even greater increases for its excess of loss reinsurer. An increase affecting all losses (those within the retention limit and those above it) multiplies itself when applied to the excess of loss portion above the retention. The effect is leveraged in that such increases fall proportionately more heavily upon the reinsurer than on the reinsured.

Limits Profile

An analysis of the composition of a block of business segregated by policy limit size, the number of policies of each size group and the total premium in each group of policies. The purpose is to judge the relative volatility of the business at any given retention level and/or to enable an exposure rate to be promulgated.

Line

1. Either the limit of insurance to be written which a company has fixed for itself on a class of risk (line limit), or the actual amount which it has accepted on a single risk or other unit.

2. A class or type of insurance (Fire, Marine, or Casualty, among others). [See Line of Business.]

3. The word "line" in a surplus share reinsurance means the amount of the reinsured's retention as respects each risk. Thus, a "two-line" surplus share reinsurance treaty means a treaty that affords reinsurance for twice the amount of the reinsured's retention. The total risk capacity of such a treaty is therefore three times the reinsured's retention.

Line Guide

An internal underwriting document that defines the maximum net line amount to which a company is prepared to be exposed on a property insurance policy. Various factors that affect the frequency and/or severity of losses are considered in establishing the line guide such as the type of construction, fire protection, occupancy and exposure to external risk. The objective is to create a homogenous net line exposure to loss.

Line of Business

The general classification of types of insurance written by insurers, e.g., Fire, Allied Lines, Homeowners, or the specific line of insurance in the statutory annual statement where a particular class of business is recorded.

Line Slip

The formal, written offering of a proposed reinsurance transaction containing a concise outline of the essential particulars of the coverage. A reinsurer indicates the extent to which it wishes to participate in the coverage, signs the document and returns it to the company or the intermediary as evidence of its agreement until such time as a formal contract is executed. The line slip is commonly referred to simply as a "slip."

Lloyd's (or Lloyds)

A type of organization for underwriting insurance or reinsurance in which a collection of individuals assumes policy liabilities as the individual obligations of each. When spelled with an apostrophe, the term refers to Lloyd's of London, the formal name of which is "Underwriters at Lloyd's, London."

Lloyd's Brokers

A broker that has access to the underwriters at Lloyd's and is regulated by Lloyd's.

Long-Tail Liability

A term used to describe certain types of third-party liability exposures (e.g., Product Liability or Professional Liability) in which the ultimate determination of damages is only made after an extended period of time following the event that gave rise to the loss. For example, the contamination of a food product that occurred when the material was packed, but which is not discovered until the product is consumed months or years later.

Loss Conversion Factor

[See Loss Loading.]

Loss Corridor

A loss ratio range that is retained by a reinsured company within the coverage granted by the reinsurer. For example, the reinsured company might agree to take back losses equaling five loss ratio points if the loss ratio exceeds 60% after which the reinsurer comes back in to provide further coverage.

Loss Cost

1. In crop hail insurance, the ratio of incurred loss to liability, or the dollars of loss per $100 of insurance in force.

2. In reinsurance, the total value of all losses to a reinsurance treaty (or layer of a treaty) divided by an exposure base. This is also referred to as Pure Premium.

3. This is sometimes used synonymously for the earned to incurred loss ratio. [See Burning Cost.]

Loss Development

Loss development refers to the change in the amount of losses as a policy or accident year matures. It is measured by the difference between the sum of paid losses and estimated outstanding losses at one point in time when compared to the sum of paid losses and estimated outstanding losses at some previous point in time. In common usage it might refer to development on reported cases only, or to a broader definition which would also take into account the IBNR claims.

Loss Exposure

A loss exposure is the risk of loss arising from the existence of a condition that gives rise to the possibility of a loss. For example, owning a house creates the possibility of losing the value of the house in a fire or of being sued for an injury to a visitor.

Loss Incurred

[See Incurred Losses.]

Loss Loading or "Multiplier"

A factor used to convert losses to premium and provide for the reinsurer's loss adjustment expense, overhead risk, and profit margin. This is also referred to as a Loss Conversion Factor.

Loss Ratio

Losses incurred expressed as a percentage of earned premiums.

Loss Reserve

For an individual loss, an estimate of the amount the insurer expects to pay for the reported claim. For total losses, estimates of expected payments for reported and/or unreported claims. It may include amounts for loss adjustment expenses. [See Incurred But Not Reported (IBNR) and Incurred Losses.]

Loss Triangles

The organization of losses into a summary, tabular form in an effort to determine the most likely ultimate, aggregate value as it develops over time. This results in a triangularly shaped table.

Losses Outstanding

Losses (reported or not reported) which have occurred but have not been paid.

Losses Paid

The amounts paid in settlement of losses.

Managing General Agent (MGA)

A person, partnership or corporation representing an insurer that performs many of the functions of an insurance company. This may includ sales and marketing management, risk selection, issuing of policies and occasionally the purchase of reinsurance on behalf of the insurance company represented - all as defined in an agency contract. This is sometimes referred to as "giving the pen" to an agent.

Manual Rate

An insurer's standard rates per unit of exposure as published in its underwriting manuals (and as filed, with regulatory authorities when applicable).

Manual Increased Limits Rates

[See Increased Limits Factors.]

McCarran-Ferguson Act

Federal law in which the states are permitted to regulate the insurance business notwithstanding the interstate nature of the business. A limited exemption from antitrust laws is granted. There continue to be efforts to amend or repeal this Act.

MFL (Maximum Foreseeable Loss)

The anticipated maximum property fire loss that could result given unusual or the worst case scenario with respect to the non-functioning of protection features (such as fire walls, sprinklers, a responsive fire department). Note that the PML (Probable Maximum Loss) on the same total insured value (TIV) assumes that such protective features function normally.

Minimum Premium

The least premium charge applicable, frequently used in excess of loss reinsurance contracts or catastrophe covers which contain a provision that the final adjusted premium may not be less than a stated amount.

Mortgage Endorsement

[See Guarantee Endorsement.]

Naive Capacity

A term used to describe insurers or reinsurers that enter the marketplace without sufficient knowledge of the business thus creating an excess of available capacity and the softening of pricing and terms below sustainable levels.

National Council on Compensation Insurance (NCCI)

An organization that develops and administers rating plans for Workers' Compensation.

Net Line

The amount of insurance the primary company carries on a risk after deducting reinsurance from its "gross" line [See Net Retention.]

Net Loss

Generally, the amount of loss sustained by an insurer after making deductions for all recoveries, salvage, and all claims upon reinsurers. However, the specifics in a given situation are defined by the reinsurance agreement. For example, the net loss may or may not include claim expenses or, may or may not include losses in excess of policy limits.

Net Retention

The amount of insurance that an insurer keeps for its own account and does not pass on to another insurer. In excess of loss reinsurance, the term "first loss retention" may be equivalent. [See Net Line.]

Ninety-Day Rule

A provision in statutory accounting that penalizes an insurance company for uncollected balances due for more than ninety days from reinsurers or agents by disqualifying such receivables as admitted assets.

Nine-Month Rule

A rule adopted by the National Association of Insurance Commissioners which (with some significant exceptions) imposes a statutory accounting penalty upon companies that fail to obtain signed reinsurance contracts within nine months following the inception date.

Non-Admitted Assets

The assets of an insurance company that are not recognized by state insurance laws or insurance department regulations for the purpose of establishing the solvency of an insurance company, for example, premiums that are uncollected and more than ninety days past due.

Non-Admitted Company

1. An insurer not licensed in a state.

2. A reinsurer not licensed or approved in a state.

Non-Admitted Reinsurance

Reinsurance protection bought by a ceding company from a reinsurer not licensed or authorized to transact the particular line of business in the jurisdiction in question. No credit is given the ceding company in its Annual Statement for such non admitted reinsurance unless it withholds funds or holds a letter of credit from the unauthorized reinsurer. This information is shown in Part 2 of Schedule F of the Convention Statement.

Non-Proportional Reinsurance

Reinsurance under which the reinsurer's loss is not a shared percentage of the gross loss, but depends upon the loss exceeding some underlying retention or deductible amount. Also known as excess reinsurance.

Non-Standard Automobile

Insurance of difficult to insure motor vehicle business involving drivers who have a record of violations and/or accidents and who may have been canceled or refused coverage in companies writing standard risks. This is sometimes referred to as "Risk Insurance."

Obligatory Treaty

A reinsurance contract under which the subject matter business must be ceded by the ceding company in accordance with contract terms and must be accepted by the reinsurer. Also known as an Automatic Treaty, or, simply a Treaty.

Occurrence

1. An accident or occurrence or a series of accidents or occurrences arising out of or caused by one event.

2. One basis or determinant for calculating the amount of loss or liability in insurance or reinsurance when an aggregation of related losses is to constitute a single subject of recovery. For example, in property catastrophe reinsurance treaties, occurrence is usually defined so that all losses within a specified period of time and geographical area involving a particular peril (such as a windstorm or riot) are deemed an occurrence.

Operating Income/Profit

The sum of the net investment income and net underwriting income.

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.

Overline

The amount of insurance or reinsurance exposure that exceeds the sum of the reinsured company's normal net capacity and its automatic reinsurance facilities.

Overriding Commission

[See Commission.]

Participate

To share in the writing of a risk.

Participating Reinsurance

In quota share and surplus share reinsurance, the sharing of risks. Pro rata participation in all losses from the first dollar up. [See Pro Rata Reinsurance.]

Payback Period

A term used in the rating of per occurrence excess covers which represents the number of years, at a given premium level, that would be necessary to accumulate total premiums equal to the limit of indemnity under the treaty. It is synonymous with Amortization Period and the inverse of Rate on Line.

Per Risk Reinsurance

A reinsurance (typically property coverages) in which the reinsurance limit and the retention apply "per risk" rather than per accident, per event or in the aggregate.

Per Policy Reinsurance

Reinsurance (typically liability coverages) in which the retention and limit are defined on a per policy basis. Thus if more than one policy is involved in a single loss, the reinsured company is subject to multiple retentions arising from the single loss occurrence but also has multiple limits of reinsurance coverage.

Peril

1. The cause of a loss (e.g., a house is exposed to the perils of fire, wind, etc.). (Compare to "Hazard")

2. The term "Major Peril" is used to designate the lines of business set forth in the Convention Form Annual Statement.

PML (Probable Maximum Loss)

The anticipated maximum property fire loss that could result given the normal functioning of protective features (fire walls, sprinklers, a responsive fire department). Underwriting decisions are typically influenced by PML evaluations. [Compare to MFL.]

Policy Profile

A study of the composition of an insurer's policies that segregates the policies into various groupings (for example, by policy limit, class of business or policy premium).

Policy Year Experience

This is a method of tracking experience by segregatingall premiums and losses attributable to policies having an inception or renewal date within a given twelve-month period. More specifically, the total value (losses paid plus loss reserves) of all losses arising from policies incepting or renewing during the year (regardless of when reported, incurred or paid) is divided by the fully developed earned premium for those same policies. The finally developed earned premium will always equal the written premium for those policies. While the experience is developing, loss reserves are used in the calculation, but the ultimate result cannot be finalized until all losses are settled. In Policy Year Experience, premiums earned from policies incepting during a one-year period of time will earn over the course of both the year of inception and a later year(s). Losses to be included will be occurring over this same extended period. This is also known as Pool Year or Underwriting Year Experience. Other methods for tracking reinsurance contract experience are based on Accident Year or Calendar Year.

Policyholder

The party in whose name an insurance policy is issued.

Policyholder Surplus

1. The net worth of an insurer as reported in its Annual Statement. For a stock insurer, the sum of its surplus and capital. For a mutual insurer, its surplus.

2. The amount by which the assets of an insurer exceed the liabilities. Another name for Surplus to Policyholders.

Pool

Any joint underwriting operation of insurance or reinsurance in which the participants assume a predetermined and fixed interest in all business written. Pools are often independently managed by professionals with expertise in the classes of business undertaken, and the participating members share in the premiums, losses, expenses, and profits. The terms "association" and "syndicate" are frequently synonymous with "pool," and the basic principles of operation are much the same.

Portfolio

A portfolio may refer to a defined body of (1) insurance (policies) in force (premium portfolio), (2) outstanding losses (loss portfolio), or (3) company investments (investment portfolio). The reinsurance of all existing insurance as well as new and renewal business is therefore described as a "Running account reinsurance with portfolio transfer" or as "In force, new and renewal."

Portfolio Reinsurance

The transfer of in-force insurance liability by an insurer to a reinsurer (or vice versa) by the payment of the unearned premium reserve on those policies alone. Transfer of liability for outstanding losses may also occur by the payment of outstanding loss reserves. The former is a premium portfolio, the latter a loss portfolio. Either type of transaction may be done alone or the two may be done concurrently.

Portfolio Return

If a reinsurer is relieved of liability (under a pro rata reinsurance) for losses happening after a specific date, the unearned premium reserve (less ceding commissions thereon) is normally returned to the cedent. It is also known as a Return Portfolio or Return of Unearned Premium.

Portfolio Runoff

Continuing the reinsurance of a portfolio beyond the termination date until all ceded premium is earned, or all losses are settled, or both. While a loss run-off is usually unlimited as to time, a premium runoff can be for a specified duration.

Premium

The monetary consideration in contracts of insurance and reinsurance.

Premium (Advance/Deposit/Provisional)

The amount charged at the effective date of a policy, reinsurance treaty or facultative certificate, to be adjusted later.

Premium Base

The ceding company's premiums (written or earned) to which the reinsurance premium rate is applied to produce the reinsurance premium. This may also be referred to as Base Premium, Subject Premium, or Underlying Premium.

Premium Earned

When used as an accounting term, premiums earned describes the premiums written during a period plus the unearned premiums at the beginning of the period less the unearned premiums at the end of the period.

Premium Written, Net

The sum of premium written on policies issued to consumers, or, for reinsurance assumed, from other companies - less premium ceded to reinsurers. (When compared to surplus funds, it is a measure of risk.)

Primary

An adjective used to differentiate an insurance transaction from a reinsurance transaction. It may designate:

1. An insurance company which issues a policy;

2. The insured of such a company;

3. The policy itself; or

4. The coverages provided by the policy.

Prior Approval Laws

Laws that require that rates and forms be filed and approved by regulators prior to use by the insurer. (Compare to Flex-Rating and File and Use.)

Priority

The term occasionally used by some reinsurance markets, generally outside the U.S., to mean the retention of the primary company in a reinsurance agreement.

Pro Rata Reinsurance

A generic term describing all forms of reinsurance in which the reinsurer shares a proportional part of the original losses and premiums of the ceding company. It is also known as Participating Reinsurance or Proportional Reinsurance.

Producer Commission

[See Brokerage Commission.]

Professional Reinsurer

A term sometimes used to differentiate an organization whose business is mainly reinsurance and related services, from other insurance organizations that operate a department or division which assumes reinsurance in addition to that company's primary insurance business.

Profit Commission

[See Commission, Contingent.]

Proportional Reinsurance

[See Pro Rata Reinsurance.]

Proprietary Insurers

An insurance entity owned by its stockholders and formed with the objective of earning a profit for the owners.

Prospective Rating Plan

The formula in a reinsurance contract used to determine the reinsurance premium or commission for a specified future period on the basis, of the loss experience of a prior period. It is a type of experience rating. (This is not to be confused with retrospective rating or retrospective premium or commission determination, which is a retroactive adjustment based on loss experience for the same period.) [See also Spread Loss Reinsurance.]

Protecting the Treaty

Used to describe any action taken by a reinsured company or underwriter to prevent losses to its treaty reinsurer when such losses could otherwise result in increased reinsurance rates or decreased participation in any profit-sharing arrangements with the treaty reinsurer.

Provisional Premium, Rate or Commission

The tentative premium, premium rate or commission that is subject to subsequent adjustment.

Punitive Damages

Damages awarded separately and in addition to compensatory damages, usually on account of malicious or wanton misconduct. It is intended to serve as a punishment of the wrongdoer and possibly as a deterrent to others. Such damages are also referred to as "exemplary damages," i.e., they are intended to "make an example" of the wrongdoer.

Pure Loss Cost

The ratio of reinsured losses incurred under a reinsurance agreement to the ceding company's subject earned premium for that agreement, before loading. Also known as Burning Cost.

Pure Premium

1. That part of the premium which is sufficient to pay losses and loss adjustment expenses but not including other expenses.

2. Also the premium developed by dividing losses by units of exposure, disregarding any loading for commission, taxes and expenses.

3. In crop hail insurance, the ratio of incurred loss to liability, or the dollars of loss per $100 of insurance indemnity in force.

Quota Share Reinsurance

A form of pro rata (proportional) reinsurance in which the reinsurer assumes an agreed percentage of all business being insured and shares all premiums and losses accordingly with the reinsured.

Rate

The percentage or factor applied to the ceding company's subject premium to produce the reinsurance premium. Also, the percentage applied to the reinsurer's premium to produce the commission payable to the primary company (or, if applicable, the reinsurance intermediary).

Rate on Line

A rate that equals the premium divided by the limit of reinsurance indemnity. (The rate, multiplied by the indemnity, would produce the premium.) This term is used extensively in judging the adequacy of rates for property per occurrence excess covers. The related terms are, "amortization period" and "payback period," and are the inverse of Rate on Line.

Recapture

The action of a ceding company in taking back risks previously ceded to a reinsurer. A term more commonly used in Life/A&H than in Property/Liability.

Reciprocity

The mutual exchange of reinsurance, often in equal amounts, from one party to another, the object of which is to stabilize overall results. More common in Europe than in the U.S.

Recoveries

Amounts received from a reinsurer for a reinsured's losses.

Redlining

The practice of discriminating against certain classes of insureds, particularly inner city urban consumers, because of location.

Regulation 98

A New York insurance regulation that requires an intermediary clause that places the credit risk of the reinsurance transaction upon the reinsurer. It also requires the intermediary to:

(1) obtain written authority from the company authorizing the intermediary to negotiate the reinsurance;

(2) give prompt written notice to the ceding company evidencing the reinsurer's commitment,

(3) make reasonable inquiry into the financial strength of the reinsurer(s) and furnish a copy of their financial statement;

(4) advise the company of any conflicts of interest that may exist with respect to the activities of the intermediary;

(5) maintain books and records sufficient to permit an audit for a period of at least ten years; and,

(6) maintain separate bank account(s) for funds held for the account of others.

Reinstatement

The restoration of the reinsurance limit of an excess treaty to its full amount after a loss payment by the reinsurer.

Reinsurance

The transaction whereby the reinsurer, for a consideration, agrees to indemnify the ceding company against all or part of the loss which the company may sustain under a policy or policies that it has issued.

Reinsurance Assumed

That portion of risk the reinsurer accepts from the original insurer or ceding company.

Reinsurance Ceded

That portion of the risk that the ceding company transfers to the reinsurer.

Reinsurance Commission

[See Ceding Commission.]

Reinsurance Intermediary Model Act

A model act promulgated by the National Association of Insurance Commissioners and adopted by many states (with some variations) which provides many of the same requirements of intermediaries as does Regulation 98 (which see). In addition, certain provisions are made for the licensing of intermediaries.

Reinsurance Management Companies

Also known as underwriting agents, these organizations perform many of the underwriting and management functions of a reinsurance company. Frequently such organizations perform these duties on behalf of a pool of companies and/or when they possess highly specialized knowledge of a particular segment of the insurance business.

Reinsurance Premium

An amount paid by the ceding company to the reinsurer in consideration for liability assumed by the reinsurer.

Reinsured

A company that has ceded reinsurance to a reinsurer. Also known as the Ceding Company, Cedent or Primary Company.

Reinsurer

An organization that assumes the liability of another by way of reinsurance.

Rent-A-Captive

An existing insurance company issues a preferred class of stock to the policyholder(s). This entitles those policyholder(s) to benefit from the underwriting profits and investment income generated by the insurance purchased by the policyholder(s) from the existing insurance company. Essentially, they have rented the existing capital and structure of the insurance company.

Retainage

Contract balances held in suretyship by an obligee for payment to a contractor upon completion of the contract.

Retention

The amount that an insurer keeps for its own account. In pro rata contracts, the retention may be a percentage of the policy limit. In excess of loss contracts, the retention is usually a monetary (dollar) amount of loss.

Retrocedent

The ceding reinsurer in a retrocession, in which the assuming reinsurer is known as the retrocessionaire.

Retrocession

The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.

Retrocessionaire

The assuming reinsurer in a retrocession, in which the ceding reinsurer is known as the retrocedent.

Retrospective Rating

A method of determining the reinsurance premium or commission for a specified period on the basis of the loss experience for that same period. (In contrast; prospective rating is based on loss experience from a prior period.) This is a type of Experience Rating.

Return Portfolio

The re-assumption by a ceding company of a portfolio of risks previously ceded to the reinsurer. [See Assumed Portfolio.]

Risk

This is a broad generic term meaning:

1. In fire insurance, the physical units of property at risk (not perils or hazards).

2. Also, the different types of properties or insurable interest, e.g., non-hazardous risks and protected risks.

3. Uncertainty concerning loss.

4. In reinsurance, variation between the expected outcome and the actual outcome of a transaction.

Risk-Based Capital

A method of estimating the necessary capital requirements of an insurer by evaluating the asset risk, credit risk, and underwriting risk and then comparing the results to the stated capital of the company.

Risk Retention Group

A group of companies combining to operate as a limited-purpose insurer as permitted under the Liability Risk Retention Act of 1986. RRGs combine resources as well as pool risk.

Runoff

A type of termination of a reinsurance treaty which provides that the reinsurer shall remain liable for loss resulting from occurrences that take place after the date of termination and which arise out of reinsured policies in force at the date of termination. [Compare to Cutoff.]

Schedule P

A schedule in the Convention Annual Statement that details the historic loss experience of a company and is an important resource used to assess a company's loss trends.

Semiautomatic Treaty

[See Facultative Semi-Obligatory Treaty.]

Single Risk Reinsurance

[See Facultative Reinsurance.]

Sliding Scale Commission

A commission adjustment on earned premiums under a formula in which the adjusted commission varies inversely with the loss ratio, subject to stated maximum and minimum commission percentages. A method of experience rating.

Slip

[See Line Slip.]

Social Inflation

The inflationary effect on insurance losses caused by such factors as higher jury awards, more liberal treatment of claims by workers' compensation boards, legislated increases in benefit levels (in some cases retroactively), and new concepts of tort and negligence.

Special Acceptance

The specific agreement by the reinsurer to include a specific risk under a reinsurance contract that would not otherwise have been covered by the treaty.

Special Covers

A general term used to describe reinsurance agreements written to protect the primary company against certain unusual situations. Usually such covers are contingent in nature, rather than for the repayment of normal losses suffered under the primary company's policies.

Special Exception

[See Special Acceptance.]

Spread Loss Reinsurance

A type of excess of loss property reinsurance that provides for a periodic adjustment of the reinsurance premium rate based on the reinsured's experience for preceding years. The rate computation provides for a loading for the purpose of compensating the reinsurer for:

1. its expenses;

2. unusual loss contingencies;

3. those losses occurring at the end of the period of the treaty that the reinsurer might not have a chance to recoup if the treaty terminates;

4. a potential catastrophe; and,

5. the reinsurer's profit.

In casualty reinsurance, adjustments to the above may be required for such other factors as economic and social inflation. Also known as Carpenter Plan.

Statutory Accounting Principles (SAP)

State laws require that certain principles be followed by insurance companies when filing their financial statements with the various state insurance departments. These principles differ from generally accepted accounting principles (GAAP) in some important respects, e.g., statutory accounting principles require that expense must be recorded immediately and cannot be deferred to track with premiums as they are earned and taken into revenue. [See GAAP.]

Stop Loss Reinsurance

[See Aggregate Excess of Loss Reinsurance.]

Structured Settlement

The settlement of a claim by means of the purchase of an annuity for the benefit of the claimant. The insurance company may benefit since the present value of an annuity is less than the total sum to be paid out, and there may as well be income tax benefits for the claimant.

Subject Premium

The ceding company's premiums (written or earned) to which the reinsurance premium rate is applied to produce the reinsurance premium. It is also referred to as Premium Base, Underlying Premium and Subject Matter Premium. [See GNEPI and GNWPI.]

Surplus Liability

That proportional part of a reinsured company's gross liability on any one risk which exceeds (or is the surplus after) the amount the ceding company retains net for its own account.

Surplus Reinsurance

A form of pro rata (proportional) reinsurance indemnifying the ceding company against loss for the surplus liability ceded. Essentially, this can be viewed as a variable quota share contract in which the reinsurer's pro rata share of insurance on individual risks will increase as the amount of insurance increases. In this way, the primary company can limit its net exposure (as expressed in monetary units) regardless of the amount of insurance written. [See First Surplus Treaty.]

Surplus Relief

A reinsurance arrangement in which the main purpose is to finance new business and/or in force business and/or to offset extraordinary drains on surplus. [See Financing Function.]

Surplus to Policyholders

1. The amount by which the assets of an insurer exceed the organization's liabilities. Another name for Policyholder Surplus.

2. The net worth of an insurer as reported in its Annual Statement. For a stock insurer, it is the sum of its unassigned surplus and capital.

Syndicate

An association of individuals or organizations to pursue certain insurance objectives. For example, investors (called "names") at Lloyd's of London combine into syndicates, lead by an underwriter, to write specific types of insurance such as marine insurance, aviation insurance, reinsurance, etc. [See Pool.]

Target Risks

Large risks designated in reinsurance treaties, or which exceed a stated monetary amount, that are specifically excluded (e.g., various, named high valued bridges, tunnels, and fine arts collections). Such exposures normally are of a size as to require individual acceptance, so that "blind" cessions under automatic reinsurance don't overline the reinsurer.

Tort

A civil wrong or injury other than as may arise as a breach of contract.

Tort Liability System

A system in which negligence must be established as a basis for liability, in contrast to a "no fault" system in which fault need not be established (e.g., Workers' Compensation and, in some states, Automobile Liability).

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.

Treaty

A reinsurance agreement between the ceding company and the reinsurer, usually for one year or longer, which stipulates the technical particulars applicable to the reinsurance of some class or classes of business. Reinsurance treaties may be divided into two broad classifications: (1) the participating type (proportional) which provides for sharing of risks between the ceding company and the reinsurer; and (2) the excess type (non-proportional) which provides for indemnity by the reinsurer only for a loss that exceeds some specified predetermined monetary amount. [For various sub-classifications, see Quota Share, Excess of Loss, First Surplus, Spread Loss, Stop Loss, Catastrophe]

Trending

The adjustment of historical statistics (both premium and losses) to present levels or expected future levels in order to reflect measurable changes in insurance experience over time. Such adjustments are necessary because of dynamic economic and demographic forces, and to make the data useful for determining current and future expected cost levels.

Triennial Examination

A periodic examination (nominally, every third year) in which regulators examine the records of an insurance company to verify its financial condition and compliance with the applicable laws and regulations.

Turn

Referred to as "the turn," this word describes the excess of reinsurance commission received by a ceding company over its actual costs incurred in producing the business ceded. The excess is considered a profit to the ceding company.

Uberrimae Fidei

Literally, means "utmost good faith." A defining characterization of the quality of some (contractual) relationships, of which reinsurance is universally recognized to be one. Among other differences from ordinary contractual relationships, the nature of reinsurance transactions is dependent upon a mutual trust and a lively regard for the interests of the other party even if inimical to one's own. A breach of utmost good faith, is accepted as grounds for any necessary reformation or redress, including rescission of the contract, especially in regard to full and voluntary disclosure of the elements of risk of loss..

Unallocated Loss Adjustment Expense

Loss adjustment expense that is not allocated to a specific claim, i.e., general overhead expenses and supervisory or managerial expenses. [See Allocated Loss Adjustment Expense.]

Unearned Premium (Reserve)

The sum of all the premiums representing the unexpired portions of the policies or contracts that the insurer or reinsurer has on its books as of a certain date. It is usually based on a formula of averages of issue dates and the length of term. [See Earned Premium.]

Ultimate Net Loss

1. In reinsurance, the unit of loss to which the reinsurance applies, as determined by the reinsurance agreement. The gross loss less any recoveries from other reinsurance that reduce the loss to the treaty in question.

2. In liability insurance, the amount actually paid or payable for the settlement of a claim for which the reinsured is liable (including or excluding defense costs) but after deductions are made for recoveries, and certain specified reinsurance.

Unauthorized Insurer, Reinsurer

An insurer not licensed, or a reinsurer neither licensed nor approved, in a designated jurisdiction.

Unauthorized Reinsurance

Reinsurance placed with a reinsurer that is neither licensed nor approved in the jurisdiction in question and for which there is no letter of credit or other acceptable arrangement to guarantee the reinsurer's obligations.

Underlying Cover

A layer of coverage that attaches before the next higher excess layer of insurance or reinsurance attaches.

Underlying Premium

The ceding company's premiums (written or earned) to which the reinsurance premium rate is applied to produce the reinsurance premium. Also known as Premium Base, and Subject Premium.

Underwriting Capacity

The maximum amount of money an insurer or reinsurer is willing to risk in a single loss event on a single risk or policy or in a given period. The limit of capacity for an insurer or reinsurer may also be imposed by law or regulatory authority.

Underwriting Income

The excess of premiums earned by an insurer or reinsurer during any reporting period after deducting the combined total of underwriting and loss adjustment expenses and losses incurred during the same period.

Underwriting Manager

A person, partnership or corporation representing an insurer or reinsurer and underwriting for the insurer's or reinsurer's account. [See also Managing General Agent and Reinsurance Management Companies.]

Underwriting Year Experience

[See Policy Year Experience.]

Variable Quota Share

A quota share agreement under which the amount ceded varies depending upon the total limit or class of business or other broadly predefined criteria.

Voluntary Market

The market in which insurers are free to choose which risks to insure; also referred to as the standard market. This is in contrast to the assigned risk or involuntary market. [See Automobile Insurance Plan.]

Warranted No Known Or Reported Losses

A statement made on application for reinsurance when the effective date of the cover is to be prior to the date that the coverage is placed. This is required to protect the reinsurer from placement of reinsurance after a known loss has occurred.

Working Excess

A contract covering an exposure in which loss frequency is anticipated, (as opposed to infrequent, severe losses). Thus, a working cover would usually have a low indemnity and would attach above a relatively low retention.

Zone Examination

An insurance department examination of an insurance company in which regulators from several states within a National Association of Insurance Commissioners' zone participate.