Reinsurance Terms Index

Access to Records Clause: A provision in a reinsurance agreement that allows the Reinsurer access to the Ceding Company's books, records and other documents and information pertaining to the reinsurance agreement. This includes related accounting, underwriting and claims information, for purposes of the Reinsurer obtaining information concerning the reinsurance agreement or its subject matter.
Accident Year Experience: Underwriting experience accumulated by matching the total value of all losses occurring during a given 12 month period (i.e., the dates of loss fall within the period) with the premiums earned for the same period regardless of when the losses are actually reported, booked or paid.
Account Executive: The individual, either as employee of a reinsurer or a reinsurance intermediary, who is responsible for all matters pertaining to the reinsurance account of a particular insurer
Accounting Earned: The unearned premium reserve at the beginning of the period is added to the premium written (booked) during the period, and the unearned premium reserve at the end of the period is subtracted.
Acquisition Costs: All expenses directly related to acquiring insurance or reinsurance accounts; i.e., commissions paid to agents, brokerage fees paid to brokers, premium taxes and expenses associated with marketing, underwriting, contract issuance and premium collection.
Addendum: A document specifying agreed amendments to an insurance (or re-insurance) contract.
Adjustment Premium: Adjustment premium payable after expiration of an insurance contract, constituting – together with a deposit premium – the premium required under the contract
Administration Expenses: Costs incurred in conducting an insurance operation other than loss adjustment expenses, acquisition costs, and investment expenses.
Admitted (Authorized) Reinsurance: Reinsurance for which credit is given in the ceding company's Annual Statement because the reinsurer is licensed or otherwise authorized to transact business in the jurisdiction of domicile of the ceding company. (See also Non-Admitted Reinsurance).
Adverse Selection: The conscious and deliberate submission by a reinsured company to a reinsurer of those risks, segments of risks, or coverages that appear less attractive for retention by the reinsured.
Aggregate Excess of Loss Reinsurance: A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the ceding company for the amount by which all of the ceding company's losses (either incurred or paid) during a specific period (usually 12 months) exceed either 1) a predetermined dollar amount or 2) a percentage of the ceding company's subject premiums earned (loss ratio) for the specific period.
Aggregate Extension: An extension of coverage permitting the aggregating of what would otherwise be two or more accidents or occurrences so that they are considered as one accident or occurrence for purposes of an excess of loss reinsurance. Thus, only one company retention and one reinsurer's limit of liability apply. Many variations may be used in further defining the term, e.g., the aggregating is usually tied to loss arising out of one policy during one policy period or, if not to one policy, then loss to one insured during a specified period.
Aggregate Extraction: A provision permitting a portion of what would be considered as one loss to be extracted and included as part of a separate loss. Example: an aggregate policy, where the reinsurance contract considers all loss under such a policy to be one occurrence, when one of the losses under that policy is involved in the same loss as another policy(ies) of the reinsured company. The aggregate policy loss may be extracted and combined with the other policy(ies) loss to make a more favorable claim under the reinsurance contract.
Aggregate Stop-Loss Reinsurance: A form of excess of loss reinsurance which indemnifies the reinsured against the amount by which the reinsured's losses incurred (net after specific reinsurance recoveries) during a specific period (usually twelve months) exceed either an agreed amount or an agreed percentage of some other business measure, such as aggregate 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, stop-loss-ratio reinsurance, or excess of loss ratio reinsurance.
Aggregate Working Excess: A form of per risk excess reinsurance under which the primary company retains its normal retention on each risk and additionally retains an aggregate amount of the losses which exceed such normal retention.
Alien (Insurer): An insurer domiciled outside the United States and incorporated under the laws of any other country.
Amortization Period: Synonymous with payback period, this term is used in the rating of per occurrence excess covers and represents the number of years at a given premium level necessary to accumulate total premiums equal to the indemnity.
Anniversary: The annual renewal date of a contract, whether the contract actually expires or is continuous. The date is usually twelve months after the effective date of the contract, but may be at some other time if the contract were written for other than one year. In provisions dealing with Run-off Cancellation, the anniversary referred to is that of the underlying policies, not the reinsurance contract.
Annual Statement: The annual report format prescribed by the National Association of Insurance Commissioners utilized to submit financial data and related information to insurance regulators. All states use the NAIC annual statement blank, but each state retains the authority to make changes in those statements.
Arbitration Clause: A provision found in reinsurance contracts wherebythe parties agree to submit their disputes to a non-judicial adjudication panel rather than a court of law, generally subject to selection criteria and procedures set out in the clause. The arbitration panel produces an award, ultimately enforceable by a court of law, binding both parties. Association (also known as Pool, Syndicate) An organization of insurers or reinsurers through which pool members underwrite particular types of risks with p...
As If: A term used to describe the recalculation of prior years of loss experience to demonstrate what the underwriting results of a particular program would have been if the proposed program had been in force during that period.
Association: An organization of insurers or reinsurers through which pool members underwrite particular types of risks with premiums, losses, and expenses shared in agreed amounts. Associations may be voluntary or involuntary if mandated by insurance laws.
Assume: To accept an obligation to indemnify all or part of a ceding company's insurance or reinsurance on a risk or exposure subject to the contract terms and conditions.
Assumed Portfolio: The transfer of in-force insurance liability from an insurer to a reinsurer (or vice versa) by the payment of the unearned premium reserve on those policies alone, or the concurrent transfer of liability for outstanding losses under those policies by the payment of the outstanding loss reserve from the insurer to the reinsurer (or vice versa). The former is a premium portfolio, the latter a loss portfolio.
Assumption: A procedure under which one insurance or reinsurance) company takes over or assumes contractual obligations of another insurer or reinsurer.
Assumption of Liability Endorsement: An endorsement to an insurance policy or reinsurance contract wherein a reinsurer assumes insurance obligations or risks, or both, of existing or in-force policies of insurance. The term is distinguished from a cut-through endorsement.
Attachment Point: The currency amount of a reinsured company's retained risk or loss at which point reinsurance begins to apply.
Bad Faith: The failure of an insurer to settle within policy limits when there was an opportunity to do so (and a court award in excess of the policy limits).
Balance: A concept in surplus share reinsurance dealing with the relationship between written premium under the treaty and the maximum limit of liability to which the reinsurer is exposed. The precise relationship will vary from treaty to treaty, but if the ratio desired for a specific treaty is achieved, the treaty is referred to as "balanced."
Banking Plan: An agreement in which the ceding company pays the reinsurer a premium over a specified number of years which is intended to fully fund a specific limit of liability. If the premium is not fully expended by a payment of losses within the contract period the unused portion is returnable, less a reinsurance expense. Also known as Advance Deposit Premium Plan.
Base Premium: The ceding company's premiums (written or earned) representing the original exposure forming the basis for the reinsurance and to which the reinsurance premium rate is applied to produce the reinsurance premium. This term is usually defined in the reinsurance contract.
Basic Capital Requirement: The BCR is a simplified factor-based capital requirement intended for insurers designated as systemic (GSIIs) and is intended to be the basis on which additional capital requirements, a.k.a. Higher Loss Absorbency (HLA), are applied to GSIIs.
Basic Limits: The minimum amounts of insurance for which it is the practice to quote premiums in liability insurance. Additional amounts are charged for by the addition of certain percentages of the premium for the minimum (or basic) limits.
Basis of Attachment/Treaty Experience: A methodology that determines which original policy losses will be covered under a given reinsurance agreement. There are two types of methodologies: policies attaching and losses occurring. The determination may be based on 1) the effective or renewal date of the original policy; or 2) on the date of the loss; or 3) on the date when the reinsured company recorded premium or loss transaction.
Binder: An interim short form contract evidencing coverage, pending issuance by a formal reinsurance contract. See Placement Slip and Cover Note. Glossary of Reinsurance Terms [ A B C D E F G I J L M O P Q R S T U V W ]
Boilerplate (Language): Clauses employing generally accepted wording with little variation, considered to be common amongst most treaties as so-called standard language.
Bordereau: A report provided periodically by the Ceding Company detailing the reinsurance premiums and/or reinsurance losses and other pertinent information with respect to specific risks ceded under the reinsurance agreement. This report typically includes the insured's name, premium basis, policy term, type of coverage, premium and the policy limit. Alternatively, a bordereau could also be the mechanism by which the Ceding Company details losses or claims, include insured, claimant, date of loss, desc...
Broker: An intermediary who negotiates reinsurance contracts between the ceding company and the reinsurer(s). The broker generally represents the ceding company and receives compensation in the form of commission, and/or other fees, for placing the business and performing other necessary services.
Broker Market: The collective reference to those reinsurance companies that accept business mainly from reinsurance intermediaries or brokers. See Direct Writing Reinsurer.
Brokerage: Also known as “broker’s commission”. The commission which is payable to a broker for placing an insurance or reinsurance contract with an insurer or a reinsurer
Buffer Layer: Used in casualty insurance to describe a stratum of coverage between the maximum policy limit which the primary underwriter will write and the minimum deductible over which the excess or umbrella insurer will cover.
Bulk Reinsurance: A transaction sometimes defined by statute through which, of itself or in combination with other similar agreements, an insurer assumes all or a substantial portion of the liability of the ceding company.
Burning Cost: The ratio of the reinsurance losses incurred to the ceding company's subject premium based upon historical experience for a proposed reinsurance agreement.
Burning Ratio: In primary insurance, the ratio of losses suffered to the amount of insurance in effect. Thus, not a "loss ratio," which is the ratio of losses incurred to premiums earned.
Buy-Back Agreement: A negotiated contractual attempt by an insurer writing primary insurance or excess insurance to curtail further exposure to the insured for defense or indemnity by making a lump sum payment to the insured. Open questions exist as to how these agreements affect third-party beneficiaries of the original insurance policy.
Calendar Year Experience: Simplistically, the matching of all losses incurred (not necessarily occurring) within a given twelve-month period, usually beginning on January 1, with all premium earned within the same period of time. Incurred losses will include the change in IBNR. More specifically, the total value of all losses incurred (not necessarily occurring) during the calendar year is divided by the Accounting Earned premium for this same exposure period. Losses incurred are equal to the sum of losses paid, plus the outstanding loss reserves at the end of the year, less the outstanding loss reserves at the beginning of the year. Once calculated for a given period, calendar-year experience never changes. Policy Year Experience: Simplistically, the segregation of all 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 (regardless of when reported) policies incepting or renewing during the year 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. Policy-Year Experience resembles Accident Year Experience in that, while the experience is developing, loss reserves are used in the calculation, but the ultimate result cannot be finalized until all losses are settled. Policy-Year Experience is different in that 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). Similarly, losses to be included will be occurring over the same extended time period. Also known as Underwriting Year.
Cancellation: Termination of an insurance contract before it is due to expire. The contract may have a cancellation clause which stipulates the conditions for cancellation which is effected by sending a cancellation notice
Capacity: The largest amount of insurance or reinsurance available from a company or the market in general. Also refers to the maximum amount of business (premium volume) that a company or the total market could write based on financial strength or regulatory limitations.
Captive Insurance Company: An insurer which is wholly-owned by another organization (generally noninsurance), the main purpose of which is to insure the risks of the parent organization.
Cash Call: A reinsurance contract provision, common in proportional contracts, which allows a reinsured company to make claim and receive immediate payment for a large loss without waiting for the usual periodic payment procedures to occur.
Casualty Catastrophe Cover: Reinsurance which is not exposed on a policy limit basis, i.e., the deductible 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 in the same loss occurrence and are referred to as clash covers.
Catastrophe Reinsurance: A form of excess of loss reinsurance which, subject to a specific limit, indemnifies the ceding company in excess of a specified retention with respect to an accumulation of losses to multiple insureds and/or policies resulting from an occurrence or series of occurrences arising from one or more disasters.
Cede: The action of an insurer of reinsuring with another insurer or reinsurer the liability assumed through the issuance of one or more insurance policies by purchasing a contract that indemnifies the insurer within certain parameters for certain described losses under that policy or policies. This action is described as transferring the risk or a part of the risk from the insurer to the reinsurer. The insurer (the buyer) is called the cedent and the assuming company (the seller) is called the reinsurer.
Cedent: The issuer of an insurance contract that contractually obtains an indemnification for all or a designated portion of the risk from one or more reinsurers.
Ceding Commission: Amount paid by the reinsurer to the ceding company as consideration for the cession, intended to cover all or part of the acquisition and administration costs borne by the ceding company.
Ceding Company: The company that transfers its risk to a reinsurer. See Cedent, Reassured, Reinsured.
Cession: The portion of insurance ceded by the ceding company to the reinsurer.
Claim Expenses: The costs incurred in processing claims: court costs, interest upon awards and judgment, the company's allocated expense for investigation and adjustments and legal expenses (excluding, however, ordinary overhead expenses of the company such as salaries, monthly or annual retainers, and other fixed expenses which are defined as unallocated loss adjustment expenses). Also known as Loss Expenses or Loss Adjustment Expenses.
Claims Control Clause: A provision in a reinsurance contract pursuant to which the ceding company (insurer) may not pay for a loss without the consent of the reinsurer
Claims Cooperation Clause: A clause which binds a ceding company to notify the reinsurer of all the claims which can be paid under the contract. Upon the reinsurer’s request, the reinsurer may co-operate in handling the settlement of such claims
Claims Made Basis Reinsurance Agreements: The provision in a reinsurance contract that affords coverage for claims that occur and are made during the contract term, for losses that occur on or after the retroactive date specified in the contract. Claims reported during the term of the reinsurance agreement are therefore covered regardless of when they occurred. A claims made agreement does not cover claims reported after the term of the reinsurance contract unless the reporting period is extended by special agreement.
Claims Made Coverage: The provision in a policy of insurance that affords coverage only for claims that are made during the term of the policy for losses that occur on or after the retroactive date specified in the policy. A claims made policy is said to "cut-off the tail" on liability business by not covering claims reported after the term of the insurance policy unless the reporting period is extended by special agreement. (Also see Occurrence Coverage).
Claims-made Basis: The provision in a contract of insurance or reinsurance that coverage applies only to losses which occur and claims that are made 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, which may be subject to a retroactive date limiting the period in which the covered losses may have occurred. Losses reported after the contract term are sometimes covered by the addition of "tail" coverage, which may be subject to a sunset provision.) Once the policy period is over in claims-made covers, the approximate extent of the underwriter's liability is known. On the other hand, the traditional "occurrence" liability insurance method provides coverage for losses from claims which occurred during the policy period, regardless of when the claims are asserted. With the traditional "occurrence" liability coverage method, the underwriter may not discover the extent of liability for years to come from losses asserted to have occurred within the policy period. With claims-made covers which are renewed, however, losses which occurred during any period when the policy was in force are again covered if reported during the renewal term. In summary, the traditional method is similar to claims-made if the latter has added to it both "prior-acts" and "tail" coverage.
Clash Cover: A casualty excess of loss reinsurance agreement with a retention level equal to or higher than the maximum limits written under any one reinsured policy or contract reinsured under the reinsurance agreement. Usually applicable to casualty lines of business, the clash cover is intended to protect the ceding company against accumulations of loss arising from multiple insureds and/or multiple lines of business for one insured involved in one loss occurrence.
Co-Reinsurance: 1) A provision in an excess of loss reinsurance contract requiring the reinsured to retain net and unreinsured otherwise (or to coreinsure) a part of the loss above the contract's retention, the purpose of which is to promote good claims handling by the reinsured. For example, when the reinsurer covers 95% of an excess of loss layer, the reinsured's 5% share of the excess losses is coreinsurance, a proportional sharing of the layer losses. 2) When several reinsurers are independently sharing a reinsurance contract (pro rata or excess, treaty or facultative), each reinsurer is a coreinsurer (as can be illustrated by another term, contributing excess).
Co-insurance: An arrangement whereby two or more insurers (co-insurers) underwrite the same risk. Each of the co-insurers has a contractual relationship with the insured
ComFrame: The IAIS's Common Framework for the Supervision of Internationally Active Insurance Groups is intended to provide supervisors with a supervisory framework for internationally active insurance groups.
Combination Plan Reinsurance: Elements of two types of reinsurance, Pro-Rata (Quota Share) and Excess of Loss, are combined in one reinsurance agreement. The excess of loss part of the plan protects the company up to a specified limit on each risk, each occurrence excess of a fixed net retained line. The pro-rata part of the plan protects the company's net retained lines under the excess part (i.e. after deducting the excess of loss recoveries), on a fixed percentage quota share basis.
Combined Ratio: Measure of underwriting profitability: incurred losses plus underwriting expenses, divided by earned premium. A ratio below 100% means underwriting profit, 100% means break-even, and above 100% means underwriting loss.
Common Account Reinsurance: Reinsurance which is purchased by the ceding insurer to protect both itself and its reinsurer (usually quota share reinsurer) and which applies to net and treaty losses combined. This may also be referred to as Joint Account Excess of Loss Reinsurance.
Commutation Agreement: An agreement between the ceding insurer and the reinsurer that provides for the valuation, payment and complete discharge of some or all current and future obligations between the parties under particular reinsurance contract(s). Commutation may be required by the reinsurance agreement or may be effected by mutual agreement.
Commutation Clause: A clause in a reinsurance agreement that provides for the valuation, payment, and complete discharge of some or all obligations between the ceding company and the reinsurer, including current and future obligations for reinsurance losses incurred.
Conflagration: A massive fire which destroys many contiguous properties.
Conflagration Area: A geographic territory in which many properties are subject to damage by a sweeping fire.
Contingency Cover: Reinsurance providing protection for an unusual combination of losses. See Clash Cover.
Contingent Commission: An allowance from the reinsurer to the reinsured based on a predetermined percentage of the profit realized by the reinsurer on the business ceded by the reinsured. Also known as Profit Commission.
Continuous Contract: A reinsurance contract that does not terminate automatically but continues indefinitely unless one of the parties delivers notice of intent to terminate. Continuous contract should have an anniversary date to satisfy risk transfer requirements and notice of intent to terminate is usually required to be delivered a specified number of days (typically 90 days) prior to the anniversary date.
Contributing Excess: A form of excess of loss reinsurance where, in addition to its retention, the ceding company has a share of losses in excess of the retention. This form of reinsurance may also apply to subject polices written in excess of underlying insurance or self insured retentions where the reinsurance applies to a share of losses within the policies, with the ceding company or other reinsurers contributing the remaining share. When more than one reinsurer shares a line of insurance on a risk in excess ...
Cover Note: A written statement issued by an intermediary, broker or direct writer indicating that the coverage has been effected and summarizing the terms. See also Binder and Placement Slip.
Covered Agreements: Defined under the Dodd-Frank Act, a covered agreement is "a written bilateral agreement or multilateral agreement regarding prudential matters with respect to the business of insurance or reinsurance that-(A) is entered into between the United States and one or more foreign governments, authorities or regulatory entities; and (B) relates to the recognition of prudential matters with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsu...
Credit Carry Forward: The transfer of credit or profit from one accounting period, as defined within the reinsurance agreement, to the succeeding accounting period under the existing contract or the replacing contract.
Credit for Reinsurance: The right of a ceding company under statutory accounting and regulatory provisions to treat amounts due from reinsurers as assets or reductions from liability based on the status of the reinsurer or collateral provided by the reinsurer. Credit Carry Forward (CCF) The transfer of credit or profit from one accounting period, as defined within the reinsurance agreement, to the succeeding accounting period under the existing contract or the replacing contract.
Cumulative Liability: The accumulation of liability of a reinsurer under several policies from several reinsureds covering similar or different lines of insurance, all of which are involved in a common event or disaster.
Cut-Off Cancellation or Termination: A provision included in the termination clause (or endorsement) which provides that the reinsurer shall not be liable for losses occurring after the termination date. See also Run-Off Cancellation or Termination. (Editor's Note: Cutoff is one word when used as a noun, two words as a verb transitive, and hyphenated as a compound adjective, e.g., a cutoff cuts off insurance business in force on a cut-off basis.)
Cut-Off Clause: The termination provision of a reinsurance contract stipulating that the reinsurer shall not be liable for loss as a result of occurrences taking place after the date of termination. The remaining unearned premiums are returned to the ceding company.
Cut-Through Clause: A clause providing that the reinsurer is authorized to pay compensation directly to the insured, thus “cutting through” the usual route of payment to the reinsured (the ceding company)
Cut-Through Endorsement: An endorsement to a policy or reinsurance contract which provides that, in the event of the insolvency of the insurance company, any loss recoverable from the reinsurer will be paid directly to the policyholder, claimant, or other payee as specified in the endorsement.
Declaratory Judgement: A decision by a court in a proceeding, which can be brought by either the insurer or the insured, to determine the rights of the parties. In insurance, for example, a court decision may be sought to determine whether an insurance company has an obligation to defend, indemnify or pay on behalf of its insured policyholder under a policy with regard to a particular loss or losses
Deemed (Or So Deemed): A condition which is said to exist by agreement between the parties even though it may not exist in fact (e.g., "all policy limits greater than $1,000,000 are to be reinsured on a pro rata facultative basis, or be so deemed.") To deem means to treat as if.
Deficit Carry Forward: The transfer of deficit or loss from one accounting period, as defined within the reinsurance agreement, to the succeeding accounting period under the existing contract or the replacing contract.
Deficit and Credit Carry Forward: Some adjustment features of reinsurance contracts allow for both a deficit and credit carry forward. See Deficit Carry Forward and Credit Carry Forward.
Deposit Premium: The amount of premium (usually for an excess of loss reinsurance contract), that the ceding company pays to the reinsurer on a periodic basis (usually quarterly) during the term of the contract. This amount is generally determined as a percentage of the estimated amount of premium that the contract will produce based on the rate and estimated subject premium. It is often the same as the minimum premium but may be higher or lower. The deposit premium will be adjusted to the higher of the actua...
Deposits retained: Amounts due to reinsurers under a reinsurance contract, but retained by a cedant to secure payments by reinsurers
Direct Action Statute: A provision allowing a third party to cut through the insured or insurer to the insurer or reinsurer.
Direct Writer: In reinsurance, a reinsurer which negotiates with a ceding company without benefit of an intermediary or broker. In insurance, a primary insurer that sells insurance through licensed agents who produce business essentially for no other organizations.
Direct Writing Reinsurer: A reinsurance company that transacts business directly with a ceding company and does not ordinarily accept business from a broker or intermediary.
Direct Written Premium: The gross premium income (written instead of earned) of a primary company, adjusted for additional or return premiums but before deducting any premiums for reinsurance ceded, and not including any premiums for reinsurance assume
Dodd-Frank Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, passed in response to the late-2000s financial crisis, intended to improve financial regulation in the U.S. It established the FIO, included the NRRA, and established the FSOC.
Drop Down Coverage: In reinsurance, a method of structuring the retention and limit of a particular layer of a property catastrophe excess reinsurance program so that, in the event that a loss (or losses) exhausts the reinsurance limit in a stated lower layer, the unexhausted limit of the highest upper layer would drop down to respond to subsequent loss(es) during the same contract period as a replacement for the lower layer. Such a method is often referred to as "top-and-drop" coverage. For example, if the first layer of $10 million xs (excess) $10 million in a program of $140 million xs $10 million were exhausted, the top layer (for this example, $10 million xs $140 million) will drop down and provide $10 million xs $10 million for a negotiated number of additional occurrences. Another use of drop-down coverage may occur within the first catastrophe layer, wherein the loss retention in a contract drops after the first loss and the layer limit then expands. For a different example, if the first layer coverage were $1 million xs $1 million and a loss in excess of $1 million occurred, provision would be made for the retention to drop to a lesser amount, such as $750,000, and for the limit to expand to $1,250,000 for the second and subsequent losses in the same period, but subject to the annual aggregate limit as negotiated.
Drop-Down: An approach to establishing the retention level in excess of loss reinsurance (usually catastrophe) under which the amount of the retention is reduced for the second (or subsequent) loss occurrence. The theory is that the ceding company can afford to retain a given retention level on one loss, but for additional loss(es) needs protection over the lower retention.
EIOPA: The European Insurance and Occupational Pensions Authority is part of the European System of Financial Supervision consisting of three European Supervisory Authorities and the European Systemic Risk Board. It is an independent advisory body to the European Parliament, the Council of the European Union and the European Commission.
EPI (Estimated Premium Income): Amount of premium to be collected for a period estimated by cedant
Earned Premium: That portion of written premium equal to the expired portion of the time for which the insurance or reinsurance was in effect.
Earned Reinsurance Premium: A reinsurance term that refers to either 1) that part of the reinsurance premium applicable to the expired portion of the policies reinsured, or 2) that portion of the reinsurance premium which is deemed earned under the reinsurance contract.
Entire Agreement Clause: A clause in some reinsurance agreements providing that the reinsurance agreement constitutes the entire agreement between the parties with respect to its subject matter, superseding all previous contracts, written or oral; and that any prior statements, negotiations or representations between the parties are merged into the final, written agreement. The clause may also provide that any modifications or changes in the agreement must be in writing, and executed by both parties.
Errors and Omissions Clause: A clause in a reinsurance treaty (requiring some affirmative act by the reinsured to activate the reinsurance protection) which stipulates that, in the event of inadvertent error or omission, the reinsured shall not be prejudiced in the fulfillment of the agreement, provided that such error or omission shall be corrected as soon as it is discovered.
Escape Clause: A clause providing that the reinsurer may terminate the contract due to some specified (sometimes very particular) reasons
Estoppel: A provision in a reinsurance agreement which reserves to the reinsurer every right under the reinsurance agreement not previously waived, and to the ceding company every right which had not been forfeited.
Event Loss Trigger: An approach designed to deem that all loss from one occurrence had one date of loss, regardless of the type of coverage (i.e., occurrence or claims made), or the number of dates of loss thereunder, or the reinsurance contracts or periods involved. The opposite of an INTERLOCKING loss trigger.
Evergreen Clause: A term in a Letter of Credit providing for automatic renewal of the credit for an indefinite number of periods until the issuing bank informs its beneficiary of its final expiration.
Ex Gratia Payment: Latin: "by favor". A voluntary payment made by an insurer or reinsurer in response to a loss for which it is not technically obligated under the terms of its contract.
Excess Limits Premiums: In casualty insurance, premiums for limits or layers of liability added to basic limits, calculated as multiples 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 Line Reinsurance: A form of per risk excess agreement under which the indemnity is not a fixed limit amount but a multiple of the primary company's net loss retention.
Excess Per Risk Reinsurance: A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the ceding company against the amount of loss in excess of a specified retention for each risk involved in each occurrence.
Excess of Loss: A form of non-proportional reinsurance in which an insurer’s participation in covering losses for a specified risk or risks is limited to stated amounts
Excess of Loss Ratio Reinsurance: A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the ceding company for the amount by which all of the ceding company's losses (either incurred or paid) during a specific period (usually 12 months) exceed either 1) a predetermined dollar amount or 2) a percentage of the ceding company's subject premiums earned (loss ratio) for the specific period.
Excess of Loss Reinsurance: A form of reinsurance which, subject to a specified limit, indemnifies the ceding company for the amount of loss in excess of a specified retention, whether that retention is expressed as a dollar amount or as a loss ratio.
Exclusions: Those risks, perils, or classes of insurance with respect to which the reinsurer will not pay 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 Rating: A method of determining the premium for a reinsurance contract based, in whole or in part, on the loss experience of the ceding company during prior or the current contract period(s) as specified in the reinsurance contract.
Expiration: The cessation of a reinsurance cover when the time period for which it was written has ended. A treaty written on a "continuous until cancelled" basis does not expire automatically but will contain a provision for termination.
Exposure Earned: This method calculates the premiums which were actually exposed to loss (or earned) for the period. The date on which premiums were booked is disregarded. What is significant is the effective date and term to which the premium applies. The portion of the premium written which was exposed to loss (earned) is allocated to the exposure period whether the premiums were booked prior to the period, during the period, or after the period. The exposure earned premium eliminates the deficiency contained in accounting earned premium that results from timing problems in the recording of premiums.
Extended Reporting Period: An additional period of time affording coverage after termination of a claims-made policy during which a claim first made after such termination for injury or damage that occurs on or after the retroactive date, if any, but before the policy termination date is covered and may be reported. Also see Retroactive Date.
Extra-Contractual Damages (Extra-Contractual Obligations, E.C.O.): In reinsurance, monetary awards required by a court of law against an insurer for its negligence to its insured. Such payments required of an insurer to its insured are extracontractual 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, percentages applicable, and required premium charges.
Extra-Contractual Obligations: In reinsurance and insurance, monetary awards or settlements against an insurer for its alleged wrongful conduct to its insured, generally arising out of claims handling. Such payments required of an insurer to its insured are extra-contractual in that they are not covered in the underlying contract.
Extraction Factor: A fraction or percentage of a reinsured company's subject premium which is deducted from the reinsurance premium to recognize and measure that portion of any policies not covered by reinsurance when the policies are written by the reinsured on an indivisible premium basis. For example, if property excess reinsurance does not cover third-party liability or burglary in a reinsured company's Homeowners Policy, an extraction factor would adjust the reinsurance premium accordingly.
FACI: The Federal Advisory Committee on Insurance provides advice and recommendations to assist FIO in carrying out its statutory authority.
FIO: The Federal Insurance Office, established by the Dodd-Frank Act, provides federal oversight of the insurance and reinsurance industries. FIO participates at the IAIS on international regulatory issues and has express authority to negotiate covered agreements with foreign jurisdictions.
FSAP: The Financial Sector Assessment Program of the International Monetary Fund is a comprehensive assessment of a country’s financial sector. This includes a financial stability assessment and, in developing and emerging markets, a financial development assessment. In jurisdictions with financial sectors deemed by the IMF to be systemically important, financial stability assessments under the FSAP are a mandatory part of surveillance under the IMF’s Articles of Agreement, and are supposed to take...
FSB: The Financial Stability Board was established by the G-20 countries to coordinate the work of national financial authorities and international standard setting bodies at the international level and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. FSOC The Financial Stability Oversight Council, established under the Dodd-Frank Act, provides comprehensive monitoring of the stability of the ...
FSOC: The Financial Stability Oversight Council, established under the Dodd-Frank Act, provides comprehensive monitoring of the stability of the United States financial system. It is charged with identifying risks to financial stability, promoting market discipline, and responding to emerging risks.
FSSA: Financial System Stability Assessment, a written document prepared at the conclusion of each country's Financial Sector Assessment Program (FSAP) by the International Monetary Fund.
Facultative Certificate of Reinsurance: A contract formalizing a reinsurance cession on a specific risk.
Facultative Obligatory Treaty: A reinsurance contract under which the ceding company can select and the reinsurer is obligated to accept cessions of risks of a defined class, provided the risks fall within the contract guidelines.
Facultative Reinsurance: Reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the ability to accept or reject and individually price each risk offered by the ceding company.
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 merely reflects how individual facultative reinsurances shall be handled.
Financial Reinsurance: A form of reinsurance that considers the time value of money and has loss containment provisions transacted primarily to achieve financial goals, such as capital management, tax planning, or the financing of acquisitions. Also see Finite Reinsurance. Finite Reinsurance (also known as Financial Reinsurance, Limited Risk Reinsurance, Nontraditional Reinsurance, Structured Reinsurance) A broad spectrum of treaty reinsurance arrangements that provide reinsurance coverage at lower margins than tra...
Finite Reinsurance: A broad spectrum of treaty reinsurance arrangements that provide reinsurance coverage at lower margins than traditional reinsurance, in return for a lower probability of loss to the reinsurer. This reinsurance is often multi-year and provides a means of sharing positive or negative claims experience with the cedent.
Finite Risk Reinsurance: A contract under which the ultimate liability of the reinsurer is capped (often by a maximum loss ratio) and on which anticipated investment income is expressly acknowledged as an underwriting component. Because this type of reinsurance is often purchased to ameliorate the balance sheet effects of statutory accounting principles, it is also known as Financial Reinsurance.
Flat Commission: A stated commission percentage, payable by the reinsurer to the reinsured, which is not subject to further adjustment under a profit-sharing provision. 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 pplicable to excess limits).
Follow the Fortunes: Follow the fortunes generally provides that a reinsurer must follow the underwriting fortunes of its reinsured and, therefore, is bound by the decisions of its reinsured in the absence of fraud, collusion or bad faith. It requires a reinsurer to accept a reinsured’s good faith, business-like reasonable decision that a particular risk is covered by the terms of the underlying policy. The term is often used interchangeably with follow the settlements, and there may be overlap between the affect...
Follow the Lead: A practice of following the lead of the leading underwriter: if the leader accepts alterations to the contract, the other reinsurers do the same
Follow the Settlements: Follow the settlements generally provides that a reinsurer must cover settlements made by the reinsured in a business-like manner, provided the settlement is arguably within the terms of the reinsured’s policy and the reinsurance agreement and the settlement is not affected by fraud, collusion or bad faith. It is an expectation that the reinsurer will abide by the reinsured’s good faith determination to settle, rather than litigate, claims under a reinsured policy and not re-litigate a reinsu...
Following Reinsurer: A reinsurer which follows the lead reinsurer on a cover being placed, accepting or rejecting the terms as presented.
Foreign Insurance Company: A U.S. domiciled insurer which is domiciled (incorporated) in a state other than the jurisdiction of the insured.
Franchise Covers: A contractual provision, common in hail insurance but also used elsewhere, stating that no loss is payable until the loss exceeds a certain amount but, when that amount is exceeded, the whole loss is paid.
Fronting: Arrangements by which an insurer, for a specified fee or premium, issues its policies to cover certain risks underwritten or otherwise managed by another insurer or reinsurer. The insurer then transfers all, or substantially all, of the liabilities thereunder to such insurers by means of reinsurance.
Funded Cover: A reinsurance contract under which the re-insured company pays a higher than normal premium intended to build a fund from which to pay expected losses. Because the higher premium reduces the reinsurer's risk (i.e., that losses will exceed the premium), the reinsurer agrees to accept a reduced reinsurance margin. All of the premium less the reinsurance charge will be returned to the ceding company at some time in the future as loss payments, returned premiums, or contingent commissions.
Funds Held Account (or Funds Withheld): The holding by a ceding company of funds representing the unearned premium reserve or the outstanding loss reserve applied to the insurance business it cedes to a (usually unauthorized) reinsurer.
G-SIFI: Global systemically important financial institution, as determined by the FSB. The FSB defines G-SIFIs as "institutions of such size, market importance, and global interconnectedness that their distress or failure would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries." G-SII: Global systemically important insurer Global systemically important insurer, as determined under the IAIS's assessment methodology. G-SIIs are on...
G-SII: Global systemically important insurer, as determined under the IAIS assessment methodology. G-SIIs are one class of G-SIFIs.
G.N.E.P.I. (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, meaning after cancellation, refunds, and premiums paid for any reinsurance protecting the cover being rated, but gross, meaning before deducting the premium for the cover being rated.
G.N.W.P.I. (Gross Net Written Premium Income): Gross written premium less returned premiums and premiums paid for reinsurance which inures to the benefit of the cover in question. Its purpose is to create a base to which the reinsurance rate is applied. Same as G.N.E.P.I., except premiums are written instead of earned.
G20: The Group of 20 is the name given to the group of 20 finance ministers and central bank governors from 20 of the world's largest economies. It includes 19 countries and the E.U. (which itself is composed of 27 member states). A list of G20 companies can be found at: https://www.g20.org/about_g20/g20_members.
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 disbursements to their proper period, as distinguished from the more conservative requirements of statutory accounting, by which insurers are regulated.
Gross Line: The total limit of liability accepted by an insurer on an individual risk (net line plus all reinsurance ceded).
Gross Loss: The amount of a ceding company's loss irrespective of any reinsurance recoveries due.
Gross Premium: Gross premium written before the deduction of various policy expenses and fees (e.g. brokerage). After the deductions it is a net premium
Ground Up Loss: The total amount of loss sustained by the ceding company before taking into account the credit(s) due from reinsurance recoverable(s).
Ground-Up Loss: In insurance, the gross amount of loss occurring to an insured and subject to the insured's insurance policy, beginning with the first dollar of loss and prior to the application to the deductible or deduction, if any, required by the policy. In reinsurance, the term refers to the gross amount of loss occurring to the reinsured, beginning with the first dollar of loss and after the application of deductions required by the reinsurance agreement (which can be several in number): a) the reinsured's retention in excess of loss covers; b) other inuring reinsurance says, such as quota share, surplus share, per risk excess, facultative, or common account coverage; or c) the uncollectibility of any reinsurances. For example, ground-up losses subject to a per risk excess treaty protecting the reinsured's net retention would equal the net loss beginning with the first dollar after reduction of the gross loss by recoveries from other treaties such as surplus covers and facultative placements, but before the application of the deductible in the per risk excess cover itself.
Hours Clause: The colloquial term which limits the time period during which claims resulting from a given occurrence may be included as part of the loss subject to the cover. The time period is usually measured in consecutive hours and most often applies to property reinsurance, e.g., a windstorm, conflagration, or earthquake, and less frequently in occupational disease and other aspects of casualty.
IAIS: The International Association of Insurance Supervisors, established in 1994, represents insurance regulators and supervisors of more than 200 jurisdictions in nearly 140 countries, constituting 97% of the world's insurance premiums. The IAIS acts as the global standard setter for insurance regulation.
ICPs: Insurance Core Principles, Standards, Guidance and Assessment Methodology established by the IAIS to provide uniform international standards and guidance for the regulation of the insurance industry. The IAIS encourages members to have the 26 ICPs incorporated or reflected in all of its members' regulatory frameworks. Although not binding on IAIS member jurisdictions, the ICPs are used by the IMF as a basis for carrying out assessments of the insurance sector under the Financial Sector Assess...
IMF: International Monetary Fund, an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
INCURRED BUT NOT REPORTED (IBNR): The liability for future payments on losses which have already occurred but have not yet been reported in the reinsurer's records. This definition may be extended to include expected future development on claims already reported. Thus, technically IBNR covers the field from a) those individual losses that have occurred but have not been reported to the insurer or reinsurer to b) that amount of loss that may arise from a known loss which has been reported as an event but which has not been recorded in full to its ultimate loss value (known as loss development).
IRIS (Insurance Regulatory Information System) Tests: A series of financial tests developed by the National Association of Insurance Commissioners (NAIC) under its Insurance Regulatory Information System (IRIS) to assist states in overseeing the financial soundness of insurance companies.
In-Force Business: Insurance policies in effect (i.e., whose time of coverage is unexpired) as a reinsurance contract period of time begins, with or without reinsurance coverage.
Incurred But Not Reported: An actuarial estimate of amounts required to pay ultimate net losses that refers to losses that have occurred but have not yet been fully and finally settled/paid . IBNR has two components: (1) a provision for loss and loss adjustment expense ("LAE") reserves in excess of the current reserves on individual claims that have been reported during the accounting period but which have not yet been paid in full, reflecting the potential increase in the value of these claim values when they are ulti...
Incurred Loss: For a specific reinsurance period (typically annual) incurred loss is calculated as paid losses during the period, plus outstanding loss at the end of the period, minus outstanding losses at the beginning of the period irrespective of when the loss actually occurred or when the original policy attached. Example: For the period 1/1/XX - 12/31XX, if outstanding losses at 1/1 are 15, paid losses during the year are 20, and outstanding losses at 12/31 are 12, then Incurred loss for the period 1/1...
Incurred Loss Ratio: The relationship between incurred losses and earned premium, usually expressed as a percentage.
Incurred Losses: 1) In insurance accounting, an amount representing the losses paid plus the change (positive or negative) in outstanding loss reserves within a given period of time. In other words, loss reserves outstanding at the end of the accounting period, plus losses paid during the accounting period, minus loss reserves outstanding at the beginning of the accounting period. For example, a) A loss occurs when specific bodily injury or property damage is legally recognized. b) A loss is incurred when the amount of a loss is booked by the accountants in the financial records of the company. c) A loss occurrence is the accumulation of all loss incurred from the losses that occurred from the same cause. 2) Losses which have happened and which will result in a claim under the terms of an insurance policy or a reinsurance agreement.
Indexing: A procedure which adjusts retention and limit provisions of excess of loss reinsurance agreements in accordance with the fluctuations of a published economic index, such as wage, price, or cost-of-living.
Indexing/Indexation: A provision, typically in an excess of loss reinsurance contract, whereby the ceding company agrees to share the excess reinsurer's (leveraged) inflation risk. It typically involves a publically recognized measure of inflation (e.g., wage inflation index) that is used as a trigger mechanism to adjust the excess of loss retention thus allowing changes in inflation to be more equitably shared by the cedent and the excess reinsurer. This sharing of inflation risk may be recognized in the price o...
Insolvency Clause: A provision appearing in most reinsurance contracts (because most if not all states require it) stating that in the event the reinsured is 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.
Interest and Liabilities Agreement: A reinsurance contract between the ceding insurer and one or multiple reinsurers in which the percentage of participation of each reinsurer is specified.
Interlocking Clause: A provision in a reinsurance agreement designed to allocate loss from a single occurrence between two or more reinsurance contract periods. The provision prorates the reinsured's retention and reinsurance coverage between two or more reinsurance agreement periods, i.e., when one loss affects policies assigned to different reinsurance periods, so that the company will have one retention and one recovery for the loss involving the two reinsurance periods.
Intermediary Clause: A contractual provision in U.S. reinsurance agreements in which the parties agree to effect all transactions through an intermediary and the credit risk of the intermediary, as distinct from other risks, is imposed on the reinsurer. Most intermediary clauses shift all credit risk to reinsurers by providing that (1) the ceding company's payments to the intermediary are deemed payments to the reinsurer, (2) the reinsurer's payments to the intermediary are not payments to the ceding company unti...
Intermediate Excess: Used in property reinsurance to describe a cover exposed to both catastrophe (occurrence) losses and policy limit exposures, excess of the probable maximum loss.
International Capital Standard: The ICS is the proposed permanent international capital standard that is intended to apply to all IAIGs. The goal is to develop a global capital standard that will allow comparability of insurers' capital position so that international insurance supervisors can understand and rely on for solvency regulation.
Inure to the Benefit of (Inuring): To take effect for the benefit of either the reinsurer or the reinsured. With respect to a given reinsurance contract (usually treaty), other reinsurances which are first applied to reduce the loss subject to the given contract are said to inure to the benefit of the reinsurer of that given contract. If the other reinsurances are to be disregarded as respects loss to the given contract, they are said to inure to the benefit of the reinsured. For example, a reinsured has a 50% quota share contract and a per occurrence excess of loss contract (e.g., catastrophe reinsurance) for $80 million excess of $20 million. A catastrophe loss of $100 million occurs. If the quota share contract inures to the benefit of the catastrophe reinsurer, the loss would be divided in this way. Of the gross loss of $100 million, the quota share reinsurer pays $50 million. Of the remaining $50 million, the reinsured bears $20 million (the catastrophe retention) and the catastrophe reinsurer indemnifies the reinsured to the extent of $30 million. On the other hand, if the quota share contract is to inure to the benefit of the reinsured (i.e., disregarded as respects the catastrophe reinsurance contracts), the catastrophe reinsurer pays $80 million and the remaining $20 million is divided equally between the reinsured and the quota share reinsurer. The reader should note that the inuring reinsurances affect the amount of risks being transferred by the reinsured and which contract is affected. In the first case, the bulk of the risks went to the quota share reinsurer; in the second case, to the catastrophe reinsurer.
Inuring Reinsurance: For a particular reinsurance contract a designation of other reinsurance contracts which are first applied pursuant to the terms of the particular reinsurance agreement to reduce the loss subject to the particular reinsurance agreement. In essence these other "inuring" reinsurances insulate the particular reinsurance contract to which they inure. If the other reinsurances are to be disregarded as respects loss to that particular agreement, they are said to inure only to the benefit of the rei...
Investment Income: Money earned from invested assets. May also include realized capital gains, or be reduced by capital losses, over the same period.
Inwards Reinsurance: Acceptance by a reinsurer of some risks ceded by another insurer (ceding company)
Joint Account Reinsurance: See Common Account Reinsurance.
Layer: The total amount of excess of loss reinsurance protection which a company needs to protect a given set of exposures is usually not written in one contract. Instead, the total amount is split into pieces or layers and separate contracts are written which fit on top of each other and have similar or identical terms but separate limits which sum to the total amount required. Each of the separate contracts in the series is called a layer or level in the total program.
Lead (or Leading) Underwriter: The individual (or organization) with a major role in negotiating the terms and conditions of a reinsurance cover and whose reputation and standing are such that other underwriters respect his or her ability, skills, and judgment and will often follow the terms and conditions set by the lead without further negotiation.
Letter of Credit: A financial instrument obtained from a bank that guarantees the availability of funds to be collected in the future under a reinsurance contract. In the noncommercial setting, these are known as standby credits in the event of non-performance by the obligor. Uniform Custom and Practices for Document Bearing Credits (2007 rev.) ICC, Pub. No. 600.
Leveraged Effect: The disproportionate result produced by inflation on a reinsurer's liability in- excess of loss reinsurance compared with the reinsured's liability. In other words, inflationary increases in average claim costs of a reinsured usually produce greater increases for the excess of loss reinsurer, since an increase affecting all losses (those within the retention limit and those above it) multiplies itself when affecting the excess of loss portion above that retention limit. The effect is leveraged in that such increases fall more on the reinsurer, proportionately at least, than the reinsured.
Limit: The maximum sum that an insurer or reinsurer will pay under a policy or for a given event or occurrence
Line: The proportion of a risk accepted by a reinsurer as the reinsurer’s maximum participation in such risk. The term is used in surplus treaties
Line Guide (Sheet): A list of the maximum amounts of insurance which a company is prepared to write on various classes of risks. Within the primary company, a line guide will usually include a suggested net retention of liability for each class of risk and is used to instruct its agents and underwriters. Also known as Line Sheet.
Line Sheet: A schedule included in a reinsurance treaty contract showing the limits of liability to be written by a ceding company for different classes of risk and (usually) also showing the amount of each respective limit (stated as a number of "lines") which can be ceded to proportional reinsurance treaties.
Line of Business: The general classification of business designated by the National Association of Insurance Commissioners (NAIC) utilized in the insurance industry to identify the major segments of policies that are sold to the general public, i.e., fire, allied lines, homeowners, other liability, products liability, auto liability, etc. These are often referenced in the "Business Covered" article of reinsurance treaty contracts to designate the classes of business covered by the treaty. Many of these general...
Lloyd's (or Lloyds): A kind of organization for underwriting insurance or reinsurance in which a collection of individuals assume 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.
Long-Tail Liability: A term used to describe certain types of third-party liability exposures (e.g., malpractice, products, errors and omissions) where the incidence of loss and the determination of damages are frequently subject to delays which extend beyond the term the insurance or reinsurance was in force. An example would be contamination of a food product which occurs when the material is packed but which is not discovered until the product is consumed months or years later.
Loss Adjustment Expense: The expense incurred by the ceding insurer in the defense, cost containment and settlement of claims under its policies. It is normally broken down into two categories: Allocated (ALAE) and Unallocated (ULAE). ALAE are those expenses that are directly related to (or "allocated" to) a specific claim such as the legal defense of a liability claim. These are typically covered by a reinsurance contract as a component of reinsured 'loss". The elements of loss adjustment expenses that are covered b...
Loss Conversion Factor: A factor applied to the anticipated projected losses (or loss cost) for an excess of loss reinsurance agreement in order to develop the reinsurance premium (or rate). This factor provides for the reinsurer's loss adjustment expense, overhead expense, and profit margin as well as the perceived "riskiness" of the loss projection, i.e. the degree to which the loss projection lacks confidence or credibility.
Loss Corridor: A mechanism contained in a proportional or an excess of loss agreement that requires the ceding insurer to be responsible for a certain amount of ultimate net loss above the company's designated retention and below the designated reinsurance limit, and which would otherwise be reimbursed under the reinsurance agreement. A loss corridor is usually expressed as a loss ratio percentage of the reinsurer's earned premium, or a combined ratio if the reinsurance agreement provides for a ceding commi...
Loss Development: The process of change in the value of claims over time until the claims are fully settled and paid. It is measured by the difference between paid losses and estimated outstanding losses at some subsequent point in time (usually 12-month periods), and paid losses and estimated outstanding losses at some previous point in time.
Loss In Excess of Policy Limit (XPL): A loss sustained by a reinsured company when required by a court to pay an amount of loss in excess of the policy's limit (which loss would have been included in the policy's coverage if the policy limit were higher) and resulting from an error or omission by the reinsured company in defending its policyholder, thereby exposing the policyholder to a loss in excess of the policy limit.
Loss Loading "Multiplier": A factor used to convert losses to premium and provide for the reinsurer's loss adjustment expense, overhead risk, and profit margin. Also known as Loss Conversion Factor.
Loss Portfolio Transfer: A financial reinsurance transaction in which loss obligations that are already incurred and which are expected to ultimately be paid are ceded to a reinsurer. In determining the premium paid to the reinsurer, the time value of money is considered, and the premium is therefore less than the ultimate amount expected to be paid.
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 unreported claims. May include amounts for loss adjustment expenses.
Loss in Excess of Policy Limits: An amount of loss which exceeds the original policy limits, but is otherwise covered under the policy, for which the insurer is potentially responsible by reason of its action or omissions, including failure to settle within the policy limits, in defending the insured under the policy. Typically an Excess Policy Limits loss is awarded by a court after an insured brings suit against its insurance carrier.
Losses Occurring During: The date of the loss under the original policy, rather than the effective date of the original policy, that determines the basis of attachment. Any losses occurring during the reinsurance agreement period on policies in force (if any), written or renewed will be covered by that reinsurance agreement irrespective of the inception or the renewal date of the original policy. This mechanism is often used with "the losses occurring during" the contract period methodology.
Losses Outstanding: Losses (reported or not reported) which have occurred but have not been paid.
Management Fee Expense: A deduction usually expressed as a percentage of ceded premium, in a calculation of profit or contingent commission. The amount is intended to account for the reinsurer's internal expenses.
Maximum Foreseeable Loss (MFL): The anticipated maximum loss that could result, given unusual or the worst circumstances with respect to the nonfunctioning of protective features as opposed to PML (Probable Maximum Loss), which would be a similar valuation but under the assumption that such protective features function normally.
Maximum Foreseeable Loss / Probable Maximum Loss: The worst loss that is foreseeable or probable to occur because of a single event. This term is typically used in property reinsurance.
Maximum Possible Loss: The worst loss that could possibly occur because of a single event. This term is typically used in property reinsurance.
Mediation: A form of alternative dispute resolution in which the parties agree to submit any dispute to a neutral mediator, whose purpose and goal is to achieve a mutually acceptable settlement and compromise of the dispute, rather than issue a formal ruling and decision on the merits as occurs in arbitration. Depending upon the parties' agreement, the results of mediation can be binding or non-binding.
Minimum Premium: An amount of premium which will be charged (usually for an excess of loss reinsurance contract), notwithstanding that the actual premium developed by applying the rate to the subject premium could produce a lower figure. See Deposit Premium.
Mortgage Insurance: A specialty line among financial guarantees which indemnifies a mortgage lender for loss on real estate loans resulting from default by a borrower if liquidation of the property proves insufficient to cover the outstanding principal.
Mortgagee Endorsement: An endorsement to an insurance policy covering the policyholder's mortgaged property to provide that, in the event of the insolvency of the insurance company, the reinsurer shall pay directly to the mortgagee and/or the policyholder the amount of loss that would have been recovered from the reinsurer by the insurance company. The endorsement may provide that the reinsurer will pay the full loss amount in accordance with the insurance protection afforded by the insurance company. Similar in co...
NBCR: An acronym referring to nuclear, biological, chemical and radiological exposures, which may be defined in the reinsurance agreement, for purposes of excluding, limiting or providing reinsurance coverage. This term is most often used in connection with defining what, if any, reinsurance coverage is provided for losses resulting from terrorism events.
NRRA: The Non-Admitted and Reinsurance Reform Act, part of the Dodd-Frank Act, is a federal effort to streamline state regulation of U.S. reinsurers. The NRRA establishes a methodology for determining which financial institutions embody systemically important risk and should be subject to heightened regulation.
National Association of Insurance Commissioners: The National Association of Insurance Commissioners is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight.
Natural Expiry: Termination of reinsurance on a run-off basis, i.e., reinsurance continues until the expiration of policies reinsured according to their original expiration dates.
Net Line: The amount of insurance the primary company carries on a risk after deducting reinsurance from its "gross" line.
Net Loss: Net Loss The amount of loss sustained by an insurer after making deductions for all recoveries, salvage and all claims upon reinsurers, with specifics of the definition derived from the reinsurance agreement.
Net Retained Liability: The amount of insurance that a ceding company keeps for its own account and does not reinsure in any way. It is the amount of loss that a cedent retains after all available reinsurance recoveries (except in some instances for catastrophe reinsurance).
Net Retained Lines Clause: Explains that the loss subject to the reinsurance agreement is net of all other reinsurances, whether collectible or not, as well as net of salvages and all other reinsurance recoveries due, of the reinsured.
Net and Treaty: The amount of the reinsured's loss retention for its own account (without reinsurance), plus its reinsurance for a given risk or a book of business.
New and Renewal Business: Insurance policies (exposures or risks) whose terms of insurance begin or continue during a reinsurance contract period of time, with or without reinsurance coverage.
Nine-Months Rule: A contract signature rule adopted by the National Association of Insurance Commissioners generally imposing a nine-month time limit from the effective date of the treaty reinsurance agreement to the time when the treaty reinsurance contract must be actually executed by the ceding company and the reinsurer or, in the case of multiple reinsurers, the lead designated reinsurer. The rule enables the ceding company to comply with statutory and/or regulatory requirements and receive accounting trea...
Ninety-Day Rule: An account balance aging rule established by the National Association of Insurance Commissioners that provides that an insurer or reinsurer must age certain balances on Schedule F of the annual statement for reinsurance recoverables over ninety days past due for which the company may need to establish an uncollectible provision.
Non-Admitted Reinsurance: Reinsurance placed with a reinsurer that does not have authorized or equivalent status in the jurisdiction of domicile of the ceding company and for which the ceding insurer may not take accounting credit in the ceding insurer's Annual Statement without the reinsurer posting security. See also Admitted Reinsurance.
Non-Proportional Reinsurance: A form of reinsurance, which, subject to a specified limit, indemnifies the ceding company for the amount of loss in excess of a specified retention. It includes various types of reinsurance, such as catastrophe reinsurance, per risk reinsurance, per occurrence reinsurance and aggregate excess of loss reinsurance.
Nonadmitted Assets: Assets owned by an insurance company which are not recognized for solvency purposes by state insurance laws or insurance department regulations, e.g., premiums due and uncollected past ninety days, and furniture and fixtures, among others.
Novation: A three party reinsurance transaction wherein a new party "steps into the shoes" of the party to an existing contract. The substitution of a new contract, debt or obligation for an existing one, between the same or different parties. A novation may substitute a new party and discharge one of the original parties to a contract by agreement of all parties. The requisites of a novation are 1) a previously valid obligation; 2) an agreement of all the parties to a new contract; 3) the extinguishme...
OFR: The Office of Financial Research, created by the Dodd-Frank Act, is housed within the U.S. Treasury. The OFR supports the data collection and research efforts of the Financial Stability Oversight Council (FSOC).
Obligatory Treaty: A reinsurance contract under which the ceding company can select and the reinsurer is obligated to accept cessions of risks of a defined class, provided the risks fall within the contract guidelines.
Occurrence: An incident or event, including continuous or repeated exposure to substantially the same general conditions, that results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.
Occurrence Coverage: Coverage under an insurance or reinsurance contract that applies to losses arising from occurrences that take place during the contract period, regardless of when the claim is reported.
Occurrence Limit: A provision in most property per risk reinsurance contracts that limits the reinsurer's liability for all risks involved in one occurrence. See Occurrence.
Offset: The netting of amounts due between two parties as provided for by common law, contract law, statutory law, regulatory law and/or judicial law. Some reinsurance contracts contain a mutual right of offset, while others may operate only for one party's benefit or remain silent. Offset may be allowed under all contracts between the parties or only under that specific contract. State insurance rules may address offset in insolvency.
Operating Ratio: The arithmetic sum of two ratios: incurred loss to earned premium, and incurred expense to written premium. Considered the best simple index to current underwriting performance of an insurer.
Original Conditions Clause: A provision in a reinsurance agreement which incorporates by reference all of the terms (as well as amendments, modifications, alterations and waivers) of the original policy written by the ceding company that are not otherwise addressed in the reinsurance agreement.
Original Insurer: The insurer which writes a policy for a policyholder (which may or may not create the need for reinsurance).
Original Terms: A reinsurance expression indicating that the terms underwritten by the reinsurer are on exactly the same basis as those of the ceding company in the original policy
Outstanding Cash Advance: A method of funding by the reinsurer using a cash advance in connection with a securitization provision contained in a reinsurance agreement requiring the reinsurer to secure its outstanding obligations under the agreement as of a particular point in time. The cash advance is held by the company in trust for the reinsurer in an interest bearing account or invested by the company in acceptable securities. The amount of the cash advance is subject to adjustment at given intervals as the reinsur...
Outstanding Loss Reserve (OLR, O/S): For an individual claim, an estimate of the amount the insurer expects to pay for the reported claim, prior to the final settlement of the claim. For total claims , estimates of expected payments for all reported and unreported claims. May include amounts for loss adjustment expenses. See Incurred But Not Reported (IBNR),.
Over-Line: The amount of insurance or reinsurance that exceeds the insurer's or reinsurer's normal capacity. This is inclusive of automatic reinsurance facilities.
Overline: The amount of insurance or reinsurance written which exceeds the insurer's or reinsurer's normal underwriting capacity, inclusive of automatic reinsurance facilities.
Overplacement: Situation created by a broker who obtained the reinsurers’ acceptance of participation which exceeds 100% of risk. To eliminate overplacement, participation of individual reinsurers must be reduced
Overriding Commission: 1) In reinsurance or retrocession business (typically proportional treaties) an allowance paid to the ceding company over and above the actual acquisition and related cost to produce and underwrite the original business. 2) A commission paid to a managing agent or general agent for supervising and controlling a book of business.
Participating Insurance: A designated class of insurance that shares in the dividends declared by the primary insurer to policyholders. While mutual insurers issue participating policies mostly, and the stock insurers usually issue non-participating policies, either type of insurer may seek authorization from its domiciliary state insurance department to issue the other type of policy.
Participating Reinsurance: A generic term describing all forms of quota share and surplus reinsurance in which the reinsurer shares a pro rata portion of the losses and premiums of the ceding company.
Payback: A method of reinsurance rating under which the price is based on how frequently a limits loss might occur over a period of time based on historical or projection indications. Thus, if the indicated or projected loss would occur only once in five years, the price would be set (without regard to expenses and profit margins) to be equal to the limit divided by five and the contract would thus be said to have a five year payback. Inverse calculation with Rate on Line.
Placement Slip: Glossary of Reinsurance Terms [ A B C D E F G I J L M O P Q R S T U V W ]
Policies Attaching: The effective date of the original policy, rather than the date of loss, determines the basis of attachment. Any losses occurring on policies written or renewed with inception or renewal dates during the term of the given reinsurance agreement will be covered by that reinsurance agreement irrespective of when the loss actually occurred. This mechanism is often used with "the policies attaching" methodology.
Policy Profile: A study which segregates an insurer's policies into various groupings (for example, by policy limit or policy premium).
Policyholder: The party in whose name an insurance policy is issued.
Policyholder Surplus: 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. The amount by which the assets of an insurer exceed the liabilities. Another name for Surplus to Policyholders. Pool
Pool: A joint underwriting operation of insurance and/or reinsurance in which the participants form a collective capacity to accept certain classes of risk, each participant assuming a pre-determined participation in premiums, payments of losses and possibly costs
Portfolio: See Loss Portfolio Transfer.
Portfolio Reinsurance: The transfer of portfolio via a cession of reinsurance; the reinsurance of a runoff. Only policies in force (or losses outstanding) are reinsured, and no new or renewal business is included. Premium or loss portfolios, or both, may be reinsured.
Portfolio Return: If the reinsurer is relieved of liability (under a pro rata reinsurance) for losses happening after termination of the treaty or at a later date, the total unearned premium reserve on business left unreinsured (less ceding commissions thereon) is normally returned to the cedent. Also known as a return portfolio or return of unearned premium.
Portfolio Run-Off: Continuing the reinsurance of a portfolio until all ceded premium is earned, or all losses are settled, or both. While a loss runoff is usually unlimited as to time, a premium run-off can be for a specified duration.
Pre-Judgment Interest: Interest assessed against the defendant in a lawsuit from the time of the injury (or in some instances from the time of filing suit) until the rendering of the court judgment. Commonly considered as part of the loss for insurance purposes rather than an expense, if the interest becomes part of the judgment. Prejudgment interest, allowed in many states, is designed to encourage defendants to settle quickly by allowing interest to accrue (in the event of a verdict for the plaintiff) from a point in time in advance of the verdict.
Premiums Earned: When used as an accounting term, premiums earned describe 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.
Primary: In reinsurance, this term is applied to the nouns: insurer, insured, policy and insurance and means respectively: 1) the insurance company that initially originates the business, i.e., the ceding company; 2) the policyholder insured by the primary insurer; 3) the initial policy issued by the primary insurer to the primary insured; 4) the insurance covered under the primary policy issued by the primary insurer to the primary insured (sometimes called underlying insurance).
Priority: The term used in some reinsurance markets 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 quota share and surplus reinsurance in which the reinsurer shares a pro rata portion of the losses and premiums of the ceding company.
Probable Maximum Loss (MPL): The greatest loss an insurance policyholder can reasonably expect to face if a specific event, such as a fire, were to occur. Maximum probable losses are generally inversely proportional to the size of the insured structure or property
Probable Maximum Loss (PML): The anticipated maximum property fire loss that could result, given the normal functioning of protective features as opposed to MFL (Maximum Foreseeable Loss), which would be a similar valuation, but on a worst case basis with respect to the functioning of the protective features. Underwriting decisions would typically be influenced by PML evaluations, and the amount of reinsurance ceded on a risk would normally be predicated on the PML valuation.
Profit Commission: A commission feature whereby the cedent is allowed a commission based on the profitability of the reinsurance contract after an allowance for the reinsurer's expense and profit margin.
Profit Margin: As a pricing factor (along with expenses and losses), the return the reinsurer expects from the degree of net risk taken. As with any investment, the reinsurer expects a larger return from risky than safe investments.
Proportional Reinsurance: A type of reinsurance in which the insurer and the reinsurer share the same proportion of a given risk, premium and losses
Prospective Rating Plan: The formula in a reinsurance contract for determining the reinsurance premium for a specified period on the basis, in whole or in part, of the loss experience of a prior period (as opposed to retrospective rating, which is based on loss experience for the same period). Also known as Experience Rating. See Spread Loss Reinsurance.
Provisional Rate, Premium, or Commission: Tentative amounts applicable to either rate, premium or commission set at the start of the contract and subject to subsequent adjustment.
Punitive Damages: Damages awarded separately and in addition to compensatory damages, usually on account of malicious or wanton misconduct, to serve as a punishment for the wrongdoer and possibly as a deterrent to others. Sometimes referred to as exemplary damages when 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: That part of the premium which is sufficient to pay losses and loss adjustment expenses but not other expenses. Also the premium developed by dividing losses by units of exposure, disregarding any loading for commission, taxes, and expenses, In crop-hail insurance, the ratio of incurred loss to liability, or the dollars of loss per $100 of insurance in force. Pyramiding Surplus
Quota Share Reinsurance: A form of pro rata reinsurance (or proportional reinsurance) indemnifying the ceding company for an established percentage of loss on each risk covered in the contract in consideration of the same percentage of the premium paid to the ceding company. This may also be known as first dollar ground up reinsurance although it can be used for Excess original business such as original Umbrella or Excess policies.
Rate: The percent or factor applied to the ceding company's subject premium that results in the reinsurance premium.
Rate On Line: A percentage derived by dividing reinsurance premium by reinsurance limit; the inverse is known as the payback or amortization period. For example, a $10 million catastrophe cover with a premium of $2 million would have a rate on line of 20 percent and a payback period of 5 years.
Rating/Pricing: There are two basic approaches for pricing of reinsurance contracts : exposure rating and experience rating. Both methods can be used as separate rating approaches or may be weighted together to calculate the expected loss for a contract that is then used as the basis for pricing the reinsurance.
Recapture: Used often in life reinsurance as the action of a ceding company to take back reinsured risks previously ceded to a reinsurer.
Reciprocity: A mutual exchange of reinsurance between two or more companies.
Recovery: In reinsurance, an amount received by the reinsured company from reinsurance, salvage of damaged property, or subrogation against third parties. If the amount is receivable (due but not yet paid to the company), the term used us recoverable, which is comparable to an account receivable.
Reinstatement Clause: A provision in a reinsurance contract stating that, when the amount of reinsurance coverage provided under a contract is reduced by the payment of loss as the result of one occurrence, the reinsurance coverage amount is automatically reinstated for the next occurrence, sometimes subject to the payment of a specified reinstatement premium.
Reinstatement Cover: A type of reinsurance that provides a ceding company all or a portion of the ceding company's contract or program limits that were eroded under a reinstatement clause in the original reinsurance agreement. The reinstatement cover is normally a separate agreement and the term usually incepts immediately after the date of the last loss, running through the end of the original coverage period.
Reinstatement Premium: An additional premium charged to reinstate the reinsurance coverage limit after a loss payment has reduced or exhausted the original limit under a reinsurance contract.
Reinstatement Premium Cover: A contract that reimburses a ceding company for all or part of an additional premium that is or was required to be paid to the reinsurer to effect a reinstated limit on another contract or contracts, typically a "Cat" or "Clash" cover / program.".
Reinsurance: The transaction whereby the assuming insurer (reinsurer), in consideration of premium paid, agrees to indemnify another insurer (ceding company) against all or part of the loss which the latter may sustain under a specific policy or group of policies.
Reinsurance Premium: The consideration paid by the ceding company to the reinsurer for assuming the risk ceded under a reinsurance agreement.
Reinsurance Program: Scheme of various treaties (proportional, non-proportional) covering cedant’s given insurance portfolio (i.e. property portfolio can be covered by a quota share and surplus treaty, whereas the retention of quota share is subject to non-proportional per risk reinsurance; in the same time a per event non proportional treaty is arranged very often)
Reinsurer: reinsurance agreement. This includes related accounting, underwriting and claims information, for purposes of the Reinsurer obtaining information concerning the reinsurance agreement or its subject matter.
Reinsuring Clause: Language that describes the coverage agreed upon by the parties, i.e., what is covered and when. The key components are three: the indemnity aspect of the agreement, the type of business covered, and the method of determining whether a loss falls within the scope of the agreement. Also known as Cover Clause, Business Reinsured Clause, and Application of Agreement Clause.
Renewal: Continuation of a reinsurance contract
Reports and Remittances Clause: The contract clause that specifies the types, timing and frequency of reports that are due to the reinsurer and usually outlines the format and content of the reports. Stipulates when adjustments and balances (if any) are due to either party.
Reserve: An amount which is established to provide for payment of a future obligation.
Retention: The amount of risk the ceding company keeps for its own account or the account of others.
Retroactive Date: The date on a claims-made policy or reinsurance contract on or after which a loss must occur in order for coverage to apply. The retroactive date eliminates coverage for losses that occurred before the specified date.
Retroactive Reinsurance: A contract that covers past insurable losses/losses that have already occurred, such as a loss portfolio transfer.
Retrocede: The action of a reinsurer of reinsuring another reinsurer for its liability assumed under one or more reinsurance contracts with primary insurance companies or with other reinsurers. The reinsurer seeking protection may purchase a reinsurance contract or contracts that will indemnify it within certain parameters for certain described losses it may incur under that reinsurance contract or contracts. This action is described as transferring the risk or a part of the risk. The reinsurer seeking ...
Retrocedent: A reinsurer who reinsures all or part of its assumed reinsurance with another reinsurer.
Retrocession: The reinsuring of reinsurance. A reinsurance transaction whereby a reinsurer, known as a retrocedent, cedes all or part of the reinsurance risk it has assumed to another reinsurer, known as a retrocessionaire. See Reinsurance.
Retrocessionaire: A reinsurer who assumes reinsurance from another reinsurer.
Retrocessionnaire: The assuming reinsurer in a retrocession, where the ceding reinsurer is known as the retrocedent.
Retrospective (Experience) Rating Plan: The formula in a reinsurance contract for determining the reinsurance premium for a specified period on the basis of the loss experience for the same period (as opposed to prospective rating, which is based on loss experience for a prior period). Also known as Experience Rating.
Reversal Expenses: Expenses incurred in the appellate process in an effort to reverse a trial court decision or to obtain a reduction of the damages award. Because appellate expense often inures largely to the benefit of the excess of loss reinsurer, it is customary for the reinsurer to share the corresponding burden of that expense in proportion to the benefit received from the appeal through a reduction in the amount of the court verdict.
Risk: A term which defines uncertainty of loss, chance of loss, or the variance of actual from expected results as it relates to coverage provided under an insurance or reinsurance contract. Also, the term is used to identify the object of insurance protection, e.g., a building, an automobile, a human life, or exposure to liability.
Risk Based Capital: A method utilized by insurance regulatory authorities to determine the minimum amount of capital required of an insurer to support its operations and write coverage. The insurer's risk profile (i.e., the amount and classes of business it writes) is used to determine its risk based capital requirement.
Risk Transfer: A key element of reinsurance, whereby insurance risk is shifted from the reinsured to the reinsurer under a reinsurance agreement. In order for a reinsured to receive statutory and GAAP credit for reinsurance, a threshold of both underwriting risk and timing risk transfer must be achieved. See Risk.
Run-Off: A termination provision of a reinsurance contract that stipulates that the reinsurer remains liable for loss as a result of occurrences taking place after the date of termination for reinsurance previously written, until all such policies have expired.
Schedule: An annex to an obligatory reinsurance contract specifying detailed terms and conditions of the contract
Schedule F: A section of the National Association of Insurance Commissioners (NAIC) Annual Statement that requires detailed information about ceded reinsurance, including amounts due from reinsurers and credit for reinsurance.
Self-Insured Obligation: An exposure of an insurance company within the classes of its reinsured business for which the company has issued its policy (or certificate) to itself, has made a premium declaration on its books, or has prepared an internal memorandum with details of the exposure, the purpose being to cover such self-insured obligation under its reinsurance contracts. Contrast with an uninsured obligation, for which there would be no coverage. Some question the validity of this type of transaction because it violates the contract law principle that an entity cannot contract with itself.
Service of Suit Clause: A clause in U.S. reinsurance contracts, typically utilized for non-U.S. reinsurers, whereby the reinsurer agrees to submit to any court of competent jurisdiction in the United States, which provides a legal basis for the enforcement of arbitration awards. The clause names a U.S. agent to accept service of process on behalf of the reinsurer for purposes of the ceding company gaining U.S. jurisdiction against the reinsurer. It is not intended to supersede the contracting parties' obligation to ...
Setoff: The netting of amounts due between two parties as provided for by common law, contract law, statutory law, regulatory law and/or judicial law. Some reinsurance contracts contain a mutual right of offset, while others may operate only for one party's benefit or remain silent.
Severability Clause: A clause in some reinsurance agreements providing that, should any part of the agreement be found illegal or otherwise unenforceable, the remainder of the agreement will continue in force while the illegal part will be severed from the agreement, or in some cases, modified to remove the illegality. Severability may apply to the entire agreement or be limited to a specific provision that may present enforceability issues. For example, in jurisdictions where punitive damages are uninsurable, a ...
Sidecar: A special purpose vehicle designed to allow investors to assume the risk and share in the profits or losses on a group of insurance policies (a "book of business") written by a particular insurer or assumed by a particular reinsurer (collectively "re/insurer"). A re/insurer will usually only cede the premiums associated with a book of business to such an entity if the investors place sufficient funds in the vehicle to ensure that it can meet claims if they arise. Typically, the liability of i...
Signed Line: Participation of reinsurers in a given contract, confirmed by a broker. Such participation may be lower than initially offered in the case of overplacing
Sliding Scale Commission: A commission structure under which the ceding company's commission varies inversely with the loss ratio, providing a higher commission when losses are low and a lower commission when losses are high, within specified minimum and maximum limits.
Solvency II: An initiative of the E.U. to undertake a "fundamental review of the capital adequacy regime for the European insurance industry." It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. The Solvency II Directive is intended to become effective on January 1, 2016.
Special Acceptance: The specific agreement by the reinsurer, upon the request of the cedent, to include under a reinsurance contract a risk not normally included within the terms of the contract. Special acceptance is generally covered in a special acceptance provision.
Special Covers: A general term used to describe reinsurance agreements written to protect the primary company against certain unusual situations, usually contingent in nature, rather than for the repayment of normal losses suffered under the primary company's policies.
Special Termination Clause: A clause found in reinsurance contracts providing that, upon the happening of some specified condition or event, such as the insolvency, merger, loss in credit rating or decline in policyholder surplus of one party, the other party may fully terminate the contract earlier than would otherwise be required, had such condition or event not happened. The clause should state which party may initiate the termination, the notice requirements, the triggering conditions or events necessary, the effect...
Spread Loss Reinsurance: A type of excess of loss property reinsurance which provides for a periodic adjustment of the reinsurance premium rate based on the reinsured's experience for preceding years (usually five), plus a loading for the purpose of compensating the reinsurer for a) its expenses, b) the possibility of unusual losses, c) those losses occurring at the end of the period of the treaty which the reinsurer might not have a chance to recoup if the treaty is not renewed, d) a catastrophe possibility, and e) the reinsurer's profit. In casualty reinsurance, adjustments to the above may be required for such other factors as economic and social inflation.
Standard Premium: The insurance premium determined on the basis of the insurer's authorized rates multiplied by the experience modification factor. The standard premium is usually not the final premium that the insured pays. It excludes the effects of some pricing programs, such as premium discounts, schedule rating, deductible credits, retrospective rating, and expense constants that are reported in statistical classes.
Statutory Successor: The party designated by law (e.g., a liquidator, conservator, or receiver appointed by a court) to receive reinsurance proceeds due an insolvent insurer's estate (instead of other claimants, such as guaranty funds or individual policyholders).
Stop Loss: A reinsurance designed to protect insurers from excess losses resulting from an accumulation of smaller losses. Unlike an excess-of-loss reinsurance, which covers individual risks, stop loss covers a whole insurance portfolio of a particular type or the insurer’s business
Structured Settlements: The settlement of a casualty or workers' compensation claim involving periodic annuity payments over an extended period of time, rather than in one up-front, lump sum cash payment. There may be certain advantages to a claimant under a structured settlement, including tax treatment of interest under the Internal Revenue Code, that are not present under a lump sum cash settlement. Structured settlements are designed to guard against the early dissipation of settlement proceeds by recipients, wh...
Subject Premium: The reinsured company's premiums (written or earned) to which the reinsurance premium rate is applied to produce the reinsurance premium. Also known as Base Premium, Premium Base, Underlying Premium, and Subject Matter Premium Income.
Subrogation: The assignment of a contractual right of an insured or reinsured by terms of the policy or a contract or by law, after payment of a loss, of the rights of the insured to recover the amount of the loss from one legally liable for it. The ceding insurer and reinsurer can agree how subrogation rights and recoveries will be addressed and handled under the reinsurance agreement.
Sunrise Clause: A clause in casualty reinsurance contracts that provides coverage for losses reported to the reinsurer or the company, as applicable, during the term of the current reinsurance contract, but resulting from occurrences that took place during a prior period. Sunrise clauses are used to reactivate coverage that no longer exists due to the existence of a sunset clause.
Sunset Clause: A clause in casualty reinsurance contracts that provides that the reinsurer will not be liable for any loss that is not reported to the reinsurer within a specified period of time (typically 5, 7 or 10 years) after the expiration of the reinsurance contract. See Sunrise Clause.
Surplus Liability: That portion of a reinsured company's gross liability on any one risk which exceeds the amount the company is willing to retain net for its own account.
Surplus Reinsurance: A form of pro rata reinsurance under which the ceding company cedes that portion of its liability on a given risk which is greater than the portion of risk the cedent retains (net line). The cession varies by risk, as it depends on the cedent's net line and the total limit insured on each risk.
Surplus Relief: The result of reinsurance ceded on a portfolio basis to offset extraordinary drains on the reinsured's policyholder surplus.
Syndicate: An organization of insurers or reinsurers through which pool members underwrite particular types of risks with premiums, losses, and expenses shared in agreed amounts. Associations may be voluntary or involuntary if mandated by insurance laws.
TRIP: The Terrorism Risk Insurance Program was established with the passage of the Terrorism Risk Insurance Act in 2002. The program provides shared public and private compensation for certain insured losses resulting from a certified act of terrorism. TRIP was reauthorized, with modifications, in 2005, 2007 and 2015. The current expiration date of TRIP is December 31, 2020.
Target Risk: In property reinsurance, certain risks (for example, particular bridges, tunnels, fine arts collections, and property of similarly high value and exposure) that are expressly excluded from coverage under reinsurance treaties. Such risks may require individual acceptance under facultative contracts.
Term Contract: A form of reinsurance contract written for a stipulated term (usually one year). The contract automatically expires at the end of the term and renewal must be negotiated.
Total Insurable Value: The total values for insured perils and coverages for a particular risk, whether or not insurance limits have been purchased to that amount.
Total Insured Value Clause: An exclusion that prevents a reinsurer's over-lining on a single large risk (usually excess of $250 million) caused by a potential accumulation of property limits from two or more ceding companies. The customary exception applies to risks insured 100 percent by one insurer or specifically listed classes (such as apartments, offices, hotels, hospitals, etc.).
Trade Ratio: The combination of loss incurred to earned premiums ratio and incurred expense to written premiums ratio. Also known as Combined Ratio and Operating Ratio.
Treaty: A methodology that determines which original policy losses will be covered under a given reinsurance agreement. There are two types of methodologies: policies attaching and losses occurring. The determination may be based on 1) the effective or renewal date of the original policy; or 2) on the date of the loss; or 3) on the date when the reinsured company recorded premium or loss transaction.
Trending: The necessary 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 which are caused by dynamic economic and demographic forces and to make the data useful for determining current and future expected cost levels.
Trust Agreements: An agreement establishing a trust arrangement, which may be utilized as a mechanism by the reinsurer for purposes of securing its obligations to the ceding company to satisfy securitization requirements that might apply to the reinsurer under the terms of a reinsurance agreement. Under the trust arrangement, a legal entity is created by a grantor (usually the reinsurer) for the benefit of a designated beneficiary (usually the ceding company). The trustee (generally a financial institution) ho...
Ultimate Net Loss: In reinsurance, the measure of loss to which the reinsurance applies, as determined by the reinsurance agreement. In liability insurance, the amount actually paid or payable for the settlement of claims for which the reinsured is liable (including or excluding defense costs) after deductions are made for recoveries and certain specified reinsurance.
Underlying: The ceding company's premiums (written or earned) representing the original exposure forming the basis for the reinsurance and to which the reinsurance premium rate is applied to produce the reinsurance premium. This term is usually defined in the reinsurance contract.
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 in the aggregate on all risks in a given period. This is the limit of capacity for an insurer or reinsurer that may also be imposed by law or regulatory authority.
Underwriting Income: The excess of premiums earned by a reinsurer during any reporting period over the combined total of expenses and losses incurred by the reinsurer during the same period.
Underwriting-Year Basis: In rating, the use of all premiums written as arising from all policies written or renewed during the year and all losses relating to those same policies, whenever they may occur.
Unearned Premium Portfolio: The sum of all unearned premium for in force policies of insurance under the reinsurance agreement, often with respect to a particular block, book or class of business during a particular period.
Unearned Premium Portfolio Rollover: A term describing an accounting transaction in which an unearned premium portfolio is carried forward from one accounting period to the following accounting period under an existing contract or a renewal.
Unearned Premium Reserve: The reserve amount included in the company's financial statements for unearned premiums with respect to the insurance policies or reinsurance agreements as of a particular point in time. Unearned premiums are the sum of all the premiums representing the unexpired portions of the policies or reinsurance agreements which the insurer or reinsurer has on its books as of a certain date.
Unearned Reinsurance Premium: That part of the reinsurance premium applicable to the unexpired portion of the policies reinsured.
Variable Quota Share Reinsurance: A form of pro rata reinsurance under which the ceding company cedes that portion of its liability on a given risk which is greater than the portion of risk the cedent retains (i.e., net line), and the premiums and losses are shared in the same proportion as the ceded amount bears to the total limit insured on each risk.
Working Cover: A contract covering an amount of excess reinsurance in which frequency of loss is anticipated, usually attaching over a relatively low retention and usually providing a relatively low limit of reinsurance coverage per loss or risk.
Working Excess: A contract covering a type of excess reinsurance (per risk) in which loss frequency is anticipated, as opposed to loss severity. Thus, a working cover would usually have a low indemnity and would attach above a relatively low retention. See Per Risk Reinsurance.
Written Line: The amount of a risk that a reinsurer is willing to accept, commonly expressed as a percentage of the sum insured. It can be reduced to the signed line

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Reinsurance Terms Index