The matching of all losses occurring
(regardless of when the losses are reported) during a given
12-month period of time with all premium earned (regardless
of when the premium was written) during the same period of
time. More specifically, the total value (losses paid plus
loss reserves) of all losses occurring during the defined
12-month time period (i.e., the date of loss falls within
the time period) is divided by the EARNED PREMIUM (see its
definition) for this same exposure period. As the experience
is developing, loss reserves are used in the calculation,
but the ultimate result cannot be finalized until all losses
are settled. While any 12-month period can be used to define
the exposure period, the year beginning January 1 is
normally used. The most accurate method uses EXPOSURE EARNED
premium (see its definition under EARNED PREMIUM) as the
denominator, whereas in practice ACCOUNTING EARNED premium
(see its definition under EARNED PREMIUM) is frequently used
as a matter of convenience.
CALENDAR YEAR EXPERIENCE
and POLICY YEAR
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.
All expenses incurred by an insurance or reinsurance company
that are directly related to acquiring insurance accounts
(insured, or reinsured) for the company.
Costs incurred in conducting an insurance
operation other than loss adjustment expenses, acquisition
costs, and investment expenses.
Assets recognized and accepted by state insurance laws in
determining the solvency of insurers or reinsurers.
- An insurer licensed to conduct business in a given
- A reinsurer licensed or approved to conduct business
in a given state.
Advance Deposit Premium
An amount paid by a reinsured to a reinsurer that is held
for the payment of the reinsured's losses. At some time in
the future, any balance in the fund remaining after paying
losses and any agreed upon reinsurance expenses will be
returned to the reinsured . Also known as BANKING PLAN.
The conscious and deliberate
cession of those risks, segments of risks, or coverages that
appear less attractive for retention by the ceding company.
In insurance, an amount paid an
agent for insurance placement services.
Excess of Loss Reinsurance
A form of excess of loss
reinsurance that indemnifies the reinsured against the
amount by which the reinsured's losses incurred (net after
specific reinsurance recoveries) during a specific period
(usually 12 months) exceed either an agreed upon amount or
an agreed upon 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 also is known as STOP LOSS REINSURANCE, STOP
LOSS RATIO REINSURANCE, or EXCESS OF LOSS RATIO REINSURANCE.
Aggregate Working Excess (Annual Aggregate Deductible)
A form of per-risk excess reinsurance under which the
primary company retains its normal retention on each loss
and additionally retains an aggregate amount of the losses
that exceed such normal retention.
An insurer or reinsurer domiciled outside the U.S. but
conducting an insurance or reinsurance business within the
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 limit of liability of the reinsurance cover. See
Annual StatementCONVENTION BLANK.
A summary of an insurance company's (or reinsurer's)
financial operations for a particular year, including a
balance sheet supported by detailed exhibits and schedules,
filed with the state insurance department of each
jurisdiction in which the company is licensed to conduct
business. Also known as
A provision sometimes appearing in
reinsurance treaties whereby the parties agree to submit any
dispute or controversy to an unofficial tribunal of their
own choosing in lieu of the tribunals provided by the
ordinary processes of law. Although the wording of the
clause may vary, it normally provides for the appointment of
two arbitrators, one selected by each party, who in turn
appoint an umpire, and the decision of a majority of the
arbitrators is binding on the parties to the reinsurance
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 "as if" the proposed program had
been in force during that period.
To accept all or part of a ceding company's
insurance or reinsurance on a risk or exposure.
The transfer of in-force
insurance liability by an insurer to a reinsurer (or vice
versa) by the payment of the unearned premium reserve on
those policies alone, or by the concurrent transfer of
liability for outstanding losses under those policies by the
payment of the outstanding loss reserve by the insurer to
the reinsurer (or vice versa). The former is a premium
portfolio, the latter a loss portfolio.
The amount at which excess
reinsurance protection becomes operative; the retention
under an excess reinsurance contract.
Reinsurance placed with a reinsurer that
is licensed or otherwise recognized by a particular state
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."
A record of reinsurance arrangements pending the
issuance of a formal reinsurance contract (which then
replaces the binder). See
Furnished periodically by the reinsured, a
detailed report of reinsurance premiums or reinsurance
losses. A premium bordereau contains a detailed list of
policies (bonds) reinsured under a reinsurance treaty during
the reporting period, reflecting such information as the
name and address of the primary insured, the amount and
location of the risk, the effective and termination dates of
the primary insurance, the amount reinsured and the
reinsurance premium applicable thereto. A loss bordereau
contains a detailed list of claims and claims expenses
outstanding and paid by the reinsured during the reporting
period, reflecting the amount of reinsurance indemnity
applicable thereto. Bordereau reporting is primarily
applicable to pro rata reinsurance arrangements and to a
large extent has been supplanted by summary reporting.
A reinsurance intermediary who negotiates
contracts of reinsurance between a reinsured and reinsurer
on behalf of the reinsured, receiving a commission for
placement and other services rendered. Under the terms of
one widely used intermediary clause, premiums paid a broker
by a reinsured are considered paid to the reinsurer, but
loss payments and other funds (such as premium adjustments)
paid a broker by a reinsurer are not considered paid to the
reinsured until actually received by the reinsured.
An amount paid a broker for
insurance or reinsurance placement and other services.
A collective reference to those
reinsurers that accept business mainly through reinsurance
Used in casualty
insurance to describe a stratum of coverage between the
maximum policy limit that the primary underwriter will write
and the minimum deductible over which the excess or umbrella
insurer will cover.
PURE LOSS COST.
The ratio of actual past reinsured losses to the
ceding company's subject matter premium (written or earned)
for the same period; used to analyze past reinsurance
experience or to project future reinsurance experience. Also
Calendar Year Experience
The matching of all
losses incurred (not necessarily occurring) within a given
12-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(Incurred but not
reported). More specifically, the total value of 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. (Also see
ACCIDENT YEAR EXPERIENCE
POLICY YEAR EXPERIENCE.)
Captive Insurance Company
A company that is wholly
owned by another organization (generally non-insurance), the
main purpose is to insure the risks of the parent
Casualty Catastrophe Cover
Reinsurance that 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.
Another name for CLASH COVER.
Whenever a catastrophe occurs that produces losses within a
prescribed period of time in excess of a certain amount (now
$1 million), the amount of such losses is recorded
separately from non-catastrophe losses, is numbered by
the American Insurance Association, and may be treated
differently in the statistical experience records of the
state used in setting rate levels.
A form of excess of loss reinsurance
which, subject to a specified limit, indemnifies the ceding
company for the amount of loss in excess of a specified
retention with respect to an accumulation of losses
resulting from a catastrophic event or series of events. The
actual reinsurance document is referred to as a catastrophe
To pass on to another insurer (the
reinsurer) all or part of the insurance written by an
insurer (the ceding insurer) with the objective of reducing
the possible liability of the latter.
In reinsurance, an allowance
(usually a percentage of the reinsurance premium) made by
the reinsurer for part or all of a ceding company's
acquisition and other costs. The ceding commission also may
include a profit factor for the reinsured.
A short-form documentation of a
- The unit of insurance passed to a reinsurer by a
primary company, which issued a policy to the original
insured. A cession may accordingly be the whole or a
portion of single risks, defined policies, or defined
divisions of business, all as agreed upon in the
- The act of ceding where such act is necessary to
invoke the reinsurance protection.
The costs incurred in
processing claims: court costs, interest upon awards
and judgments, 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 that are defined as unallocated loss adjustment
expenses). Also known as LOSS EXPENSES or LOSS ADJUSTMENT
The provision in a
contract of insurance or reinsurance that coverage applies
only to losses that 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. Losses reported after
the contract term are sometimes covered by the addition of
"tail" coverage.) 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 that 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 that are renewed,
however, losses that 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.
A casualty excess of loss agreement with a
retention higher than the limits on any one reinsured
policy. The agreement is thus only exposed to loss when two
or more casualty policies (perhaps from different lines of
business) are involved in a common occurrence in an amount
greater than the clash cover retention. Also known as
A form of quota share and excess of
loss reinsurance combined that provides that, in
consideration of a premium at a fixed percent of the ceding
company's subject premium on the business covered, a) the
reinsurer will indemnify the ceding company for the amount
of loss on each risk in excess of a specified retention,
subject to a specified limit, and b) after deducting the
excess recoveries on each risk, the reinsurer will indemnify
the ceding company for a fixed quota share percent of all
The combination of an insurer's (or reinsurer's)
Loss Ratio and Expense Ratio. Another name for OPERATING
RATIO or TRADE RATIO.
- AGENT COMMISSION - In insurance, an amount paid an
agent for insurance placement services.
- BROKERAGE COMMISSION - An amount paid a broker for
insurance or reinsurance placement services.
- CEDING COMMISSION - In reinsurance, an allowance
(usually a percentage of the reinsurance premium) made
by the reinsurer for part or all of a ceding company's
acquisition and other costs. The ceding commission may
also include a profit factor for the reinsured.
- OVERRIDING COMMISSION
- A fee or percentage of money that is paid to a
party responsible for placing a retrocession of
- In insurance, a fee or percentage of money that
is paid by the insurer to an agent or general agent
for premium volume produced by the other agents in a
- OVERWRITING COMMISSION - Another name for OVERRIDING
- PRODUCER COMMISSION - Another name for BROKERAGE
- REINSURANCE COMMISSION - Another name for CEDING
A clause in a
reinsurance agreement that provides for estimation, payment,
and complete discharge of all obligations including future
obligations between the parties for reinsurance losses
incurred. This clause is sometimes found in contracts
reinsuring workers'compensation and may be optional (which
is usual) or mandatory.
Reinsurance protection against the unusual combination of
An allowance by the
reinsurer to the reinsured based on a predetermined
percentage of the profit realized by the reinsurer on the
business ceded by the reinsured. Also known as PROFIT
form of the National Association of Insurance Commissioners.
Another name for the
A written statement issued by an
intermediary, broker, or direct writer, indicating that
coverage has been effected. See
The measure of credence or belief that is
attached to a particular body of statistical experience for
rate-making purposes. Generally, as the body of experience
increases in volume, the corresponding credibility also
increases. This term would frequently be defined in terms of
specific mathematical formulas.
The accumulation of liability of a reinsurer under several
policies from several ceding companies covering similar or
different lines of insurance , all of which are involved in
a common event or disaster.
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 or
after an agreed-upon date following termination. A cutoff
normally involves return of unearned premium in force at the
addition to an insurance policy between an insurance company
and a policyholder which requires that, in the event of the
company's insolvency, any part of a loss covered by
reinsurance be paid directly to the policyholder by the
reinsurer. The cut-through endorsement is so named because
it provides that the reinsurance claim payment "cuts
through" the usual route of payment from reinsured
company-to-policyholder and then reinsurer-to-reinsured
company, substituting instead the payment route of
reinsurer-to-policyholder. The effect is to revise the route
of payment only, and there is no intended increased risk to
the reinsurer. Similar to the guarantee endorsement, the
cut-through endorsement is also known as an ASSUMPTION
As used in reinsurance, any excess of charges over credits
at the end of any accounting period (which excess shall be a
charge in the computation of the contingent commission for
the succeeding period, or in computing various experience
rated reinsurance arrangements).
Deposit PremiumADVANCE DEPOSIT
When the terms of a treaty provide that the ultimate premium
is to be determined at some time after the treaty itself has
been written, the reinsurer may require a tentative or a
deposit premium at the beginning. The tentative premium is
readjusted when the actual earned charge has been later
- In reinsurance, a reinsurer that negotiates with a
ceding company without benefit of an intermediary or
- In insurance, a primary insurer that sells insurance
through licensed agents who produce business essentially
for no one else.
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 assumed.
An insurer conducting business in
its domiciliary state from which it received its charter to
write insurance. (As opposed to a foreign company, an
insurer conducting business in a state other than its
domiciliary state; or an alien company, one domiciled
outside the U.S. but conducting business within the U.S.).
Early Warning Test
and performance criteria designed by the National
Association of Insurance Commissioners (NAIC) to identify
insurance companies that may need close surveillance by
state insurance departments.
portion of written premium equal to the expired portion of
the time for which the insurance or reinsurance was in
effect. Technically, the following definitions are
This is the most common and widely understood method. 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. Accounting earned is the figure used in the
This method calculates the premiums
that were actually exposed to loss (earned) for the period.
The date on which premiums were booked is disregarded. What
are significant are 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 premium records.
Errors and Omissions
A clause in a reinsurance treaty (requiring
some affirmative act by the ceding insurer to activate the
reinsurance protection) stipulating 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
Excess Judgment Loss
The amount paid by a liability
insurer in excess of applicable policy limits occasioned by
the failure, on account of negligence or bad faith, to
settle a claim for an amount within such policy limits.
Excess Limits Premiums
In casualty insurance,
premiums for limits 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
Excess of Line Reinsurance
of per-risk excess agreement under which the indemnity is
not a fixed dollar limit but a multiple of the primary
company's net retention.
Excess of Loss Reinsurance
A generic term
describing reinsurance which, subject to a specified limit,
indemnifies the ceding company against all or a portion of
the amount in excess of a specified retention. The term
includes various types of reinsurance, such as catastrophe
reinsurance, per-risk reinsurance, per-occurrence
reinsurance, and aggregate excess of loss reinsurance. It
should never be confused with "surplus share," which always
refers to a pro rata form of reinsurance. Also known as
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 with respect to each risk involved in
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.
Expenses (other than loss adjustment
expenses) incurred during a specific period of time divided
by premiums written during the same period.
Experience RatingPROSPECTIVE RATING
Another name for
Extra Contractual Damages (Extra Contractual Obligations,
In reinsurance, monetary awards required by a
court of Extra Contractual 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.
A document formalizing a facultative reinsurance cession.
The reinsurance of part or
all of (the insurance provided by) a single policy, with
separate negotiation for each cession. The word
"facultative" connotes that both the primary insurer and the
reinsurer have the faculty or option of accepting or
rejecting the individual submission (as distinguished from
the obligation to cede and accept, to which the parties
agree in treaty reinsurance).
Facultative Semi-obligatory Treaty
contract under which the ceding company may or may not cede
exposures or risks of a defined class to the reinsurer,
which is obligated to accept if ceded.
A reinsurance contract under which the ceding
company has the option to cede and the reinsurer has the
option to accept or decline individual risks. The contract
describes how individual facultative reinsurances shall be
A purpose of reinsurance in some cases,
i.e., whenever the reinsurer relieves the primary company of
all or part of the company's responsibility for carrying an
unearned premium reserve and the reinsurer allows a ceding
commission to the primary company. Because the cash or other
statutorially recognized assets being transferred (causing a
change in assets) are less than the unearned premium reserve
change (causing a change in liabilities), the primary
company's policyholder surplus is increased by the amount of
the reinsurance commission allowance.
The amount of loss sustained by the
reinsured before the liability of the excess of loss
reinsurer attaches, often referred to as NET RETENTION. See
First Surplus Treaty
A term exclusive to pro rata
reinsurance treaties that defines the amount of each cession
as the amount of gross (policy) liability which exceeds, or
is "surplus" to, an agreed upon net retention up to the
limit of (reinsurance) liability. Often a maximum net
retention is specified in the treaty, with the primary
company having the option to choose a lesser retention on
individual risks. The amount of first surplus reinsurance
provided will be limited to a fixed multiple of the selected
retention in each case. Larger policy surpluses are termed
"second," "third," and so on, each being the amount of
reinsurance afforded once the prior surplus reinsurance
capacity plus the true net retention have been exceeded. See
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.
- A fixed rate not subject to any subsequent
- A reinsurance premium rate applicable to the entire
premium income derived by the ceding company from the
business ceded to the reinsurer (as distinguished from a
rate applicable to excess limits).
A reinsurer that
follows the lead reinsurer on a cover being placed,
accepting or rejecting the terms as presented.
A U.S. reinsurer conducting business in a
state other than its domiciliary state, where it is known as
a domestic company (as opposed to an alien reinsurer: one
domiciled outside the U.S. but conducting business within
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.
An arrangement whereby
one insurer issues a policy on a risk for, and at the
request of, one or more other insurers with the intent of
passing the entire risk by way of reinsurance to the other
insurer(s). Such an arrangement may be illegal if the
purpose is to frustrate regulatory requirements.
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
business it cedes to a reinsurer.
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GAAP (Generally Accepted Accounting Principles)
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 affecting insurers.
G.N.E.P.I. (Gross Net Earned Premium Income)
G.N.W.P.I. (Gross Net Written Premium Income)
The amount of liability an insurer
has written on a risk including the amount it has reinsured.
Net line plus reinsurance equals gross line.
The total amount of loss sustained before
deductions are applied for reinsurance covers, which inure
to the benefit of the cover being considered and before the
application of a deductible, if any, because that base
theoretically reflects changes in exposure.
An addition to an insurance
policy (between an insurance company and a policyholder
covering the policyholder's mortgaged property) which
requires that, in the event of the company's insolvency, the
mortgagee and/or the policyholder be paid directly by the
reinsurer either for any loss covered by reinsurance or (as
is often provided) for the full insurance protection
afforded by the insurance company. Since the full insurance
protection afforded by the insurance company may be above
the reinsurance that would be payable to a reinsured
company, the reinsurer may be assuming an additional risk in
such an endorsement. Similar to the cut-through endorsement,
the guarantee endorsement is also known as a MORTGAGEE
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Incurred But Not Reported (IBNR)
for future payments on losses that 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. See
- 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.
- Losses that have happened and which will result in a
claim under the terms of an insurance policy or a
Incurred Loss Ratio
between incurred losses and earned premium, usually
expressed as a percentage.
that 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, cost-of-living, etc.
provision now appearing in most reinsurance contracts
(because many states require it) stating that the
reinsurance is payable, in the event the reinsured is
insolvent, 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
A reinsurance broker who
negotiates contracts of reinsurance on behalf of the
reinsured, receiving a commission for placement and other
services rendered. Under the terms of one widely used
intermediary clause, premiums paid a broker by a reinsured
are considered paid to the reinsurer, but loss payments and
other funds (such as premium adjustments) paid a broker by a
reinsurer are not considered paid to the reinsured until
actually received by the reinsured.
A provision in a reinsurance contract that identifies the
specific intermediary or broker involved in negotiating the
contract, communicating information and transmitting funds.
The clause should state clearly whether payment to the
broker does or does not constitute payment to the other
party of the reinsurance contract. Currently a widely used
clause provides that payments by the ceding company to the
intermediary shall be deemed to constitute payment to the
reinsurer(s) and that payments by the reinsurer(s) to the
intermediary shall be deemed to constitute payment to the
ceding company only to the extent that such payments are
actually received by the ceding company.
Used in property reinsurance to describe a
cover exposed to both catastrophe (occurrence) losses and to
policy limit exposures, excess the probable maximum loss.
Money earned from invested assets.
May also include realized capital gains, or be reduced by
capital losses, over the same period.
Law of Large
A mathematical concept which postulates that the more times
an event is repeated (in insurance, the larger the number of
homogeneous exposure units), the more predictable the
outcome becomes. In a classic example, the more times one
flips a coin, the more likely that the results will be 50%
heads, 50% tails.
The reinsurer recognized as the one of
several reinsurers on a contract responsible for negotiating
the initial terms of the contract. There may be joint
leaders on a contract, and the contract may specifically
provide to the lead reinsurer the power to bind others to
limited changes in or enhancements of the contract during
result produced by inflation on a reinsurer's liability in
excess of loss reinsurance compared with the ceding
company's liability. In other words, inflationary increases
in average claim costs of a reinsured usually produce even
greater increases for its 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. For
example, if the reinsured's retention limit average claim
cost increases 8%, the reinsurer's increase can be as much
as twice or three times that amount, or more. The increase
on the reinsurer over the ceding company's increase is
referred to as the leveraged effect. The effect is leveraged
in that such increases fall more on the reinsurer,
proportionately at least, than on the reinsured.
- Either the limit of insurance to be written that a
company has fixed for itself on a class of risk (line
limit), or the actual amount which it has accepted on a
single risk or other unit.
- A class or type of insurance (fire, marine or
casualty, among others), also known as LINE OF BUSINESS.
- The word "line" in reference usually pertains to
surplus reinsurance and means the amount of the
reinsured's retention with respect to each risk. Thus,
reference to a "two-line reinsurance treaty" pertains to
a treaty that affords reinsurance for 200% of the
Line of Business
The general classification
of reinsurance written by insurers, i.e., fire, allied lines
and homeowners, among others.
A list of the maximum amounts of insurance that
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 for each class of risk and
is used to instruct its agents and underwriters. Also known
as LINE SHEET.
Another name for
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."
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 that extend beyond the term the insurance or
reinsurance was in force. An example would be contamination
of a food product that occurs when the material is packed
but which is not discovered until the product is consumed
months or years later.
The process of change in amount
of losses as a policy or accident year matures, as measured
by the difference between paid losses and estimated
outstanding losses at one point in time, and paid losses and
estimated outstanding losses at some previous point in time.
In common usage it might refer to development on reported
cases only, whereas a broader definition also would take
into account the
Losses (reported or not reported) that have occurred but
have not been paid.
The amounts paid
to claimants as insurance claim settlements.
Losses incurred expressed as a percentage of earned
INCURRED BUT NOT REPORTED (IBNR)
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. See
MFL (Maximum Foreseeable Loss)
The anticipated maximum property fire loss that could result
given unusual or the worst circumstances with respect to the
non-functioning of protective features (firewalls,
sprinklers, a responsive fire department, etc.), as opposed
to PML (Probable Maximum Loss), which would be a similar
valuation, but under the assumption that such protective
features function normally.
The least premium charge applicable,
frequently used in excess of loss reinsurance contracts or
catastrophe covers which contain a provision that the final
adjusted premium may not be less than a stated amount.
The amount of insurance the primary
company carries on a risk after deducting reinsurance from
its "gross" line. See
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. Such net loss may or
may not include claim expenses. As provided in the
reinsurance agreement, net loss can be confined to the
amount paid by the reinsured within applicable policy
limits, or it also can include amounts paid by the reinsured
for compensatory damages in excess of applicable policy
limits because of failure of the reinsured to settle within
applicable policy limits.
amount of insurance that an insurer keeps for its own
account and does not pass on to another insurer. In excess
of loss reinsurance, the term "first loss retention" may be
Assets owned by an insurance
company that are not recognized for solvency purposes by
state insurance laws or insurance department regulations,
e.g., premiums due and uncollected past 90 days, and
furniture and fixtures among others.
- An insurer not licensed in a given state.
- A reinsurer not licensed or approved in a given
placed with a non-admitted insurer.
Reinsurance protection bought by a ceding
company from a reinsurer not licensed or authorized to
transact the particular line of business in the jurisdiction
in question. No credit is given the ceding company for such
non-admitted reinsurance in its Annual Statement unless it
withholds funds or holds a letter of credit on behalf of
such unauthorized reinsurer, as shown in Part 2 of Schedule
F of the Statement.
EXCESS OF LOSS REINSURANCE.
Reinsurance under which the reinsurer's
participation in a loss depends on the size of the loss.
Also known as
- In a non-insurance sense, an incident, event or
happening. In insurance, the term may be defined as
continual, gradual or repeated exposure to an adverse
condition that is neither intended nor expected to
result in injury or damage, as contrasted with an
accident which is a sudden happening. In reinsurance,
per occurrence coverage permits all losses arising out
of one event to be aggregated instead of being handled
on a risk-by-risk basis.
- One basis or determinant for calculating the amount
of loss or liability in insurance or reinsurance when an
aggregation of related losses is to constitute a single
subject of recovery. For example, in property
catastrophe reinsurance treaties, occurrence is usually
defined so that all losses within a specified period of
time involving a particular peril are deemed an
The sum of the net
investment income and net underwriting income in any
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
The amount of insurance or
reinsurance that exceeds the insurer's or reinsurer's normal
capacity. This is inclusive of automatic reinsurance
- A fee or percentage of money that is paid to a party
responsible for placing a retrocession of reinsurance.
- In insurance, a fee or percentage of money that is
paid by the insurer to an agent or general agent for
premium volumeproduced by other agents in a given
To share in the
writing of a risk.
PRO RATA REINSURANCE.
The sharing of risks, as in
quota share and surplus share reinsurance that participate
pro rata in all losses from the first dollar up. See
A term used in the rating of per
occurrence excess covers that represents the number of years
at a given premium level that would be necessary to
accumulate total premiums equal to the indemnity. Synonymous
Reinsurance in which the reinsurance
limit and the retention apply "per risk" rather than per
accident, per event, or in the aggregate.
PML (Probable Maximum Loss)
The anticipated maximum
property fire loss that could result given the normal
functioning of protective features (firewalls, sprinklers, a
responsive fire department, etc.), as opposed to MFL
(Maximum Foreseeable Loss), which would be similar
valuation, but on a worst-case basis with respect to the
functioning of the protective features. Underwriting
decisions typically would be influenced by PML evaluations,
and the amount of reinsurance ceded on a risk would normally
be predicated on the PML valuation.
- 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 organization's liabilities. Another name for SURPLUS
TO POLICY HOLDERS.
A study that segregates an
insurer's policies into various groupings (for example, by
policy limit or policy premium).
Policy Year Experience
ACCIDENT YEAR EXPERIENCE.
The segregation of all
premiums and losses attributable to policies having an
inception or renewal date within a given 12-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 this
same extended time period. See
Any joint underwriting operation of
insurance or reinsurance in which the participants assume a
predetermined and fixed interest in all business written.
Pools are often independently managed by professionals with
expertise in the classes of business undertaken, and the
members share equally in the premiums, losses, expenses and
profits. An "association" and a "syndicate" (excluding that
of Lloyd's of London) are both synonymous with a pool, and
the basic principles of operation are much the same.
A defined body of:
- insurance (policies) in force (premium portfolio),
- outstanding losses (loss portfolio), or
- company investments (investment portfolio).
(The reinsurance of all existing insurance, as well
as new and renewal business, is therefore described as a
running account reinsurance with portfolio transfer or
of a 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. The
term is sometimes applied to the reinsurance by one insurer
of all business in force of another insurer retiring from an
agency, from a territory or from the insurance business
or RETURN OF UNEARNED PREMIUM.
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
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
runoff can be for a specified duration.
The monetary consideration in contracts of insurance and
and UNDERLYING PREMIUM.
The ceding company's premiums (written
or earned) to which the reinsurance premium rate is applied
to produce the reinsurance premium. Also known as BASE
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.
An adjective applied in reinsurance to these
nouns: insurer, insured, policy, and insurance - meaning
- the primary insurer is the insurance company that
initially originates the business, i.e., the ceding
- the primary insured is the policyholder insured by
the primary insurer;
- the primary policy is the initial policy issued by
the primary insurer to the primary insured;
- the primary insurance is the insurance covered under
the primary policy issued by the primary insurer to the
primary insured (sometimes called "underlying
A term used to designate
an organization whose business is mainly reinsurance and
related services, as contrasted with other insurance
organizations that may operate reinsurance — assuming
departments in addition to their basic primary insurance
Proportional ReinsurancePRO RATA
Another name for
Pro Rata ReinsurancePARTICIPATING
A generic term describing
all forms of reinsurance in which the reinsurer shares a
proportional part of the original losses and premiums of the
ceding company. Also known as
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
"Protecting the Treaty"
Used to describe any action
taken by an insurer to prevent heavy losses to its treaty
reinsurer, which can lead to increased reinsurance rates or
decreased participation in any profit-sharing arrangements
with the reinsurer.
Provisional Premium, Rate or
The tentative amount that is subject to
awarded separately and in addition to compensatory damages,
usually on account of malicious or wanton misconduct, to
punish the wrong-doer and possibly others. Sometimes
referred to as "exemplary damages" when intended to "make an
example" of the wrongdoer.
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
- That part of the premium which is sufficient to pay
losses and loss adjustment expenses but not including
- The premium developed by dividing losses by units of
exposure, disregarding any loading for commission, taxes
- In crop-hail insurance, the ratio of incurred loss
to liability, or the dollars of loss per $100 of
insurance in force.
Quota Share Reinsurance
A form of pro rata
reinsurance (proportional) in which the reinsurer assumes an
agreed upon percentage of each insurance being insured and
shares all premiums and losses accordingly with the
reinsured. Quota share reinsurance is usually arranged to
apply to the insurer's net retained account (i.e., after
deducting all other reinsurance except perhaps excess of
loss catastrophe reinsurance), but practice varies. A quota
share reinsurer may be asked to assume a quota share of a
gross account, paying its share of premium for other
reinsurance protecting that gross account.
The percent or factor applied to the ceding company's
subject premium to produce the reinsurance premium, or the
percent applied to the reinsurer's premium to produce the
commission payable to the primary company (or, if
applicable, the reinsurance intermediary).
Rate on LineAMORTIZATION
and PAYBACK PERIOD.
Premium divided by indemnity. A British term for the rate
which, when multiplied by the indemnity, would produce the
premium. Related to the American terms, "amortization
period" and "payback period." This term is used extensively
in judging the adequacy of rates for per occurrence excess
covers, and is the inverse of
The action of a ceding company to take back
reinsured risks previously ceded to the reinsurer.
The mutual exchanging of reinsurance,
often in equal amounts, from one party to another, the
object of which is to stabilize overall results.
Amounts received from a reinsurer for a reinsured's losses.
The restoration of the reinsurance
limit of an excess property treaty to its full amount after
payment by the reinsurer of loss as a result of an
- The transaction whereby the reinsurer, for a
consideration, agrees to indemnify the ceding company
against all or part of the loss that the latter may
sustain under the policy or policies which it has
- When referred to as "a reinsurance," the term means
the reinsurance relationship between reinsured(s) and
That portion of risk
the reinsurer accepts from the original insurer or ceding
That portion of the risk which the ceding company transfers
to the reinsurer.
An amount paid by the ceding
company to the reinsurer in consideration for liability
assumed by the reinsurer.
A company that has placed reinsurance risks
with a reinsurer in the process of buying reinsurance. Also
An organization that assumes the liability
of another by way of reinsurance.
amount that an insurer assumes for its own account. In pro
rata contracts, the retention may be a percentage of the
policy limit. In excess of loss contracts, the retention is
a dollar amount of loss.
reinsurer in a retrocession, where the assuming reinsurer is
known as the retrocessionnaire.
transaction whereby a reinsurer cedes to another reinsurer
all or part of the reinsurance it has previously assumed.
The assuming reinsurer in a
retrocession, where the ceding reinsurer is known as the
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 the prior period). Also known as
Return PortfolioASSUMED PORTFOLIO
reassumption by a ceding company of a portfolio of risks
previously assumed by the reinsurer. See
- In fire insurance, the physical units of property at
risk instead of perils or hazards. In reinsurance, each
insurance company makes its own rules for defining units
of hazard or single risks.
- The different types of properties or insurable
interest, e.g., non-hazardous risks and protected risks.
A termination provision of a
reinsurance contract stipulating that the reinsurer shall
remain liable for loss under reinsured policies in force at
the date of termination, as a result of occurrences taking
place after the date of termination.
A supplementary treaty to a
FIRST SURPLUS TREATY.
FACULTATIVE SEMI-OBLIGATORY TREATY.
A commission adjustment on earned
premiums under a formula whereby the actual commission
varies inversely with the loss ratio, subject to stated
maximum and minimum percentages.
The increasing of insurance losses caused by higher jury
awards, more liberal treatment of claims by
workers'compensation boards, legislated rises in benefit
levels (in some cases retroactively), and new concepts of
tort and negligence, among others.
The specific agreement by the reinsurer to include under a
reinsurance contract a risk that is not automatically
included within the terms thereof.
Those principles required by state
law that must be followed by insurance companies in
submitting their financial statements to state insurance
departments. Such principles differ from generally accepted
accounting principles (GAAP) in some important respects,
e.g., SAP requires that expenses must be recorded
immediately and cannot be deferred to track with premiums as
they are earned and taken into revenue. See
Stop Loss Reinsurance
AGGREGATE EXCESS OF LOSS REINSURANCE.
The ceding company's premiums
(written or earned) to which the reinsurance premium rate is
applied to produce the reinsurance premium. Also known as
G.N.E.P.I. (Gross Net Earned Premium Income)
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
cancellations, refunds and premiums paid for any reinsurance
protecting the cover being rated, but gross, meaning before
deducting the premium for the cover being rated.
G.N.W.P.I. (Gross Net Written Premium Income)
Gross written premium less only returned premiums and
less premiums paid for reinsurance that inure 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.
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 ReinsuranceFIRST SURPLUS
A form of pro rata
reinsurance indemnifying the ceding company against loss for
the surplus liability ceded. Essentially, this can be viewed
as a variable quota share contract wherein the reinsurer's
pro rata share of insurance on individual risks will
increase as the amount of insurance increases, in order that
the primary company can limit its net exposure regardless of
the amount of insurance written. First surplus is the amount
of surplus on each risk that must apply first to the first
surplus contract. Second surplus, third surplus, etc.,
reinsurances are the remaining portions of the surplus that
must apply to each such respective contract after deducting
the amount(s) ceded to the underlying surplus contract or
- The result of reinsurance ceded on a portfolio basis
to offset extraordinary drains on policyholder surplus.
- A designation of a reinsurance the main purpose of
which is to finance new or in-force business, or both.
Surplus to Policyholders
- The net worth of an insurer as reported in its
Annual Statement. For a stock insurer, the sum of its
unassigned surplus and capital.
- The amount by which the assets of an insurer exceed
the organization's liabilities. Another name for
An association of individuals or
organizations to pursue certain insurance objectives. For
example, individual underwriters in Lloyd's of London
associate in separate syndicates to write marine insurance,
reinsurance life insurance, etc., entrusting the
administrative details of each syndicate to a syndicate
A reinsurance agreement between the ceding company and the
reinsurer, usually for one year or longer, which stipulates
the technical particulars applicable to the reinsurance of
some class or classes of business. Reinsurance treaties may
be divided into two broad classifications:
EXCESS OF LOSS,
- The participating type that provides for sharing of
risks between the ceding company and the reinsurer; and
- The excess type that provides for indemnity by the
reinsurer only for loss which exceeds some specified
predetermined amount. For different forms, see
A standing agreement
between reinsured and reinsurer for the cession and
assumption of certain risks as defined in the treaty. While
most treaty reinsurance provides for automatic cession and
assumption, it may be optional or semi-obligatory and is not
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.
Literally, of the utmost good faith. A defining
characterization or quality of some (contractual)
relationships, of which reinsurance is universally
recognized to be one. Among other differences from ordinary
relationships, the nature of reinsurance transactions is
dependent upon a mutual trust and a lively regard for the
interests of the other party, even if inimical to one's own.
A breach of utmost good faith, especially in regard to full
and voluntary disclosure of the elements of risk of loss, is
accepted as grounds for any necessary reformation or
redress, including rescission.
Ultimate Net Loss
- In reinsurance, the unit of loss to which the
reinsurance applies, as determined by the reinsurance
agreement. In other words, the gross loss less any
recoveries from the reinsurance that reduce the loss to
the treaty in question.
- In liability insurance, the amount actually paid or
payable for the settlement of a claim for which the
reinsured is liable (including or excluding defense
costs) after deductions are made for recoveries, and
certain specified reinsurance.
Unauthorized Insurer, Reinsurer
not licensed, or a reinsurer neither licensed nor approved,
in a designated jurisdiction.
Reinsurance placed with a reinsurer that does not have
authorized status in the jurisdiction in question.
The amount of loss that attaches before
the next higher excess layer of insurance or reinsurance
The ceding company's premiums (written or earned) to which
the reinsurance premium rate is applied to produce the
reinsurance premium. Also known as
The maximum amount of money an
insurer or reinsurer is willing to risk in a single loss
event on a single risk or in a given period. The limit of
capacity for an insurer or reinsurer that may also be
imposed by law or regulatory authority.
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.
Unearned Premium Reserve
The sum of all the premiums representing the
unexpired portions of the policies or contracts that the
insurer or reinsurer has on its books as of a certain date.
It is usually based on a formula of averages of issue dates
and the length of term.
Warranted No Known or Reported Losses (WNKORL)
A statement made
on application for excess or catastrophe reinsurance, which
is being back-dated, to protect the reinsurer from placement
of reinsurance after a loss has occurred.
A contract covering an area of excess
reinsurance 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.
©1998 American Re-Insurance Company