Frequently Asked Questions: Insurance Terms Glossary
A
ACCEPTANCE
Operation by which a insurer accepts to cover part of a risk already underwritten or accepted by an insurer or insured. This is the opposite of a cession or transfer.
ACCIDENT YEAR
A given twelve-month period of time (usually a calendar year), in which loss events occur, regardless of when the losses are claimed, booked or paid.
ACCOUNTING YEAR
The company's financial year in which the accounts are recorded. Because of the time required to transfer information for a given period of cover, the ceding company's accounting year may differ from that of the insurer. For insurers wishing to calculate their results more rapidly, estimates are made for the accounts of ceding companies for the last quarters not yet received at closing date.
ACCUMULATION
All the risks that could be hit by the same event or all the underwritten lines regarding the same risk.
ACTUARY
Specialist who applies probability theory to insurance object in order to measure risks and calculate premiums, as well as technical or mathematical reserves.
ADDITIONAL RESERVE
Reserves for claims beyond the amounts calculated based on past experience to take into account estimated future adverse developments.
ADMITTED ASSETS
Assets recognized and accepted by country, state or territorial insurance laws in determining the solvency of insurers or reinsurers.
ADMITTED COMPANY
Is or an insurer or reinsurer licensed or approved to conduct business in a given country, state or territory.
ADVANGE DEPOSIT PREMIUM
An amount paid by a insured to a insurer which is held for the payment of the insured's losses. At some time in the future, any balance in the fund remaining after paying losses and any agreed insurance expenses will be returned to the reinsured. Also known as a Banking Plan.
ADVANGE PREMIUM
The amount charged at the start of a treaty, to be adjusted later. Also known as Deposit Premium or Provisional Premium.
ADVERSE DEVELOPMENT
Losses for which initial estimates prove insufficient.
AGGREGATE EXCESS
The insurer indemnifies the insured for an aggregate (or cumulative) amount of losses in excess of a specified aggregate amount.
AGGREGATE STOP-LOSS INSURANCE
Aggregate Stop-Loss insurance provides a ceiling on the amount of eligible expenses that an organisation would pay, in total, during a contract period. The insurer reimburses the organisation after the end of the contract period for aggregate claims. This form of insurance is also known as stop-loss insurance, stop-loss-ratio insurance, or excess of loss ratio insurance.
ATTACHMENT POINT
The amount of losses above which excess of loss insurance becomes operative.
B
BEST ESTIMATES
Technical or mathematical reserve level for both Life and Non-Life defined according to work carried out by actuaries. The objective of this level of reserves is to cover predictable adverse risk development with smaller then 0.5 percent probability.
C
CAPTIVE INSURANCE
A limited purpose in-house self-insurance vehicle established with the specific objective of financing risks emanating from their parent group or groups, although they sometimes also insure some of the risks of the parent company's customers. Captive insurance often represent commercial, economic and tax advantages due to the reductions on costs they help create, the ease for insurance risk management and the flexibility for cash flows they generate and may provide coverage of risks which are neither available nor offered in the traditional insurance market at reasonable prices.
CASUALTY INSURANCE
Insurance primarily concerned with the losses caused by injuries to third persons (in other words, persons other than the policyholder) and the legal liability imposed on the insured resulting therefrom.
CATASTROPHE LAYER
This layer contains the low frequency/high severity losses. An induvidual loss of this magnitude can seriously distort the financial results of the organisation.
CEDING COMPANY (ALSO CALLED CEDANT, OR CEDING OFFICE)
Insurance company, mutual society or provident insurance provider that transfers (or lays off) a part of the risk it has underwritten to a insurer.
CESSION
Transaction whereby an insurer (cedant or ceding company) either mandatorily or facultatively transfers part of its risk to the insurer, as opposed to the concept of acceptance.
CLAIMS/PREMIUM RATIO
Ratio of claims incurred and evaluated, and of Incurred But Not Reported (IBNR) reserves to earned premiums.
CLASS OF BUSINESS
A homogeneous category of insurance. Since 1985, French insurers have utilised a uniform presentation that distinguishes between life, fire, crop hail, credit and surety, other risks, third party liability, motor, marine and aviation classes. The last eight of these form the general class of Non-Life business. English-speaking markets generally distinguish between Property (damage to goods) and Casualty (liability insurance and industrial injury), and Life business.
COMBINED RATIO
Sum of operating expenses, commissions payable, claims incurred and additional reserves to earned premiums.
COMMUTATION
Operation through which the ceding company takes back the risks ceded to the insurer.
CREDIT AND SURETY INSURANCE
Credit insurance provides cover against loss to a supplier caused by customer insolvency. Surety insurance is a commitment to a bondholder to substitute for his debtor in case of default by the latter.
D
DECENNIAL INSURANCE
Decennial insurance provides cover to building owners and construction companies against losses caused by structural defects in new buildings resulting from inherent defects in design, construction or the materials employed. In a number of countries, including France, such coverage is required as a matter of law. It is generally granted for a period of ten years after construction is completed.
DEPOSIT
Amount deposited with the ceding company to guarantee the insurer's liabilities. Cash deposits generally earn interest at a rate agreed at the time of writing the business. Income from securities deposited accrues to the insurer.
DIRECT INSURANCE
A policy written with an insurer by an individual or a company to cover a risk (property, service or person). This policy can either be underwritten directly with one of the insurer's agents or via a broker who receives a commission.
E
EARNED PREMIUMS
Fraction of the premium corresponding to the expired portion of time for which the insured policy(ies) was/were in effect. The unearned portion of premiums is recorded in the premium reserve and carried under technical reserves.
EQUALIZATION RESERVE
Long-term reserve set aside by the insurer or insurer in order to equalise operating results from certain risks, notably catastrophes.
EVENT
Aggregation of claims having a common fortuitous origin and affecting either a single insured under more than one policy, or more than one insured.
F
FACULTATIVE INSURANCE
Facultative insurance is usually written for very large-line risks. It may be either proportional or non-proportional. Underwriting expenses are higher relative to premiums written on facultative business because each risk is individually underwritten and administered but the ability to separately evaluate each risk insured increases the probability that the underwriter can price the contract to more accurately reflect the risks involved.
FISCAL YEAR
Twelve-month accounting period of the company's activity.
G
GOODWILL
Goodwill is the intangible asset of a company (i.e. strategic positioning, reputation on the market, etc.). The calculation of goodwill is one of the methods used to financially evaluate a company and its capacity to create wealth.
GROSS PREMIUMS
Premiums received. Gross premiums represent premium income for the year.
GROUP POLICY
A single insurance policy that provides cover for several persons forming a homogeneous group, and generally belonging to the same company or association, against certain risks such as death, accident, sickness.
I
INCURRED BUT NOT REPORTED (IBNR)
Incurred losses or accidents that have happened in the fiscal year but have not yet reported. Common with catastrophes as hurricane, earth quake or flood, when early on the insured or insurer does not know with any accuracy the number or amount of claims that will be generated.
INSURANCE COMMISSION
Percentage of premiums paid by the insured to the insurer in quota-share or facultative treaties as a contribution to the acquisition and administrative costs relating to the business ceded.
INSURANCE CONDITIONS
All the clauses included in the insurance treaty. In economic terms, "insurance conditions" cover the rates established for the commission, the share in profits, the frequency of presentation of accounts and payment of interest on the deposits, or on the absence of deposits, which together determine the insurers' probable profit margin.
INSURANCE PORTFOLIO
The total insurance business (Treaty and Facultative) written and managed by a insurance company.
INSURANCE PREMIUM
Amount received by the insurer as a consideration for covering a risk.
INSURANCE TREATY
Insurance convention between an insurer and a insurer defining the terms under which the risks covered by the convention are ceded and accepted. The two main categories of treaty insurance are proportional and non-proportional.
INSURER
Company that undertakes to cover the portion of a risk ceded to it by the insurer.
L
LEADING INSURER
Primary insurer and first signatory of an insurance policy in a co-insurance. The signatory company defines the clauses and the conditions of the policy.
LIQUIDATION BONUS
Profit earned on liquidation of technical reserves on settlement of a claim or expiration of a Treaty.
LOSS
Event that triggers insurance cover and reserves noticing.
LOW OR WORKING LAYER EXCESS OF LOSS INSURANCE
Insurance that absorbs the losses immediately above the reinsured's retention layer. A low layer excess of loss insurer will pay up to a certain monetary amount at which point a higher layer insurer or the ceding company will be liable for additional losses. Also known as working layer insurance.
M
MARINE AND AVIATION INSURANCE
Insurance covering damage occasioned during carriage (by sea, river, land, or air) to the means of transport ("hull"), excluding motor-driven land vehicles, and to the goods carried ("cargo"), and third party liability incurred by the carrier.
MATHEMATICAL RESERVE
Amount that an insured, insurance or capitalisation company must set aside and capitalise in order to meet its commitments.
MAXIMUM POTENTIAL LOSS (MPL)
Estimate of the maximum potential loss of a single event for any contract of insurance.
MORTALITY
The relative incidence of death of Life insureds or annuitants.
N
NON-PROPORTIONAL (EXCESS OF LOSS) INSURANCE
Insurance contract written to protect the ceding company from all or part of claims in excess of a specified amount retained (priority). This generally takes the form of Excess of Loss (or XL) or excess of annual loss insurance.
NON-TRADITIONAL INSURANCE
Initially, this concerned a multi-year, multi-line form of insurance whose contract terms included an aggregate limit of liability and loss sensitive features (e.g. profit sharing or additional premium). Nowadays it also encompasses technical and investment accounts within a single cover, securitisation of insurance risks, credit derivatives, and climate derivatives.
P
PENDING CLAIMS RESERVE
Reserve for claims reported but not yet settled. These are estimated by ceding companies and communicated to the insurer.
POLITICAL RISK
All political or administrative events, actions or decisions that could lead to losses for companies contracting or investing abroad.
PREMIUMS NET OF CANCELLATIONS
Premium written by an insurer after deduction of cancelled premiums.
PREMIUMS NET OF RETROCESSION
Gross premiums less the portion of premiums paid for retrocession. As opposed to gross premiums.
PRIMARY INSURER
An insurance company that issues insurance contracts generally or to certain non-insurance entities.
PRIMARY LAYER
This layer contains the high frequency/low severity losses which are essentially predictable. The losses in this layer are unlikely to have any impact on the organisation.
PROBABLE MAXIMUM LOSS (PML)
Estimate of the maximum probable loss of a single event for any contract of insurance.
PROPERTY & CASUALTY (P&C) CLASSES
All insurance classes other than Life.
PROPERTY INSURANCE
Insurance that provides coverage to a person with an insurable interest in tangible property for that person's property loss, damage or loss of use.
PROPORTIONAL AND NON-PROPORTIONAL INSURANCE
Both treaty and facultative reinsurance can be written on a proportional, or pro rata, basis or a non-proportional, or excess of loss or stop loss, basis.
With proportional (or pro rata) reinsurance, the reinsurer, in return for a predetermined portion or share of the insurance premium charged by the ceding company, indemnifies the ceding company against a predetermined portion of the losses and loss adjustment expenses of the ceding company under the covered insurance contract or contracts.
In the case of non-proportional reinsurance, or excess of loss basis or excess of loss, the reinsurer indemnifies the ceding company against all or a specified portion of losses and loss adjustment expenses, on a claim by claim basis or with respect to a line of business, in excess of a specified amount, known as the ceding company's retention or reinsurer's attachment point, and up to a negotiated reinsurance contract limit.
PROTECTED SELF-INSURANCE (PSI)
Protected Self-Insurance Program is an alternative risk financing mechanism in which an organisation retains the mathematically calculated cost of risk within the organisation and transfers the catastrophic risk with specific and aggregate limits to an Insurer so the maximum total cost of the program is known. A properly designed and underwritten Protected Self-Insurance Program reduces and stabilizes the cost of insurance and provides valuable risk management information.
PURE PREMIUM
Premium equal to the technical estimate of the risk covered by the insurer.
R
RATE
Scale showing the various premium rates applied to risks belonging to a given category of insurance (i.e. motor rates, fire rates).
REINSTATEMENT
A provision in an excess of loss insurance contract, particularly catastrophe and clash covers, that provides for reinstatement of a limit that had been reduced by the occurrence of a loss or losses. The number of times that the limit can be reinstated varies, as does the cost of the reinstatement.
REINSTATEMENT PREMIUMS
Additional premiums charged under certain excess of loss insurance contracts to restore coverage amounts after a loss.
REINSURANCE
Reinsurance is an arrangement in which a reinsurance company agrees to indemnify - in return for payment of a premium - an insurance company against all or a portion of the primary insurance risks underwritten by the insurer under one or more insurance contracts much along the lines of an insurance company indemnifying an individual risk.
RESERVE FOR UNEXPIRED RISKS
Reserves intended to cover the portion of the cost of claims not covered by the unearned premiums reserve, for the period between the accounts closing date and the contract expiration date.
RETENTION
Share of the risk retained by the insurer or insurer for its own account.
RETENTION CAPACITY
The maximum amount of risk for a contract of insurance an insured is able to retain without substantially affecting shareholder value.
RETROCESSION
Reinsurers typically purchase reinsurance to cover their own risk exposure or to increase their capacity. Reinsurance of a reinsurer's business is called a retrocession. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause primary insurers to purchase reinsurance: to reduce net liability on individual risks, protect against catastrophic losses and obtain additional underwriting capacity.
RETROCESSIONAIRE
A reinsurance company that accepts a retroceded risk from another reinsurer.
RISK
Property or person insured.
RISK MANAGEMENT
The human activity which integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources.
RUN OFF
Run off is a halt to all underwriting of new business on a risk portfolio resulting in reserves that run off over time until their complete extinction. Run off may take up to several decades depending on the class of business.
S
SELF-INSURANCE
Protecting against loss by setting aside one's own money. This can be done on a mathematical basis by establishing a separate fund into which funds are deposited on a periodic basis. Through self insurance it is possible to protect against high-frequency low-severity losses.
To do this through an insurance company would mean having to pay a premium that includes loadings for the company's general expenses, cost of putting the policy on the books, acquisition expenses, premium taxes, and contingencies. Source: Wikipedia.
STOP-LOSS INSURANCE
Stop-loss insurance is a product that provides protection against catastrophic or unpredictable losses. It is purchased by organisations who do not want to assume 100% of the liability for losses arising from the plans. Under a stop-loss policy, the insurance company becomes liable for losses that exceed certain limits called deductibles.
STOP-LOSS - SPECIFIC
Specific Stop-Loss is excess risk coverage that provides protection for the organisation against higher then expected claims. This is protection against abnormal severity of a single claim rather than abnormal frequency of claims in total. Specific stop-loss is also known as individual stop-loss. Generally, all but the largest organisations will want to protect their plan with both specific and aggregate stop-loss coverage. See also Protected Self-Insurance.
STOP-LOSS - AGGREGATE
Provides a ceiling on the amount of eligible expenses that an organisation would pay, in total, during a contract period. The insurer reimburses the organisation after the end of the contract period for aggregate claims.
Generally, all but the largest organisations will want to protect their plan with both specific and aggregate stop-loss coverage. See also Protected Self-Insurance.
T
TAIL
The period of time that elapses between either the writing of the applicable policy or the loss event (or the insurer's or insurer's knowledge of the loss event) and the payment in respect thereof. A “short-tail” is a tail where ultimate losses are known comparatively quickly while the losses of a “long-tail” are sometimes not known for many years.
TECHNICAL (OR UNDERWRITING) RESERVES
Amounts that a insurer must place in reserves in order to pay out on claims insured, and on liabilities arising from policies written.
TREATY INSURANCE
Treaty insurance does not separately evaluate each of the individual risks assumed under their treaties and the insurer is contractually bound to assume a specified portion of a type or category of risks insured by the ceding company. In treaty insurance the insurer is, after a review of the ceding company's underwriting practices and adequate evaluation of the underwriting risks by the ceding primary policy writers, dependent on the original risk underwriting decisions made.
U
UNDERWRITING
Decision by an insurer or a insurer to accept to cover a risk upon collection of a premium.
UNDERWRITING CAPACITY
The maximum amount that an insurance or insurer can underwrite. The limit is generally determined by the company's retained earnings and investment capital. Reinsurance serves to increase a insurer's underwriting capacity by reducing its exposure to particular risks.
UNDERWRITING CYCLE
Pattern in which Property and Casualty insurance and insurance premiums, profits and availability of coverage rise and fall over time.
UNDERWRITING EXPENSES
The aggregate of policy acquisition costs, including commissions, and that portion of administrative, general and other expenses attributable to underwriting activities.
UNDERWRITING YEAR
Also known as policy- or Accident year (see under Accident year).
UNEARNED PREMIUM RESERVES
For each insurance contract, these cover the portion of premiums written during the year relating to the period between the balance sheet closing date and the date at which the insurance contract expires.
W
WORKING LAYER
This layer contains the medium frequency/medium severity losses where there are only a few losses a year expected.
WRITTEN PREMIUMS
Premiums recorded in the accounts that the insurer or insured transmits to the (re)insurer. Estimated by the (re)insurer for accounts not yet received at the close of his financial year, these written premiums are divided into two parts: portion earned for the year in question appears on the credit side of the operating statement; the unearned portion is recorded as a reserve under liabilities in the balance sheet.
