04 May 2017
13 October 2018
Here is a glossary of some of the terms used in Reinsurance. There are many more terms, phrases and abbreviations used in international reinsurance, often connected with a specific class, such as marine, energy or aviation, or simply within the practices of one market, such as the United States. It has not been possible to include these specialist terms etc. but we hope that you find our selection useful as you progress through your career in reinsurance or simply that you want to develop an interest in the subject.
Accounting Year: An annual period in which insurers and reinsurers record earned written premiums and claims movements which are paid and settled during that accounting period. They would also allow a credit for incoming unearned written premiums and outstanding loss portfolio transfers from the previous period and a debit for outgoing unearned written premiums and outstanding loss portfolio transfers from the current period into the following period.
Accumulation: The aggregation of different liabilities on a single risk generated by liability arising from a number of different reinsurance treaties and/or contracts, e.g. individual facultative quota share or excess of loss acceptances, proportional treaties and risk excess of loss contracts.
Acquisition Cost: The costs incurred by an insurer in acquiring its business. Normally this would be in the form of commissions paid to agents or other third parties. Reinsurers reimburse these acquisition costs to the insurer as commission under proportional treaties.
Actuary (Pricing and Reserving): A professional person qualified to apply the laws of mathematics, probability and statistical theory in the pricing of both insurance and reinsurance, assessment of outstanding loss reserves, IBNR and IBNER, investment and many other areas of financial planning and business operations.
Adjustment Premium: A premium payable after the expiry of an excess of loss reinsurance contract. The adjustment will depend on the agreed minimum and deposit premiums for that contract.
Aggregate Excess of Loss: Form of excess of loss reinsurance which indemnifies the reinsured against the amount by which incurred losses in the aggregate exceed a stated monetary deductible in the aggregate during the period of the contract. See alsoStop Loss.
Aggregation: Concentration of sums insured on individual risks situated in one geographic zone or area (and all insured by same insurer) that could result in a severe loss event if many original policies suffered direct loss or damage during one identified meteorological event or disturbance, normally caused by natural or fundamental perils.
Alternative Risk Financing (ARF) and Alternative Risk Transfer (ART): Often described as a "non-traditional way of dealing with a risk transfer problem". Various forms of protection were created in the banking world and have been developed to cover the need of both the insurance and reinsurance markets. These specialist products are offered by capital and financial markets. ARF and ART use various constructions, such asCatastrophe Bonds, Insurance Linked Securities, Contingent Capital contracts,Industry Loss Warranties,Reinsurance Sidecars, Catastrophe Futures, Insurance Derivatives andFinite Risksolutions, these last types offering either prospective (in the future) or retroactive (from the past) coverage.
Annual Aggregate Limit: Alternative description of maximum horizontal (or sideways) coverage available under an excess of loss contract in an annual period. Original loss plus 3 full reinstatements offers a maximum of 4 total losses recoverable from that excess of loss contract in any one year. The annual aggregate limit would therefore be equivalent to four times the individual layer limit.
Back-Up Cover: Special form of excess of loss reinsurance that becomes available should an original excess of loss programme and all its nominated reinstatements be fully exhausted by a series losses before the expiry of the period.
Balance (and Exposure):Method of assessing the relationship between premium and maximum liability ceded to a proportional treaty (e.g. surplus or quota share treaty).
Bordereau (plural: Bordereaux), for premiums and losses: A detailed list of risks and related premiums and/or losses prepared by an insurer. The list would be prepared on a monthly or quarterly basis and then sent to reinsurers to enable them to see the names and locations of risks and results of business ceded to various proportional treaties.
Broker:An independent intermediary who, in reinsurance, is employed by the insurer (the reinsured) to place reinsurance on its behalf and to collect claims. The broker is paid a commission or brokerage by the reinsurer and not the insurer.
(Pure) Burning Cost: The percentage ratio of total losses incurred to a particular reinsurance layer (normally the total of paid and outstanding elements) divided by the reinsured's total premium income for the business protected.
(Underwriting) Capacity: The maximum amount an insurer is able to commit to an individual risk according to various criteria (insured peril. size, quality, class of insurance etc.) in accordance with the financial strength of that insurer and the market in which it operates.
Captive Insurance Company: An insurer established by a large industrial or commercial concern for the purpose of insuring all or part of the risk exposures of the non-insurance parent group. Captives are normally located in "tax friendly" countries or jurisdictions. There are also various forms of captive which we have not included specifically in this Glossary.
Catastrophe Bonds (Insurance Linked Securities): Specialist form of (re-)insurance protection offered within theAlternative Risk Financing (ARF)andAlternative Risk Transfer (ART)markets. These involve specialist constructions known asSpecial Purpose Vehicles. Operation of Catastrophe Bonds and Insurance Linked Securities is often linked to a specified index or "trigger".
Catastrophe Excess of Loss: A form of excess of loss reinsurance which is in excess of a specified retention up to a further identified amount. The contract protects the reinsured against an aggregation of losses arising from one catastrophic event, normally caused by natural or fundamental perils. Loss definition might read "ultimate net loss, any one loss occurrence", then further refined by the inclusion ofEvent Hours and Extended Expiration Clauses, together with aTwo (Original) Risk Warranty Clause, whether implied or imposed.
Catastrophe (or Computer) Modelling: Sophisticated computer programmes were developed in the late 1980s to assess likely estimates of insured damage should a severe natural perils event occur in a geographic zone or region. These programmes have become ever more powerful over the last 20 years and are now accepted by both financial regulators and rating agencies as a "benchmark" indicator of the level of catastrophe excess of loss cover that all insurers should buy in a particular country or region. Computer modelling (involvingscenario-basedandprobabilisticmodels) is now being applied to many other forms of (re-)insurance exposure, such as marine transits, sabotage and terrorism, nuclear incidents and more.
Catastrophe Probable Maximum Loss (Catastrophe PML): Historic and arbitrary method of assessing total level of catastrophe excess of loss protection required by using notional percentage of total sums insured at risk in a geographic zone or area. Insurers, reinsurance brokers and reinsurers would effectively reduce total sums insured at risk in an identified zone or area to a more realistic loss expectation, e.g. 2% of total sums insured at risk. These Catastrophe PML percentages varied according to the individual peril involved.Catastrophe Modellinghas replaced this notional assessment method.
Cede: When an insurer transfers part of its liability to a reinsurer under a proportional reinsurance treaty, it is said to cede that business.
Ceding Company or Cedant: The insurer that transfers part of its risk to a reinsurer under a proportional reinsurance treaty or facultative quota share placement.
Cession: The amount of liability transferred to reinsurers under a proportional reinsurance treaty. The risk, premium, commission and claims will be settled in accordance with the amount of the cession, normally expressed in percentage terms.
Cession Limit Clause: Special clause used in the construction of a proportional reinsurance treaty that restricts the cession of original insurances exposed to natural perils to that treaty. See alsoEvent Limit Clause.
Claims Made and Losses Discovered: These are special forms of (re-)insurance coverage. Claims made or losses discovered coverage means that reinsurers would only be liable for any claims notified during the actual period of reinsurance coverage. There is no 'tail' as there might be for other types of excess of loss reinsurance coverage. This coverage is favoured by insurers and reinsurers for products liability, errors and omissions and similar professional liability business. Please refer to themini-glossary(Week 3.2) for some of thekey termsused in Claims Made coverage.
"Clean-Cut" Treaty: Term used to describe the accounting of a proportional treaty that involves the transfer in and out of premium and outstanding loss portfolio transfers.
Co-insurers: Two or more insurers jointly covering the same risk.
Condition Precedent: Condition imposed by reinsurers that informs an insurer that reinsurers will not accept liability unless the terms of the condition precedent have been met by the insurer.
Co-reinsurers/Co-reinsurance: Two or more reinsurers jointly covering the same risk or part of it. In certain types of reinsurance coverage, reinsurers might ask the reinsured to bear a certain percentage of the limit as a co-reinsurance. The reinsured is thus interested in minimising any loss recoverable.
Commission: An allowance made by the reinsurer for part or all of an insurer's acquisition, production, administration and other costs under a proportional treaty. It may include a profit element. This form of commission is also known ascontingent commission.Commission may be a fixed percentage amount or on a sliding scale basis dependent upon the actual results of the treaty.
CRESTA (Catastrophe Risk Evaluating and Standardizing Target Accumulations):International system of recording total sum insured aggregates by risk classification and peril in pre-identified zones throughout the world.
Deductible (also Excess or Retention): A fixed monetary amount which the reinsured is prepared to retain on any one claim under an excess of loss contract. When the deductible (excess or retention) is exceeded, only the amount in excess of that deductible is recoverable from the reinsurance contract, up to a further maximum identified amount (limit of liability or indemnity).
Earned Premium/Unearned Premium: That part of an insurance or reinsurance premium attributable to the expired portion of a risk at a particular point in time. The premium for the unexpired portion of that risk is called the unearned premium. There are various methods of calculating the unearned premium, pro rata (orper diem,daily, basis), 1/24ths (half a calendar month), 1/8ths (half a calendar quarter), 1/12ths (calendar month) or at a notional figure, e.g. 50%. See alsoExpired/Unexpired Liability.
Endorsement: System used in the placement of a reinsurance agreement to correct or amend various aspects that have changed in that agreement since its inception.
Estimated Maximum Loss (EML): An expression used in fire, explosion and material damage policies. It is a realistic estimate of the monetary loss which could be sustained by an insurer on a single risk as a result of a single loss event considered by the underwriter and/or risk surveyor to be within the realms of normal probability. The EML becomes the "target" level for reinsurance coverage. The difference between the Full Value Sum insured and the EML estimate is known as theEML Error.
Event Hours Clause (72 Hours Clause): Special clause used in the construction of catastrophe excess of loss programmes to limit the effect of a meteorological disturbance in time and space. Many variations of the clause exist to reflect the length of major loss incidents that have occurred over the last 30 years.
Event Limit Clause: Special clause used in the construction of a proportional treaty that limits the maximum recovery from that treaty if a natural perils event affected many individual cessions, thus producing an unusually large catastrophic loss to that treaty. See alsoCession Limit Clause.
Excess of Loss: A non-proportional form of reinsurance which indemnifies the reinsured for that part of a loss which exceeds a specified monetary amount (deductible, excess or retention) up to a further specified monetary amount (limit of liability or indemnity).
Experience Rating: Method of rating excess of loss contracts using historic loss experience to a particular excess of loss layer expressed as a percentage of the total premium income for the account to be protected.
Expired Risk/Unexpired Liability: That part of an insurance or reinsurance risk which has expired at a particular point in time. After that identified date, the run-off of liability until the end of the policy or contract is called the unexpired portion of the risk. (See alsoEarned Premium/Unearned Premium).
Exposure (and Balance): seeBalance.
Exposure Rating: Method of rating excess of loss contracts that uses levels of exposure on different sizes and qualities of risk to apportion premium between the deductible and layer limit of an excess of loss layer or programme. System is known asDeductible Credit RatingorFirst Loss Rating.
Extended Expiration Clause: Special clause used in the construction of catastrophe excess of loss programmes to identify how recoveries should be made if a loss event starts at the end of one period and runs on into the following period.
Facultative Reinsurance (Proportional and Excess of Loss): The reinsurance of risks on an individual basis where the insurer has no obligation to offer a risk, nor has the reinsurer any obligation to accept or decline an offer. Facultative risks can be placed on both a proportional and an excess of loss basis. Placements made on a proportional basis are known as facultative quota share reinsurances.
Facultative Obligatory Treaty: Reinsurance treaty where the insurer has the option of ceding risks, but once the insurer has decided to cede those risks, the reinsurer is obliged to accept them. This type of treaty is neither a surplus nor is it automatic and obligatory, although its construction does appear to resemble both aspects.
Finite Risk Solutions: One of the original methods used inAlternative Risk Transfer (ART). These reinsurance constructions recognised the "time value of money" (discounting the present day value) and were subject to special terms and conditions that differentiated them from traditional reinsurance arrangements. Some financial regulators questioned whether there was any transfer of risk, as a result of which their rules on risk transfer were tightened and subsequently adopted on a universal basis.
Firm Order Instruction: Having received various quotations for a reinsurance agreement, the insurer's management team will decide upon the definite terms and conditions and issue a firm order instruction to the reinsurance intermediary involved to complete placement of that agreement with the leading and following markets suggested by the intermediary.
Follow the Fortunes Clause: Special clause used in facultative placements where reinsurers agree to follow the terms, conditions and exclusions of the original insurance protected by that facultative placement.
Follow the Settlements Clause: Special clause used in facultative placements where reinsurers agree to follow any loss settlements made by an insurer on the original insurance protected by that facultative placement.
From the Ground Up (FGU): Term used in excess of loss reinsurance to describe the amount of an incurred loss from zero (the ground) to its ultimate incurred amount. That loss is then set vertically against the retention and limit(s) of the excess of loss protection and excess of loss recoveries made accordingly.
Full Reinsurance Clause: Special clause used in facultative placements that warrants that the facultative reinsurance is based upon the original gross rate charged by the insurer for the original risk and that the insurer retains its stated retention throughout the period of the facultative placement.
Gross Retention: The total limit of liability retained by an insurer on a risk after surplus and facultative quota share cessions, but before any quota share treaty cession. Also known as the insurer's gross line. See alsoNet Retention.
Incurred But Not Enough Reserved (IBNER): Despite best claims practice over a period of (say 5 years), there is sometimes a dramatic increase in the total incurred loss amount for an individual claim. This sudden and dramatic increase, the "spike", is known asIncurred But Not Enough Reservedas an insurer must fund any additional liability from its resources in the year that "spike" occurs, perhaps many years after the date of loss itself. IBNER affects random claims, but reserving actuaries have developed computer programmes to provide a solution to this unusual problem.
Incurred But Not Reported (IBNR): An addition calculated to allow for losses which may have occurred, but have yet to be reported to the insurer or reinsurer. Using carefully selected criteria, sophisticated mathematical and actuarial models have been created to analyse the potential future development of a whole portfolio of known paid and outstanding losses at a point in time, then projecting that known experience to a likely ultimate total incurred loss position. The difference between the known and projected figures is called theIBNR Factor. IBNR is assessed on a whole portfolio of losses, rather than individual losses as in IBNER above.
Incurred Losses: The aggregate of losses attributable to a specific reinsurance agreement during a specified contract period. Incurred losses normally mean the total of paid and outstanding elements before the addition of any IBNR allowance or associated developmental calculation.
Incurred Loss Ratio: The percentage result of dividing incurred losses by earned premiums. Definitions for both incurred losses and earned premium will vary between different insurers, reinsurers and sometimes between countries.
Indemnify: To put the original insured in the same position (or as closely as possible) as he or she was before a loss occurred.
Industry Loss Warranties: Another specialist form of (re-)insurance protection offered within theAlternative Risk Financing (ARF)andAlternative Risk Transfer (ART)markets.
Insurance Linked Securities (Catastrophe Bonds): Specialist form of (re-)insurance protection offered within theAlternative Risk Financing (ARF)andAlternative Risk Transfer (ART)markets. These involve unique constructions known asSpecial Purpose Vehicles. Operation of Insurance Linked Securities and Catastrophe Bonds is often linked to a specified index or "trigger".
Intermediary: An agent or broker through whom an insurance policy or reinsurance contract is arranged.
(Excess of Loss) Layer:Term used to denote a fixed monetary amount of cover given by reinsurers under an excess of loss contract. Alternative names are often used: cover, coverage, limit of liability or limit of indemnity. Many excess of loss programmes comprise consecutive and vertical layers of coverage in order to attain the total programme coverage required for a particular reinsurance requirement.
(Excess of Loss) Limitof Indemnity or Liability: Maximum amount recoverable from an excess of layer, hence "to pay up to a maximum of ………. in excess of ……….. (amount of excess of loss deductible, excess or retention)".
Leading (and Following) Reinsurers: A leading reinsurer is one whose terms and conditions have been accepted by an insurer for its reinsurance agreement.Following reinsurersare those who participate on the same reinsurance agreement but have not necessarily influenced the terms and conditions involved.
Line: One line is equal to the insurer's gross (or net) retention. A proportional treaty may have a total capacity expressed asxnumber of lines or multiples, subject to a maximum treaty capacity geared to the insurer's own maximum gross (or net) retention. Reinsurers would express their participation asynumber of lines or as a percentage of the maximum treaty capacity.
Loss Event: Defined under a particular reinsurance contract. Could arise from a loss affecting a single risk, or from the aggregation of many smaller losses arising from a natural perils event like a storm, flood or earthquake. Another example might be a serious explosion following a motor accident. Many different policies could be involved, e.g. third party property damage, motor third party liability, general third party liability, employers' liability and personal accident.
Loss Ratio: The percentage result of dividing incurred claims amounts (as defined) by total earned or written premiums (as required). Acombined loss ratiorefers to the total of both incurred losses and operating expenses compared to total earned or written premiums (as required).
Loss Reporting Clause: Important condition imposed by reinsurers to ensure that an insurer advises losses to its reinsurers in a prompt and efficient manner. Different loss reporting clauses exist which we explain in detail in theattachment inWeek 4.1.
Loss Settlement Pattern: Time progression from initial outstanding loss reserve estimate on a claim through partial settlements and adjustments to the remaining outstanding loss amount to full and final settlement of that claim.
Losses Discovered: SeeClaims Made.
Losses Occurring During (LOD): An expression used to signify that losses which occur within the period of the reinsurance contract are covered, no matter when the original insurance policy was issued. It is worth mentioning that some part of an original policy must be in force during the LOD period to produce a loss to that LOD contract.
Net Retained Lines Clause (NRL): This confirms to reinsurers that an incurred loss amount to be recovered from an excess of loss layer or programme is the net retained amount after all prior reinsurance recoveries, normally proportional. As with theUltimate Net Loss Clause (UNL), it will vary depending on class of business and type of reinsurance. These two clauses are perhaps two of the most important clauses used in the construction of excess of loss agreements.
Net Retention: The total limit of liability retained by an insurer on a risk after both surplus and quota share treaty cessions, and after any facultative quota share cessions. Also known as the insurer's net line. See alsoGross Retention.
Non-proportional reinsurance: seeExcess of Loss.
Observation Period: Period for which historic premium and loss statistics are available to assist excess of loss reinsurers to structure an excess of loss programme and make their relative pricing calculations.
Offset: Generally accepted accounting principle used in the settlement of any additional reinstatement premium due following the settlement of a loss under an excess of loss contract. The reinsurer agrees to settle its share of the loss after having deducted ("offset") the amount of any additional reinstatement premium due in its favour.
Original Gross Rate: SeeRate.
Original Gross Risk Profile: Table showing an insurer's portfolio of risks, analysed by various bands of sums insured (or limits of indemnity), number of risks, aggregate sums insured and premium income generated within each band.
Outstanding Loss Reserve (Deposit): An amount withheld by an insurer to guarantee that a reinsurer will meet its obligations for known outstanding losses advised but not yet settled. The insurer would pay reinsurers a notional rate of interest as compensation for withholding such a deposit.
Outstanding Losses: Losses which have occurred but are unsettled at the time of preparation of either proportional or excess of loss accounts. Reinsurers are obliged to establish reserves for both outstanding losses, together with an allowance for bothIncurred But Not Reported (IBNR)andIncurred But Not Enough Reserved (IBNER)losses.
Overriding Commission: Paid by a reinsurer to an insurer under a proportional treaty to cover an amount over and above the actual costs of acquisition, production and administration costs incurred by the insurer.
Periodic Accounts: Term used in accounting of proportional reinsurance treaties to identify the frequency with which an insurer must deliver technical accounts to reinsurance intermediaries and reinsurers for premium and loss cessions made to those treaties.
Policies Issued and Renewed (PID), also known as Risks Attaching During (RAD): A type of coverage and accounting for excess of loss contracts where all claims under policies issued or renewed in a particular underwriting year are covered, no matter in what year afterwards any losses occur. The reinsurer is at risk until all policies covered by the contract for that underwriting year have expired and all losses have been fully settled.
Pool: An organisation of insurers or reinsurers through which particularly dangerous risks are written. These could include sabotage and terrorism, nuclear risks, and those that relate to earthquake, flood and windstorm in some countries. Premiums, losses and expenses are shared in agreed proportions.
Portfolio (of Business): A block of business whether originally insured (e.g. all industrial complexes) or part of a reinsurer's overall account (e.g. all catastrophe programmes written with the same territorial scope).
Portfolio Transfers (Premiums and Losses): A calculation used by insurers and reinsurers to transfer premiums and losses from one period to another in order to facilitate accounting. Premium portfolio transfers should reflect the unearned written premium in respect of unexpired risks at a particular point in time. They will be credited and debited to reinsurers net of commission. (Outstanding) loss portfolio transfers reflect the total of known outstanding losses for all underwriting years at a particular point in time. Since reinsurers expect some saving by the time of ultimate settlement, reinsurers might allow a notional discount, transferring between 90% and 95% of known outstanding losses between different accounting years. This notional discount is known as "claims redundancy".
(Minimum and Deposit) Premiums:A deposit premium is paid to reinsurers during the period of an excess of loss contract but before the ultimate adjusted total premium income for the contract is known. A minimum premium is normally requested by reinsurers to guarantee their earnings potential under a contract.
Placement Slip: A booklet, normally A4 size, containing full details of the risk, its premium, limits, terms, conditions and exclusions, together with a full policy wording. Various formats are used in different markets, but all seek to achievecontract certainty.
Poisson Distribution Theory: Famous mathematical theory that describes the probability of loss incidence at different return periods.
Premium Reserve Deposits: In certain countries there is a legal requirement for insurers to withhold remittance of a percentage of their ceded premiums to ensure that overseas reinsurers fulfil their contractual obligations. Reserves are released one year after being withheld. The insurer would pay reinsurers a notional rate of interest as compensation for withholding such a deposit.
Probable (or Possible) Maximum Loss: Historically, a method used to assess the likely incurred loss amount which might arise from a loss affecting a single identified risk in a given set of circumstances.Estimated Maximum Loss(EML) has been adopted in the UK, but different systems exist in other countries.
Profit Commission: An additional commission allowed by reinsurers based upon the results of a particular proportional treaty. Profit commissions are sometimes negotiated on excess of loss contracts.
(Excess of Loss) Programme: Series of vertically ascending and consecutive excess of loss layers to give an insurer sufficient overall coverage to protect its perceived maximum exposure for a particular reinsurance requirement.
Proportional Reinsurance: All sharing forms of reinsurance whereby the reinsurer participates proportionately in all premiums, commissions and losses dependent upon the percentage amount of an original insurance ceded to a treaty or facultative quota share placement.
Quota Share Treaty: A form of obligatory and automatic proportional reinsurance agreement indemnifying the insurer against a fixed percentage cession of each and every risk falling within its own maximum retention.
Rate: Underproportional treatiesthe rate of premium paid to reinsurers will be at the sameoriginal gross rate(OGR) charged by the insurer for the original insurance. Underexcess of loss and stop loss contractsthe rate will normally be expressed as apercentageof the reinsured's total premium income for the account to be protected. That percentage will then be converted into a monetary amount to enable reinsurers to calculate deposit and minimum premiums.
Rate on Line: Term used in excess of loss reinsurance to describe the relationship between the premium charged for the excess of loss contract and the limit of the excess of loss layer. For example : XL premium 100,000 as percentage of XL layer limit 1,000,000 produces 10% rate on line (100,000 ÷ 1,000,000 = 10%).
Reciprocity: An exchange between two insurers of their respective outwards reinsurance placements, e.g. their individual fire first surplus treaties. They might be domiciled in different countries but would probably have similar coverages, limits and premium incomes. Historically, reciprocity normally only applied to the exchange of proportional reinsurance treaties, but today any mutual exchange of business could be considered as a form of reciprocity.
Reinstatement: Re-establishes the limit of indemnity to its original amount after it has been reduced by a loss. In excess of loss reinsurance, an additional premium is often (but not always) payable to reinstate the limit of indemnity, but such details would be defined in the terms and conditions of the reinsurance contract. In insurance, reinstatement is one of four methods of settling indemnity following a loss (cash, repair, replacement or reinstatement). See alsoUnlimited Horizontal Coverage.
Reinsurance: In its simplest form, an insurance of an insurance.
Reinsurance Brokerage: A deduction made from the reinsurer's premium by a reinsurance broker as commission for business placed with that reinsurer.
Reinsurance Sidecar: Specialist form of reinsurance capacity provided in the short term via aSpecial Purpose Vehicle. Forms part of theAlternative Risk Financing (ARF)andAlternative Risk Transfer (ART)markets.
Retention: The proportion of a risk retained by an insurer under a proportional treaty or a fixed monetary amount retained by a reinsured under an excess of loss contract. An excess of loss retention is also known as an excess or deductible.
Retrocede/Retrocession: When a reinsurer transfers part of its liability to another seller of reinsurance, that reinsurer retrocedes its business. Retrocession is therefore a reinsurance of a reinsurance. (Retrocedant- party buying retrocession coverage;retrocessionaire- party selling retrocession coverage).
Return Period: The probability of a loss event of an identified intensity, magnitude or severity occurring and causing both severe economic and insured damage to the infrastructure of a particular country or geographic region. A return period is often expressed as 1-in 100 year event (1.0% probability), 1-in-200 year event (0.5% probability) or 1-in-250 year event (0.4% probability) and so on.
Revaluation: Important discipline used to bring historic premiums and loss information to present day values. Pricing and reserving actuaries will apply separate sets of revaluation indices to the different elements forming part of the analysis, e.g. different sets of indices will be used to revalue paid and outstanding loss elements and a separate set of indices to revalue historic premium incomes.
Risk (or Working) Excess of Loss: An excess of loss contract where reinsurers expect a loss incidence of individual risk losses to affect a particular layer. Where reinsurers anticipate a large loss incidence, such layers are known as working excess of loss. Risk excess of loss contracts normally contain the provision "ultimate net loss each and every loss, each and every risk" and would be further subject to the reinsured's definition of "any one risk" for the purposes of the reinsurance contract.
Risk Profile: Statistics showing the number of risks or policies falling within selected bands of exposure, whether by sum insured, Estimated Maximum Loss (EML) or limit of indemnity. The profile should show the number of risks in each band of cover, together with the total sums insured and total premium income generated by all risks in each individual band.
Risks Attaching During (RAD): SeePolicies Issued and Renewed (PID).
Run-Off: Term applicable where the reinsurance contract has been terminated but where liability remains in force (at the date of termination) for cessions or risks accepted during the period of the contract. Losses could still occur after the date of termination on those cessions or risks accepted. Reinsurers apply different approaches according to the reinsurance coverage given. Any run-off is covered under reinsurances issued on an underwriting year basis (RAD/PID/Claims Made), but must be negotiated separately for those issued on an accounting year (LOD) basis.
Sideways (or Horizontal) Cover: Term used to describe the maximum number of losses that could be paid by reinsurers under an excess of loss contract in an annual period. For example, original loss plus three full reinstatements would offer the insurer a maximum recovery of four total losses from the excess of loss contract in that annual period. See alsoAnnual Aggregate Limit.
Sliding Scale Commission: A commission adjusted under a formula whereby the actual commission varies inversely with the loss ratio, subject to a specified maximum commission at a minimum loss ratio. This form of commission is becoming more popular as it is of immediate effect at the end of a proportional treaty period. The method can be used to replace the combination of a fixed percentage commission and separate profit commission calculation.
Special Purpose Vehicles (SPV): SeeCatastrophe BondsandInsurance Linked Securities.
Stability (or Index) Clause: Certain claims, especially those under casualty and legal liability contracts, take many years to settle and may be subject to increases caused by external social influences. This important clause is often applied to casualty and legal liability excess of loss contracts as it creates an indexed link to the limit and deductible of that excess of loss contract. From an identified date, the clause apportions the effects of inflation on excess of loss claims fairly between the reinsured and reinsurer.
Stop Loss: A form of excess of loss reinsurance under which the reinsurer reimburses the insurer for losses incurred in an annual period by the amount which those losses exceed a specified percentage loss ratio. Stop loss contracts are subject to a specified percentage or monetary amount and then further subject to additional minimum and maximum parameters geared to the total premium income involved.
Subjectivities: Special terms requested by reinsurers at the quotation stage of a reinsurance agreement. If a reinsurance intermediary is involved, the intermediary is obliged to inform the insurer of any subjectivities.
Sum Insured: The sum expressed in a policy as the maximum of the insurer's liability under an original insurance contract or policy of indemnity. Note : Please note the use of the term "Limit of Indemnity" for original insurance policies covering different forms of legal liability, such as compulsory motor third party (to comply with local legislation), employers' liability (or similar), general third party liability, errors and omissions, other forms of professional liability public and products liability and so on.
Surplus:The amount by which the gross sum insured accepted by the insurer exceeds its own retention.
Surplus Treaty Reinsurance: Under this method of reinsurance, the insurer decides that it will retain a certain amount on selected risks and cede the amount surplus to its own chosen retention to an obligatory and automatic facility, known as a surplus treaty. It is possible to have contiguousFirst and Second Surplus Treaties(and perhaps aThird Surplusetc.) that offer an insurer sufficient automatic underwriting capacity to operate in its local market.
Table of (Underwriting) Limits: Matrix of an insurer's maximum underwriting limits for each category of risk in its portfolio. Risks are graded according to their perceived size and quality, with the insurer prepared to accept higher amounts on superior risks and lower amounts on risks of lesser quality. Reinsurers use this matrix to establish capacity, premium and exposure for many forms of reinsurance, but particularly for proportional treaties.
Terms of Settlement: Generally accepted accounting system where the instalments of deposit premiums due under excess of loss contracts are paid within an agreed period. The time parameter varies between different classes and different worldwide markets.
Third Party: A person claiming against the original insured. In insurance terminology, the first party is the original insured and the second party is the insurer. A third party is therefore not involved in the contract between the first and second parties.
Third Party Liability: Liability of the original insured to persons (or other entities) who are not parties to the contract of insurance, nor are employees of the original insured.
Treaty Reinsurance: Reinsurance agreement that covers an insurer's entire portfolio of risks. Technically, "treaty" refers to proportional reinsurance agreements, whereas "contract" refers to excess of loss reinsurance arrangements, but many markets use "treaty" for both methods of reinsurance.
Two (Original) Risk Warranty Clause (TRW or TORW): Special condition used in the construction of catastrophe excess of loss programmes. If a loss event occurs, an insurer must be liable for the direct loss or damage suffered by two or more of its original insureds in that event. The condition is often implied, but can be imposed as an individual warranty.
Ultimate Net Loss Clause (UNL): Defines what an insurer is allowed to claim from an excess of loss agreement. Different clauses exist to reflect the practices used for different types and classes of reinsurance in individual markets. Often works in conjunction with theNet Retained Lines Clause (NRL). These two clauses are perhaps two of the most important clauses used in the construction of excess of loss agreements.
Underwriter: An individual who determines the acceptability of an insurance or reinsurance risk and determines the premium and specific terms, conditions and exclusions for that risk.
Underwriting Year: A reinsurance treaty or contract that remains in force until the natural expiry of all policies issued or renewed by the insurer during a specified contract period, normally one year. Let us take a reinsurance contract from 1 January to 31 December 2017. If original policies are issued for twelve months and such a policy is issued on 31 December 2017, then the 2017 underwriting year would be open until 31 December 2018. If policies are issued for a period longer than 12 months (e.g. engineering policies), then the underwriting year will last for one year plus that maximum policy period (inclusive of the maintenance period in the case of engineering policies).
Unlimited Horizontal Coverage: Term used in the construction of excess of loss contracts and implies that reinsurers will pay for as many losses that affect that excess of loss contract in an annual period. This rarely happens as most excess of loss contracts are restricted by a limited number of reinstatements, whether subject to an additional premium or not. Some excess of loss contracts must offer unlimited horizontal coverage due to local legislation. These normally relate to reinsurances involving compulsory insurances such as motor third party legal liability and employers' liability (or the local equivalent).
Warranty: A very strict condition in an insurance policy or reinsurance treaty or contract imposed by the insurance company or reinsurer. A warranty states that something should or should not be done, or that a condition should be fulfilled or avoided. A warranty might also be the confirmation or denial of a statement or a particular set of circumstances. There are legal remedies for breach of warranty.
Written Line/Signed Line: The maximum amount a reinsurer is prepared to accept when accepting or writing a slip. Total lines on that slip might amount to more than 100%. In such a case the broker would sign down the placement so that the total of all lines equal 100% (or another agreed figure). The broker would then confirm a signed line or signed participation to those reinsurers involved by means of a premium closing advice.
Written Premium: That premium which is generated by risks issued or renewed within an identified period, normally an underwriting year. If an original policy is issued within that period, all premiums and claims are recorded in that same period, although certain premium movements and losses would occur long after the expiry of the period identified. In simple terms, everything is taken back to the period in which the original policy was issued (or renewed).