Glossary Flashcards
(221 cards)
1
Q
24ths method
A
A method of estimating unearned premium reserve, based on the assumption that annual policies are written evenly over each month and risk is spread evenly over the year.
For example, policies written in the first month of the year are assumed to contribute 1/24th of the month’s written premium to the unearned premium reserve at the end of the year.
2
Q
365ths method
A
A method of estimating unearned premium reserve, based on the assumption that the risk is spread evenly over the 365 days of a year of cover.
For example, where a policy was written 100 days ago, 265/365ths of the premium is taken as being unearned.
3
Q
Accident year
A
An accident year grouping of claims means that all the claims relating to loss events that occurred in a 12-month period (usually a calendar year) are grouped together, irrespective of when they are actually reported or paid and irrespective of the year in which the period of cover commenced.
4
Q
Accumulation of risk
A
An accumulation of risk occurs when a single event can give rise to claims under several different policies. Such an accumulation might occur by location (property insurance) or occupation (employers’ liability insurance), for example.
5
Q
Aquisition costs
A
Costs arising from the writing of insurance contracts, such as commission.
6
Q
Additional reserve for unexpired risk
A
The reserve held in excess of the unearned premium reserve, which allows for any expectation that the unearned premium reserve will be insufficient to cover the cost of claims and expenses incurred during the period of unexpired risk.
7
Q
Adjustment premium
A
The adjustment premium is an additional premium payable at the end of a period of cover. This may result from the use of retrospective experience rating or from a situation where the exposure cannot be adequately determined at the start of the period of cover.
8
Q
Adverse development cover
A
A reinsurance arrangement whereby a reinsurer agrees, in return for a premium, to cover the ultimate settled amount of a specified block of business above a certain pre-agreed amount.
9
Q
Agents’ balances
A
Moneys (typically premiums) that belong to an insurer but are held by an agent.
10
Q
Aggregate excess of loss reinsurance
A
A form of excess of loss reinsurance that covers the aggregate of losses, above an excess point and subject to an upper limit, sustained from a single event or from a defined peril (or perils) over a defined period, usually one year.
11
Q
All risks
A
Cover that is not restricted to specific perils such as fire, storm, flood and so on.
The cover is for loss, destruction or damage by any peril not specifically excluded.
The exclusions will often be inevitabilities like wear and tear.
The term is sometimes loosely used to describe a policy that covers a number of specified risks, though not all.
12
Q
Allocated loss adjustment expenses (ALAE)
A
Type of claims handling expense
13
Q
Annual basis of accounting
A
Annual accounting is one of two statutory bases of accounting, the other being fund accounting.
Annual accounting is based on the cover provided during the accounting period, regardless of when the contracts of insurance start and end.
This is also known as one-year (accident-year) accounting.
14
Q
Anti-selection
A
The preference of some insurance applicants for policies whose underwriting requirements are less stringent than others.
Anti-selection occurs when a more profitable business is attracted away from an insurer by a competitor who has found a way of identifying the more profitable segment and offers more attractive terms.
15
Q
Asset-liability modelling
A
A form of actuarial projection which analyses future flows of investment income against liability outgo.
16
Q
Atafs - Age to age factors
A
Used by the CAS to refer to link ratios or development factors.
17
Q
Atufs - Age to ultimate factors
A
Used by the CAS in triangulation reserving methods to refer to the grossing-up factor to get from an intermediate period of development to ultimate.
18
Q
Average
A
- In non-marine insurance, the term relates to the practice of reducing the amount of a claim in proportion to the extent of underinsurance.
- In marine insurance, the term is generally used to describe damage or loss.
19
Q
Average cost per claim method
A
A method of reserving which relies on the average cost of claims paid or incurred.
20
Q
Balance of a reinsurance treaty
A
The ratio of the total premiums receivable by a reinsurer under a surplus treaty to the reinsurer’s maximum liability for any one claim, based on estimated (or expected) maximum loss (EML).
21
Q
Benchmark
A
A benchmark is any statistic derived from external sources; for example, loss ratio, expense-related measure, claim reporting or claim payment development pattern
22
Q
Binding authorities
A
Contractual agreements setting out the scope of delegated authority, allowing cover holders to enter into contracts of insurance and to issue insurance documents on behalf of Lloyd’s managing agents.
23
Q
Bonus hunger
A
The reluctance of policyholders under a no-claim discount (NCD) or bonus-malus system to notify claims or claim amounts when faced with a potential increase in premiums. Also known as hunger for bonus.
24
Q
Bonus-malus
A
A rating system in which the base premium level can be discounted or loaded in response to the policyholder’s claims experience.
25
Bordereau
A detailed list of premiums, claims and other important statistics provided by ceding insurers to reinsurers, so that payments due under a reinsurance treaty (or delegated authority schemes in direct insurance) can be calculated.
26
Bornhuetter-Ferguson method
A reserving method which uses weights based on an a priori loss ratio and claim development.
27
Break-up basis
A valuation basis that assumes that the writing of new business ceases and cover on current policies is terminated.
Current policyholders would normally be entitled to a proportionate return of the original gross premium and deferred acquisition costs would probably have to be written off.
Also known as a wind-up basis.
28
Broker
An intermediary between the seller and buyer of a particular insurance contract who is not tied to either party.
A reinsurance broker is similarly defined where reinsurance contracts are bought and sold.
29
Burning cost
The actual cost of claims paid or incurred during a past period of years expressed as an annual rate per unit of exposure.
This is sometimes used (after adjustment for inflation, incurred but not reported (IBNR) claims and so on) as a method of calculating premiums or monitoring experience for certain types of risks, for example, motor fleets and non-proportional reinsurance.
30
Business interruption insurance
Insurance cover for financial losses arising following damage (for example, by a fire) to business premises. Also called loss of profits or consequential loss insurance.
31
Cancellation
A mid-term cessation of a policy that may involve a partial return of premium.
32
Capacity
The amount of premium income that an insurer is permitted to write or the maximum exposure that could be accepted (possibly based on capital limitations).
It could refer to an insurance company, a Lloyd’s Name, a Lloyd’s syndicate or a whole market.
33
Cape Cod method
A reserving method, similar to the Bornhuetter Ferguson method where, instead of an a priori loss ratio, it uses weights proportional to a measure of exposure and inversely proportional to claims development.
34
Captive
An insurer wholly owned by an industrial or commercial enterprise and set up with the primary purpose of insuring the parent or associated group companies, and retaining premiums and risk within the enterprise.
Some insurers are set up with the primary purpose of selling insurance to the customers of the parent.
These are often known as captives but, as they write third-party business, should not properly be so called. If the word “captive” is used without qualification it precludes this interpretation.
Lighter regulatory capital requirements for captive reinsurers only apply if the purpose of the captive is to provide cover exclusively for the risks of the undertaking or group to which it belongs and so does not provide cover for third parties
35
CAS
The Casualty Actuarial Society (CAS) is a professional society of actuaries based in the USA. Its members are mainly involved in the property and casualty areas of the actuarial profession.
36
Case by case estimation
A method of determining the reserve for outstanding reported claims, where each outstanding claim is individually assessed to arrive at an estimate of the total payments to be made.
The sum of all case estimates is often referred to as the outstanding claims reserve (OCR) or reported but not settled reserve (RBNS).
The shorter term “case estimation” is often used and the estimates are referred to as case estimates.
37
Casualty insurance
Specifically the term is used in the USA, and to a lesser extent in the UK, as an alternative to liability insurance. In a wider context “casualty insurance” may be used as a phrase to cover all non-life insurance as in the phrase “property/casualty insurance”.
38
Catastrophe
In the context of general insurance a catastrophe is a single event that gives rise to an exceptionally large aggregation of losses.
39
Catastrophe reinsurance
This is a form of aggregate excess of loss reinsurance providing coverage for very high aggregate losses arising from a single event, that may be spread over a number of hours; 24 or 72 hour periods are commonly used.
40
Catastrophe reserve
A reserve built up over periods between catastrophes to smooth the reported results over a number of years. The purpose of a catastrophe reserve is smoothing, not solvency.
41
Ceding company (cedant)
An insurer or reinsurer that passes (or cedes) a risk to a reinsurer. The insurer or reinsurer may be a company or a Lloyd’s syndicate.
42
Central fund (Lloyd's)
A contingency reserve built up from contributions by Lloyd’s Names and held by Lloyd’s as a layer of protection for policyholders.
A central fund held by Lloyd’s to demonstrate overall solvency to the regulator. This capital is in addition to members’ capital resources held as Funds at Lloyd’s.
43
Chain ladder method
A statistical method of estimating outstanding claims, whereby the weighted average of past claim development is projected into the future.
The projection is based on the ratios of cumulative past claims, usually paid or incurred, for successive years of development. It requires the earliest year of origin to be fully run-off or at least that the final outcome for that year can be estimated with confidence.
If appropriate, the method can be applied to past claims data that have been explicitly adjusted for past inflation.
44
Claim
The word “claim” has a variety of meanings. The most common ones are:
* as a noun: an assertion by a policyholder that an insurer is liable to make a payment in accordance with the terms of a policy
* as a verb: to make a request for payment from an insurer.
Care is often needed to discover the precise meaning in a given context; for example, whether a reference to “claims” is to the number of claims or their cost.
45
Claim amount distribution
A statistical frequency distribution describing the total amount of claims.
46
Claim cohort
A group of claims with a common period of origin. The period is usually a month, a quarter or a calendar year.
The origin varies but is usually defined by the date of a claim, the date of reporting of a claim, the date of payment of a claim, or the date when the period of cover to which a claim attaches commenced.
47
Claim cost inflation
The rate of increase in the cost of like-for-like claim payments
48
Claim frequency
The number of claims in a period per unit of exposure, such as the number of claims per vehicle year for a calendar year or per policy over a period.
49
Claim frequency distribution
A statistical frequency distribution for claim occurrence.
50
Claim ratio (loss ratio)
The ratio of the cost of claims to the corresponding premiums, either gross or net of reinsurance. An alternative term, especially in South Africa and the USA, is loss ratio.
51
Claim size distribution
A statistical distribution describing the size of individual claims.
52
Claims handling expenses
The expenses incurred in handling and settling claims are known in some countries, including South Africa and the UK, as claims handling expenses, the equivalent term in the USA (and increasingly elsewhere) being “loss adjustment expenses”.
In the USA the terms allocated loss adjustment expenses (ALAE) and unallocated loss adjustment expenses (ULAE) are used.
53
Claims made policy
A policy that covers all claims reported to an insurer within the policy period irrespective of when the incident occurred. The type of cover provided by such a policy is known as claims made cover.
54
Claims reported
Claims incurred that have been reported to the insurer. The term is often used in relation to those claims reported during the accounting period. It may refer to the number of claims themselves or the cost of claims that have been reported.
55
Claims run-off analysis
A tabulation showing the speed of reporting or settlement for cohorts of claims. Also called a delay table or, since it is usually triangular in form, a run-off triangle.
The analysis may be in terms of claim numbers or claim amounts. It is often presented as an intermediate step in a chain ladder projection.
56
Clash cover
Excess of loss reinsurance cover, limiting an insurers’ exposure to the risk that one claim incidence gives rise to claims on more than one policy insured by the insurer.
57
Closed year
In the case of fund accounting a closed year is an underwriting year that is older than the prescribed limit for the class in question. In the Lloyd’s market, a closed year is one that has been closed by reinsurance to close (RITC).
58
Coinsurance
An arrangement whereby two or more insurers enter into a single contract with the insured to cover a risk in agreed proportions at a specified premium. Each insurer is liable only for its own proportion of the total risk. It is frequently applied to individual “slip” business in the London Market where a lead insurer takes a major share of the risk and manages the outturn, while others subscribe on fixed terms.
The term is also used in direct insurance and reinsurance to describe an arrangement in which the insured or cedant retains a proportion of their own risk.
59
Combined ratio
The sum of the claim ratio and the expense ratio (and thus not a ratio itself, unless the two separate ratios have the same denominator). Also called the operating ratio or underwriting ratio.
The fact that the denominators for the claim and expense ratio may be different can give rise to anomalies.
60
Commercial lines
Classes of insurance for commercial and business policyholders. Those for individuals are usually referred to as personal lines.
61
Commutation
The process of prematurely terminating a reinsurance contract by agreeing an amount to settle all current and future claims.
62
Commutation account
A register of the inflows and outflows to the treaty after the commutation has taken place.
63
Commutation clause
A clause in an insurance or reinsurance contract that allows the contract to be commuted under certain conditions. The clause works in conjunction with commutation accounts, which are used to calculate the relevant numbers.
64
Composite insurer
A single insurance company that writes both life and non-life business.
65
Cover note
A note issued by an insurance company to confirm the existence of insurance cover pending the issue of formal policy documentation.
66
Credibility
A statistical measure of the weight to be given to a statistic.
67
CRESTA zones
The Global Catastrophe Risk Evaluating and Standardising Target Accumulations (CRESTA) zone data set helps brokers and reinsurers assess and present risk, based on the zoning system established by the world's leading reinsurers.
Based primarily on the observed or expected seismic activity (although drought, flood and wind storms are also considered) within a country, CRESTA zones consider the distribution of insured values within a country as well as administrative or political boundaries for easier assessment of risks.
68
Deductible
The amount which, in accordance with the terms of the policy, is deducted from the claim amount that would otherwise have been payable and will therefore be borne by the policyholder.
69
Deep pocket syndrome
A situation where claims are made based on the ability of the defendant to pay rather than on share of blame. An injured party will try to blame the party with the greatest wealth (that is, deepest pocket) where there is more than one potential defendant.
70
Deferred Acquisition Costs
Acquisition costs relating to contracts in force at the balance sheet date. They are carried forward as an asset from one accounting period to subsequent accounting periods in the expectation that they will be recoverable out of future margins within insurance contracts after providing for future liabilities.
71
Deposit premium
This occurs in cases where all relevant exposure or rating information is not known at the start of the period of cover, or the premium to be paid is dependent on the claims experience during the policy term. An initial premium is paid at the start of the period of cover, followed by an adjustment at the end when the information required is known.
Where this latter adjustment is stipulated at the outset as being upwards only, the term “Minimum and Deposit Premium” applies.
Where it is found in cases relating to retrospective experience rating, the term “swing rated premium” is often applied.
72
Development factors (link ratios)
The factors emerging from a chain ladder calculation that are the ratios of claims in successive development periods. Sometimes known as link ratios.
73
Direct business
This term has two meanings:
* Business acquired without the intervention of an intermediary.
* The cover provided by an insurer to an original policyholder, as opposed to any reinsurance cover provided for the insurer.
The meaning intended is usually clear from the context in which the term is used.
74
Discovery period
A time limit, usually defined in the policy wording or through legislative precedent, placed on the period within which claims must be reported. It generally applies to classes of business where several years may elapse between the occurrence of the event or the awareness of the condition that may give rise to a claim and the reporting of the claim to the insurer, for example, employers’ liability or professional indemnity.
75
Earned premiums
The total premiums attributable to the exposure to risk in an accounting period; they can be gross or net of adjustment for acquisition expenses and gross or net of reinsurance.
76
Eights method
A method of estimating unearned premium reserve, based on the assumption that annual policies are written evenly over each quarter and the risk is spread evenly over the year.
77
Endorsement
Some change to the policy wording, usually following a change in the risk covered, that takes effect during the original period of insurance and is usually, but not necessarily, accompanied by an alteration in the original premium.
78
Equalisation reserve
An equalisation reserve, sometimes called a claims equalisation reserve, is a reserve built up (generally from profitable years) as a cushion against periods with worse than average claims experience.
79
Escalation clause
A policy clause that permits the insurer to raise automatically the level of benefits or sum insured (and therefore the premium) in line with some form of inflation index.
80
Estimated Maximum Loss (EML)
The largest loss that is reasonably expected to arise from a single event in respect of an insured property. This may well be less than either the market value or the replacement value of the insured property and is used as an exposure measure in rating certain classes of business.
81
Events not in data (ENIDs)
Reserving methods that project from historical data are unlikely to satisfy any requirement for a probability-weighted average of future cashflows (often required by regulators), since not all possible future cashflows ‒ or the events that cause them ‒ may be represented in the data. Although these events are sometimes referred to as “binary events” or “extreme events”, such terms suggest that events not found in the data are necessarily extreme or rare, which is not the case.
* Care should be taken when estimating ENIDs as part of reserving, capital modelling or even pricing as may not be adequate.
* Care should be taken equally when removing outliers from data as this will remove events from the data – unless the actuary can show that it would not be possible for these, or similar, events to occur again in future.
82
Excess
The amount of a claim, specified in the policy, that the insured must bear before any liability falls upon the insurer.
83
Excess and surplus lines insurance
Excess and surplus lines insurance is a segment of the insurance market that allows consumers to buy property and casualty insurance through the state-regulated insurance market, where policyholders, agents, brokers and insurance companies all have the ability to design specific insurance coverages and negotiate pricing based on the risks to be secured.
84
Excess of loss reinsurace
A form of reinsurance whereby the reinsurer indemnifies the cedant for the amount of a loss above a stated excess point, usually up to an upper limit.
The excess point and upper limit may be fixed, or indexed as specified in a stability clause. Usually this type of reinsurance relates to individual losses, but it can be a form of aggregate excess of loss reinsurance covering the total of all losses in a period and subject to a total aggregate claim limit.
85
Exclusion
An event, peril or cause defined within the policy document as being beyond the scope of the insurance cover.
86
Expense ratio
The ratio of management expenses plus commission to premium (usually calendar accounted expenses to written premium, or sometimes to earned premium). In practice it is common for the expense ratio to refer to management expenses alone (excluding commission) and be specified as a percentage of gross written premium.
87
Experience account
Often a feature of multi-year financial engineering contracts, this is an account that tracks the performance of the business reinsured by the treaty so that the profitability or otherwise of the treaty can be determined.
88
Experience rating
A system by which the premium of each individual risk depends, at least in part, on the actual claims experience of that risk (usually in an earlier period, but sometimes in the period covered). The latter case is sometimes referred to as swing rated or loss sensitive, and there are often upper and lower limits defining a “collar”.
Experience rating also has a more general meaning; for example, in the context of London Market rating. In this context, it is a rating based purely on the experience of the historic risk presented, as opposed to “exposure rating”.
89
Exposure
This term can be used in three senses:
* the state of being subject to the possibility of loss
* a measure of extent of risk
* the possibility of loss to insured property caused by its surroundings.
Exposure statistics are usually shown in one of three common bases: written exposures, earned exposures and in-force exposures.
90
Exposure rating
A method of calculating the premium that is based on external data or benchmarks. The risk profile (exposure) of every insured from the products in question is examined.
Scenarios of losses of various sizes are analysed and the impact on the policies is determined.
The premium of each individual insured does not depend on the actual claims experience of that insured. Instead, the amount of exposure that the insured brings to the insurer and the experience for comparable risks is used to calculate a premium rate.
91
Exposure measure/unit
The basic unit used by the insurer to measure the amount of risk insured, usually over a given period and usually used directly in rating, with premiums expressed as the rate per exposure unit of exposure times the number of units of exposure for the risk.
92
Facultative-obligatory reinsurance
A reinsurance facility where the cedant has the option to reinsure the risk, but the reinsurer is obligated to accept the risk if the insurer chooses to reinsure the risk.
93
Facultative reinsurance
A reinsurance arrangement covering a single risk as opposed to a treaty arrangement; commonly used for very large risks or portions of risk written by a single insurer.
94
Fidelity guarantee insurance
Insurance covering the insured against financial losses caused by dishonest actions of its employees (fraud or embezzlement)
95
Financial engineering
Financial engineering contracts can generally be characterised as ones that attempt to improve a company's balance sheet but with little or no transfer of risk.
96
Financial risk reinsurance or finite risk reinsurance
This is a form of reinsurance (or insurance) involving less underwriting risk transfer and more investment or timing risk transfer from the cedant than is customary in reinsurance.
97
Financial Services Board (FSB)
The body responsible for, among other things, the supervision of insurance activity in South Africa.
98
First loss
A form of insurance cover in which it is agreed that the sum insured is less than the full value of the insured property, and average will not be applied.
99
Fleet
A group of vehicles, ships or aircraft that are insured together under one policy.
100
Fleet rating
The process of determining premium rates for fleets.
101
Franchise
A minimum percentage or amount of loss that must be attained before insurers are liable to meet a claim. Once it is attained the insurers must pay the full amount of the loss. This feature distinguishes a franchise from a deductible or excess.
Note that franchise is also a term to describe the permission given to syndicates to operate within the Lloyd’s market.
102
Free reserves
The excess of the value of an insurer’s assets over its technical reserves and current liabilities.
Also known as the solvency margin and sometimes, in the case of a proprietary insurer, referred to as shareholders’ funds or net asset value.
103
From the ground up
A statement of an original insurer’s experience of a class of business offered for reinsurance is said to be from the ground up when it shows the number and distribution by amount of all claims however small, even though reinsurance is required for large claims only (above retention levels or other contract lower limits).
104
Functional costing
A process used within an expense analysis to split the expenses of each line department between the different classes of business covered by that department.
The process usually relies upon fixing relative unit costs for each of the processes carried out by the department and counting the number of times that each of the processes is carried out over the period in question.
105
Fund accounting
A method of accounting whereby premiums, claims and associated expenses are related to the underwriting year in which the policies start.
The recognition of any underwriting profit is deferred until a subsequent accounting period but provision is made for losses as soon as they are foreseen.
Fund accounting is based on the contracts starting during the accounting period, regardless of the periods of cover provided.
106
Funds at Lloyd's
Each member of Lloyd's is required to provide capital as security to support their total Lloyd’s underwriting business.
This is known as Funds at Lloyd’s. The level of Funds at Lloyd’s determines the amount of insurance business that a member can underwrite.
107
Generalised linear model (GLM)
In statistics, the generalised linear model (GLM) is a flexible generalisation of ordinary least squares regression. The GLM generalises linear regression by allowing the linear model to be related to the response variable via a link function and by allowing the magnitude of the variance of each measurement to be a function of its predicted value.
108
Going-concern basis
The accounting basis normally required for an insurer’s published accounts, based on the assumption that the insurer will continue to trade as normal for the long term future. AKA wind-up basis.
109
Grossing-up factor
A factor used to adjust an immature or incomplete figure to an ultimate or complete one. For example, a factor to adjust claims paid to date from a specific accident year to the full ultimate claim amount for that accident year
110
Hard premium rates
High, profitable premium rates.
111
Hours clause
A clause within a catastrophe reinsurance treaty that specifies the limited period during which claims can be aggregated for the purpose of one claim on the reinsurance contract. Commonly 24 or 72 hours are used.
112
Inception date
This is the date from which the insurer assumes cover for a risk. This may or may not coincide with the premium collection date.
113
Increased limit factor (ILF)
These are factors which estimate the cost for a new limit as a multiple of the basic (original) limit.
114
Incurred but not enough reported (IBNER) reserve
A reserve reflecting expected changes (increases and decreases) in estimates for reported claims only (that is, excluding any “true” or “pure” IBNR claims). The abbreviation is sometimes stated as “incurred but not enough reserved”. The two terms can be regarded as identical in meaning.
115
Incurred but not reported (IBNR) reserves
A reserve to provide for claims in respect of claim events that have occurred before the accounting date but still to be reported to the insurer by that date. In the case of a reinsurer, the reserve also needs to provide for claims that, although already known to the cedant, have not yet been reported to the reinsurer as being liable to involve the reinsurer.
In some types of work, especially in reinsurance and in the London Market, IBNR provisions include any IBNER provisions. Sometimes the provision for claims incurred on or before the valuation date and reported after the valuation date is referred to as the True IBNR or the Pure IBNR (ie excluding the IBNER component for claims that have been reported on or before the valuation date).
116
Incurred claims
Incurred claims refers to the total amount paid on a cohort of claims up to a specified valuation date plus the total of all case estimates on these claims as at the valuation date. In this sense it is used in contrast to paid claims, which refers only to the amounts paid up to the valuation date. Incurred claims usually include ALAE. Other terms for incurred claims when used in this sense are outstanding report claims and incurred to date claims.
The term is also used to refer to the estimate of ultimate claims in annual accounting, which is defined as the total amount paid in the year plus the total claims reserve at the end of the year less the corresponding figure at the start of the year.
This term can be used in different senses and it is essential to confirm the intended meaning in every case.
117
Principle of indemnity
The principle whereby the insured is restored to the same financial position after a loss as before the loss. This is typical of most types of insurance. This contrasts with the new-for-old basis of settlement, often used in home contents insurance, under which the insured is entitled to the full replacement value of the property without any deduction for depreciation or wear and tear. It is important to note that the sum insured under the new-for-old basis of settlement is equal to the value of the new (replacement) item.
118
Insurance cycle
The observed tendancy of insurance prices and hence profitability to vary over a period of several years
119
Inwards reinsurance
Reinsurance business accepted or written by an insurer or reinsurer, as opposed to outwards reinsurance which is ceded to a reinsurer
120
Knock-for-knock agreement
An agreement between two insurers specifying how claims costs are shared between them when vehicles insured by each of them are involved in the same accident. It specifies that each insurer meets the cost of the damage to the vehicle it has insured without any investigation or allocation of legal liability.
121
Lapse
When a policyholder, having been invited to renew the policy, does not do so, the policy is said to laps
122
Lapse rate
Usually defined as the ratio of the number of lapses in a defined period to the corresponding number of renewal invitations, but could be another ratio associated with lapses.
123
Latent claims
Strictly, latent claims are those claims that result from perils or causes that the insurer is unaware of at the time of writing a policy, and for which the potential for claims to be made many years later has not been appreciated.
In common parlance, latent claims are also those that generally take many years to be reported.
124
Lead underwriter
An underwriter who takes the lead in setting premium rates and agreeing policy conditions under a system of coinsurance (for example, in the Lloyd’s market). A lead underwriter may, or may not, be the lead claims handler depending on market practice and agreements for the class of business.
125
Liability insurance
Insurance against the risk of being held legally liable to pay compensation to a third party.
126
Line
Three different meanings arise - the context usually makes it clear which is intended:
* the ceding office’s retention under a surplus reinsurance treaty
* the percentage allocated to an insurer under coinsurance arrangements
* a class of business may also be referred to as a line of business (or LOB).
127
Line slip
A facility under which underwriters delegate authority to accept a pre-determined share of certain coinsured risks on their companies’ behalf. The authority may be exercised by the leading underwriter on behalf of the following underwriters; or it may extend to the broker or some other agent authorised to act for all the underwriters.
128
Link function
A link function provides the relationship between the linear predictor and the mean of the distribution function in a generalised linear model (GLM).
129
Lloyd's
A society, incorporated by the Lloyd’s Act 1871, that provides a market place and regulatory framework within which individual and corporate members may participate in the underwriting of insurance risks on their own account.
130
Lloyd's broker
An agent approved by the Committee of Lloyd’s to place business with Lloyd’s underwriters. There are Lloyd’s brokers in many countries around the world to facilitate the process of individuals, companies and insurers insuring risk through Lloyd’s.
131
LMX on LMX
Excess of loss reinsurance provided for syndicates or companies operating in the London Market in respect of LMX business written by them. This is a form of retrocession business.
132
London Market
The part of the insurance market in which insurance and reinsurance business is carried out on a face-to-face basis in the City of London. Sometimes known as the London Reinsurance Market although not all business transacted is reinsurance.
133
Long tailed business
Types of insurance in which a substantial number of claims take several years from the date of exposure and/or occurrence to be notified and/or se
134
Loss portfolio transfer
An arrangement whereby the total liabilities in respect of a specified book of business is passed in its entirety from one insurance entity to another. Policyholders will be informed of this “novation”.
135
Losses-occurring policy
A reinsurance policy providing cover for losses occurring in the defined period no matter when they are reported, as opposed to a claims-made policy or a risks-attaching policy.
136
Minimum solvency margin
The Short Term Insurance Act, 1998, sets a statutory minimum level that all companies must adhere to. This minimum level is called the Minimum Solvency Margin.
137
Model uncertainty
When modelling data for the purpose of reserving, the risk that an inappropriate model has been used is known as model uncertainty. The quantification of model uncertainty is difficult to assess, but by using alternative models the risk can be minimised and hence the level of uncertainty can be assessed by comparing the outputs of alternative models.
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Moral hazard
The risk that an insured may behave in a less risk averse manner when they are insurerd.
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Mutual insurer
Owned by policyholders to whom all profits (ultimately) belong
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Names (Lloyd's)
The members of Lloyd’s who accept the liability for (and profits from) the risks underwritten in their name. Names may be individuals or corporate entities.
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Net premium
Usually, the premium net of the cost of reinsurance, although it could mean net of premium tax, or net of acquisition expenses and/or commission. Premium net of both reinsurance and acquisition expenses is sometimes referred to as net net premium.
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Nil claim
A claim that results in no payment by the insurer, because, for example:
* the claim is found not to be valid
* the amount of the loss turns out to be no greater than the excess
* the policyholder has reported a claim in order to comply with the conditions of the policy but has elected to meet the cost in order to preserve any entitlement to no-claim discount.
AKA zero claim
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No claim discount (NCD)
A form of experience rating in which an individual policyholder may be granted a discount from the relevant base premium depending on his or her claims experience.
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Non-proportional reinsurance
Reinsurance arrangements, where the claims are not shared proportionately between the cedant and reinsurer. An excess of loss contract is an example.
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Novation
The transfer of the rights and obligations under a contract from one party to another
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Office premium
This is the total premium charged for the period of cover. This premium will contain the risk premium, commission, an allowance to cover all other types of expenses, an allowance for any premium tax and a profit loading.
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One-year (accident year) accounting
A basis of accounting that presents, at the end of each year of account, the estimated technical account for business exposed during the year.
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Outstanding claims reserve (OCR)
The reserve set up in respect of the liability for all outstanding claims, whether reported or not, including reserves for future payments on claims that are currently regarded as settled but may be reopened.
The reserve set up in respect of the liability for all reported outstanding claims, including reserves for future payments on claims that are currently regarded as settled but may be reopened. It is important to note that this definition does not give the complete reserve, which should include an allowance for IBNR (pure IBNR and IBNER).
It is essential to confirm the intended meaning in every case.
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Outwards reinsurance
Reinsurance ceded by an insurer or reinsurer, as opposed to inwards reinsurance, which is reinsurance accepted.
150
Overriding commission
Additional commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit. The term is often used on primary business written through agents or brokers and refers to any addition to basic commission rates either for volume or for profitable business.
151
Parameter uncertainty
When a model is fitted based upon historic data, certain parameters are selected, for example, development factors and associated tail distributions or average cost assumptions. There is the possibility that parameters do not accurately reflect the underlying statistical process. This uncertainty is known as parameter uncertainty. A goodness of fit test using these parameters can quantify this element of uncertainty.
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Partial payment
* Partial claim settlement paid on account, before a claim is finalised or closed
* Any claim for less than the full sum insured.
153
Per-claim basis
A per-claim basis means that original loss curves are based on the amounts that will be paid to each individual claimant (plaintiff) for losses that arise from one incident.
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Per-occurrence basis
A per-occurrence basis means that original loss curves are based on the total amounts paid to all plaintiffs for losses that arise from one incident.
155
Peril
A type of event that may cause a loss that may or may not be covered by an insurance policy. An insured peril is one for which insurance cover is provided as opposed to an excluded peril for which insurance cover is not provided
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Period of unexpired risk
For a policy in force on an accounting date, the period from the accounting date to the expiry date.
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Persistency
A measure of the probability that a policy will remain in force at renewal, rather than lapse.
157
Portfolio transfer
The reinsurance of an entire portfolio at a premium relating to the estimated outstanding claims (including IBNR) and unexpired risk under that portfolio. Usually used when an insurer has decided to discontinue writing a particular class, or by a reinsurer wanting to close a treaty year and pass on the liability to the following year for administrative reasons.
157
Personal lines
Types of insurance products offered to individuals, rather than to groups or business entities. Products include private motor, domestic household, private medical, personal accident and travel insurance.
157
Pooling
Arrangements where parties agree to share premiums and losses for specific types of class or cover in agreed proportions. To some extent all insurance is pooling but specific pooling arrangements often apply particularly where the risks have very large unit size (for example, atomic energy risks) or via mutual associations, such as P&I clubs, catering for an industry.
158
Probable maximum loss (PML)
The term “probable maximum loss” represents an attempt to quantify exposure, used in rating or to judge requirements for outwards reinsurance. It may be used as another term for estimated maximum loss, depending on the class of business. The term “possible maximum loss” implies the consideration of more remote scenarios than those for probable or estimated maximum loss and therefore carries a higher value. The fact that the same abbreviation, PML, may be used for both is a source of possible (and, indeed, probable) confusion.
158
Process uncertainty
Process uncertainty is the risk inherent in writing business and settling claims in general insurance. The modelling of number and amount of claims will vary from the true value owing to random variation. Process uncertainty is represented by a probability density function. Foe example, claims in the coming year may take on a range of values with associated likelihood.
159
Profit commission
Commission paid by a reinsurer to a cedant under a proportional reinsurance treaty that is dependent upon the profitability of the total business ceded during each accounting period. Also, commission paid by an insurer to a broker or insured that is dependent upon the profitability of the business written.
160
Profit testing
A term used for estimating the economic value of contracts using net present value techniques; that is, proposed premium rates are tested by projecting possible levels of future business, claims, expenses, investment experience and profit. The process may be extended to include all business and so form a model office akin to those used in life companies.
160
Proprietary insurer
An insurance company owned by shareholders; that is, not a mutual insurer.
160
Proportional reinsurance
A reinsurance arrangement where the reinsurer and cedant share the claims proportionally. Usually, premiums follow the same proportions but commission rates may differ. Two types commonly arise: quota share and surplus.
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Protected NCD
A modification to an NCD system whereby a policyholder who has attained a high level of NCD may elect to pay an extra premium in order to be able to make claims without losing future entitlement to discount. There may be a specified limit to the number of claims that can be made without affecting the discount, or the insurer may simply reserve the right to withdraw the policyholder’s option to continue on protected NCD.
162
P&I Clubs
Protection and indemnity clubs.
Mutual insurers of marine risks
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Quota share reinsurance
A form of proportional reinsurance where the proportions used in apportioning claims and premiums between the insurer and reinsurer are constant for all risks covered by the treaty.
164
Rating
The process of arriving at a suitable premium for an insurance risk. The term is sometimes synonymous with underwriting, though rating is strictly just one part of the underwriting process.
165
Rating basis
The collection of assumptions used to associate the risk premium with the characteristics of the risk being insured.
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Rating factor
A factor used to determine the premium rate for a policy, which is measurable in an objective way and relates to the intensity of the risk. It must, therefore, be a risk factor or a proxy for a risk factor or risk factors.
167
Reciprocity
An arrangement between two insurers who agree to reinsure risks with each other. Commonly used with quota share reinsurance to diversify the insurers’ overall portfolios.
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Reinstatement
The restoration of full cover following a claim. For example, non-proportional reinsurance often require a reinstatement premium following a claim that breaches the deductible on the reinsurance treaty. There may be a certain number of free reinstatements.
Normally, the number of reinstatements, and the terms upon which they are made, will be agreed at the outset. Once agreed, they are automatic and obligatory on both parties.
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Reinsurance to close (RITC)
An agreement under the Lloyd’s system of three-year accounting. Underwriting members (the reinsured members) for one year of account (the closing year) of a syndicate agree with another party (the reinsuring party) that the reinsuring party will assume responsibility for handling and paying all known and unknown liabilities of the reinsured members arising out of insurance business underwritten by the syndicate and allocated to the closing year.
The reinsuring party will usually be the subsequent open year of the same syndicate but could also be a later open year, an open year of another syndicate or a reinsurer outside Lloyd’s.
The term is also sometimes used to refer to the premium paid to the reinsuring party by the reinsured members for the above-mentioned transfer.
169
Reinsurance
An arrangement whereby one party (the reinsurer), in consideration for a premium, agrees to indemnify another party (the cedant) against part or all of the liability assumed by the cedant under one or more insurance policies, or under one or more reinsurance contracts.
170
Reinsurer
An insurer providing reinsurance cover. Some reinsurers do not write any direct or primary insurance busin
171
Reopened claim
A claim formerly deemed settled, but subsequently re-opened because further payments may be required.
172
Reporting year
A reporting year grouping of claims will combine all the claims that are reported within a given calendar year, irrespective of the date on which the relevant policy commenced, irrespective of when the claims are actually paid and irrespective of the year in which the incident actually arose.
173
Retention
The amount (or proportion) of risk retained by the cedant under a reinsurance arrangement or the insured under an insurance arrangement.
Although, in the case of non-proportional insurance covering a band from R (retention) to U (upper limit), the cedant may be said to retain not only the risk from 0 to R but also the risk above U, it is R that would be termed the retention.
174
Retrocession
Reinsurance purchased by a reinsurer in relation to its inwards reinsurance liabilities (that is, reinsurance of reinsurance).
175
Retrocessionaire
A reinsurer that accepts reinsurance from another reinsurer.
176
Risk-attaching basis
A basis under which reinsurance is provided for claims arising from policies commencing during the period to which the reinsurance relates, irrespective of when the claims are incurred or reported.
176
Return commission
Commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit. Also called overriding commission.
177
Risk-based capital (RBC)
The assessment of the capital requirement for a general insurer by considering the risk profile of the insurance business written and of any other operations. Regulation around the world, including SAM in South Africa and Solvency II in the EU, are moving toward a risk-based regime, where insurers’ capital requirements are dependent on the risk inherent in their businesses operation.
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Risk excess of loss reinsurance
Excess of loss reinsurance that relates to individual losses affecting only one insured risk at any one time.
178
Risk factor
A factor that is expected, possibly with the support of statistical evidence, to have an influence on the intensity of risk in an insurance cover.
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Risk group
The rating cell or risk segment into which particular policies are categorised, within a type of insurance cover. The objective is to achieve a group of policies or risks that have homogeneous characteristics and hence a similar risk of clai
180
Risk premium
The amount of premium required to cover claims expected for a risk; that is, average claim amount times average claim frequency. It may alternatively be expressed as a rate per unit of exposure.
180
Run-off basis
A valuation basis that assumes an insurer will cease to write new business, and continue in operation purely to pay claims for previously written policies. Typically expenses and reinsurance arrangements change after an insurer ceases to write new business.
181
Run-off triangle
The development or run-off triangle may be of paid or incurred claims by amount or number (for determining the development of claims), or of premiums (to determine the earning pattern of written premiums).
182
Salvage
Amounts recovered by insurers from the sale of insured items that had become the property of the insurer by virtue of the settling of a claim.
183
Self-insurance
The retention of risk by an individual or organisation, as distinct from obtaining insurance cover.
184
Short-tailed business
Types of insurance in which most claims are usually notified and/or settled in a short period from the date of exposure and/or occurrence.
185
Slip system
The face-to-face system used within the London Market to coinsure risks. Proposed risks are described by a broker on a standard form (slip); terms and the premium rate are added after negotiation with a lead underwriter (who also signs for a certain proportion of the risk), before the slip is circulated by the broker amongst other underwriters who sign the slip to confirm the proportion of risk that they will accept.
186
Soft premium rates
Premium rates with significantly reduced margins due to the competitive state of the market.
187
Solvency ratio
The free reserves divided by the net (of reinsurance) written premiums.
188
Stability clause
A clause that may be included in a non-proportional reinsurance treaty, providing for the indexation of monetary limits (that is, the excess point and/or the upper limit) in line with a specified index of inflation.
189
Surplus lines insurance
Specialised property or liability coverage in the USA provided by an unlicensed insurer in instances where it is unavailable from insurers licensed in the state in question.
189
Statutory returns
Annual statements and accounts that an insurance company is obliged to file under the Short Term Insurance Act and Regulations. The purpose is to enable the supervisory authorities to monitor the financial condition of the insurer and decide what action, if any, may be needed to prevent insolvency.
190
Stop loss reinsurance
An aggregate excess of loss reinsurance that provides protection based on the total claims, from all perils, arising in a class or classes over a period. The excess point and the upper limit are often expressed as a percentage of the cedant’s premium income rather than in monetary terms; for example, cover might be for a claims ratio in excess of 110% up to a limit of 140%.
190
Subrogation
The substitution of one party for another as creditor, with a transfer of rights and responsibilities. It applies within insurance when an insurer accepts a claim by an insured, thus assuming the responsibility for any liabilities or recoveries relating to the claim. For example, the insurer will be responsible for defending legal disputes and will be entitled to the proceeds from the sale of damaged or recovered property.
191
Sunset clause
Clause defining the time limit within which a claim must be notified, if it is to be valid.
192
Surplus reinsurance
A form of proportional reinsurance where the proportions are determined by the cedant for each individual risk covered by the treaty, subject to limits defined in the treaty.
Sometimes known as surplus lines insurance, but should not be confused with the USA definition above.
193
Syndicate (Lloyd's)
A group of Lloyd’s Names who collectively coinsure risks. The syndicates often specialise in particular types of insurance.
194
Technical reserves
The accounting entries in the balance sheet that represent the insurer’s liabilities from the business that has been written.
195
Three-year accounting
The usual form of funded accounting, in which the underwriting profits are first recognised at the end of the third accounting year from the start of the underwriting year.
196
Time and distance reinsurance
A type of financial reinsurance that had widespread use in the London Market and Lloyd’s, whereby an insurer pays a single premium in return for a fixed schedule of future payments matched to the estimated dates and amounts of the insurer’s claim outgo. The purpose of such contracts was to achieve the effect of discounting in arriving at the reserves for outstanding claims. Since Lloyd’s changed its rules so that the credit allowed for time and distance policies in a syndicate’s accounts was limited to the present value, such policies have become less popular.
197
Treaty reinsurance
Reinsurance that a reinsurer is obliged to accept, subject to conditions set out in a treaty.
198
Uberrima fides
Latin for “utmost good faith”. This honesty principle is assumed to be observed by the parties to an insurance, or reinsurance, contract. An alternative form is uberrimae fidei: “of the utmost good faith”
199
Underinsurance
When the sum insured is less than that required under the terms of the contract. Depending on the policy conditions, where underinsurance is proved to exist, insurers may be able to claim that the policy is null and void. Alternatively, average may be applied to claim amounts.
200
Underwriter
An individual who assesses risks and decides the premiums, terms and conditions on which the risks can be accepted by the insurer.
201
Underwriting
The process of consideration of an insurance risk. This includes assessing whether the risk is acceptable and, if so, the appropriate premium together with terms and conditions of the cover. It may also include assessing the risk in the context of the other risks in the portfolio. The more individual the risk (for example, most commercial lines), the more detailed the consideration.
The term is also used to denote the acceptance of reinsurance and, by extension, the transacting of insurance business. For example, an insurance policy is underwrittten by (insured by) insurer A.
202
Underwriting year
An underwriting year grouping of claims will combine all the claims relating to loss events that can be attributed to all policies that commenced cover within a given calendar year, irrespective of when they are actually reported or paid and irrespective of the year in which the incident actually arose.
202
Underwriting factor
Any factor that is used to determine the premium, terms and conditions for a policy. It may be a rating factor or some other risk factor that is accounted for in a subjective manner by the underwriter.
203
Unearned premium reserve (UPR)
The amount set aside from premiums written before the accounting date to cover risks incurred after that date.
204
Unearned premium reserve
The portion of premium written in an accounting period that is deemed to relate to cover in one or more subsequent accounting periods. It can be calculated in at least two ways:
* Net of deferred acquisition costs (DAC); that is, by deducting acquisition expenses before proportioning the written premium.
* Gross of DAC; that is, by proportioning the full written premium without any deduction for DAC.
The first approach is consistent with a going-concern basis, whilst the second is consistent with a break-up basis. However, the second approach can also be used for a going-concern basis by including DAC as an asset in the balance sheet.
A typical balance sheet includes values gross and net of reinsurance also.
205
Unexpired risks reserve (URR)
This term is often used in two ways:
1. The reserve required to cover the claims and expenses that are expected to emerge from an unexpired period of cover.
2. The reserve required to cover the excess of (1) over the UPR. This is sometimes known as the additional reserve for unexpired risk (AURR).
206
Value at Risk (VaR)
In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading) is the given probability level. VaR can be applied to various quantities, including the profit level of an insurer in order to determine capital requirements.
207
Working layer
A layer of excess of loss reinsurance where the deductible is at a low enough level for it to be likely to experience a fairly regular flow of claims.
208
Written premiums
The amount of premium, either gross or net of reinsurance, for which cover commenced in an accounting period.
