Glossary Flashcards
1
Q
Syndicate (Lloyd’s)
A
A group of Lloyd’s Names who collectively co-insure risks.
The syndicates often specialise in particular types of insurance. Individual Names will usually spread their exposure by belonging to many different syndicates.
However, some corporate members only underwrite through a single syndicate. There are also some syndicates that underwrite exclusively on behalf of a single corporate member.
2
Q
Technical Account – General Business
A
For insurance companies in the UK and South Africa, the Technical Account – General Business is part of the Profit and Loss Account.
It is made up of:
- earned premiums
- less incurred claims (both adjusted for reinsurance as appropriate)
- less expenses (with an allowance for deferred acquisition costs as appropriate),
- plus any part of the investment income that may be allocated to the technical account.
3
Q
Technical reserves (provisions)
A
The accounting entries in the balance sheet that represent the insurer’s liabilities from the business that has been written.
4
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.
5
Q
Time and distance reinsurance
A
A type of financial reinsurance, which 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.
6
Q
Treaty reinsurance
A
Reinsurance that a reinsurer is obliged to accept, subject to conditions set out in a treaty.
7
Q
Twenty-fourths 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.
8
Q
Uberrima fides
A
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”.
9
Q
Underinsurance
A
There is said to be 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.
10
Q
Underwriter
A
An individual who assesses risks and decides the premiums, terms and conditions on which they can be accepted by the insurer.
11
Q
Underwriting
A
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 (e.g. 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.
12
Q
Underwriting agent
A
An organisation at Lloyd’s providing management services for syndicates and/or advice for Names.
13
Q
Underwriting Management Agency (UMA)
A
Is the authorised agent of a particular Insurer or Insurers to act for the Insurer/s in receiving proposals, accepting them, issuing Policies on their behalf, and handling claims under the Policies.
They are remunerated by means other than commission. See Section 48(2) in the STIA. An insurer may enter into a UMA agreement for a particular kind of insurance with only one UMA. A UMA may not accept applications directly from a policyholder. A UMA may not hold shares in a broker from which it receives an application.
14
Q
Underwriting factor
A
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.
15
Q
Unearned premiums
A
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:
(1) Net of deferred acquisition costs (DAC), i.e. by deducting acquisition expenses before proportioning the written premium
(2) Gross of DAC, i.e. by proportioning the full written premium without any deduction for DAC.
The first approach is consistent with a going-concern basis, while 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.
16
Q
Unearned Premium Reserve (UPR) or Provision for Unearned Premiums
A
The amount set aside from premiums written before the accounting date to cover risks incurred after that date.
17
Q
Unexpired Risks Reserve (URR) or Provision for unexpired risks
A
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).
18
Q
Working layer
A
A layer of excess of loss reinsurance at a level where there is likely to be a fairly regular flow of claims.
19
Q
Written premiums
A
The amount of premium, either gross or net of reinsurance, for which cover commenced in an accounting period.
20
Q
Accident year
A
An accident year grouping of claims means that all the claims relating to events that occurred in a 12-month period are grouped together, irrespective of when they are actually reported or paid and irrespective of the year in which the period of cover commenced.
21
Q
Accounting classes
A
The different classes of insurance business for the purpose of statutory returns.
There are currently ten different UK accounting classes (e.g. accident and health, motor vehicle, general liability) which cover the eighteen different classes of business for which insurers may be authorised. In South Africa there are eight different classes of business.
22
Q
Accumulation of risk
A
An accumulation of risk occurs when a portfolio of business contains a concentration of risks that might give rise to exceptionally large losses from a single event.
Such an accumulation might occur by location (property insurance) or occupation (employers’ liability insurance), for example.
23
Q
Acquisition costs
A
Costs arising from the writing of insurance contracts including:
- direct costs, such as acquisition commission or the cost of drawing up the insurance document or including the insurance contract in the portfolio
- indirect costs, such as advertising costs or the actuary’s/underwriter’s expenses connected with the establishment of the premium-rating table.
24
Q
Actual total loss
A
A form of total loss, defined by the Marine Insurance Act 1906. Actual total loss is deemed to occur in one of three ways:
(1) where the insured item is totally destroyed
(2) where it is so damaged that it can no longer be classed as the type of object
originally insured
(3) where the insured is irretrievably deprived of the insured item.
25
Additional reserve (provision) for unexpired risk
The reserve held in excess of the Unearned Premium Reserve, to allow 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.
26
Adjustment premium
The adjustment premium is a further 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.
27
Adverse development cover
This is 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.
28
Agents' balances
Moneys, typically premiums, that belong to an insurer but are held by an agent.
29
Aggregate excess of loss reinsurance
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.
30
All risks
A term used where the cover is not restricted to specific perils such as fire, storm, flood, etc.
The cover is for loss, destruction or damage by any peril not specifically excluded.
The exclusions will often be inevitabilities such as wear and tear.
The term is sometimes loosely used to describe a policy that covers a number of specified risks, though not all.
31
Annual basis of accounting
The usual basis of accounting for general insurance business. A result is determined at the end of the accounting period reflecting:
• the profit or loss from providing insurance cover during that period (including the anticipation of losses arising from cover to be provided in subsequent periods in respect of business written prior to the end of the accounting period)
• any adjustments to the profit and loss from business written during earlier accounting periods.
32
Anti-selection
An insurer is exposed to the risk of anti-selection if a policyholder can make use of information not available to the insurer to obtain insurance cover that would not have been granted if the insurer had had the information, or to obtain cover on more favourable terms than would have been granted by the insurer.
An insurer may also be exposed to the risk of anti-selection by failing to make use of available, relevant information.
33
Atafs
Age to Age Factors
Used by the CAS in triangulation reserving methods to refer to selected development period link ratios between year of development y-1 to y.
34
Atufs
Age to Ultimate Factors
Used by the CAS in triangulation reserving methods to refer to the grossing up factor to get from year y of development to ultimate.
35
Average
(1) In non-marine insurance, the term relates to the practice of scaling down the amount of a claim by applying the ratio of the actual sum insured to the amount deemed to have been the appropriate sum insured.
(2) In marine insurance, the term is generally used to describe damage or loss.
36
Balance of a reinsurance treaty
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 EML.
37
Benchmark
A benchmark is any statistic derived from external sources, e.g. loss ratio, expense-related measure, claim reporting or claim payment development pattern.
38
Bonus Hunger
The reluctance of policyholders under an 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.
39
Bonus-malus
A bonus-malus system is ano-claim discount (or no-claim bonus) system in which the premium level reached after a policyholder has made claims may be higher than that corresponding to the point of entry. The term is used throughout Continental Europe and elsewhere.
40
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 can be calculated.
41
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.
42
Broker
One who acts as an intermediary between the seller and buyer of a particular insurance contract without being tied to either party. A reinsurance broker is similarly defined where reinsurance contracts are bought and sold.
43
mandated intermediary
In South Africa "a mandated intermediary" means an independent intermediary that holds a written mandate from a potential policyholder or policyholder that authorises that intermediary, without having to obtain the prior approval of that potential policyholder or policyholder to:
• Terminate the policy of that policyholder or
• Perform any act, in relation to a policy, that legally binds that potential policyholder or policyholder.
44
non-mandated intermediary
A "non-mandated intermediary" means a representative or an independent intermediary, other than a mandated intermediary or an underwriting manager.
Very simply put, a mandated intermediary acts on behalf of the client and a non-mandated intermediary needs written consent from the client before approving any act.
45
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, IBNR, etc. as a method of calculating premiums for certain types of risks or monitoring experience, e.g. motor fleets and non-proportional reinsurance.
46
Business interruption insurance
Insurance cover for financial losses arising following damage (e.g. a fire) to business premises. Also called loss of profits or consequential loss insurance.
47
Cancellation
A mid-term cessation of a policy, that may involve a partial return of premium.
48
Capacity
The amount of premium income that an insurer is permitted to write or the maximum exposure that could be accepted. It could refer to an insurance company, a Lloyd's Name, a Lloyd's syndicate or a whole market.
49
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.
50
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 clients 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.
51
Case by case estimation
A method of determining the reserve for outstanding reported claims. Each outstanding claim is individually assessed to arrive at an estimate of the total payments to be made. The shorter term “case estimation” is often used and the estimates are referred to as case estimates.
52
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.
53
Catastrophe
In the context of general insurance, a catastrophe is a single event that gives rise to exceptionally large losses. The exact definition often varies and is often dependent on excess of loss wordings, e.g. it might mean all losses incurred in a 72-hour period from a single event such as a wind storm.
54
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.
55
Catastrophe reserve
A reserve built up over periods between catastrophes to provide some contingency against the risk of a catastrophe.
56
Ceding company (cedant)
An insurance or reinsurance company that passes (or cedes) a risk to a reinsurer. The term "cedant" may also be applied to a Lloyd's syndicate.
57
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.
58
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.
59
Claim
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.
60
Claim amount distribution
A statistical frequency distribution describing the total amount of claims.
61
Claim cohort
A group of claims with a common period of origin. The period is usually a month or a quarter or a calendar year. The origin varies but is usually defined by the date of occurrence of a claim, by the date of reporting of a claim, or by the date of payment of a claim or by the date on which the period of cover to which a claim attaches commenced.
62
Claim cost inflation
The rate of increase in the cost of claim payments. It is likely to be influenced by many different types of inflationary force, e.g. general or specific earnings inflation, general or specific price inflation or court award inflation. The term can apply to the general escalation of the average claim cost within a class of business or more specifically to the increase in settlement of a particular claim event (e.g. a broken windscreen).
63
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.
64
Claim frequency distribution
A statistical frequency distribution for claim frequency.
65
Claim ratio
The ratio of the cost of claims to the corresponding premiums, either gross or net of reinsurance. The claim ratio could, for example, be:
- the ratio of the incurred claims cost to the written premium for a given underwriting year
- the ratio of the estimated ultimate claims cost to the estimated ultimate premium for a given underwriting year
- the ratio of the incurred claims cost to the earned premium for a given accounting year or year of exposure, or
- the ratio of the estimated ultimate claims cost to the earned premium for a given accounting year or year of exposure.
In the latter two examples the numerator could also include the estimated change in the cost of claims that occurred in earlier years. Similarly, the denominator could include changes in earned premium in respect of earlier years.
Claim ratios may relate to periods other than a year. An alternative term, especially in the USA, is loss ratio.
66
Claim size distribution
A statistical distribution describing the size of individual claims.
67
Claims handling expenses
The expenses incurred in handling and settling claims are known in some countries, including the UK, as claims handling expenses, the equivalent term in the USA being “loss adjustment expenses". In motor insurance claim handling, expenses may include assessment fees, investigator fees, salvage and release fees, towing and storage fees and upliftment fees. They may be classified as either:
(1) external and internal claim handling expenses, or
(2) expenses (both external and internal) that are allocated to individual claims, plus expenses (both external and internal) that are not allocated to individual claims but are spread over the claims as a whole. In the USA, the terms "allocated loss adjustment expenses (ALAE)” and “unallocated loss adjustment expenses (ULAE)” are used.
The reserves (provisions) required for the future expenses that will be incurred in respect of outstanding claims (whether reported or not) may be correspondingly divided into those that are allocated to individual claims and those that are not. The reserves for the former category are normally included in the reserves for outstanding claims and hence form part of the estimated cost of incurred claims. Those for the other category form part of the estimated incurred expenses.
68
Claims made policy
A policy that covers all claims reported to an insurer within the policy period irrespective of when they occurred. The type of cover provided by such a policy is known as claims made Cover.
69
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 claims themselves or their cost.
70
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 method projection.
71
Clash cover
Excess of loss cover for liability business, obtained by insurers to limit their exposure to the risk that one event gives rise to claims on more than one policy, where otherwise the insurer might be liable for claims up to any retention limit for each individual policy.
72
Closed year
A year for which reserves (provisions) for all future claims arising in the year have been established. Under the system of funded accounting an underwriting year is closed at the end of the period, e.g. at the end of three years from the start of the underwriting year at which point the results for the underwriting year are determined and a profit (or loss) is struck. The underwriting years not closed are "open". In the company market, the accounting convention is to carry any outstanding liabilities into the next open underwriting year as a notional reinsurance transfer premium. In the case of a Lloyd's syndicate, any outstanding liabilities are dealt with by an actual premium payment called a Reinsurance to Close (RITC).
In some cases, where the outcome of a year of account is highly uncertain at the point when it would normally close, or in certain other circumstances, it may be left open until greater certainty allows it to be closed.
73
Co-insurance
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 certain excess of loss contracts to refer to the proportion of claims retained by the cedant.
74
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.
75
Commercial lines
Classes of insurance for businesses. Those for individuals are usually referred to as personal lines.
76
Committee of Lloyd's
A committee that is responsible for administrative matters within Lloyd's under delegation from the Council of Lloyd's. Prior to the establishment of the Council of Lloyd's by the Lloyd's Act 1982, the Committee had sole responsibility for the overall direction of Lloyd's.
77
Commutation
The finalisation of an outstanding liability by payment of an agreed amount in settlement. This process is sometimes used to enable an insurance or reinsurance company to discharge all future obligations in respect of a particular contract or book of business in return for the payment of a settlement amount to the insured or cedant.
78
Commutation clause
Common in Financial Engineering contracts, this is a clause allowing the contract to be commuted under certain conditions. They often work in conjunction with Commutation Accounts, which are used to calculate the relevant numbers.
79
Composite insurer
A single insurance company writing both life and non-life business.
80
Constructive total loss
Typically found in marine insurance. Constructive total loss is where the insured abandons the insured item because an "actual total loss" is unavoidable or because the costs of preventing a total loss exceed the value saved.
81
Council of Lloyd's
The governing body responsible for the overall direction of Lloyd's. It was established as a result of the Lloyd's Act 1982 and consists of six working members, six external members and six nominated members whose appointment must be confirmed by the Governor of the Bank of England. One of the nominated members is the chief executive.
82
Cover note
A note issued by an insurance company to confirm the existence of insurance cover pending the issue of formal policy documentation.
A Cover note is particularly useful where the policyholder is under a statutory obligation to be covered by insurance and may be required to show evidence of cover, for example, third party motor insurance.
83
Credibility
A statistical measure of the weight to be given to a statistic. This often refers to the claims experience for a particular risk (or class) as compared with that derived from the overall experience of a corresponding parent or larger population. The measure is used to determine a premium when using experience rating.
For example, a company may give full credibility to any motor fleet expected to give rise to 1 000 claims in a period (i.e. use a burning cost approach alone) but would only give partial credibility or weight to the burning cost experience of smaller schemes, and may use weighted averages in rating. The weight applied to the actual burning cost in that case would be referred to as the “credibility measure" or "weight", following a Bayesian type approach to risk evaluation.
84
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. Suppose that, under the terms of the policy, the sum insured is S and there is a deductible of D. Then the maximum liability of the insurer is S - D.
In the event of a loss L that exceeds S, the loss borne by the insured is L-S+D.
In the event of a loss L that does not exceed S, the insurer is liable to pay L-D and the loss borne by the insured is D.
85
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 (i.e. deepest pocket) where there is more than one potential defendant.
86
Deferred acquisition costs (DAC)
Acquisition costs relating to contracts in force at the balance sheet date, which 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.
87
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.
88
Development factors
The factors emerging from a chain ladder calculation that are the ratios of claims in successive development years. Sometimes known as link ratios.
89
Direct business
This term has two meanings:
(1) Business acquired without the intervention of an intermediary
(2) The cover provided by an insurer to an original policyholder, as opposed to any reinsurer cover provided for the insurer. The meaning intended is usually clear from the context in which the term is used.
90
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, e.g. employer's liability or professional indemnity.
91
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.
92
Eighths 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.
Policies written in the first, second, third and fourth quarter of each year are assumed to contribute one-eighth, three-eighths, five-eighths and seven-eighths respectively of the quarters' written premium to the Unearned Premium Reserve at the end of the year.
93
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.
94
Equalisation reserve and equalisation provision
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.
95
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.
96
Estimated (or expected) 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. See also the two terms probable and possible maximum loss (PML).
97
Event
An occurrence that may lead to one or more claims.
98
Excess
The sum, specified in the policy, that the insured must bear before any liability falls upon the insurer.
Suppose that, under the terms of the policy, the sum insured is S and there is an excess of E. In the event of a loss L that exceeds S+ E, the loss borne by the insurer is S and the loss borne by the insured is L- (S + E) +E, i.e. L-S.
In the event of a loss L that exceeds E but does not exceed S + E, the insurer is liable to pay L-E and the loss borne by the insured is E.
Thus, in the case of a policy with a specified sum insured, the operation of an excess differs from that of a deductible where l exceeds S.
Excesses are widely used in personal lines of insurance such as motor insurance. They may be compulsory, in that they apply to all claims of the types specified, or voluntary to secure lower premiums.
99
Excess of loss (XL) reinsurance
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.
100
Exclusion
An event, peril or cause defined within the policy document as being beyond the scope of the insurance cover.
101
Expense ratio
The ratio of management expenses plus commission to premium (usually calendar accounted expenses to written premium, or sometimes to earned premium).
102
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.
103
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 called a "collar".
104
Expiry date
The date on which the insurance cover for a risk ceases.
105
Exposure
This term can be used in three senses:
(1) the state of being subject to the possibility of loss
(2) a measure of extent of risk
(3) the possibility of loss to insured property caused by its surroundings.
106
Exposure statistics
Exposure statistics are usually shown in one of three common bases: written exposures, earned exposures and in-force exposures.
107
Exposure rating
A method by which 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. Thus the premium of each individual risk does not depend at all on the actual claims experience of that risk. Instead, the amount of exposure which the risk brings to the insurer is used to calculate a premium rate.
108
Exposure unit/measure
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 times the number of units for the risk. For example, sum insured for property risks or vehicle year for motor risks.
109
Exposure units
should demonstrate certain core characteristics:
1. It should be a reasonable measure of the exposure to loss.
2. It should be easy to determine accurately.
3. It should respond to changes in exposure to loss. For example, in employer's liability insurance the benefits are linked to wages. An exposure unit of payroll is clearly superior to the exposure unit of the number of employees.
110
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.
111
Facultative-obligatory reinsurance
A facultative reinsurance facility with an obligation placed on the reinsurer to accept.
112
Financial Condition Reporting (FCR)
The proposed revision to the South African solvency standard for general insurers. Similar to a risk-based approach to solvency assessment.
113
Financial risk reinsurance, finite risk insurance or reinsurance
This is a form of reinsurance involving less underwriting risk transfer and more investment or timing risk transfer from the cedant than is customary in reinsurance. The contracts are often on a multi-line, multi-year basis. They typically absorb at least the cost associated with claims differing from expected claims experience, and often carry excess of loss terms and multiple options. Premiums usually reflect the time value of money to a larger extent than those in traditional excess of loss contracts.
114
Financial Services Board Act
The Act that, among other things, gives the Financial Services Board its supervisory powers over the insurance industry.
115
Financial Services Board
The body responsible for, among other things, the supervision of insurance activity in South Africa.
116
First loss
A form of insurance cover in which the sum insured is less than the full value of the insured property, so that the policyholder has to bear any loss in excess of the sum insured. It is appropriate in circumstances where the policyholder considers that a loss in excess of the sum insured is extremely unlikely or the item is effectively priceless. It is commonly used in fire business.
117
Fleet
A group of vehicles, ships or aircraft that are insured together under one policy. Such groups are usually subject to different rating approaches from those that would apply to individual risks.
118
Fleet rating
The process of determining premium rates for fleets.
Different techniques, largely based on the size of the fleet and the amount of claims history available, will be used from those that would be used for the individual risks in a fleet. For example, while small fleets may be largely rated according to book rates per vehicle with some adjustment for expense savings, some form of experience rating will be used for larger fleets with the credibility of the fleet's past claims experience increasing with the size of the fleet.
In marine hull insurance, fleet rating will aim to incorporate the characteristics of a fleet (for example, ones under common management) into the rating process, as well as the risk characteristics of the individual ship. Advanced statistical rating techniques could be applied although simpler rating techniques are used in practice.
119
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.
120
Free reserves
The excess of the value of an insurer's assets over its technical reserves and current liabilities. Also referred to as shareholders' funds or net asset value.
121
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 the amount of all claims, however small, even though reinsurance is required for large claims only.\
Also, ground up loss distributions are used to evaluate the effect of different levels of deductible on insurance or reinsurance contracts. Analyses often entail simulation techniques to evaluate (re)insured loss distributions.
122
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.
123
Fund (or funded) accounting
A method of accounting whereby premiums, claims and associated expenses are related to the underwriting year in which the policies incept. 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.
124
Going-concern basis
The accounting basis normally required for an insurer's published accounts, that is based on the assumption that the insurer will continue to trade as normal for the long-term future.
125
Grossing-up factor
A factor used to adjust a base figure to an ultimate one. For example:
(1) The ratio between the ultimate cost and the accumulated payments at a prior development period, as used in statistical claims projection methods, such as the chain ladder method.
(2) The scaling-up of claims experience to allow for the expectation of the occasional very large claim. This is used in experience rating of individual claims experience that has been stripped of any very large claims. It is also sometimes used in motor rating to make adequate allowance for large bodily injury liability claims, stripped out of a basic analysis.
126
Guarantee fund
(1) The higher of 1/3 of the general insurance capital requirement
or
base capital resources requirement (the minimum guarantee fund).
If an insurer's margin of solvency falls below the Guarantee Fund it must, within 14 days of becoming aware of the position, submit a financial plan to the PRA that must include, among other things, an explanation of how it expects to restore its margins.
(2) The UK Guarantee Fund is a fund operated by the Motor Insurers Bureau to compensate victims of negligent uninsured or untraced drivers who have no other source of compensation.
127
Home foreign business
General insurance business written in the UK relating to risks that originate or are located outside the UK.
128
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.
129
Inception date
This is the date from which the insurer assumes cover for a risk. This may or may not coincide with premium collection date.
130
ILFs – Increased limit factors
They give the ratio of premium for higher limits to a basic limit. We choose a “basic limit"; this is usually a relatively low primary limit. We construct a table of multiplicative factors (ILFs) giving the ratio of the premium for higher limits to the basic limit premium. We usually use this terminology and format for casualty business.
131
Incurred But Not Enough Reported (IBNER) reserve
A reserve reflecting expected changes (increases and decreases) in estimates for reported claims only (i.e. excluding any "true" or "pure" IBNR claims). The abbreviation is sometimes stated as applying to “incurred but not enough reserved". The two terms can be regarded as identical in meaning.
132
Incurred But Not Reported (IBNR) reserve
A reserve to provide for claims in respect of claim events that have occurred before the accounting date but had still to be reported to the insurer by that date. In the case of a reinsurer, the reserve needs also 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.
133
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.
134
Insurance certificate
A certificate provided by an insurer to confirm that the policyholder has insurance cover. Although provided for many types of insurance, its main purpose relates to compulsory insurance where it is a legal requirement as evidence of statutory levels of cover may be required by a third party.
135
Insurance cycle
The process whereby hard (that is, profitable) premium rates that often result in an increase in the supply of insurance are followed by soft (that is, unprofitable or less profitable) premium rates usually associated with increased competition, that in turn may be followed by a decrease in supply, reduced competition and a return to hard premium rates. This process is complex but appears to occur in all types of insurance and reinsurance, though at different speeds and to different degrees.
136
IGF - Intermediaries Guarantee Facility
Intermediaries Guarantee Facility is a facility set up by the short-term insurance industry generally for the purposes of providing security in terms of Section 45 of the Short-term Insurance Act read together with Regulation 4 thereto. A short-term insurer may not authorise a person in writing to act as an independent intermediary, to receive, hold or in any other manner deal with premiums payable to it under short term policies unless that person has provided security in terms of the Regulations Part 4 and Section 45 of the Short-term Insurance Act of 1998.
Very simplistically, SAIA is the policyholder, intermediaries are the premium payers and insurers can claim from SAIA if a member intermediary disappears with the premiums.
137
Inwards reinsurance
Reinsurance business accepted or written by an insurer or reinsurer, as opposed to outwards reinsurance which is ceded to a reinsurer.
138
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.
139
Lapse
When a policyholder, having been invited to renew the policy, does not do so, the policy is said to lapse and may be referred to as a lapse. The term is typically used on personal lines such as motor and home building or contents insurance.
140
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.
141
Latent claims
Claims resulting 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. The first claims from these sources may often not be apparent until many years after the period of cover. Sources of latent claims already experienced include asbestos-related diseases, pollution and industrial deafness.
142
Lead underwriter
The underwriter who takes the lead in setting premium rates and agreeing policy conditions under a system of co-insurance (e.g. 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.
143
Letter of credit
A financial guarantee issued by a bank that permits the party to which it is issued to draw funds from the bank in the event of a valid unpaid claim against another party.
144
Liability
(1) A duty or contract to fulfil an obligation to another person or organisation
(2) A type of insurance, i.e. liability insurance, that is an insurance to meet obligations
to third parties that arise:
• from accidents or disease causing injury or illness
• or in the case of property, loss of productive capacity or loss of use arising from
an accident
• or in the case of professional indemnity, financial loss arising from an event found by the courts to be the responsibility of the professional involved.
145
Line
(1) The ceding office's retention under a surplus reinsurance treaty
(2) Used in co-insurance arrangements as the percentage allocated to an insurer
(3) A class of business.
146
Line slip
A facility under which the underwriters delegate authority to accept a pre-determined share of certain co-insured risks on their 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 being authorised to act for all the underwriters.
147
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.
148
Lloyd's broker
An agent approved by the Committee of Lloyd's to place business with Lloyd's underwriters. Except for some of the smaller risks, business written at Lloyd's must pass through a Lloyd's broker.
149
Lloyd's deposit
Wholly owned, non-assigned assets that must be lodged in trust with the Committee of Lloyd's before a member can write any business. The amount of the Lloyd's deposit, together with the Name's means if they are individuals or their capital if they are incorporated Names, determines the maximum limit of premium income that may be written on their behalf.
150
Lloyd's Managing Agent
A company appointed to manage the affairs of an underwriting syndicate, appoint the underwriter, and provide technical and administrative services.
Also known as an underwriting agent.
151
Lloyd's Members' Agent
A company that looks after the interests of individual Lloyd's Names. The Members Agent will introduce Names to syndicates, and advise Names on how to spread their capital between different syndicates. The Members Agent will also be responsible for the regular audit of a Name's wealth, and for submitting all financial statements to Lloyd's.
152
Lloyd's special reserve fund
A contingency reserve of limited size that may be built up by individual Lloyd's Names out of pre-tax income.
153
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.
154
LMX Spiral
The concentration of risk that occurred prior to the mid-1990s when, through the writing of retrocession business, insurers unwittingly ended up reinsuring themselves. One of the reasons that this situation arose was that, when risks were retroceded, the information on the underlying risks that was passed between the parties was inadequate.
155
London Market
That 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.
156
London Market excess of loss (LMX)
Excess of loss reinsurance provided for syndicates or companies operating in the London Market.
157
Long-tailed business
Types of insurance in which a substantial number of claims take several years to be notified and/or settled from the date of exposure and/or occurrence.
158
Loss
This may signify:
- the financial loss suffered by a policyholder, as distinct from the amount of any insurance claim that may be payable in respect of that financial loss
- the amount of the insurance claim, as in the expression “loss reserve” which means the same as the reserve (or provision) for outstanding claims
- in relation to accounts, the opposite of “profit". In this case, the word needs to be appropriately qualified, e.g. underwriting loss or operating loss.
159
Losses-occurring (losses occurring during or LOD) policy
A 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 risk attaching policy.
160
Loss expense reserve
Another expression for any type of claims handling expense provision.
161
Loss portfolio transfer (LPT)
An arrangement whereby the liability for a specified book of business is passed in its entirety from one insurer to another. Policyholders will be informed of this “novation".
162
Loss ratio
Another expression for claim ratio.
163
Loss reserve
Another name for claims reserve. The expression is also often used in association with the reserve deposited by a reinsurer with the cedant to cover in part outstanding claims (exact terms would indicate which party received the investment income on associated assets).
164
Minimum Capital Requirement (MCR)
In terms of SAM proposals in South Africa, the minimum amount of capital required by a general insurer. Similar to the Required Margin of Solvency in the EU (and UK).
165
Moral hazard
The risk that an insured may attempt to take an unfair advantage of the insurer, for example, by suppressing information relevant to the assessment of risk or by submitting a false claim.
166
Motor Insurers Bureau (MIB)
This comprises almost all the insurance companies and Lloyd's underwriters transacting motor insurance in the UK. The Bureau undertakes to meet legitimate claims of third parties in respect of liabilities covered by the Road Traffic Act in circumstances where the third party is unable to recover from an insurer because the negligent driver is uninsured or untraced. In the latter case, the payments are limited to claims other than those for property damage. The costs of claims met by the MIB are financed by a general levy on its members.
167
Mutual insurer
A mutual insurer is one owned by policyholders to whom all profits (ultimately) belong.
168
Names
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.
169
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.
170
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.
171
No-claim discount (NCD)
A form of experience rating in which policyholders are allowed a discount from the basic premium according to a scale that depends upon the number of years since the most recent claim. In practice, the systems often do not count claims where the policyholder was not at fault ("allowed claims") and will usually still provide some discount if a claim is made after a previously long claim free period. It is used most often in private car insurance and occasionally in other classes such as household contents and medical expenses insurance.
172
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.
173
Non-technical account
The non-technical account is a feature of accounts of insurance companies in the EU. It is an account made up from the balance on the technical account plus the balance of the investment income and gains not included in the technical account, plus profits on any other activities less tax, dividends and any other charges.
174
Novation
The transfer of the rights and obligations under a contract from one party to another.
175
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.
176
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.
177
Open year
An underwriting year that is not closed under the system of fund accounting. Typically no contribution to profit is removed from an open year, but any identified deficiency is offset by the use of external funds.
178
Original Gross Premium Income (OGPI)
The gross premium income received by an insurer in relation to business that is covered by a non-proportional reinsurance treaty. The reinsurance premium is calculated as a percentage of this OGPI.
Similar abbreviations, such as OGWP, OGEP, GWPI and GEPI are also used.
179
Outstanding Claims Reserve (OCR) or outstanding claims provision
(1) 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 re-opened.
(2) 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 re-opened.
180
Outwards reinsurance
Reinsurance ceded by an insurer or reinsurer, as opposed to inwards reinsurance which is insurance accepted.
181
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.
182
Partial payment
(1) Partial claim settlement paid on account, before a claim is finalised or closed
(2) Any claim for less than the full sum insured.
183
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.
Examples of perils that may be covered are fire, theft, accident, windstorm, earthquake, riot and civil commotion.
184
Period of unexpired risk
For a policy in force on an accounting date, the period from the accounting date to the expiry date.
185
Persistency
A measure of the probability that a policy will remain in force at renewal, rather than lapse.
186
Personal lines
Types of insurance products offered to individuals, as opposed to commercial lines business or group business. They include private motor, domestic household, private medical, personal accident and travel insurance.
187
Points rating system
A system for calculating the office premium by relating it to points associated with each cell within a rating factor. The higher the risk associated with the cell, the higher the points and the higher the premium. For example, a driver aged 20 would be associated with many more points and, all other things being equal, a higher premium, than a driver aged 40.
188
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 (e.g. atomic energy risks) or via mutual associations, such as P&l clubs, catering for an industry.
189
Portfolio claims
Used in proportional reinsurance and other forms of reinsurance.
The outstanding claims that, together with the portfolio premiums, make up the reinsurance premium required for a portfolio transfer; usually used to transfer obligations from one year of account to the next and hence enable a result for the year to be struck.
Can also apply to the body of claims transferred in a portfolio transfer.
190
Portfolio premiums
The premiums that together with the portfolio claims make up the reinsurance premium required for a portfolio transfer.
191
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.
192
Premium income limit
The amount of premium that a Lloyd's Name may write in a given year, determined by the size of the Name's wealth, their Lloyd's deposit and whether or not incorporated.
193
Premiums trust fund
A fund into which all premiums for a Lloyd's syndicate in a given underwriting year are paid. No moneys may be released from the fund other than any profit on closure and ongoing claims and expenses.
194
Primary insurer
An insurer providing cover directly to the insured policyholder, as distinct from a reinsurer.
195
Probable (possible) 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.
196
Product costing
Product costing is the calculation of the theoretical office premium to be charged for a particular class of business.
197
Product pricing
Product pricing is the determination of the actual office premium. This will take account of current market conditions.
198
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 used, in other arrangements, as any commission contingent on the claims experience.
199
Profit testing
A term used for estimating the economic value of contracts using net present value techniques i.e. 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.
200
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.
201
Proprietary insurer
An insurance company owned by shareholders, i.e. not a Lloyd's syndicate or a mutual insurer.
202
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.
203
Protection and indemnity (P&I) clubs
Mutual associations of ship owners that cover, as a pool, risks not traditionally insured by a commercial marine hull policy, e.g. damage to harbours, removal of wrecks, pollution, loss of life and personal injury. They also provide ship owners with technical assistance in the marine market and advise on issues coming before the shipping industry.
204
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.
205
Rate on line
For non-proportional reinsurance, the total premium charged (ignoring reinstatement premiums) for the reinsurance divided by the width of the layer covered.
206
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.
207
Rating basis
The collection of assumptions used to associate the risk premium with the characteristics of the risk being insured.
208
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.
209
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.
210
Recoveries
Amounts received by insurers to offset directly part of the cost of a claim. Recoveries may be made from several different sources, e.g. reinsurers, other insurers, salvage, liable third parties.
211
Reinstatement
The restoration of full cover following a claim. 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.
212
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.
213
Reinsurance to close (RITC)
Under the Lloyd's system of three year accounting, an agreement under which 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 indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of insurance business underwritten by the syndicate and allocated to the closing year. In return, the reinsuring party receive a premium and the assignment of all the rights of the reinsured members arising out of their participation in the closing year. This then allows the closing year to be closed.
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 reinsurance to close is also sometimes used to refer to the premium paid to the reinsuring party by the reinsured members.
214
Reinsurer
An insurer providing reinsurance cover. Some reinsurers do not write any direct or primary insurance business.
215
Re-opened claim
A claim formerly deemed settled, but subsequently re-opened because further payments may be required.
216
Replacement
A basis of cover under which the insurer pays the cost of replacing the insured item with a similar but new item. Also referred to as replacement as new or new for old and contrasts with the principle of indemnity.
217
Required Margin of Solvency (RMS)
The minimum level by which an insurance company's assets should exceed its liabilities according to EU (and UK) legislation.
218
Required Minimum Margin (RMM)
The greater of RMS and the Minimum Guarantee Fund (MGF) set by the EU.
219
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.
220
Retroactive date
Used for claims made cover. It is the date after which claims must have occurred in order to be covered.
221
Retrocession
Reinsurance purchased by a reinsurer in relation to its inwards reinsurance liabilities (i.e. reinsurance of reinsurance).
222
Return commission
Commission paid by a reinsurer to an insurer ceding proportional business, as a contribution towards expenses and profit. Also called overriding commission.
223
Risk attaching basis
A basis under which reinsurance is provided for claims arising from policies commencing during the period to which the reinsurance relates.
224
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. In the USA, the required minimum margins of solvency are determined after considering RBC requirements.
225
Risk excess of loss reinsurance
Excess of loss reinsurance that relates to individual losses affecting only one insured risk at any one time.
226
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.
227
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.
228
Risk premium
The amount of premium required to cover claims expected for a risk, i.e. average claim amount x average claim frequency. It may alternatively be expressed as a rate per unit of exposure.
229
Road Traffic Act
The UK legislation that, inter alia, requires anyone using a motor vehicle on the road to have insurance to cover their legal liabilities to third parties (including passengers) in respect of personal injury and property damage.
230
Road Accident Fund Act
The South African legislation that, inter alia, provides for the establishment of the Road Accident Fund (RAF) to provide compensation for legal liabilities to third parties (including passengers) in respect of personal injury, arising from the driving of motor vehicles.
231
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.
232
Run-off triangle
The development or run-off triangle may be of paid or incurred claims by amount or number, or of premiums.
233
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.
234
Section 36 (2) transfer
A court-approved transfer of business from one insurer to another, under Part V of the Short-term Insurance Act of 1998.
235
Self-insurance
The retention of risk by an individual or organisation, as distinct from obtaining insurance cover.
Large commercial concerns may opt for self-insurance on the grounds that they are avoiding the extra expenses and profit loadings of an insurance policy and have sufficiently strong finances to cope with their likely losses. In practice, they will typically still seek insurance against very large losses by having insurance contracts with very high excesses.
Effectively, having any non-zero excess implies a level of self-insurance. Owning a captive insurance company is a means of arranging for self-insurance, with cover for very large losses being arranged by the captive by means of reinsurance.
236
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.
237
Short-term policy
This definition comes from the STIA. It means an engineering policy, guarantee policy, liability policy, miscellaneous policy, motor policy, accident and health policy, property policy or transportation policy or a contract comprising a combination of those policies; and includes a contract whereby any such contract is renewed or varied.
238
Signing down
The process of reducing the proportion of risk that each co-insurer has accepted for a given risk where the slip has been more than 100% subscribed.
239
Slip system
The face-to-face system used within the London Market to co-insure 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 among other underwriters who sign the slip to confirm the proportion of risk that they will accept.
240
Solvency ratio
The free reserves divided by the net (of reinsurance) written premiums.
241
Stability clause
A clause that may be included in a non-proportional reinsurance treaty, providing for the indexation of monetary limits (i.e. the excess point and/ or the upper limit) in line with a specified index of inflation.
242
Statutory returns
Annual statements and accounts that an insurance company is obliged to file under the UK Insurance Companies Acts and Regulations, or the short-term Insurance Act in South Africa. 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.
243
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, e.g. cover might be for a claims ratio in excess of 110% up to a limit of 140%. Where this form of reinsurance exists in practice, it is common for the cedant to be required to retain a proportion of the risk (called the co-insurance proportion) in the reinsured layer, to reduce any moral hazard.
244
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.
245
Sunset clause
Clause defining the time limit within which a claim must be notified, if it is to be valid.
246
Suretyship
Insurance to provide a guarantee of performance or for the financial commitments of the insured.
247
Surplus
In the USA, the term has two meanings:
- (1) a risk that a broker is unable to place with insurers in their own state and for which cover must be sought outside the state
- (2) the shareholders' equity of an insurance company.
248
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.
249
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 US definition.
