Glossary

adjuster: A person who settles claims for insurers or self-insurance pools who may be either an employee of the insurance company or an independent contractor engaged by the insurer or self-insured. See also third-party administrator (TPA).

admitted/authorized reinsurance: Reinsurance for which credit is given in the ceding company's annual statement because the reinsurer is licensed or approved to transact business in the jurisdiction where the risk is located. See also nonadmitted balance.

admitted company: A company licensed or authorized to sell insurance to the general public. In the United States, admitted companies are licensed on a state-by-state basis and differentiated from surplus lines insurers, which are authorized to sell insurance in a state on a nonadmitted basis.

admitted insurance: The insurer is licensed in the state or country where the risk is located.

adverse selection: A situation in which an insurer or self-insurance pool fails to get an adequately broad cross section of risks and the result is greater-than-average exposure.

affiliated risk: The risks of the owners of the captive or their affiliates or of the participant in a captive cell when describing risks insured in a captive. Can be either first-party or third-party risk.

agent: Individuals working for the insurer to sell insurance; therefore, they are compensated by the insurer. May be company employees of independent contractors. Must be licensed in all states where the insurance is written.

aggregate: The greatest amount recoverable under a policy or reinsurance agreement from a single loss or all losses incurred during the contract period. May be multiyear or annual.

aggregate excess: Short for aggregate excess of loss. A method by which an insurer may recover excess losses after a policy or reinsurance aggregate or underlying deductible has been exhausted.

aggregate stop loss: Insurance purchased to attach excess of an aggregate loss limit. See also stop loss.

aleatory contract: A contract where performance is in a future period. An insurance policy is aleatory—payment of premium today for payment of future losses.

alien: An insurer domiciled outside the United States. ("Foreign" in the U.S. insurance regulatory system means an insurer domiciled in another state.)

allocated loss adjustment expenses (ALAE): Defense and cost containment expenses (e.g., legal defense costs, investigations, external experts, surveillance, etc.). Typically external costs, but can include internal costs. These costs may or may not be included within the policy limits.

all risks insurance: A term used to refer to any property or inland marine insuring form that insures against damage by "all risks" of loss, except those that are specifically excluded (as opposed to insuring against damage caused by specifically "named perils"). Also called "special risks."

alternative risk financing mechanism: A legal entity, such as a captive insurance company, which assumes from one or more entities the liability to pay their future losses; used as an alternative to commercial insurance.

alternative risk transfer (ART): Financing risks outside of the commercial insurance regulatory system, which is designed to protect unsophisticated insurance buyers. Also refers to transferring risk using nontraditional methods—e.g., combining insurance and noninsurance techniques.

A.M. Best rating: An evaluation published by A.M. Best Company of all life, property, and casualty insurers domiciled in the United States and U.S. branches of foreign property insurer groups active in the United States. The ratings are often used to determine the suitability, service record, and financial stability of insurance companies. Other rating agencies include Standard & Poor's.

annuitant: The person or persons (two or more) that receive an income benefit for life or during a specified period (the liquidation period) under an annuity contract.

arbitration clause: A provision found in many reinsurance contracts whereby the parties agree to submit their disputes to an unofficial tribunal of their own choosing rather than a court of law, generally subject to selection criteria and procedures set out in the clause, which produces an opinion ultimately enforceable by a court of law.

association captive: A captive insurance company that has as its primary purpose the insurance of the risks of the members of an association that either sponsors or owns the captive.

assumed premiums: Premiums received or receivable for coverage provided under a reinsurance agreement.

assumed reinsurance: Insurance accepted from another insurer—e.g., an admitted (policy-issuing) company.

assumed risk: In the context of business written by an insurer, see assumed reinsurance. In the context of self-insurance, risk retained by an insured.

assumption of liability endorsement (ALE): An endorsement added to an insurance policy to provide that, in the event of insolvency of the insurance company, the amount of any loss that would have been recovered from the reinsurer by the insurance company will be paid instead directly to the policyholder by the reinsurer. Also referred to as a cut-through or assumption of risk endorsement.

attachment point: The dollar threshold or loss and expense ratio above which the reinsurer or excess insurer pays losses.

automobile liability insurance: Insurance that protects the insured against financial loss because of legal liability for automobile-related injuries to others or damage to their property by an auto.

automobile physical damage insurance: Automobile insurance coverage that insures against damage to the insured's own vehicle. Coverage is provided for perils such as collision, vandalism, fire, and theft.

base premium: See subject premium.

basic premium: The underwriting and administrative expense component of premium; amounts required for adjusting of expected losses. (see unallocated loss adjustment expenses (ULAE)) It is added to the pure premium to produce the standard premium. In life insurance, the basic premium also includes agent's commissions.

basis risk: The random variation in values between a hedge instrument (i.e., the "hedge recovery") and the actual loss experience of the hedger (investor).

basket aggregate: An annual aggregate loss limit on a multiline basis.

benefit plan: Under Employee Retirement Income Security Act (ERISA), a promise by an employer to provide benefits to employees, where the funds for payment of the benefits are transferred to a party unrelated to the employer, such as an insurance company.

binder: A temporary insurance contract indicating coverage is in place pending execution of the actual contract. Usually issued for a limited time period such as 30 or 60 days.

blanket limits: Property insurance limits applying to multiple insured locations, stated as the sum of all exposures or a fixed amount covering property wherever it is located.

blended finite risk: An insurance or reinsurance agreement that combines risk transfer with financial insurance by insuring against multiple causes of loss, one or more of which is underwritten on a finite basis.

Blue Book: The regulatory report filed by life, accident, and health insurers in the United States, named for its cover. See also convention statement.

boards and bureaus: As part of an insurer's acquisition expense, the amount of premium allocated to pay for participation in rating agencies and for filing policies for approval by regulators.

bond: A three-party contract under which the insurer agrees to pay losses caused by criminal acts (e.g., fidelity bonds) or the failure to perform a specific act (e.g., performance or surety bonds). The principal (i.e., the party paying the bond premium) is also called the obligor—i.e., the party with the obligation to perform. If there is a default, the surety (i.e., the insurer) pays the loss of the third party (the obligee). The obligor must then reimburse the surety for the amount of loss paid.

bordereau: A report provided periodically by the reinsured detailing the reinsurance premiums and/or reinsurance losses with respect to specific risks ceded under a treaty reinsurance agreement.

Bornhuetter-Ferguson technique: An actuarial method of forecasting losses, using loss development and loss ratio.

branch captive: A captive insurance company that registers to operate in a state or country other than its domicile state. For example, an offshore captive that qualifies under 953(d) to be taxed as a U.S. insurer might form a branch in an onshore captive domicile to write lines of business that it does not write in its offshore captive.

broker: An intermediary who represents the insured in the purchase of insurance or reinsurance. Therefore, the broker's compensation should be from the insured, not the insurer, to prevent conflicts of interest.

buffer layer: The loss layer between an insured's predictable working layer losses and the attachment point of excess insurance. Losses are within the insured's or an insurer's retention capacity but not predictable.

builders risk: A type of fire insurance that indemnifies for loss of, or damage to, a building under construction; the loss must be caused by specified or named perils.

bulk reserves: An amount of reserves established using a formula or loss ratio, rather than specifically identified case reserves. The insurer records movements in losses in aggregate for a period. Used with a loss portfolio transfer.

burning cost: The maximum probable amount of excess losses, used by excess of loss and catastrophe reinsurers as a method of calculating amount of pure premium required over time to pay reinsured losses.

business interruption: Coverage generally written as part of a property policy, providing protection against losses resulting from a temporary shutdown because of fire or other insured peril—e.g., computer virus. The insurance provides reimbursement for lost net profits and necessary continuing expenses. Limits and deductibles are stated as amount of days the business is interrupted.

business risks: Risks that are not "pure" but speculative—i.e., the outcome could be loss, no loss, or profit.

capital: The difference between a company's assets and liabilities, often referred to as "net worth." The source of capital can be amounts contributed by investors or the company's retained earnings. For an insurance company, the assets used to calculate capital may be restricted as to amount and type. For example, minimum paid-in capital may need to be in the form of cash, and the captive statute will specifically define what constitutes "cash." See also capital at risk; nonadmitted asset; paid-in capital; statutory capital; surplus.

capital at risk: Capital that is available to support the retention of risk by a self-insurer or underwriter of risk. Such "risk capital" may be required in a captive insurance company for payment of losses, in the event that premium collected is insufficient to pay losses and expenses. Typically it is an amount in excess of statutory capital, and can therefore be used as collateral to ceding companies. May also be referred to as surplus funds or risk bearing capital. See also risk capital; surplus.

captive: An insurance company that has as its primary purpose the financing of the risks of its owners or participants. Typically licensed under special purpose insurer laws and operated under a different regulatory system than commercial insurers. The intention of such special purpose licensing laws and regulations is that the captive provides insurance to sophisticated insureds that require less policyholder protection than the general public.

captive facility: An insurance or reinsurance company, licensed under either commercial or captive insurance laws, used to provide captive insurance to insureds that may share in the facility's ownership or have no ownership position. See also rental captive; cell captive.

captive value added (CVA): The financial benefit to an organization resulting from participation in a captive program as a shareholder and/or an insured. One formulaic approach to calculating CVA uses net present value (NPV) program cost comparisons to show a captive's contribution to an organization's retention ability—i.e., the capacity creation effect—as well as the lower after-tax cost, compared to self-insurance or commercial insurance. The "value added" approach can also be used to recognize subjective as well as objective benefits.

case reserves: Reserves for losses and allocated loss adjustment expenses (ALAE) for specific claims reported to the insurer.

cash call: Provision whereby large losses can be collected from reinsurers, rather than paid by the insurer on account or from funds withheld or a loss escrow account.

cash flow underwriting: Rating a risk based on an expectation that any incurred losses will pay out slowly providing for the insurer to earn investment income on reserves adequate to cover any rate deficiency. Common during "soft" markets when interest rates are high and insurers are competing for market share.

casualty insurance: Insurance of losses arising when an accident involving the insured's property (e.g., a boiler) or actions (e.g., as an employer) cause injury or damage to third parties. Unlike liability insurance, there is no requirement for negligence for a loss to be covered. The casualty policy also covers loss to the insured's own property that caused the loss.

catastrophe bond: A debt instrument where the promise to pay interest on the loan and return of principal is contingent on fortuitous events of a catastrophic nature, such as a natural disaster. May be used instead of purchase of catastrophe reinsurance.

catastrophe reinsurance: Protects against multiple losses under one policy class in one occurrence—e.g., a 72-hour period of a natural disaster. Also known as "cat cover."

causes of loss: Used in casualty insurance to identify an action or accident that, when combined with an exposure and hazard, creates risk of loss. Can be direct (the action immediately precedes the loss) or indirect (part of an uninterrupted chain of events leading to the loss).

cede: When a company reinsures its liability with another, it "cedes" business.

ceded premiums: Premiums paid or payable by the captive to another insurer for reinsurance protection.

cedent: The reinsured or ceding company.

ceding commission: A fixed percent of original gross premium, or a flat dollar amount, paid by the assuming reinsurer to a ceding company to cover acquisition costs and other policy expenses.

ceding company: The insurer that buys the reinsurance (cedes the risk).

cell captive: A sponsored captive or rent-a-captive, which maintains underwriting accounts separately for each participant. May be called protected cell captive (PCC) or segregated cell insurer. If the cells are legally segregated, it may be used to securitize risk. See also captive facility.

certificate holder: An additional insured, as evidenced by issuance of a certificate of insurance.

certificate of compliance: Statement issued by an insurance department or other regulatory authority confirming that an insurer is in compliance with applicable statute and regulation.

certificate of insurance: Written verification from an insurance company of the existence of insurance, the policy amount, the insured(s), and the period for which coverage is effective. A certificate may simply provide evidence of the named insured's insurance, or may evidence coverage for additional insureds.

certificate of reinsurance: A record of reinsurance coverage pending replacement by a formal reinsurance contract, which is usually a facultative certificate. Opportunity is given for the ceding company to acknowledge acceptance of terms, with the reinsurer's obligation contingent on validity of key information stated in the certificate.

cession statement: A periodic statement of subject premiums and the losses and expenses incurred under the reinsured policies, provided by the ceding company to a reinsurer.

claims-made basis: A form of reinsurance under which the date of the claim report is deemed to be the date of the loss event. Claims reported during the term of the reinsurance agreement are therefore covered, regardless of when they occurred. A claims-made agreement is said to "cut off the tail" on liability business by not covering claims reported after the term of the reinsurance agreement—unless extended by special agreement.

claims-made insurance: Insurance that provides coverage for claims made against an insured within the policy period, regardless of when the action or accident giving rise to the claim occurred. The insured must have been notified of the claim after the retroactive date and must report it to the insurer before the expiration of the policy or any extended reporting period.

clash cover: Excess of loss reinsurance on a per-event or accident basis to protect against losses in more than one class of business in a single occurrence.

class of business: Types of insurance, classified according to the perils insured and the exposure. The purpose is to group homogeneous risks for purposes of rate development. See also line of business.

coinsurance: 1. A provision in a property insurance policy under which the insured agrees to carry a certain amount of insurance expressed as a percentage of the value of the property. It provides for the full payment, up to the amount of the policy, of all losses if the insurance carried is at least equal to the specified percentage. However, if the insured fails to carry the necessary amount of insurance, he or she assumes a proportionate share of each loss, regardless of the size of the loss, up to the policy limit. 2. In health insurance and some casualty lines, the percentage share of losses that an insured retains. It is a form of deductible.

collateral: Assets that are provided as security to ensure satisfaction of a future liability. Often required by ceding companies, to minimize their credit risk, or offset a nonadmitted balance. A direct writing captive writing deductible reimbursement coverage may provide collateral to the insurance company that has issued a deductible policy to the captive's insureds. The most common form of collateral posted by captives or captive insureds or captive shareholders is the bank letter of credit (LOC), but insurance trust funds may be used. See also letter of credit; Regulation 114 Trust.

combined ratio: An insurer's incurred losses, loss adjustment expenses (LAE), acquisition costs, and general and administrative costs compared to earned premiums for the same period.

commercial multiple peril (CMP) policy: A package type of insurance that includes a wide range of essential liability and property coverages for businesses.

commercial risks: The risks arising from the operations of for-profit and tax-exempt organizations (as opposed to the risks of individuals and households).

commission: In reinsurance, the primary insurance company usually pays the reinsurer its proportion of the gross premium it receives on a risk. The reinsurer then allows the company a ceding or direct commission allowance on such gross premium received, large enough to reimburse the company for the commission paid to its agents, plus taxes and its overhead. The amount of such allowance frequently determines profit or loss to the reinsurer.

commutation agreement: An agreement between the ceding insurer and the reinsurer that provides for the valuation, payment, and complete discharge of all obligations between the parties under particular reinsurance contract(s). Used if an insurer is withdrawing from underwriting a class of business.

commutation clause: Provision in a reinsurance agreement that allows for payment of cash by one party to release the other from all future obligations to pay claims after a certain period of time. Common in long-term disability insurance, where the reinsurer wishes to settle and discharge all future obligations for claims that have a very long payment pattern. Also used in finite risk reinsurance.

compensatory damages: Payments to a plaintiff to indemnify the plaintiff for actual losses sustained as a result of an insured's negligence.

confidence level: The credibility attached to loss projections in an actuarial analysis.

consequential loss: A loss not directly caused by a peril insured against but instead resulting indirectly following a loss caused by an insured peril.

consideration: The value received to bind a contract; also, payment for an annuity.

consolidation: 1. financial—Combining the financial results of a subsidiary company with its shareholder, resulting in the elimination of intercompany accounting entries (transactions between affiliates offset each other). 2. tax—The filing of a single income tax return for all companies within a corporate group.

contingent commission: Commission based on the profitability of the ceded risk. Can be fixed or sliding scale.

contingent liability: Coverage for losses to a third party for which the insured is vicariously liable. Contingent liability can be assumed—e.g., for losses arising from product or service failure—where the insurer has assumed liability by providing a performance warranty. Also written as a contingent business interruption form.

continuous contract: A form of reinsurance contract for accepting new business that does not terminate automatically but rather is intended to continue from year to year unless one of the parties delivers notice of intent to discontinue, or termination is mutually agreed to in accordance with the termination provisions of the contract.

contractual liability: An obligation assumed by contract to pay damages for which another is legally liable; the liability would not exist in the absence of the contract.

contributing excess: Where there is more than one reinsurer sharing a line of insurance on a risk in excess of a specified retention, each such reinsurer shall contribute toward any excess loss in proportion to its original participation in such risk. Example: Retention $100,000, Reinsurer A accepts one-half contributing share part of $1 million in excess of said $100,000. Reinsurer B accepts remaining one-half contribution share part of $1 million.

controlled foreign corporation (CFC): A foreign corporation where shareholders owning, by vote or value, more than 10 percent of the corporation collectively own more than 50 percent of the stock.

controlled unrelated business: Risks that are not owned by the captive shareholder but, because of an existing business affiliation—e.g., a franchise or joint venture relationship—the owner of the captive exercises risk management control over the risk.

convention statement: The annual report format developed by the National Association of Insurance Commissioners (NAIC) and adopted by member states as the standard for all commercial insurers. Convention statements are filed by an insurer in its domicile and copied to the NAIC for Insurance Regulatory Information System (IRIS) ratios and risk-based capital calculations to be published. See also Blue Book; Yellow Book.

convergence: In the financial services industry, the coming together of credit institutions and insurance companies to develop products that combine the elements of each industry sector.

core capital: The statutory capital of a sponsored captive, as distinct from the capital and surplus available to support the underwriting of risk in a captive cell.

corridor deductible: A deductible applied to an excess loss layer, calculated as a percent of the loss above the attachment point, or as a per occurrence or aggregate dollar amount.

cost of risk: The financial impact on an organization of undertaking activities with an uncertain outcome. The cost of managing risks and incurring losses.

countersignature: State insurance laws that require an insurance policy to be signed not only by the insurer issuing the policy but an agent residing in the state where the risk is located. Risk retention groups (RRGs) have resisted compliance with countersignature laws, since this increases the cost of policy issuance.

cover notes: A binding reinsurance confirmation in the form of an "adhesive contract"—i.e., not requiring signature by the ceding company to be valid. Operates like a binder/declarations page, providing details about the type of reinsurance, form of contract, lines of business reinsured, effective date, cancellation provisions and territory, commissions, and exclusions.

credibility: The weight assigned to specifically analyzed data, compared to a broader set of data. A measure of the relative predictive value of the data being reviewed. The weight assigned generally increases with the increase in the number of risks in the data analysis. A lower weighting (credibility factor) means higher levels of variability in outcomes for the analyzed data.

credit for reinsurance: A statutory accounting procedure permitting a ceding company to treat amounts due from reinsurers as assets or reductions from liability based on the status of the reinsurer. See also nonadmitted balance.

credit insurance: Coverage against insolvency of a customer, which provides protection against payment default on loan, interest, or scheduled payments. Also known as "bad debts" insurance.

credit life insurance: Term life insurance that pays off the balance of a loan if the creditor dies. Usually sold by banks or finance companies to their customers at the point of sale.

credit wrap: A form of financial guarantee insurance, covering not all debts of the creditor, but a specific loan, debt issuance, or other financial transaction.

cut-through clause: Used with retrocessions. The primary insurer has the ability to receive reinsurance payments directly from the retrocessionaire if unable to recover from the reinsurer.

cyber liability: Liability for claims arising from negligent use of Internet and information technology infrastructure and activities. Typically excluded from traditional commercial general liability policies. See also Health Insurance Portability and Accountability Act (HIPAA).

cyber security: Measures required under federal and state regulations to protect consumers from misuse of personal information stored and transmitted electronically. See also Health Insurance Portability and Accountability Act (HIPAA).

deposit: See funds withheld.

deposit accounting: The method of accounting for premium when the policy or reinsurance agreement does not qualify as insurance. The premium is not recognized as income but as a deposit or contribution to the insurer's surplus. Losses paid are not an expense but rather return of capital. Since premium does not flow though the income statement, the insurer cannot reduce income by the increase in loss reserves.

deposit premium: The amount of premium (usually for an excess of loss reinsurance contract) that the ceding company pays to the reinsurer on a periodic basis during the term of the contract. This amount is generally determined as a percentage of the estimated amount of premium that the contract will produce based on the rate and estimated subject premium. It is often the same as the minimum premium but may be higher or lower. The deposit premium will be adjusted to the higher of the actual developed premium or the minimum premium after the actual subject premium has been determined by audit or reporting of the actual exposures insured during the coverage period.

derivative contract: A financial contract (i.e., a promise to pay an amount to the holder of the contract at a specified time or under specified conditions) where the value of the contract is based on certain variables—e.g., an index of commodity prices.

development factor: The percentage amount by which reported losses for a given time period must be multiplied to adjust for claims development, which is the amount of loss unknown at the time the initial loss reserves were established.

difference-in-conditions (DIC): A policy that insures against perils excluded in a special risk policy or supplements coverages in a named perils policy. Often used to provide flood and earthquake cover.

difference-in-limits (DIL): A DIL policy provides additional loss limits for risks already covered under other policies. Captives may write combined DIC/DIL policies.

directors and officers (D&O) liability insurance: Protects directors and officers against suits arising from their actions. May or may not cover shareholder derivative actions.

direct loss: Loss resulting directly and immediately from the hazard insured against. A policy may insure direct loss or direct and indirect (consequential) loss. Also used sometimes by captives to identify losses under policies directly insured by the captive, as opposed to losses assumed from a front company.

direct premiums: The gross premium income for coverage under policies issued by the captive.

direct procurement: The purchase of insurance by an insured directly from an insurer, rather than accessing coverage through a broker. This procedure is commonly used by large commercial buyers of insurance that reside in states or countries that permit insureds to purchase nonadmitted insurance.

direct writer: An insurer or reinsurer that accepts business directly from insureds or reinsureds without requiring business to be submitted through a broker or intermediary.

direct writing: The insurance company issues the insurance policies to its named insureds.

direct writing captive: A captive that issues policies of insurance to its insureds. See also reinsurance captive.

discovery period: The time allowed the insured after termination of a policy to report a loss that occurred during the period covered by the contract and that would have been recoverable had the contract continued in force.

distributions: See policyholder dividend.

distribution system: The method by which an insurance company reaches its insureds—i.e., as direct writer, wholesaler, agency system, or broker market.

domicile: The state or country that licenses an insurance company, and has primary regulatory oversight over that insurer. A captive domicile may or may not have special purpose legislation under which it licenses special purpose insurers referred to as "captives."

dynamic financial analysis: Statistical modeling techniques that project an outcome not on a static basis—i.e., under one set of defined assumptions or the same assumption with one or two variables changed—but to project a range of possible outcomes assuming constant movements in interrelated variables.

dynamic risk: Risks that arise as a result of organizational change.

engineering: See loss control.

enterprise risk management: A strategy for identifying, controlling, and financing of all sources of risk within an organization in a coordinated manner; an effort to provide insurance solutions to business risks not historically insured under property and casualty policies.

errors and omissions (E&O) insurance: Coverage protecting insureds for damages arising out of the insureds' acts, errors, or omissions when performing their duties, like professional liability coverage.

event: A loss occurrence where there are multiple claims with a single cause of loss. Could affect one or more insureds and one or more policy.

excess insurance: Insurance over a self-insured retention or a primary insurance policy. If the latter, it only raises the limit but does not provide wider coverage, as does an umbrella policy.

excess of loss: The reinsurance limit attaches above a per occurrence or aggregate limit.

excess point: The dollar attachment point for the reinsurer.

exclusions: Specific perils and exposures identified as not being covered under a particular policy.

exemplary damages: See punitive damages.

ex gratia payment: A payment made for which the company is not liable under the terms of its policy. Usually made in lieu of incurring greater legal expenses in defending a claim. Rarely encountered in reinsurance as the reinsurer by custom and for practical reasons follows the fortunes of the ceding company.

expediting expense: Costs to complete repairs to put the insured back in business as rapidly as possible, even if a temporary arrangement. Used chiefly with boiler and machinery insurance.

expense load: The amount of acquisition and other costs included in premium in addition to the pure premium. This factor provides for overhead expense and profit margin included in the gross premium (or rate).

expense ratio: The percentage of premium used to pay all the costs of acquiring, writing, and servicing insurance and reinsurance.

experience: The loss record of an insured, including all incurred losses, whether insured or not.

experience modifier ("mod"): Factor based on loss experience by which insurance premiums are adjusted. Used in calculating workers compensation rates.

experience rating (loss or merit rating): A method of rating under which the rate is based on the insured's own experience, rather than on industry statistics or filed rates for an underwriting class as a whole. See also prospective rating; retrospective rating.

exposure data: Information about an insured's operations—e.g., revenues, property values, payroll, vehicle, or employee head count; the number by which rates are multiplied to calculate premium.

exposure rating: A method of rating, usually applied to excess of loss reinsurance, under which the rate is determined based on an analysis of the exposure inherent in the business to be covered and not on the loss experience the business has demonstrated in the past. Both exposure rating and loss rating can be used by the reinsurance underwriter to determine the price that is quoted.

exposures: A measurable unit by which premium is to be calculated (e.g., revenues, payroll, vehicles, property values).

extended coverages: Additional coverages added to a fire policy. Protection for the insured against property damage caused by windstorm, hail, smoke, explosion, riot, strike, civil commotion, vehicle, and aircraft. Provided in such package policies as commercial multiperil.

extended reporting period (ERP): A provision contained in most claims-made policies that provides coverage under an expired claims-made policy for claims first made after the policy has expired. The period of time allowed to report claims is often limited. Additional premium may be required to extend the reporting period.

extra contractual obligations (ECOs): The requirement under a policy that the insurer pay certain losses or expenses not arising from the insuring agreement but from externally imposed obligations—e.g., fines from a court or regulatory body. If ECOs are covered under a reinsurance agreement, the reinsurer pays punitive damages imposed on the insurer.

extra expense insurance: Coverage that pays for extra costs to maintain vital operations after a loss. Business interruption insurance also covers such expense, but only up to the point that the costs reduce loss of profits.

Federal Liability Risk Retention Act: Preempts some state functions. For example, the Act does not allow a state insurance regulator to prohibit risk retention groups domiciled in other states from operating within the regulator's state, thus eliminating the need for a fronting company.

fidelity bond: A bond that guarantees honesty of an employee.

fiduciary: A person entrusted to act for another, which includes having the responsibility for protection of another's assets.

field service advice (FSA): Information provided by the Internal Revenue Service to field agents to guide them in conduct of tax audits. The IRS also issues the Technical Advice Memorandum (TAM).

filed forms: Insurance policies that have been approved by the state insurance department and that are required in a state where the risk is located for certain types of coverage.

Financial Accounting Standards Board (FASB): Promulgates Financial Accounting Standards (FAS) for generally accepted accounting principles (GAAP).

financial consolidation: Combining the financial results of a subsidiary company with its shareholder, resulting in the elimination of intercompany accounting entries (transactions between affiliates offset each other).

financial guarantee insurance: Insurance against losses arising from the bankruptcy of the insured. The insurer guarantees the performance of the insured—e.g., for debt repayment.

financial reinsurance: The contract is multiyear and the reinsurance has an aggregate limit over the entire contract period. Premium will be equal to the ultimate net loss and discounted to net present value, so the reinsured pays all losses over a stated time period and recovers the underwriting and investment income. Contract may restrict loss settlements to specified times and amounts to reduce the reinsurer's timing risk and will contain a commutation clause to end the coverage period.

financial responsibility: The legal requirement for an insured to evidence ability to pay losses, either through purchase of insurance or by providing other proof of financial strength. Used to ensure that drivers carry adequate auto liability insurance.

finite risk: An insurance or reinsurance program where the period of insurance is fixed; all premium and losses will be paid within that period. A contract may contain sufficient underwriting risk to qualify as insurance but has the same objective as financial insurance, which is to enhance the current presentation of the insured's or reinsured's financial condition.

first-party risk: Insurance of the income or assets of the named insured (e.g., property insurance).

flat rate: In reinsurance, a percentage rate applied to a ceding company's premium writings for the classes of business reinsured to determine the reinsurance premiums to be paid the reinsurer.

floater: A property insurance policy covering articles that do not necessarily have a fixed location—e.g., jewelry and cameras.

follow form policies: Insuring (coverage) terms, conditions, and exclusions are as stated in a lead policy. The policy that follows has only its own limits, deductible, and premium and issues a declarations page with the lead policy form attached.

follow the fortunes: The reinsurer must agree to the adjusted loss amount as determined by the reinsured.

forced placed: Insurance that must be purchased to comply with terms of a contract—e.g., a mortgagee can purchase insurance on mortgaged properties and charge the premium to the mortgagor.

foreign: A U.S.-domiciled insurer that is domiciled in a state other than the jurisdiction where the risk is located. See also alien.

Foreign Account Tax Compliance Act (FATCA): The Foreign Account Tax Compliance Act of 2009 establishes rules for the reporting of foreign financial assets held by U.S. taxpayers in a foreign financial institution (FFI) or a nonfinancial foreign entity (NFFE). FATCA imposes a 30 percent FATCA withholding tax on withholdable payments made to an FFI or an NFFE unless the FFI or the NFFE meets certain stipulated conditions.

front company: An insurer that issues a policy and reinsures all or a substantial part of the risk to another insurer. Certain types of statutory coverages requiring evidence of insurance from admitted insurers are fronted and reinsured to captives. A "pure front" is one that delegates underwriting and claims handling authority to the reinsurer or a managing general agent (MGA). Most insurers that front for captives are not pure fronts.

fronted captive: See reinsurance captive.

fronting: Most commonly refers to the practice of a nonadmitted insurer (or an insured with a captive insurance company) contracting with a licensed insurer to issue an insurance policy for regulatory or certification purposes.

fundamental risk: A risk intrinsic to the state of being, or an absolute hazard producing no uncertainty about whether the loss will occur, making the risk commercially uninsurable.

funded covers: Also known as "time and distance"—i.e., no real underwriting risk to the reinsurer, only a credit risk, timing risk, or investment risk. The lump sum prepaid premium equals the reinsurance recoverable, recognizing the time value of money.

funds withheld: A provision in a reinsurance treaty under which some or all of the premium due the reinsurer, usually an unauthorized reinsurer, is not paid but rather is withheld by the ceding company either to enable the ceding company to reduce the provision for unauthorized reinsurance in its statutory statement or to be on deposit in a loss escrow account for purposes of paying claims. The reinsurer's asset, in lieu of cash, is "funds held by or deposited with reinsured companies."

futures contract: An agreement made by a seller to deliver a stated amount of product to a buyer at a future date for an agreed price.

incurred loss ratio: The percentage of losses incurred to premiums earned. See also experience.

indemnification agreement: An agreement by one party to compensate another, regardless of fault, if losses arise from a specified activity. Often inserted as a hold harmless clause in a contract, to protect one party from the legal consequences of actions required under the contract.

index: A number derived from a formula calculated from a set of data. See also risk index.

indexed deductible: The amount deducted from each loss payment is not fixed in relation to the policy limit but determined by variables (the index) impacting the insured's retention ability.

industrial insured: A commercial insurance buyer presumed by virtue of its financial size to be able to negotiate insurance contracts with insurers without the protection of insurance regulators. Restrictions may apply on the ability of the insured to recover from a state's guaranty funds. Under some state insurance laws, an industrial insured must meet size criteria (net worth and number of employees) to be eligible to purchase nonadmitted insurance.

industrial insured captive insurance company: Any company that insures risks of the industrial insureds that comprise the industrial insured group and their affiliated companies.

industrial insured group: A group of commercial insureds in the same industry or involved in the same risk-taking activity.

inflation factor: A loading to provide for increased medical costs and loss payments in the future due to inflation.

inland marine insurance: A broad form of insurance generally covering articles that may be transported from one place to another, including items normally covered on floater policies.

insolvency clause: A contractual provision, generally required by statute or regulation as a prerequisite to receiving credit for reinsurance, under which the reinsurer agrees, in the event of the ceding insurer's insolvency, to pay its reinsurance obligations under the contract whether or not the insurer has paid its obligations.

inspection fees: Fees for statutory boiler inspections. Fully earned when paid (not part of property policy premium or routine engineering expenses).

insurable interest: A business or other relationship between the named insured and the exposure. Must be present for an insurance contract to be issued.

insurance line: A type of insurance business, grouped according to the reporting categories used when filing an insurer's statutory reports. See also monoline.

insurance-linked securities (ILS): A derivative such as a catastrophe bond with value influenced by insured loss event(s) underlying the security.

Insurance Regulatory Information System (IRIS): The mechanism developed by the National Association of Insurance Commissioners (NAIC) to assist states in overseeing the financial condition of insurance companies. The IRIS ratios are a set of ratios designed to measure solvency and liquidity. They are calculated from insurers' annual statements that are filed with the NAIC, and insurers that fail one or more tests can be placed under the supervision of their domicile regulator.

insurance risk: The possibility of the insurer experiencing a loss under an insurance or reinsurance contract. Under FAS 113, insurance risk is explained as the presence of underwriting risk in addition to timing and investment risk.

Insurance Services Office (ISO), Inc.: An insurer member organization that files rates and forms for insurance companies. See also filed forms. Nonmember insurers may use ISO rates, endorsements, and certificate and binder formats, etc.

insurance to value: In property insurance, the requirement that premium is based on the full amount of exposure.

insured: Person or organization covered by an insurance policy, including the "named insured" and any additional insureds for whom protection is provided under the policy terms.

insuring clause: The section of a policy that follows the declarations and states what risks are insured—i.e., the covered perils and exposures and the amount of insurance. Limitations of coverage will be identified in the policy exclusions.

integrated disability management (IDM): Adjusting claims for both occupational (workers compensation) and nonoccupational (employee benefits-related) accidents and absence.

integrated risk: Insuring more than one type of risk in a single policy; may be part of an enterprise risk management program. See also blended finite risk.

intermediary: A third party in the design, negotiation, and administration of a reinsurance agreement. Intermediaries recommend to cedents the type and amount of reinsurance to be purchased and negotiate the placement of coverage with reinsurers.

intermediary clause: A contractual provision, generally required by statute or regulation as a prerequisite to receiving credit for nonadmitted reinsurance, in which the parties agree to effect all transactions through an intermediary licensed in the insurer's domicile, and the credit risk of the intermediary, as distinct from other risks, is imposed on the reinsurer.

investment risk: The possibility that investment income earned on unearned premium or loss reserves will be lower than expected when calculating rates.

payout profile: The rate at which a reported claim is paid out, usually expressed as percentages paid each year. See also loss payout curve.

payroll audit: A yearly comparison of the estimated payroll reported for workers compensation purposes at the beginning of the policy year with the actual payroll for that period, determined at the close of the policy year.

performance bond: A bond to guarantee proper execution of job functions.

performance ratio: A test of an insurer's or reinsurer's financial strength—e.g., Standard & Poor's solvency ratios, which track net premium to adjusted shareholder funds, and liquidity ratio, which looks at technical reserves to liquid assets.

perils: The cause of loss—e.g., fire, accident, negligence.

per-risk excess: Also known as specific, working layer, or underlying excess of loss reinsurance. A method by which an insurer may recover losses on an individual risk in excess of a specific per-risk retention. Has both property and casualty applications.

personal injury: Damage to a person caused by the wrongful conduct of the insured; covers libel, slander, etc., as well as bodily injury. Insured under liability policies.

personal lines: Insurance purchased by an individual (as opposed to an organization) to protect against personal risks.

personal risks: Losses arising from ownership of personal property; also loss of health and income.

placement slips: A general understanding of the terms and conditions of a reinsurance transaction—not a binding contract. Terms and conditions should be confirmed in a reinsurance confirmation or cover note.

policy conditions: A section of a policy that identifies the duties of the insured to keep coverage in effect.

policyholder dividends: Return of premium, under the terms of the policy, resulting from income in excess of losses and expenses.

policyholder surplus: The net worth of the insurer as reported in the annual statement or statutory financial statements. The amount by which assets exceed liabilities.

policy registers: A historical listing of all policies issued by an insurer, showing reinsurance.

policy year experience: Incurred losses and loss adjustment expenses (LAE) for those claims incurred within a policy effective period, regardless of when the claim was reported, divided into the earned premiums for all policies issued during that same period. The loss amount is not final until all losses incurred (reported if claims-made) are settled. The premiums earned amount is derived from all policies incepting during the defined period, and may be earned over more than one financial reporting period.

pool: Any joint underwriting operation of insurance or reinsurance in which the participants assume a predetermined and fixed interest in all business written.

portfolio: The book of business of an insurer or reinsurer, including all policies in force and open reserves.

portfolio reinsurance: In transactions of reinsurance, it refers to all the risks of the reinsurance transaction. For example, if one company reinsures all of another's outstanding automobile business, the reinsuring company is said to assume the "portfolio" of automobile business and it is paid the total of the unearned premium on all the risks so reinsured (less some agreed commission).

portfolio runoff: The opposite of return of portfolio—permitting premiums and losses in respect of in-force business to run to their normal expiration upon termination of a reinsurance treaty.

portfolio transfer: The cession of a book of business—e.g., for an insurer withdrawing from writing a certain class of risk. Since the business has already been written, it is retroactive insurance, so it is a balance sheet only transaction (transfer of assets and liabilities). See also commutation agreement; loss portfolio transfer (LPT); novation.

premium: The sum paid for an insurance policy or consideration in the insurance contract. As income to the insurer, it is therefore the basis for taxes on the insurer.

premium audit: A survey of the insured's payroll, sales, or vehicle count records to determine premium and premium taxes due.

premium, deposit: When the terms of a policy provide that the final earned premium be determined at some time after the policy itself has been written, companies may require tentative or "deposit" premiums at the beginning that are readjusted when the actual earned charge has been later determined.

premium, pure: The portion of the premium calculated to enable the insurer to pay losses and, in some cases, allocated claim expenses or the premium arrived at by dividing losses by exposure and in which no loading has been added for commission, taxes, and expenses.

premiums earned: The portion of the written premium allocable (usually pro rata) to the time already elapsed under the policy period.

premium tax: A tax, imposed by each state, on gross premium written by insurers allocable to risks located in that state. Gross written premium (GWP) means before reinsurance ceded but after salvage and subrogation.

premium, unearned: Premium for a future exposure period is said to be unearned premium for an individual policy; written premium minus unearned premium equals earned premium. Earned premium is income for the accounting period, while unearned premium will be income in a future accounting period.

principle of indemnification: A defining characteristic of insurance, providing that a loss payment will replace what is lost, putting the insured back to where it was financially prior to the loss without rewarding or penalizing the insured for its loss.

Private Letter Ruling: A ruling by the Internal Revenue Service (IRS) regarding how a specific transaction will be taxed.

producer-owned reinsurance company (PORC): A captive or a rent-a-captive cell owned or used by a broker or managing general agent (MGA) for reinsurance of selected risks that it produces for the purposes of retaining the underwriting income. May be set up by insurance companies to circumvent state laws regarding the amount of commissions that can be paid to their producing agents.

product liability insurance: Protection against financial loss arising out of the legal liability incurred by an insured because of injury or damage resulting from the use of a covered product or out of the liability incurred by a contractor after a job is completed (completed operations cover).

professional reinsurer: A term used to designate a company whose business is confined solely to reinsurance and the peripheral services offered by a reinsurer to its customers as opposed to primary insurers who exchange reinsurance or operate reinsurance departments as adjuncts to their basic business of primary insurance. The majority of professional reinsurers provide complete reinsurance and service at one source directly to the ceding company.

profit center captives: A captive that has the primary function of earning underwriting income by writing unrelated risk.

profit commission: A provision found in some reinsurance agreements that provides for profit sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurer's expenses, and the cedent's share of such profit after expenses.

program business captive: A captive that insures or reinsures a "program"—i.e., a group of homogenous risks, none of which is individually underwritten. It may or may not be owned by the program business agency or producer.

prohibited transaction exemption (PTE): A ruling by the Department of Labor (DOL), based on specific facts and circumstances, that a transaction is allowable under Employee Retirement Income Security Act (ERISA) regulations. Required by pure captives insuring shareholders' employee benefit risks.

proportional liability: Members of a group are held responsible for the financial results of the group in proportion to their participation. Compare to joint and several liability.

proportional reinsurance: The premium and losses are calculated on a pro rata basis. The reinsurer has a fixed percentage of premium and the same percentage of losses.

pro rata cancellation: Provides for the return of all unearned premium, without the penalty associated with short-rate cancellation.

pro rata reinsurance: The reinsurer receives a percentage of premium and pays a proportional share of losses, above the ceding company's retention.

prospective aggregates: Spread loss program giving accident year reinsurance for long-tail risks with premiums paid annually over the expected life of the policy. (Any adjustments in pricing resulting from adverse loss development occur prospectively.)

prospective rating: Adjustments to premium based on projections of future incurred losses. See also experience rating and retrospective rating.

protected cell captive (PCC): See cell captive and special purpose vehicle (SPV).

provisional notice of cancellation (PNOC): Notice is given to allow the option of withdrawing from the reinsurance treaty if renewal terms are unacceptable. Issued with continuous contracts.

punitive damages: Damages awarded to the plaintiff over and above what will compensate for the loss. Intended to solace the plaintiff for mental anguish or to punish and make an example of the defendant. Not included in policy limits.

pure captive: A captive insurance company that has as its primary business purpose the insurance of the risks of its shareholders and affiliates.

pure loss cost: The ratio of the retained losses incurred to the insurer's retained premium. Also known as burning cost ratio.

pure premium: The amount of premium calculated for the risk to be insured, net of policy expenses. The amount of premium available to pay losses and allocated loss adjustment expenses (ALAE).

pure risk: The possibility that a loss may or may not occur, but with no possibility of a gain.

third-party administrator (TPA): A licensed claims adjuster that is not an employee of the insurer or the insured. See also adjuster.

third-party risk: Insurance to protect the named insured from liability to unrelated parties.

time element loss: Loss resulting from inability to use a property. Examples are business interruption, extra expense, rental income, etc.

timing risk: Uncertainty surrounding the timing of a loss occurrence and its payout profile.

tort: A noncriminal and noncontractual wrong; a negligent action that is the proximate cause of resulting injury or harm to a third party.

transfer pricing: Payments for goods or services exchanged between affiliated companies, where the payment is not "market rate" and the intention is to transfer revenues on a pretax basis from one taxation jurisdiction to another, to earn income in the country with the lowest effective tax rate.

treaty reinsurance: An automatic or "obligatory" contract; all risks are assumed or ceded within a defined underwriting class. Usually a continuous until canceled contract.

trend analysis: Tracking incurred and paid losses over multiple time periods to determine the rate of increase or decrease in average paid claims.

trending factor: The percentage by which average paid claims increase or decrease over time.

ultimate loss: The amount of loss paid over time from a single occurrence. See also incurred loss. Funding to ultimate means establishing a reserve in the year the loss is incurred in an amount sufficient to pay the claim in full in a future period.

ultimate net loss: This term usually means the total sum that the assured, or any company as its insurer, or both, become obligated to pay either through adjudication or compromise, and usually includes hospital, medical, and funeral charges; all sums paid as salaries, wages, compensation, fees, charges, and law costs; premiums on attachment or appeal bonds; interest; expenses for doctors, lawyers, nurses, and investigators and other persons; and for litigation, settlement, adjustment, and investigation of claims and suits that are paid as a consequence of the insured loss, excluding only the salaries of the assured's or of any underlying insurer's permanent employees.

umbrella coverage: Covers losses in excess of amounts covered by other insurance policies and/or self-insured retentions; often providing broader coverage than primary policies.

unaffiliated business: Also known as unrelated or open market risk. Insurance of noncontrolled entities—i.e., insureds not in the same corporate organization (less than 50 percent ownership) or not under common management control.

unallocated loss adjustment expenses (ULAE): All external, internal, and administrative claims handling expenses, including determination of coverage, that are not included in allocated loss adjustment expenses (ALAE).

unbundling: When an insurer agrees to allow a third party to adjust claims and provide other services usually provided by the insurer such as engineering or safety inspections.

underwriter: A person with the responsibility of selecting and rating risks to insure.

underwriting: The selection of risks to be insured.

underwriting capacity: The risk assumption and/or retention ability of an insurer, or of the insurance industry as a whole. Determined by the amount of surplus. See also risk capital.

underwriting cash flow: Net collected premiums (net of reinsurance premiums) less losses, loss adjustment expenses (LAE), and underwriting expenses paid.

underwriting class: All risks with a specified risk profile—e.g., age, location, and occupation. Risks are classified using characteristics likely to produce the same or similar loss experience for each risk over time.

underwriting cycle: See market cycles.

underwriting expenses: All expenses for the insurer related to policy acquisition, maintenance, and general overhead of the company.

underwriting profit: Insurer profit before investment income and income taxes. See also combined ratio.

underwriting risk: Uncertainty about whether or when a loss will occur and its amount.

unearned premium reserve (UPR): The amount of unexpired premiums on policies or contracts as of a certain date (the total annual premium less the amount earned).

unimpaired surplus: A stock insurer's equity that is over and above statutory minimum capital and is not used for collateralization of assumed risk or otherwise pledged in support of the insurer's or an affiliate's business activities. For a mutual insurer, it is funds not allocated as collateral, loss, or premium reserves nor intended for distribution to members.

unrelated business income tax (UBIT): Tax paid on income earned in an affiliate. Could be paid by a tax-exempt entity as a result of receiving income earned by a profit-making entity, also called unrelated business taxable income (UBTI).

unrelated risk: The source of risk is an entity or individual not under common management and control with the captive owner or user. See controlled unrelated business and unaffiliated business.

Yellow Book: The annual reporting form for property and casualty insurers in the United States. See also convention statement. Also known as Yellow Peril, for its size and complexity, although with the advent of computerized work sheets, electronic filings, and some of the information in this text, much less of a peril than in the days of typewriters and calculators.