Reinsurance Basic Guide
Reinsurance Basic Guide
Reinsurance Basic Guide
Introduction
What Is Reinsurance?
Functions of Reinsurance
Providers of Reinsurance
Regulation
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3
3
4
Reinsurance Concepts
Facultative and Treaty
Pro Rata and Excess of Loss
5
5
6
8
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10
12
13
14
15
15
16
20
22
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Glossary
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This publication is intended only as a reference tool for the insurance and reinsurance industry. While
the publication is designed to provide general information with regard to the subject matter covered, it
does not address all of the technical aspects of a defined term or topic and does not constitute a legal
consultation or legal opinion. No decision should be made on the basis of the definitions or the overview
provided herein. Instead, readers should consult with legal counsel. The definitions or the overview
contained herein are intended to apply only to property and casualty reinsurance.
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INTRODUCTION
Munich Re stands for solution-based expertise, consistent risk management,
financial stability and client proximity. Our clients trust us to develop
solutions for the whole spectrum of reinsurance from traditional reinsurance
agreements to the management of complex specialty reinsurance risks.
Our U.S. operations is, on a standalone basis, one of the largest propertycasualty reinsurance companies in the United States. Together with our
affiliates, American Modern Insurance Group and Hartford Steam Boiler
Group, we deal with the issues that affect society and work to devise cuttingedge solutions that render tomorrows world insurable. Our recipe for success:
we anticipate risks early on and deliver solutions tailored to clients needs,
creating opportunities to achieve sustained profitable growth.
This book is intended to be a brief and basic introduction to reinsurance
concepts. The numerical examples given are merely to illustrate the concepts
discussed, and are not intended to suggest any particular price or condition
for any of the reinsurance described. We have also included a comprehensive
glossary of terms used to understand these concepts. For additional
information, however, the reader should consult more comprehensive
reinsurance publications.
Keep in mind that developing a financially sound reinsurance program must
take into account the unique risks that an insurer faces. Our professional
specialists combine their expertise in applying the fundamental concepts
found in this brochure with their extensive experience in designing
reinsurance programs to address the unique needs of each client.
Please visit our website www.munichreamerica.com if you would like
additional information about Munich Re.
WHAT IS REINSURANCE?
Functions of Reinsurance
The most common reasons for purchasing reinsurance include:
Capacity Relief
Allows the reinsured to write larger amounts of insurance.
Catastrophe Protection
Protects the reinsured against a large single, catastrophic loss or multiple
large losses.
Stabilization
Helps smooth the reinsureds overall operating results from year to year.
Surplus Relief
Eases the strain on the reinsureds surplus during rapid premium growth.
Market Withdrawal
Provides a means for the reinsured to withdraw from a line of business or
geographic area or production source.
Market Entrance
Helps the reinsured spread the risk on new lines of business until premium
volume reaches a certain point of maturity; can add confidence when in
unfamiliar coverage areas.
Expertise/Experience
Provides the reinsured with a source of underwriting information when
developing a new product and/or entering a new line of insurance or a new
market.
Providers of Reinsurance
Direct Writers
Reinsurers enter into reinsurance relationships directly with the ceding
company. The collection of premiums and payment of claims are handled
directly by the reinsurer.
Broker-Market Reinsurers
Assume business through reinsurance intermediaries (i.e. brokers) who
typically negotiates reinsurance contracts between the ceding company and
the reinsurer(s), and provide the production or sales support.
Regulation
Reinsurers are generally subject to many of the same regulations as primary
insurers. Both insurers and reinsurers are mostly regulated at the state level,
where state insurance departments create and enforce state regulations.
Regulation of both insurance and reinsurance aims at ensuring the solvency
of the insurer/reinsurer to pay claims on the contracts that it issues.
State insurance departments also license insurers/reinsurers to do business
in their state.
Admitted Company (Authorized Company)
An insurer or reinsurer licensed to conduct business in a given state.
Non-Admitted Company (Un-authorized Company)
An insurer or reinsurer not licensed in a given state.
The National Association of Insurance Commissioners is an organization
of the chief insurance regulatory officials of the 50 states, the District of
Columbia, American Samoa, Guam, Puerto Rico and the Virgin Islands.
Its purpose is to coordinate regulatory activities among these states and
territories and provide a forum to discuss insurance issues
REINSURANCE CONCEPTS
Treaty
(Book of Business)
Premium
Losses
60% Reinsurance $
60% Reinsurance $
Excess of Loss
A term describing a reinsurance transaction that, subject to a specified limit,
indemnifies a ceding company against the amount of loss in excess of a
specified retention. Excess of loss reinsurance is also called non-proportional
reinsurance
In excess of loss reinsurance, premiums are typically negotiated as a
percentage of the primary insurers premium charge.
Advantages
Good protection against frequency or severity potential, depending upon
the retention level.
Allows a greater net premium retention.
More economical in terms of reinsurance premium and cost of
administration.
Premium
Losses
Excess of
Retention
Reinsurer $
Negotiated
Reinsurer $
Retention
of Primary
Company
Example 1
$1,000,000
$10,000
Example 2
Restaurant/Hotel, 100% PML (Probable Maximum Loss)
Buildings
Contents
Total Insurable Value (TIV)
Annual Premium
$ 10,000,000
$ 2,000,000
$ 12,000,000
$ 20,000
Losses
Assuming a loss of $9,000,000, the ceding company would
pay 80%, or $7,200,000, and the reinsurer would pay 20%, or
$1,800,000.
Loss = $9,000,000
$7,200,000
(80% Ceding Company)
$1,800,000
(20% Reinsurer)
Excess of Loss
$ 1,000,000
$ 10,000
$750,000
x/s
$250,000
Umbrella
Limit
$1,000,000
Umbrella
Retention
$250,000
Treaty
Underlying
Limit/Retention
$1,000,000
Net
10
$ 10,000,000
$ 2,000,000
$ 12,000,000
PML
Annual Premium
$ 6,000,000
$ 20,000
$15,000 Premium
Facultative Reinsurer:
$6,000,000 excess $6,000,000
$6,000,000
x/s
$6,000,000
Ceding
Company
Retention
$6,000,000
$20,000
Premium
$9,000,000
Loss
Reinsurer
$5,000
Premium
Reinsurer Pays
3,000,000
$15,000
Premium
Ceding
Company Pays
$6,000,000
(9,000,000
6,000,000)
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12
2.
3.
4.
5.
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Pro Rata
As described earlier,
pro rata, also called
proportional, is a form
of reinsurance in which
the reinsurer shares
a proportional part of
the original losses and
premiums of the ceding
company. Pro rata forms
are often used in property
insurance, since this form
provides catastrophic
protection in addition to
individual risk capacity.
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Quota Share
Quota share reinsurance is a form of pro rata reinsurance whereby the ceding
company is indemnified for a fixed percent of loss on each risk covered by
the treaty contract. All liability and premiums are shared from the first dollar.
Quota or definite share relates to the fixed percentage as stated in the
treaty.
On premiums ceded, the reinsurer pays the ceding company a commission.
The commission to the ceding company is an important factor in quota
share reinsurance as it provides a financial benefit to the primary company
(illustrated on next page).
Also referred to as an obligatory reinsurance contract, the quota share
treaty requires the primary company to cede and the reinsurer to accept
each and every policy underwritten by the reinsured. The treaty will usually
include a maximum dollar amount over which the reinsurer is not willing to be
committed on any one risk.
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Example
The ceding company has a 60% quota share treaty. Therefore,
40% of all premiums and losses will be retained by the
company and 60% of all premiums (less commission) and
losses will be ceded to the reinsurer subject to the limit of the
treaty. The commission to the ceding company is agreed upon
at 30%.
Premium
Assume a risk is written for a limit of $400,000 at a premium
of $2,000.
Premium retained by ceding company:
Premium paid to reinsurer:
Commission to ceding company:
Losses
Assume a total loss of $400,000 occurs. For this loss, the
ceding company would pay $160,000 (40% of $400,000) and
the reinsurer would pay $240,000 (60% of $400,000).
Loss = $400,000
$160,000
(40% Ceding Company)
$240,000
(60% Reinsurer)
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Financing Function
As a financing mechanism, a quota share treaty is very important to providing
surplus relief. Theoretically, barring other negative factors, it makes sense
that the more surplus (assets minus liabilities) a company has to back
up its premium writings, the more financially stable that company will be,
particularly when it is growing its new business. Regulators focus on insurer
solvency and apply what is known as statutory accounting principles which
are very conservative. This approach requires that when a policy is issued, the
insurer must immediately and fully recognize all the expenses associated with
issuing the policy (e.g., taxes, administrative, commissions paid) but can only
recognize the premium over the life of the policy.
When a policy is written, an unearned premium reserve (a liability) in the
amount of the policy premium must be established. The amount of this
reserve shrinks over the life of the policy as the premium becomes earned.
For example, a 12 month policy issued at 1/1 for $100 will have an unearned
premium of $100 at 1/1, $75 at 4/1, 50 at 7/1 and so on until the entire
premium is earned and the unearned premium reserve is $0 at 12/31. This
mis-matching of when the assets (premium) and liabilities (expenses) are
recognized for accounting purposes results in a situation where the more
premium that is written (i.e., the more the business grows), the more surplus
shrinks.
A quota share treaty has the effect of sharing both the unearned premium
reserve (through the insurer ceding part of the written premium to the
reinsurer) and the administrative expense (through the ceding commission
that the reinsurer pays to the insurer for the portion of the written premium
that is ceded). The net effect on the insurance company balance sheet is a
replenishment of surplus, the amount of which depends on the amount of
business ceded to the reinsurer and the level of ceding commission paid to
the insurer by the reinsurer.
Example
A ceding company wants to create surplus relief and strengthen its balance
sheet. The reinsurer agrees to assume 50% quota share of all premiums and
losses. The reinsurer will pay 30% commission on the premium assumed.
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Balance Sheet
(Before the Quota Share)
Assets
Liabilities/Surplus
Cash/Premium
Other
$8,000,000
$12,000,000
$2,000,000
$ 22,000,000
Liabilities/Surplus
Cash/Premium
$ 4,000,000
Other
$14,000,000 Other
$12,000,000
Surplus 3
$ 19,200,000
$3,200,000
$ 19,200,000
Notes
1
Premium-to-Surplus Ratio
One of a number of tests applied to an insurance company to ascertain its financial
stability is the Premium-to-Surplus Ratio. For example, a ratio of 3:1 or less (premium
is three times that of surplus) may be considered acceptable for a given line of
business. Quota share reinsurance ceded to a financially sound reinsurer will positively
impact the written premium/surplus ratio of the reinsured company.
Note in the example above that the Premium-to-Surplus Ratio before the quota share
was 4:1 ($8,000,000/$2,000,000). After the quota share, the Premium-to-Surplus
Ratio improved to 1.6:1 ($5,200,000/$3,200,000).
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Surplus Share
Under a surplus share type of treaty, the pro rata proportion ceded depends
on the size and type of risk. The ceding company has the right to decide how
much it wants to retain on any one risk. This retention is called a line. Any
risk that falls within this retention or line is handled totally by the primary
company. Whenever the company insures a risk that is larger than the
retention, the amount over the retention is ceded to the surplus share treaty
as a multiple of the retention. All losses between the insurers retention on the
risk and reinsurers participation are pro rated.
Since the ceding company decides how much of each risk it will cede to the
treaty, the particular percentage between the insurer and reinsurer will vary.
This concept differs from a quota share treaty where the percentage is fixed
between the insurer and the reinsurers participation, for all risks.
From a reinsurers perspective, it is possible to experience adverse selection
under the treaty. The ceding company may retain most of the lines on low and
moderate hazard risks and may cede most of the lines on high hazard risks to
the treaty. As a result, the reinsurer may not experience a good spread of all
risks written by the ceding company.
A surplus share treaty can aid the ceding company by helping to build
policyholders surplus, providing capacity needed to write larger lines,
stabilizing results, and minimizing insurers exposure to large losses and
catastrophic events.
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Example
Assume the minimum retention or line is $50,000. The limit of the treaty is
then expressed as a multiple of the line. A 9-line surplus treaty would be (9 x
$50,000) or $450,000. The total capacity to the insurer is $500,000.
Any risk with a value of $50,000 or less is retained and not ceded to the
treaty. For risks greater than $50,000, the insurer determines how many lines
it will retain above the $50,000 and how many lines will be ceded up to the
$450,000 limit.
Risk A
A low hazard risk with a limit of $350,000. The insurer may retain 5 lines or
$250,000 and cede 2 lines or $100,000 to the treaty.
Low Hazard
$350,000 Limit
Insurer Retains
$250,000
Insurer Cedes
$100,000
Risk B
A moderate hazard risk with a limit of $400,000. The insurer may retain 3
lines or $150,000 and cede 5 lines or $250,000 to the treaty.
Moderate Hazard
$400,000 Limit
Insurer Retains
$150,000
Insurer Cedes
$250,000
Risk C
A high hazard risk with a limit of $500,000. The insurer may retain 2 lines or
$100,000 and cede 8 lines or $400,000 to the treaty.
High Hazard
$500,000 Limit
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Excess of Loss
In pro rata type treaties,
the operative word is
sharing. The ceding
company and reinsurer
share premium and
losses according
to a predetermined
percentage.
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Example
Assume an insurer needs capacity to write casualty business of $1,000,000
in order to compete in its market niche. Because it is a small company, it
determines that it can retain the first $300,000 loss on any risk. However,
it needs reinsurance to apply to that part of any loss that exceeds the
retained limit of $300,000. In this example, an excess of loss treaty would be
expressed as $700,000 x/s $300,000.
Assume each of these risks is written by the insurer for a limit of $1,000,000.
Risk A
Has a loss of $600,000.
The insurer pays the first
$300,000 (retention)
and the reinsurer the
remaining $300,000.
$600,000 Loss
Reinsurer
Pays
$300,000
Insurer
Pays
$300,000
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Risk B
Has a loss of $250,000.
The insurer pays the
entire loss with no
indemnification by the
reinsurer as the loss is
within the retention of
$300,000.
$250,000 Loss
Reinsurer
Pays
$0
Insurer
Pays
$250,000
Risk C
Has a loss of
$1,000,000.
The insurer pays the first
$300,000 (retention)
and the reinsurer,
$700,000.
$1,000,000 Loss
Reinsurer
Pays
$700,000
Insurer
Pays
$300,000
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Unlike pro rata treaties, the premium paid for an excess of loss contract has
no proportional relationship to the premium paid by insureds to the primary
company. Rather, premium charged by the reinsurer is subject to individual
analysis and negotiation and may be based on a number of factors. These
include the ceding companys prior loss experience, loss potential and
premium estimates for the book of business, geographic area for business,
underwriting policies, and desired retention level.
Variations
Property Per-Risk Excess Of Loss
The reinsurer indemnifies the primary company for any loss in excess of the
specified retention on each risk.
Catastrophe Per-Occurrence Excess Of Loss
The purpose of a catastrophe excess treaty is to protect a primary company
against adverse loss experience resulting from the accumulation of losses
arising from a single, major natural disaster or event such as a hurricane,
tornado, earthquake, flood, windstorm, etc. For a given event, the treaty
applies once the accumulation of losses paid by the primary company, less
inuring reinsurance (the amount the ceding company expects to receive via
other reinsurance agreements), reaches a predetermined retention.
Stop Loss/Aggregate Stop Loss
This excess of loss cover is designed to protect a companys overall
underwriting results after application of other types of reinsurance it may
have. It provides reinsurance for losses incurred during the treaty term, usually
one year, in excess of either a specified loss ratio or a predetermined dollar
amount.
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GLOSSARY
This glossary has been reproduced, in part, from:
The book Reinsurance, 1980, originally published at the
College of Insurance, New York, NY, and now available from
Strain Publishing, PO Box 1520, Athens, Texas 75751. The
book was written by 23 reinsurance authorities and edited by
Robert W. Strain, its copyright owner from whom permission
to use these terms was obtained.
RAA Glossary Of Reinsurance Terms. Relying on a variety
of sources, the Reinsurance Association of America (RAA)
manages a comprehensive list of terms commonly used in
insurance/reinsurance. More information can be found at
http://www.reinsurance.org. The RAA has been the voice
of the reinsurance industry since 1968. Headquartered in
Washington, DC, the RAA is a nonprofit trade association
committed to an activist agenda that represents the interests
of reinsurance professionals across the United States.
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Admitted Assets
Assets recognized and accepted by state insurance laws in determining the solvency
of insurers or reinsurers.
Admitted Company
1) An insurer licensed to conduct business in a given state.
2) A reinsurer licensed or approved to conduct business in a given state.
Admitted Reinsurance (also known as Authorized Reinsurance)
Reinsurance for which credit is given in the ceding company's Annual Statement
because the reinsurer is licensed or otherwise authorized to transact business in the
jurisdiction in question. See Non-Admitted Reinsurance.
Advance Deposit Premium
An amount paid by a cedent to a reinsurer that is held for the payment of the
reinsureds losses. At some time in the future, any balance in the fund remaining
after paying losses and any agreed upon reinsurance expenses will be returned to the
reinsured.
Adverse Selection
The conscious and deliberate cession of those risks, segments of risks, or coverages
that appear less attractive for retention by the ceding company.
Agent Commission
In insurance, an amount paid an agent for insurance placement services.
Aggregate Deductibles
The total loss amount a ceding company of a non-proportional reinsurance policy
keeps on top of normal retention before the reinsurer gets liable.
Aggregate Excess of Loss Reinsurance (also known as Excess of Loss Ratio
Reinsurance, Stop Loss Reinsurance)
A form of excess of loss reinsurance which, subject to a specified limit, indemnifies
the ceding company for the amount by which all of the ceding company's losses
(either incurred or paid) during a specific period (usually 12 months) exceed either 1) a
predetermined dollar amount or 2) a percentage of the company's subject premiums
(loss ratio) for the specific period.
Alien (Insurer)
An insurer domiciled outside the United States.
Amortization Period
Synonymous with payback period, this term is used in the rating of per occurrence
excess covers and represents the number of years at a given premium level necessary
to accumulate total premiums equal to the limit of liability of the reinsurance cover.
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Basis of Attachment
A methodology that determines which original policy losses will be covered under
a given reinsurance agreement. There are two types of methodologies: policies
attaching and losses occurring. The determination may be based on 1) the effective or
renewal date of the original policy; or 2) on the date of the loss; or 3) on the date when
the reinsured company recorded premium or loss transaction.
Underwriting Year
The effective date of the original policy, rather than the date of loss, determines
the basis of attachment. Any losses occurring on policies written or renewed with
inception or renewal dates during the term of the given reinsurance agreement
will be covered by that reinsurance agreement irrespective when the loss
actually occurred. This mechanism is often used with the policies attaching
methodology.
Accident Year
The date of the loss under the original policy rather than the effective date of the
original policy that determines the basis of attachment. Any losses occurring
during the reinsurance agreement period on policies in force (if any), written
or renewed will be covered by that reinsurance agreement irrespective of the
inception or the renewal date of the original policy. This mechanism is often used
with the losses occurring during the contract period methodology.
Bests Rating
Rating system that evaluates factors affecting the overall performance of insurance
companies. It shows a weighted relative measure of a companys financial strength,
operation performance, competitive market position and ability to meet its current and
future obligations to policyholders.
Binder
A record of reinsurance arrangements pending the issuance of a formal reinsurance
contract (which then replaces the binder). See Cover Note and Placement.
Blended Covers
In order to limit risk transfer, this type of reinsurance combines elements of traditional
and financial reinsurance.
Book Value
The value that is shown in the account (in contrast to market value).
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Calendar Year
All transactions (loss payments) and movements in reserves (new, increases and
decreases) which happen in the same year are attributed to the calendar year
notwithstanding the point of occurrence. Statistics on calendar year basis are suitable
only for financial considerations. However, they can be highly misleading for the
assessment of treaty results.
Calendar Year Experience
The evaluation of underwriting experience whereby the total value of all losses
incurred during a given twelve-month period (regardless of the dates of loss or the
inception date of the policy) is matched with the premiums earned for the same
period. As the name implies, Calendar Year Experience is usually calculated for a
twelve-month period beginning January 1st. See Accident Year Experience and Policy
Year Experience.
Cancellation
Putting a (re-)insurance contract actively to an end, prior to the ending of the contract
period.
Capacity
The largest amount of insurance or reinsurance available from a company or the
market in general. Also refers to the maximum amount of business (premium volume)
that a company or the total market could write based on financial strength.
Captive Insurer
The main purpose of a captive insurer is to insure the risks of its parent organizations.
It is fully owned by one or more entities.
Captive Reinsurer
The main purpose of a captive reinsurer is to provide reinsurance capacity for
insurance policies taken out by the corporation or the associations members.
Casualty
A type of reinsurance primarily concerned with risks resulting in injuries to persons
and legal liability imposed upon the insured for such injury or for damage to the
property of others.
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Claim
Occurrence or loss under an insurance policy which triggers a request for an
indemnity under an insurance contract. A reinsurance claim is a request by the
primary insurer to the reinsurer which is defined in a reinsurance contract between the
two parties. The claim will be covered if the occurrence or loss is within the contract's
terms and conditions.
Claim Expenses (also known as Loss Expenses or Loss Adjustment Expenses)
The costs incurred in processing claims: court costs, interest upon awards and
judgments, the companys allocated expense for investigation and adjustments and
legal expenses (excluding, however, ordinary overhead expenses of the company such
as salaries, monthly or annual retainers, and other fixed expenses that are defined as
unallocated loss adjustment expenses).
Claim Frequency
The statistical quantity of occurrences of claims in a time/policy period or in ratio to
the number of insured objects.
Claims Made Basis Insurance Agreements
The provision in a policy of insurance that affords coverage only for claims that are
made during the term of the policy for losses that occur on or after the retroactive
date specified in the policy. A claims made policy is said to cut-off the tail on liability
business by not covering claims reported after the term of the insurance policy unless
extended by special agreement.
Claims Made Basis Reinsurance Agreements
The provision in a reinsurance contract that affords coverage for claims that occur
and are made during the contract term, for losses that occur on or after the retroactive
date specified in the contract. Claims reported during the term of the reinsurance
agreement are therefore covered regardless of when they occurred. A claims made
agreement does not cover claims reported after the term of the reinsurance contract
unless extended by special agreement.
Clash Cover
A casualty excess of loss reinsurance agreement with a retention level equal to or
higher than the maximum limits written under any one reinsured policy or contract
reinsured under the reinsurance agreement. Usually applicable to casualty lines
of business, the clash cover is intended to protect the ceding company against
accumulations of loss arising from multiple insureds and/or multiple lines of business
for one insured involved in one loss occurrence. See Contingency Cover.
Class of Business
A homogeneous category of insurance. Most reinsurance markets generally
differentiate between Property and Casualty and Life insurance. See Line of Business.
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Contributing Excess
A form of excess of loss reinsurance where, in addition to its retention, the ceding
company has a share of losses in excess of the retention. This form of reinsurance may
also apply to subject polices written in excess of underlying insurance or self insured
retentions where the reinsurance applies to a share of losses within the policies, with
the ceding company or other reinsurers contributing the remaining share. When
more than one reinsurer shares a line of insurance on a risk in excess of a specified
retention, each reinsurer contributes towards any excess loss in proportion to its
original participation in such risk.
Convention Blank
See Annual Statement.
Cover
Insurance and reinsurance protection defined on an insurance or reinsurance policy.
Cover Note
A written statement issued by an intermediary, broker or direct writer indicating
that the coverage has been effected and summarizing the terms. See Binder and
Placement Slip.
Credibility
Credibility is a form of insurance pricing that is widely used and is a special type
or experience rating that employs a weighted average of claims experience on a
previously established price to determine a new price for each risk class under
consideration.
Credit Carry Forward (CCF)
The transfer of credit or profit from one accounting period, as defined within the
reinsurance agreement, to the succeeding accounting period under the existing
contract or the replacing contract.
Credit for Reinsurance
The right of a ceding company under statutory accounting and regulatory provisions
permitting a ceding company to treat amounts due from reinsurers as assets or
reductions from liability based on the status of the reinsurer.
Cumulative Liability
The accumulation of liability of a reinsurer under several policies from several ceding
companies covering similar or different lines of insurance, all of which are involved in a
common event or disaster.
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Cut-Through Endorsement
An endorsement to an insurance policy or reinsurance contract which provides that,
in the event of the insolvency of the insurance company, the amount of any loss
which would have been recovered from the reinsurer by the insurance company (or its
statutory receiver) will be paid instead directly to the policyholder, claimant, or other
payee, as specified by the endorsement, by the reinsurer. The term is distinguished
from an assumption. See Assumption of Liability Endorsement.
Deductible
The amount of a loss agreed in a non-proportional or facultative reinsurance policy
which is retained by the cedent before he can claim on the policy.
Deficit and Credit Carry Forward (DCCF)
See Deficit Carry Forward and Credit Carry Forward.
Deficit Carry Forward (DCF)
The transfer of deficit or loss from one accounting period, as defined within the
reinsurance agreement, to the succeeding accounting period under the existing
contract or the replacing contract.
Deposit
Amount paid by the cedent to the reinsurer as a guarantee at inception of the risk
period. A deposit stands as security for reinsurers contractual obligations and are
usually calculated as pro rata premium reserves and/or loss reserves. See Premium
Reserves.
Direct Writer
1) In reinsurance, a reinsurer that negotiates with a ceding company without benefit of
an intermediary or broker.
2) In insurance, a primary insurer that sells insurance through licensed agents who
produce business essentially for no one else.
Direct Written Premium
The gross premium income (written instead of earned) of a primary company, adjusted
for additional or return premiums but before deducting any premiums for reinsurance
ceded and not including any premiums for reinsurance assumed.
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Domestic Company
An insurer conducting business in its domiciliary state from which it received its
charter to write insurance. (As opposed to a foreign company, an insurer conducting
business in a state other than its domiciliary state; or an alien company, one domiciled
outside the U.S. but conducting business within the U.S.).
Drop-Down (also known as Second Event Retention)
An approach to establishing the retention level in excess of loss reinsurance (usually
catastrophe) under which the amount of the retention is reduced for the second (or
subsequent) loss occurrence. The theory is that the ceding company can afford to
retain a given retention level on one loss, but for additional loss(es) needs protection
over the lower retention.
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Funded Cover
A type of excess of loss reinsurance agreement under which the reinsured company
pays an agreed upon premium to build a fund (which is held by the insurer or reinsurer
pursuant to the terms of the agreement) from which to pay covered losses. Since
that fund reduces the reinsurers risk that losses will exceed the fund, the Reinsurer
agrees to accept a reduced reinsurance margin. Any excess monies in the fund will be
returned to the appropriate party pursuant to the terms of the contract.
Funds Held Account (or Funds Withheld)
The holding by a ceding company of funds representing the unearned premium
reserve or the outstanding loss reserve applied to the business it cedes to a reinsurer.
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Gross Premiums
Gross premiums equal the premiums received for one year.
Gross Written Premium (G.W.P.)
The gross written premium describes the total premium on insurance underwritten by
an insurer or reinsurer during a period before deduction of premium ceded.
Ground-Up Loss
The total amount of loss sustained by the ceding company before taking into account
the credit(s) due from reinsurance recoverable(s).
Group Policy
A single insurance policy covering a group of several persons. The persons insured
in the group are generally belonging to the same company or association. The
premium of the group is usually calculated on the basis of the specific risk structure
of the group, sometimes it may just be derived from individual premiums subject to a
discount.
Guarantee Endorsement
An addition to an insurance policy (between an insurance company and a policyholder
covering the policyholder s mortgaged property) which requires that, in the event of
the companys insolvency, the mortgagee and/or the policyholder be paid directly by
the reinsurer either for any loss covered by reinsurance or (as is often provided) for the
full insurance protection afforded by the insurance company. Since the full insurance
protection afforded by the insurance company may be above the reinsurance
that would be payable to a reinsured company, the reinsurer may be assuming an
additional risk in such an endorsement. Similar to the cut-through endorsement, the
guarantee endorsement is also known as a mortgagee endorsement.
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Insolvency Clause
A provision now appearing in most reinsurance contracts (because many states
require it) stating that in the event the reinsured is insolvent the reinsurance is payable
directly to the company or its liquidator without reduction because of its insolvency or
because the company or its liquidator has failed to pay all or a portion of any claim.
Interest and Liabilities Agreement
A reinsurance contract between the ceding insurer and one or multiple reinsurers in
which the percentage of participation of each reinsurer is specified.
Interlocking Clause
A provision in a reinsurance agreement designed to allocate loss from a single
occurrence between two or more reinsurance agreements. The provision is intended
to be used when the company purchases its excess of loss reinsurance on an
underwriting year or risks attaching basis. The provision allows the reinsured
to prorate its retention between two or more reinsurance agreement periods, i.e.,
when one loss affects policies assigned to different reinsurance periods, so that
the company will have one retention and one recovery for the loss involving the two
reinsurance periods.
Intermediary
A reinsurance broker who negotiates contracts of reinsurance on behalf of the
reinsured, receiving a commission for placement and other services rendered. Under
the terms of one widely used intermediary clause, premiums paid a broker by a
reinsured are considered paid to the reinsurer, but loss payments and other funds
(such as premium adjustments) paid a broker by a reinsurer are not considered paid to
the reinsured until actually received by the reinsured. See Broker.
Intermediary Clause
A contractual provision in which the parties agree to effect all transactions through
an intermediary and the credit risk of the intermediary, as distinct from other risks, is
imposed on the reinsurer.
Intermediate Excess
Used in property reinsurance to describe a cover exposed to both catastrophe
(occurrence) losses and to policy limit exposures, excess the probable maximum loss.
Inuring Reinsurance
A designation of other reinsurances which are first applied pursuant to the terms
of the reinsurance agreement to reduce the loss subject to a particular reinsurance
agreement. If the other reinsurances are to be disregarded as respects loss to that
particular agreement, they are said to inure only to the benefit of the reinsured.
Example: A ceding insurer has a 50% quota share agreement and a per occurrence
excess of loss contract (i.e., catastrophe reinsurance) for $80 million excess of $20
million. A catastrophe loss of $100 million occurs. If the quota share contract inures
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to the benefit of the catastrophe reinsurer, of the gross loss of $100 million, the quota
share reinsurer pays $50 million, the ceding insurer bears the $20 million catastrophe
retention, and the catastrophe reinsurer indemnifies the ceding insurer to the extent of
$30 million.
Investment Income
Money earned from invested assets. May also include realized capital gains, or be
reduced by capital losses, over the same period.
IRIS (Insurance Regulatory Information System) Tests
A series of financial tests developed by the National Association of Insurance
Commissioners (NAIC) under its Insurance Regulatory Information System (IRIS) to
assist states in overseeing the financial soundness of insurance companies.
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Leading Reinsurer
The reinsurer recognized as the one of several reinsurers on a contract responsible for
negotiating the initial terms of the contract. There may be joint leaders on a contract,
and the contract may specifically provide to the lead reinsurer the power to bind
others to limited changes in or enhancements of the contract during its term.
Leading Underwriter
The insurer recognized as the one of several insurers on a contract responsible for
negotiating the terms, conditions and premium rates of the contract. In most cases
the leader takes the largest share of the risk.
Letter of Credit
A financial instrument obtained from a bank that guarantees the availability of funds
to be collected in the future under a reinsurance contract. In the noncommercial
setting, these are known as standby credits in the event of non-performance by the
obligor. Uniform Custom and Practices for Document Bearing Credits (1993 rev.) ICC,
Pub. No. 500. See Evergreen Clause.
Leveraged Effect
The disproportionate result produced by inflation on a reinsurers liability in excess
of loss reinsurance compared with the ceding companys liability. In other words,
inflationary increases in average claim costs of a reinsured usually produce even
greater increases for its excess of loss reinsurer, since an increase affecting all losses
(those within the retention limit and those above it) multiplies itself when affecting
the excess of loss portion above that retention limit. For example, if the reinsureds
retention limit average claim cost increases 8%, the reinsurers increase can be as
much as twice or three times that amount, or more. The increase on the reinsurer
over the ceding companys increase is referred to as the leveraged effect. The effect
is leveraged in that such increases fall more on the reinsurer, proportionately at least,
than on the reinsured.
Liability Insurance
Insurance providing compensation for the insureds legal liability to third parties
resulting from negligent acts or omissions.
Life Insurance
Insurance providing payment of the insured sum upon death of the insured, or in the
case of endowment insurance, upon survival of a specified period. In case of annuity
insurance, benefits consist of a regular payment for a specified period. Other products
in life insurance expand cover to incidents like critical illness or disability.
Limit
Maximum amount the insurer will pay under the policy coverage.
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Long-Tail Liability
A term used to describe certain types of third-party liability exposures (e.g.,
malpractice, products, errors and omissions) where the incidence of loss and the
determination of damages are frequently subject to delays that extend beyond the
term the insurance or reinsurance was in force. An example would be contamination
of a food product that occurs when the material is packed but which is not discovered
until the product is consumed months or years later.
Loss
Event triggering a claim under the respective reinsurance/insurance contract. See
Incurred Loss.
Loss Adjuster
Specialist (mostly an independent agent) who investigates into claim requests and
negotiates and settles claims on behalf of the insurer/reinsurer.
Loss Adjustment Expense (LAE)
The expense incurred by the ceding insurer in the defense, cost containment and
settlement of claims under its policies. They are normally broken down into two
categories: Allocated (ALAE) and Unallocated (ULAE). ALAE are often considered
part of the loss to the ceding insurer and may be recovered as part of the reinsurance
payments from the reinsurer. By contrast, ULAE are considered part of the ceding
insurers overhead and cost of doing business, and should not be subject to
reinsurance recovery. The elements of loss adjustment expenses that are covered by
reinsurance are specified in the terms of the reinsurance agreement.
Loss Conversion Factor (also known as Loss Loading or Multiplier)
A factor applied to the anticipated losses (or loss cost) for an excess of loss
reinsurance agreement in order to develop the reinsurance premium (or rate). This
factor provides for the reinsurer's loss adjustment expense, overhead expense, and
profit margin. See Rating.
Loss Development
The process of change in amount of losses as a policy or accident year matures, as
measured by the difference between paid losses and estimated outstanding losses
at some subsequent point in time (usually 12 month periods), and paid losses and
estimated outstanding losses at some previous point in time. In common usage it
might refer to development on reported cases only, whereas a broader definition also
would take into account the IBNR claims.
Loss Excess of Policy Limits
An amount of loss which exceeds the policy limits, but is otherwise under the
coverage terms of the policy, for which the insurer is potentially responsible by reason
of its action or omissions in defending the insured under the policy.
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Loss Incurred
See Incurred Loss.
Loss Loading or Multiplier
See Loss Conversion Factor.
Loss Portfolio Transfer
A financial reinsurance transaction in which loss obligations that are already incurred
and which are expected to ultimately be paid are ceded to a reinsurer. In determining
the premium paid to the reinsurer, the time value of money is considered, and
the premium is therefore less than the ultimate amount expected to be paid. The
difference between the premium paid for the transaction and the amount reserved
by the cedent is the amount by which the cedent's statutory surplus increases. Other
terms used in context with Lloyds contracts are loss portfolio-rollover and reinsurance
to close.
Loss Rating
See Rating.
Loss Ratio
Losses incurred expressed as a percentage of earned premiums.
Loss Reserve
For an individual loss, an estimate of the amount the insurer expects to pay for the
reported claim. For total losses, estimates of expected payments for reported and
unreported claims. May include amounts for loss adjustment expenses. See Incurred
But Not Reported (IBNR) and Incurred Losses.
Losses Occurring
A specific time delineated in a reinsurance agreement when a loss is deemed to
have occurred for purposes of determining whether the loss is within the period
that reinsurance coverage applies, usually based on the definition of loss occurrence
provided for in the agreement.
Losses Outstanding
Losses (reported or not reported) that have occurred but have not been paid.
Losses Paid
The amounts paid to claimants as insurance claim settlements.
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Mortgagee Endorsement
An endorsement to an insurance policy covering the policyholder's mortgaged
property to provide that, in the event of the insolvency of the insurance company, the
reinsurer shall pay directly to the mortgagee and/or the policyholder the amount of
loss that would have been recovered from the reinsurer by the insurance company.
The endorsement may provide that the reinsurer will pay the full loss amount in
accordance with the insurance protection afforded by the insurance company. Similar
in concept to the Cut-Through Endorsement.
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Nine-Months Rule
A contract signature rule adopted by the National Association of Insurance
Commissioners generally imposing a nine-month time limit from the effective date of
the treaty reinsurance agreement to the time when the treaty reinsurance agreement
must be actually executed by the ceding company and the reinsurer or, in the case
of multiple reinsurers, the lead designated reinsurer. The rule enables the ceding
company to comply with statutory and/or regulatory requirements and receive
accounting treatment as prospective, as opposed to retroactive, reinsurance.
Ninety-Day Rule
The National Association of Insurance Commissioners annual statement requirement
which provides that an insurer or reinsurer must account for certain balances on
Schedule F of the annual statement when it has reinsurance recoverables over ninety
days past due for which the company may incur penalties.
No Claims Discount/Bonus
A discount or bonus for the benefit of the reinsured given in excess of loss reinsurance
covers applicable after a loss free period for the specified cover.
Non-Admitted Assets
Assets owned by an insurance company that are not recognized for solvency purposes
by state insurance laws or insurance department regulations, e.g., premiums due and
uncollected past 90 days, and furniture and fixtures among others.
Non-Admitted Company
1) An insurer not licensed in a given state.
2) A reinsurer not licensed or approved in a given state.
Non-Admitted Insurance
Insurance protection placed with a non-admitted insurer.
Non-Admitted Reinsurance (also known as Unauthorized Reinsurance)
Reinsurance placed with a reinsurer that does not have authorized or equivalent status
in the jurisdiction in question. See Admitted Reinsurance.
Non-Life insurance
All classes of insurance which are not written under life insurance, for example
property, casualty and marine insurance.
Non-Proportional Reinsurance
See Excess of Loss Reinsurance.
Nontraditional Reinsurance
See Financial Reinsurance, Finite Reinsurance, Limited Risk, Structured Reinsurance,
Reinsurance.
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Non-Waiver Clause
See Estoppel.
Novation
The substitution of a new contract, debt or obligation for an existing one, between
the same or different parties. A novation may substitute a new party and discharge
one of the original parties to a contract by agreement of all parties. The requisites of a
novation are 1) a previously valid obligation; 2) an agreement of all the parties to a new
contract; 3) the extinguishment of the old obligation; and 4) the validity of the new
obligation.
Obligatory Reinsurance
Also treaty reinsurance. A standing agreement between reinsured and reinsurer
for the cession and assumption of certain risks as defined in the treaty, where both
parties are obliged to cede / to accept the risk.
Obligatory Treaty
A reinsurance contract under which the subject business must be ceded by the
insurer in accordance with contract terms and must be accepted by the reinsurer.
Occurrence
A frequently used term in reinsurance referring to an incident, happening or event
which triggers coverage under an occurrence-based agreement. The definition of an
occurrence will vary, depending upon the intent and interests of the parties. See Event.
Occurrence Coverage
A policy covering claims that arise out of damage or injury that took place during the
policy period regardless of when claims are made. Most commercial general liability
insurance is written on an occurrence form. Contrast with claims-made coverage.
Occurrence Limit
A provision in most property per risk reinsurance contracts that limits the reinsurers
liability for all risks involved in one occurrence. See Occurrence.
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Portfolio Return
If the reinsurer is relieved of liability (under a pro rata reinsurance) for losses
happening after termination of the treaty or at a later date, the total unearned
premium reserve on business less unreinsured (less ceding commissions thereon) is
normally returned to the cedent. Also known as a return portfolio or return of unearned
premium.
Portfolio Runoff
Continuing the reinsurance of a portfolio until all ceded premium is earned, or all
losses are settled, or both. While a loss runoff is usually unlimited as to time, a
premium run-off can be for a specified duration.
Possible Maximum Loss
See Probable Maximum Loss.
Premium
The monetary consideration in contracts of insurance and reinsurance.
Premium Base
See Base Premium.
Premium Portfolio Entry
A reinsurers responsibility for cessions in force at the time at the inception of a
reinsurance contract or reinsurance period. For this responsibility the reinsurer is
being paid an unearned premium.
Premium Portfolio Withdrawal
On expiry of a reinsurance contract, or at the cancellation of the reinsurance contract,
the reinsurer can be relieved of responsibility for any in force contract risks by paying
to the reinsured a premium which represents the unearned exposure. The reinsurer is
then relieved from any further obligations.
Premium Reserves
A reinsurer deposits the unearned premium with the cedent (also known as: unearned
premium reserves). The cedant reserves it for future liabilities (i.e. for the unexpired
part of each cession) and is gradually released each quarter after it has been earned.
In some countries premium reserves are required by law. See Deposit.
Premiums Earned
When used as an accounting term, premiums earned describe the premiums written
during a period plus the unearned premiums at the beginning of the period less the
unearned premiums at the end of the period.
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Primary
In reinsurance this term is applied to the nouns: insurer, insured, policy and insurance
and means respectively: 1) the insurance company which initially originates the
business, i.e., the ceding company; 2) the policyholder insured by the primary
insurer; 3) the initial policy issued by the primary insurer to the primary insured; 4)
the insurance covered under the primary policy issued by the primary insurer to the
primary insured (sometimes called "underlying insurance").
Pro Rata Reinsurance (also known as Proportional Reinsurance)
A generic term describing all forms of quota share and surplus reinsurance in which
the reinsurer shares a pro rata portion of the losses and premiums of the ceding
company. See Quota Share Reinsurance and Surplus Share Reinsurance.
Probable Maximum Loss
The anticipated maximum property fire loss that could result given the normal
functioning of protective features (firewalls, sprinklers, a responsive fire department,
etc.), as opposed to MFL (Maximum Foreseeable Loss), which would be similar
valuation, but on a worst-case basis with respect to the functioning of the protective
features. Underwriting decisions typically would be influenced by PML evaluations,
and the amount of reinsurance ceded on a risk would normally be predicated on the
PML valuation. See Maximum Foreseeable Loss.
Professional Reinsurer
A term used to designate an organization whose business is mainly reinsurance and
related services, as contrasted with other insurance organizations that may operate
reinsurance assuming departments in addition to their basic primary insurance
business.
Profit Commission
See Contingent Commission.
Proportional Reinsurance
See Quota Share Reinsurance, Participating Reinsurance, Pro Rata Reinsurance,
Surplus Reinsurance.
Prospective Rating
See Rating.
Provisional Notice of Cancellation
Cancellation of a reinsurance contract written on a continuous basis. This cancellation
can be initiated by either party only on the anniversary date of the contract with prior
written notice.
Provisional Rate, Premium, or Commission
Tentative amounts applicable to either rate, premium or commission set at the start of
the contract and subject to subsequent adjustment.
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Proximate Cause
The proximate cause is the most direct cause of a loss which can be established.
Punitive Damages
Damages awarded separately and in addition to compensatory damages, usually on
account of malicious or wanton misconduct, to punish the wrongdoer and possibly
others. Sometimes referred to as exemplary damages when intended to make an
example of the wrongdoer.
Pure Loss Cost
See Burning Cost.
Pure Premium
1) That part of the premium which is sufficient to pay losses and loss adjustment
expenses but not including other expenses.
2) The premium developed by dividing losses by units of exposure, disregarding any
loading for commission, taxes and expenses.
3) In crop-hail insurance, the ratio of incurred loss to liability, or the dollars of loss per
$100 of insurance in force.
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Rate
The percent or factor applied to the ceding company's subject premium to produce
the reinsurance premium.
Rate on Line
A percentage derived by dividing reinsurance premium by reinsurance limit; the
inverse is known as the payback or amortization period. For example, a $10 million
catastrophe cover with a premium of $2 million would have a rate on line of 20
percent and a payback period of 5 years.
Rating
There are two basic approaches for pricing of reinsurance contracts usually applied
to excess of loss reinsurance contracts: exposure rating and experience rating. Both
methods can be used as separate rating approaches or may be weighted together to
calculate the price for the contract.
Experience Rating (also known as Loss Rating)
An approach by which the rate is determined based on the ceding companys
historical loss experience, actual and reconstructed.
Prospective Rating (also known as Flat Rating)
A formula for calculation of reinsurance premium for a specified period
where a fixed rate is promulgated using the ceding companys historical loss
experience, actual or constructed, and the premium for the current period is
calculated by multiplying the fixed rate by the current period ceded earned (or
occasionally written) premium.
Retrospective Rating (also known as Self Rating, Swing Rating, and Loss
Rating)
A formula for calculation of reinsurance premium for a specified period where
a provisional rate is promulgated using the ceding companys historical loss
experience, and is adjusted (subject to minimum and maximum) based on the
current period actual loss experience. Premium for the current period is then
calculated by multiplying the adjusted rate by the by the current period ceded
earned premiums.
Loss Loaded Rating (also known as Expense Loaded)
A type of retrospective rate adjustment using the same period losses
multiplied by a loss load and/or expense load.
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Reinstatement Cover
A type of reinsurance that provides a ceding company all or a portion of the ceding
company's contract or program limits that were eroded under a reinstatement clause
in the original reinsurance agreement. The reinstatement cover is normally a separate
agreement and the term usually incepts at the date of the last loss, running through
the end of the original coverage period. Customarily, the reinstatement cover provides
only a single limit and is not likely to include a reinstatement provision. For example,
after the major windstorms of 2004 and 2005, ceding companies that sustained
losses reinsured under their reinsurance contracts may have lacked sufficient
reinsurance protection for the remainder of the year. In such an instance, those
insurers might attempt to secure reinsurance to replace that no longer available under
the original contracts.
Reinstatement Premium
An additional pro rata reinsurance premium that may be charged for reinstating the
amount of reinsurance coverage reduced as the result of a reinsurance loss payment
under a reinsurance contract. See Reinstatement Clause.
Reinsurance
The transaction whereby the assuming insurer in consideration of premium paid,
agrees to indemnify the ceding company against all or part of the loss which the latter
may sustain under the policy or policies which it has issued.
Reinsurance Assumed
That portion of risk the reinsurer accepts from the original insurer or ceding company.
Reinsurance Ceded
That portion of the risk which the ceding company transfers to the reinsurer.
Reinsurance Commission
Another name for Ceding Commission.
Reinsurance Conditions
All clauses included in a reinsurance contract.
Reinsurance Home Office Expense (RHOE)
See Management Fee Expense.
Reinsurance Premium
The consideration paid by a ceding company to a reinsurer for the coverage provided
by the reinsurer.
Reinsured (also known as Cedent, Ceding Company or Reassured)
A company that has placed reinsurance risks with a reinsurer in the process of buying
reinsurance.
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Reinsurer
The insurer which assumes all or a part of the insurance or reinsurance risk written by
another insurer. See Professional Reinsurer.
Reinsurers Expense
See Management Fee Expense.
Reports and Remittances Clause
The contract clause that specifies the types, timing and frequency of reports
that are due to the reinsurer and usually outlines the format and content of the
reports. Stipulates when adjustments and balances (if any) are due to either party.
Reserve
An amount which is established to provide for payment of a future obligation.
Retention
The amount of risk the ceding company keeps for its own account or the account of
others.
Retroactive Date
The date on a claims made policy or reinsurance contract which triggers the
beginning period of coverage for occurrences commencing prior to the effective
date of the policy. A retroactive date is not required. If one is shown on a claims
made policy, any claim made during the policy period on a loss that occurred before
the retroactive date will not be covered. In reinsurance, losses occurring before the
contract term are sometimes covered by the addition of "retroactive" coverage to the
contract. See Extended Reporting Period.
Retrocede
The action of a reinsurer of reinsuring with another reinsurer its liability assumed
through the issuance of one or more reinsurance contracts to primary insurance
companies or to other reinsurers. The reinsurer seeking protection may purchase a
reinsurance contract or contracts that will indemnify it within certain parameters for
certain described losses under that reinsurance contract or contracts. This action is
described as transferring the risk or a part of the risk. The reinsurer seeking protection
(the buyer) is called the retrocedent and the reinsurer providing the protection (the
seller) is called the retrocessionaire.
Retrocedent
A reinsurer who underwrites and issues a reinsurance contract to a reinsured
(either a primary insurance carrier or another reinsurer) and contractually obtains
an indemnification for all or a designated portion of the risk from one or more
retrocessionaires. See Retrocede.
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Retrocession
The reinsuring of reinsurance. A reinsurance transaction whereby a reinsurer, known
as a retrocedent, cedes all or part of the reinsurance risk it has assumed to another
reinsurer, known as a retrocessionaire.
Retrocessionaire
The assuming reinsurer in a retrocession, where the ceding reinsurer is known as the
retrocedent.
Retrospective Rating (also known as Self Rating, Swing Rating)
See Rating.
Return Portfolio
The reassumption by a ceding company of a portfolio of risks previously assumed by
the reinsurer. See Assumed Portfolio.
Risk
A term which defines uncertainty of loss, chance of loss, or the variance of actual from
expected results as it relates to coverage provided under an insurance or reinsurance
contract. Also, the term is used to identify the object of insurance protection, e.g.,
a building, an automobile, a human life, or exposure to liability. In reinsurance, each
ceding company customarily makes its own rules for defining a risk.
Risk Attaching Basis
LORA contract: (losses occurring on risks attaching) A contract type where
reinsurance is provided for claims arising from original policies that the cedent incepts
during the term of an arrangement, as opposed to a loss-occurring approach (also
called LOD contracts: losses occurring during).
Risk Based Capital
A method utilized by insurance regulatory authorities to determine the minimum
amount of capital required of an insurer to support its operations and write coverage.
The insurers risk profile (i.e., the amount and classes of business it writes) is used to
determine its risk based capital requirement.
Risk Premium
The part of the premium that is purely needed to cover a potential loss. All other
expenses like commissions, profits and taxes are not included.
Risk Transfer
A key element of reinsurance, whereby insurance risk is shifted from the reinsured
to the reinsurer under a reinsurance agreement. In order for a reinsured to receive
statutory and GAAP credit for reinsurance, a threshold of both underwriting risk and
timing risk transfer must be achieved. See Risk.
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Risk-Based Capital
Risk-based capital is the hypothetical amount of capital that is allocated to operate
insurance or reinsurance to ensure that the risked based part of the business has an
reasonably low expectation of becoming financially insolvent. The amount of required
capital is calculated by risks and financial based mathematical models.
Run Off
A termination provision of a reinsurance contract that stipulates the reinsurer remains
liable for loss as a result of occurrences taking place after the date of termination
for reinsured policies in force at the date of termination until their expiration or for a
specified time period.
Salvage
Amount of a paid loss in property insurance that is returned by the insured to the
insurer because he could make money out of the damaged asset by using or selling it.
Schedule F
The schedule within the Annual Statement which provides information on a
companys reinsurance transactions.
Self-Insurance
Insurance organized by the insured himself usually by building reserves through funds.
Often used when insurance capacity is difficult to get or expensive.
Semi-Automatic Treaty
See Facultative Semi-Obligatory Treaty.
Service of Suit Clause
A clause in reinsurance contracts whereby the reinsurer agrees to submit to any court
of competent jurisdiction in the United States, which provides a legal basis for the
enforcement of arbitration awards. The clause names a U.S. agent to accept service
of process on behalf of the reinsurer for purposes of the ceding company gaining
U.S. jurisdiction against the reinsurer. It is not intended to supersede the contracting
parties obligation to arbitrate disputes, but to provide a mechanism to enforce
awards.
Setoff
See Offset.
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Severability Clause
A clause in some reinsurance agreements, providing that should any part of the
agreement be found illegal or otherwise unenforceable, the remainder of the
agreement will continue in force while the illegal part will be severed from the
agreement. Severability may apply to the entire agreement or be limited to a specific
provision which may present enforceability issues. For example, in jurisdictions where
punitive damages are uninsurable, a severability clause in an Extra Contractual
Obligations provision (or as a separate clause) will preserve the overall enforceability
of the provision, even though a portion of the ECO provision has been invalidated.
Short Tail Business
Insurance business where claims are typically settled within a few weeks to one
year of the loss occurrence. This is often the case in property insurance and rarely in
casualty. See Long Tail Business.
Sidecar
A special purpose vehicle designed to allow investors to assume the risk and earn the
profit on a group of insurance policies (a book of business) written by a particular
insurer or assumed by a particular reinsurer (collectively re/insurer). A re/insurer will
usually only cede the premiums associated with a book of business to such an entity
if the investors place sufficient funds in the vehicle to ensure that it can meet claims
if they arise. Typically, the liability of investors is limited to these funds. The vehicle is
often formed as an independent company and to provide additional capacity to the
re/insurer to write property catastrophe business or other short tail lines. The original
capacity is usually provided through a quota share or similar type arrangement. The
re/insurer normally charges a fee (ceding commission) for originating and managing
the sidecar business and may sometimes also receive a profit commission if the
book of business is profitable. Because the investors capital is usually intended to be
invested in this vehicle for a short-term, the sidecar has a limited existence, often for
only one year, after which investors may withdraw their investment. These structures
have become quite prominent in the aftermath of Hurricane Katrina as a vehicle
for re/insurers to add risk bearing capacity, and for investors to participate in the
potential profits resulting from sharp price increases in re/insurance.
Sliding Scale Commission
A commission adjustment on earned premiums under a formula whereby the actual
commission varies inversely with the loss ratio, subject to stated maximum and
minimum percentages.
Slip
A comprehensive document containing details of the risk, the cover period, the
premium and the participation of the reinsurer. It is signed by the reinsured and
reinsurer. Later on it is replaced by a full reinsurance contract wording describing all
details.
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Solvency
The ability of insurance companies to ensure that they are always able to meet their
liabilities for claims.
Solvency Margin
The assets owned by the insurer have to exceed its liabilities. The calculation method
of the required solvency margin is normally regulated by the supervisory authority of a
given country.
Special Acceptance
The specific agreement by the reinsurer to include under a reinsurance contract a risk
not included within the terms of the contract.
Special Termination Clause
A clause found in reinsurance contracts providing that, upon the happening of some
specified condition or event, such as the insolvency, merger, loss in credit rating or
decline in policyholder surplus of one party, the other party can fully terminate the
contract earlier than would otherwise be required, had such condition or event not
happened. The clause should state which party may initiate the termination, the notice
requirements, the triggering conditions or events necessary, the effective date of
termination, and the method of terminating existing business (i.e., whether on a cut-off
or run-off basis).
Standard Premium
The insurance premium determined on the basis of the insurers authorized
rates multiplied by the experience modification factor. The standard premium is
usually not the final premium that the insured pays. It excludes the effects of some
pricing programs, such as premium discounts, schedule rating, deductible credits,
retrospective rating, and expense constants that are reported in statistical classes.
Statutory Accounting Principles (SAP)
Those principles required by state law that must be followed by insurance companies
in submitting their financial statements to state insurance departments. Such
principles differ from generally accepted accounting principles (GAAP) in some
important respects, e.g., SAP requires that expenses must be recorded immediately
and cannot be deferred to track with premiums as they are earned and taken into
revenue. See GAAP.
Statutory Annual Statement
See Annual Statement.
Stop Loss Reinsurance
See Aggregate Excess of Loss Reinsurance.
Structured Reinsurance
See Financial Reinsurance, Finite Reinsurance, Limited Risk Reinsurance,
Nontraditional Reinsurance.
MUNICH RE Reinsurance: A Basic Guide To Facultative And Treaty Reinsurance
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Structured Settlements
The settlement of a casualty or workers compensation claim involving periodic
annuity payments over an extended period of time, rather than in one up-front, lump
sum cash payment. There are certain advantages to a claimant under a structured
settlement, including favorable tax treatment of interest under the Internal Revenue
Code, that are not present under a lump sum cash settlement. Structured settlements
are designed to guard against the early dissipation of settlement proceeds by
recipients, who are often minors or those in need of life-time care as a result of their
injuries.
Subject Premium
See Base Premium.
Subrogation
The assignment of a contractual right of an insured or reinsured by terms of the policy
or by law, after payment of a loss, of the rights of the insured to recover the amount
of the loss from one legally liable for it. The ceding insurer and reinsurer can agree
how subrogation rights and recoveries will be addressed and handled under the
reinsurance agreement.
Sunrise Clause
A clause in casualty reinsurance contracts that provides coverage for losses reported
to the reinsurer during the term of the current reinsurance contract, but resulting
from occurrences that took place during a prior period. Sunrise clauses are used to
reactivate coverage that no longer exists due to the existence of a sunset clause. See
Sunset Clause.
Sunset Clause
A clause in casualty reinsurance contracts that provides that the reinsurer will not be
liable for any loss that is not reported to the reinsurer within a specified period of time
after the expiration of the reinsurance contract. See Sunrise Clause.
Surplus Liability
That portion of a reinsured companys gross liability on any one risk which exceeds the
amount the company is willing to retain net for its own account.
Surplus Reinsurance (also known as Surplus Share Reinsurance)
A form of pro rata reinsurance under which the ceding company cedes that portion of
its liability on a given risk which is greater than the portion of risk the cedent retains
(i.e., net line), and the premiums and losses are shared in the same proportion as the
ceded amount bears to the total limit insured on each risk.
Surplus Relief
1) The result of reinsurance ceded on a portfolio basis to offset extraordinary drains on
policyholder surplus.
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2) A designation of a reinsurance the main purpose of which is to finance new or inforce business, or both. See Financing Function.
Surplus Share Reinsurance
See Surplus Reinsurance, Variable Quota Share Reinsurance.
Surplus to Policyholders
1) The net worth of an insurer as reported in its Annual Statement. For a stock insurer,
the sum of its unassigned surplus and capital.
2) The amount by which the assets of an insurer exceed the organizations liabilities.
Another name for Policyholder Surplus.
Swing Rating
See Rating.
Syndicate
An association of individuals or organizations to pursue certain insurance objectives.
For example, individual underwriters in Lloyds of London associate in separate
syndicates to write marine insurance, reinsurance life insurance, etc., entrusting the
administrative details of each syndicate to a syndicate manager. See Association, Pool.
Target Risk
In property reinsurance certain risks (for example, particular bridges, tunnels, fine arts
collections, and property of similarly high value and exposure) that are excluded from
coverage under reinsurance treaties.
Such risks require individual acceptance under facultative contracts.
Term Contract
A form of reinsurance contract written for a stipulated term (usually one year). The
contract automatically expires at the end of the term and renewal must be negotiated.
See Continuous Contract.
Total Insurable Value (TIV)
The total values for insured perils and coverages for a particular risk, whether or not
insurance limits have been purchased to that amount.
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Uberrimae Fidei
Literally, of the utmost good faith. A defining characterization or quality of some
(contractual) relationships, of which reinsurance is universally recognized to be
one. Among other differences from ordinary relationships, the nature of reinsurance
transactions is dependent upon a mutual trust and a lively regard for the interests of
the other party, even if inimical to ones own. A breach of utmost good faith, especially
in regard to full and voluntary disclosure of the elements of risk of loss, is accepted as
grounds for any necessary reformation or redress, including rescission. See Utmost
Good Faith.
Ultimate Net Loss
1) In reinsurance, the measure of loss to which the reinsurance applies, as determined
by the reinsurance agreement.
2) In liability insurance, the amount actually paid or payable for the settlement of
claims for which the reinsured is liable (including or excluding defense costs) after
deductions are made for recoveries and certain specified reinsurance.
Umbrella Cover
Reinsurance protection for several classes of business that combines the contracts of
different classes of business into one reinsurance contract.
Unauthorized Insurer, Reinsurer
An insurer not licensed, or a reinsurer neither licensed nor approved, in a designated
jurisdiction.
Unauthorized Reinsurance
See Non-Admitted Reinsurance.
Underlying
The amount of insurance or reinsurance on a risk (or occurrence) which applies to a
loss before the next higher excess layer of insurance or reinsurance attaches.
Underlying Premium
See Base Premium.
Underwriter
An employee of an insurer or reinsurer with the responsibility to negotiate, accept or
reject the terms of the (re-)insurance on behalf of his employer.
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Underwriting Capacity
The maximum amount of money an insurer or reinsurer is willing to risk in a single
loss event on a single risk or in a given period. The limit of capacity for an insurer or
reinsurer that may also be imposed by law or regulatory authority.
Underwriting Income
The excess of premiums earned by a reinsurer during any reporting period over the
combined total of expenses and losses incurred by the reinsurer during the same
period.
Underwriting Result
Premiums earned less insurance losses, adjustment expenses and underwriting
expenses (determined on a GAAP or statutory basis). Also referred to as GAAP
underwriting result or statutory underwriting result.
Underwriting Year Experience
The effective date of the original policy, rather than the date of loss, determines
the basis of attachment. Any losses occurring on policies written or renewed with
inception or renewal dates during the term of the given reinsurance agreement will be
covered by that reinsurance agreement irrespective when the loss actually occurred.
This mechanism is often used with the policies attaching methodology.
Unearned Premium Portfolio
The effective date of the original policy, rather than the date of loss, determines
the basis of attachment. Any losses occurring on policies written or renewed with
inception or renewal dates during the term of the given reinsurance agreement will be
covered by that reinsurance agreement irrespective when the loss actually occurred.
This mechanism is often used with the policies attaching methodology. The sum
of all unearned premium for in force policies of insurance under the reinsurance
agreement, often with respect to a particular block, book or class of business during a
particular period.
Unearned Premium Portfolio Rollover
A term describing an accounting transaction in which an unearned premium portfolio
is carried forward from one accounting period to the following accounting period
under an existing contract or a renewal.
Unearned Premium Reserve
The reserve amount included in the companys financial statements for unearned
premiums with respect to the insurance policies or reinsurance agreements as of
a particular point in time. Unearned premiums are the sum of all the premiums
representing the unexpired portions of the policies or reinsurance agreements which
the insurer or reinsurer has on its books as of a certain date.
Unearned Reinsurance Premium
That part of the reinsurance premium applicable to the unexpired portion of the
policies reinsured.
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