Captive Insurance Programs - Captive 101

Captive Insurance Glossary

A collection of common Captive Insurance terms.

Select definitions from the tabs below.

  • A-C
  • D-F
  • G-I
  • J-L
  • M-O
  • P-R
  • S-V
  • W-Z

A

Actuary:

A statistician who computes insurance risks and premiums.

Admitted insurer:

An insurance company licensed to do business in a specified jurisdiction to underwrite insurance in that jurisdiction.

Admitted Reinsurance:

Reinsurance provided by a reinsurer licensed or authorized in the jurisdiction in question. A company is "admitted" when it has been licensed and accepted by appropriate insurance governmental authorities of a state or country.

Aggregate limit of liability:

An insurance contract provision limiting the maximum liability of an insurer for a series of losses in a given time period. An insurance policy may have one or more aggregate limits. For example, the standard commercial general liability policy has two: the general aggregate that applies to all claims except those that fall in the products-completed operations hazard and a separate products-completed operations aggregate. Aggregate excess of loss reinsurance -A form of reinsurance that requires participation by the reinsurer when aggregate excess losses for the primary insurer exceed a certain stated retention level.

Alien insurer:

An insurer domiciled outside the US.

Alternative Market:

A term commonly used in risk financing to refer to one of a number of risk funding techniques (e.g., self-insurance, captive) or facilities (e.g., ACE, XL) that provide coverages or services outside the realm of those provided by most traditional property and casualty insurers. The alternative market may be utilized by large corporations, for example, to provide high limits of coverage over a large self-insured retention. It may also be utilized by groups of smaller entities, for example, participating in a risk retention group or group captive program. Note that the distinction between traditional and alternative markets tends to blur over time as many traditional insurers have expanded their offering of products to encompass alternative-type funding techniques, and vice versa. Finally, retrospective funding plans, especially paid loss plans, are sometimes identified with the alternative market.

Arbitration Clause:

A clause within a reinsurance agreement providing that if the ceding company and the reinsurer fail to agree, then they select neutral arbitrators with the authority to bind both parties to a solution. Resolving differences without litigation.

Association captive:

A captive insurance company formed and owned by a trade or professional association

Attachment point:

The point at which excess insurance or reinsurance limits apply. For example, a captive's retention may be $250,000. This is the attachment point at which excess reinsurance limits would apply.


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B

Bordereau:

A report providing premium or loss data with respect to identified specific risks, which is furnished the reinsurer by the reinsured. This report typically includes the insured's name, premium basis, premium and the amount of coverage.

Buffer layer:

Any layer of insurance (or risk retention) that resides between the primary (burning) layer and the excess layers. For example, if the insured's primary CGL limit is $500,000 and its umbrella attachment point is $1 million, the layer of $500,000 excess of $500,000 coverage between the two is the buffer layer.

Burning Cost:

The premium needed to cover losses based on historical experience for a proposed reinsurance agreement.


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C

Cancellation:

Run-off basis means that the liability of the reinsurer under policies, which became effective under the treaty prior to the cancellation date of such treaty, shall continue until the expiration date of each policy; Cut-off basis means that the liability of the reinsurer under policies, which became effective under the treaty prior to the cancellation date of such treaty, shall cease with respect to losses resulting from accidents taking place on and after said cancellation date. Usually the reinsurer will return to the company the unearned premium portfolio, unless the treaty is written on an earned premium basis.

Capacity:

The largest amount of insurance an insurer or a reinsurer is willing and able to underwrite, including the amount they retain and the amounts for which they automatically bind their reinsurer.

Captive Insurance Company:

A risk-financing method or form of self-insurance involving the establishment of a subsidiary corporation or association organized to write insurance. Captive insurance companies are formed to serve the insurance needs of the parent organization and to escape uncertainties of commercial insurance availability and cost. The insureds have a direct involvement and influence over the company's major operations, including underwriting, claims, management policy, and investments.

Catastrophe reinsurance:

A form of reinsurance that indemnifies the ceding company for the accumulation of losses in excess of a stated sum arising from a single catastrophic event or series of events.

Catastrophic loss:

Loss in excess of the working layer, usually of such magnitude as to be difficult to predict and therefore rarely self-insured or retained.

Cedant:

A ceding insurer or reinsurer. A ceding insurer is an insurer that underwrites and issues an original, primary policy to an insured and contractually transfers (cedes) a portion of the risk to a reinsurer. A ceding reinsurer is a reinsurer that in turn transfers (cedes) a portion of its reinsurance layer to a retrocessionnaire.

Cede:

When a company transfers risk to another company.

Ceding Company:

The original or primary insurer; the insurance company that transfers its risk to a reinsurer.

Ceding commission:

A percentage of the reinsurance premium retained by a ceding company to cover its acquisition costs, and sometimes, to provide a profit.

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

Claims reserve:

An amount of money set aside to meet future payments associated with claims incurred but not yet settled at the time of a given date.

Combined ratio:

The sum of two ratios, loss and expense, calculated by dividing incurred losses and all other expenses by earned premiums. Used in both insurance and reinsurance, a combined ratio below 100 percent indicates an underwriting profit.

Commission:

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:

In the result of the termination of this contract, the Reinsurer shall be free from all further liability to the company for all loss and allocated loss expense not finally settled by the company as of the date of termination. In consideration of that release, the Reinsurer shall pay to the Company all amounts of loss and allocated loss expense due for losses finally settled.

Commutation Clause:

A clause in a reinsurance agreement, which provides for estimation, payment and complete discharge of all future obligations for reinsurance losses incurred regardless of the continuing nature of certain losses.

Contingent commission:

In reinsurance, an allowance payable to the ceding company in addition to the normal ceding commission allowance. It is a predetermined percentage of the reinsurer's net profits after a charge for the reinsurer's overhead, derived from the subject treaty.

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 towards any excess loss in proportion to his original participation in such risk.


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D

Deductible:

An amount agreed to between the insured and insurer whereby the insured reimburses the insurer for losses it pays within the specified deductible amount.

Domicile:

The location or venue in which a captive insurer is licensed to do business. Some factors to be considered in selecting the best domicile for a given captive include capitalization and surplus requirements, investment restrictions, income and local taxes, formation costs, acceptance by fronting insurers and reinsurers, availability of banking and other services, and proximity considerations.


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E

Earned premium:

An insurer "earns" a portion of a policy's premium as time elapses during the policy period.

Earned surplus:

Funds earned by an insurance company (including captives and risk retention groups) after all losses and expenses have been paid. Once earned surplus is recognized, it can be allocated to capital and/or dividends.

Enterprise risk management:

A risk management approach that totally integrates both financial (i.e., speculative) and event (i.e., pure) risk into one broad program of multiple retentions and high-excess aggregate insurance limits. To date, however, few firms have implemented such a comprehensive program. Nevertheless, companies are increasingly buying multiyear, multiline insurance programs that cover disparate forms of risk (e.g., property and directors and officers liability), which are designed to maximize the benefits of portfolio diversification.

Excess insurance:

A policy or bond covering the insured against certain hazards, and applying only to loss or damage in excess of a stated amount, a specified primary limit, or a self-insurance limit. It is also that portion of the amount insured that exceeds the amount retained by an entity for its own account. See net line.

Errors and Omissions Clause:

A provision in reinsurance agreements which is intended to neutralize any change in liability or benefits as a result of an inadvertent error by either party. To the extent possible the parties are placed in the position they would have been if the error had not occurred.

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.

Excess of loss reinsurance:

A form of reinsurance that indemnifies the ceding company against the amount of loss excess of only the specified retention.

Expected loss:

Estimated loss frequency multiplied by estimated loss severity, summed for all exposures. This measure of loss generally refers to the total losses of an organization of a particular type, e.g., workers compensation or general liability.

Expense ratio:

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

Experience rating:

Describes any plan that uses the past loss experience and exposure levels, e.g., payrolls, of the individual risk as a basis of determining premiums.

Exposure:

The state of being subject to loss because of some hazard or contingency. Also used as a measure of the rating units or the premium base of a risk.

Extra Contractual Obligations (ECO):

When used in reinsurance agreements, refers to damages awarded by a court against an insurer which go beyond the coverages of the insurance policy, typically due to the insurer's bad faith, fraud, or gross negligence in the handling of a claim.


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F

Facultative reinsurance:

Reinsurance of individual risks on an individual "offer" and "acceptance" basis wherein the reinsurer has the option to accept or reject each risk offered.

Facultative obligatory treaty:

The hybrid of the facultative versus treaty reinsurance approach. It is a treaty under which the primary insurer has the option to cede or not cede individual risks. However, the reinsurer must accept any risks that are ceded.

Feasibility study:

A study undertaken to determine whether a contemplated risk financing program is practicable for an organization or group of organizations. An actuarial analysis is often performed in conjunction with a feasibility study. The term is often used in reference to studies that attempt to ascertain whether or not the formation of a captive insurance company is a viable risk financing option under a given set of circumstances.

Federal Risk Retention Act:

This 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.

Financial Reinsurance:

A form of reinsurance which considers the time value of money and has loss containment provisions, and is transacted primarily to achieve financial goals, such as capital management, tax planning, or the financing of acquisitions.

Flat Rate:

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.

Following the Fortunes:

The clause stipulating that once a risk has been ceded by the reinsured, the reinsurer is bound by the same fate thereon as experienced by the ceding company.

Foreign insurer:

An insurer domiciled in the United States but outside the state in which the insurance is to be written.

Frequency:

The likelihood that a loss will occur. Expressed as low frequency (meaning that the loss event is possible but the event has not happened in the past and is not likely to occur in the future), moderate frequency (meaning the loss event has happened once in a while and can be expected to occur sometime in the future), or high frequency (meaning the loss event happens regularly and can be expected to occur regularly in the future). Workers compensation losses normally have a high frequency as do automobile collision losses. General liability losses are usually of a moderate frequency, and property losses often have a low frequency.

Fronting:

The process whereby an insurance company issues an insurance policy to the insured and then reinsures all or most of the risk with the insured's captive insurance company or elsewhere as directed by the insured. This approach allows the insured to issue certificates of insurance acceptable to regulators and lenders and avoids the burden of licensing the insured's captive in all states or of becoming a qualified self-insurer in all states.


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G


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H

Hard market:

One side of the market cycle that is characterized by high rates, low limits, and restricted coverage. Contrasts with a soft market.


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I

Incurred but not reported (IBNR):

Recognition that events have taken place in such a manner as to eventually produce claims but that these events have not yet been reported. In other words, IBNR is a loss that has happened but is not known about. Since it is impossible to know the value of a case not yet reported or investigated, a subjective estimate is often used by insurance companies to recognize losses incurred but not reported.

Incurred losses:

All open and closed claims occurring within a fixed period, usually a year. Incurred losses include reserves for open claims but do not usually include IBNR losses.

Industrial Insured:

An insured which procures the insurance of any risk or risks by use of the services of a full-time employee acting as an insurance manager or buyer and whose aggregate annual premiums for insurance on all risks total at least $25,000 and who has at least 25 full-time employees.

Insurance department:

A regulatory department charged with the administration of insurance laws and other responsibilities associated with insurance. The commissioner of insurance is the head of this department in most states.

Industrial Insured Captive Insurance Company:

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

Inflation Factor:

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

Intermediary:

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

Intermediary Clause:

A provision in reinsurance agreements, which identifies the intermediary negotiating the agreement. Most intermediary clauses shift all credit risk to reinsurers by providing that: the cedant's payments to the intermediary are deemed payments to the reinsurer; and the reinsurer's payments to the intermediary are not payments to the cedant until actually received by the cedant.

Investment income:

The income of an insurance company derived from itsinvestments, as opposed to its underwriting operations. The term has special significance in the insurance industry as various factions consider whether such income should be considered in ratemaking.


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J


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K


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L

Layer:

A horizontal segment of the liability insured.

Law of large numbers:

A tool used in probability and statistics. The larger the number of units independently exposed to loss, the more accurate the ability to predict loss results arising from those exposure units.

Letter of credit:

A legal commitment issued by a bank or other entity stating that, upon receipt of certain documents, the bank will pay against drafts meeting the terms of the letter of credit. Letters of credit are frequently used for risk financing purposes to collateralize monies owed by an insured under various cash flow programs such as incurred but not paid losses in a paid loss retrospective rating program. "LOCs" also provide a means of meeting capitalization requirements of captives, and are used to satisfy the security requirements in "fronted" deductible or retention programs.

Loss adjustment expense:

The cost of investigating and adjusting losses. Such expenses may be termed "allocated loss adjustment expenses (ALAE)" or unallocated loss adjustment expenses.

Loss development:

The difference between the original loss as first reported to an insurer and its subsequent evaluation at a later date or at the time of its final disposal.

Loss Event:

The total losses to the ceding company or to the reinsurer resulting from a single cause.

Loss forecasting:

Predicting future losses through an analysis of past losses.

Loss portfolio transfer:

A financial reinsurance transaction in which loss obligations that are already incurred and will ultimately be paid are ceded to a reinsurer.

Loss ratio:

Proportionate relationship of incurred losses to earned premiums expressed as a percentage. If, for example, a firm pays a $100,000 annual premium for worker's compensation insurance, and its insurer pays and reserves $50,000 in claims, its loss ratio is 50 percent ($50,000/$100,000).

Loss reserve:

An estimate of the value of a claim or group of claims not yet paid. A case reserve is an estimate of the amount for which a particular claim will ultimately be settled or adjudicated. An insurer will also set reserves for its entire books of business to estimate its future liabilities.

Loss trending:

One step in the process of predicting future losses, through an analysis of past losses.


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M

Market cycles:

Market-wide fluctuations in the prevailing level of insurance and reinsurance premiums. A soft market, i.e., a period of increased competition, depressed premiums, and excess capacity, is followed by a hard market—a period of rising premiums and decreased capacity.

Minimum premium:

The least amount of premium to be charged for providing a particular insurance coverage. The minimum premium may apply in any number of ways such as per location, per type of coverage, or per policy.


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N

Non-Admitted Insurers:

Insurance companies not licensed in a state may engage in business in the state if an admitted, properly filed company issues the policy and reinsures losses to the non-admitted reinsurer.

Non-Subscriber Workers' Compensation Plan:

A non-subscriber is an employee who elects, by filing appropriate notices required by state insurance authorities, to pay work-related injury loss through some method other than statutory workers' compensation.


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O

Occurrence:

An adverse contingent accident or event neither expected nor intended from the point of view of the insured. With regard to limits on occurrences, property catastrophe reinsurance agreements frequently define adverse events having a common cause and sometimes within a specified time frame.

Offset Clause:

A condition in reinsurance agreements which allows each party to net amounts due against those payable before making payment.

Outstanding losses:

Losses that have been reported to the insurer but are still in the process of settlement. Paid losses plus outstanding losses equal incurred losses.


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P

Participating reinsurance:

A form of reinsurance under which the reinsurer and primary insurer share losses in the same proportion as they share premiums and policy limits. Quota share reinsurance and surplus share reinsurance are the two types of participating reinsurance. Pro rata reinsurance is another term often used to describe participating reinsurance.

Payout profile:

A schedule illustrating the typical rate of dollars paid out in claim settlements over time. For example, on average, less than 30 cents of the total loss dollar for workers compensation claims is paid during the first year of coverage. Even less is paid on average for general liability claims. Depending upon the particular type of risk, an additional 5 to 10 years can elapse before the full 100 percent of the loss reserve is paid out on a particular claim. During this long pay-out period, the loss reserves (i.e., the not-yet-paid-out funds which are set aside by the insurer to cover the loss claims) can be a source of significant investment income to the insurer, and the payout profile is instrumental in estimating this source of profit for any given category of risk.

Per Risk Excess Reinsurance:

Retention and amount of reinsurance apply "per risk" rather than on a per accident or event or aggregate basis.

Peril:

The causes of possible loss in the property field - for example: Fire, Windstorm, Collision, Hail, etc.

Policy Year:

The year commencing with the effective date of the policy or with an anniversary of that date.

Pool:

An organization of insurers or reinsurers through which particular types of risks are underwritten with premiums, losses, and expenses shared in agreed ratios. Pools are also groups of organizations that are not large enough to self-insure individually and thus form a shared risk pool, also referred to as "risk pooling".

Portfolio Reinsurance:

In transactions of reinsurance, it refers to all the risks of the reinsurance transaction.

Portfolio Run-off:

Permitting premiums and losses in respect of in-force business to run to their normal expiration upon termination of a reinsurance treaty.

Premium (Written/Unearned/Earned):

Written premium is premium registered to an insurer or reinsurer at the time a policy is issued and paid for. Premium for a future exposure period is said to be unearned premium for an individual policy, written premium minus unearned premium equals earned premium.

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 which 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, 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.

Private letter ruling:

A taxpayer may, for a fee, seek advice from the IRS as to the proper tax treatment of a transaction. A private letter ruling binds only the IRS and the requesting taxpayer. Thus, a private ruling may not be cited or relied upon for precedent. The IRS does have the option of redacting the text of a private ruling and issuing it as a revenue ruling, which become binding on all taxpayers and the IRS.

Probability:

A numerical measure of the chance or likelihood that a particular event will occur. Probabilities are generally assigned on a scale from 0 to 1. A probability near 0 indicates an outcome that is unlikely to occur, while a probability near 1 indicates an outcome that is almost certain to occur.

Producer-owned reinsurance captive (PORC):

This is a type of captive reinsurance company that underwrites risks of an affiliated operating business by means of having those risks first directly underwritten by a fronting insurance company which then cedes those risks on through to the captive as reinsurer. The insurance is "producer-owned" in the sense that the producer of the initial insurance contract owns the captive. In some instances, this type of reinsurance company is owned by an insurance agent and broker, in which case, it is not technically-speaking a captive insurer since it is not owned by the owners of the affiliated operating company.

Professional Reinsurer:

Reinsurers that offer reinsurance to other than affiliate companies. The majority of professional reinsurers provide complete reinsurance and service at one source directly to the ceding company.

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 cedant's share of profit after expenses.

Pro forma financial statements:

A set of financial statements (usually an income statement, balance sheet, and statement of cash flows) designed to exhibit "as-if" financial results, often used to project future financial results, based on a set of assumptions. These statements are commonly used to evaluate the feasibility of proposed risk funding programs such as captives and risk retention groups.

Pro Rata Reinsurance:

Includes Quota Share, First Surplus, Second Surplus, and all other sharing forms of reinsurance where under the reinsurer participates pro rata in all losses and in all premiums.

Public administrative rulings:

These are part of second tier authorities and generally do not prevail over legislative regulations, the Internal Revenue Code, Court Cases and Treaties. However, they hold higher weight than tier 3 authorities such as legislative history and private letter rulings. Revenue Rulings can be used to avoid certain IRS penalties.

Purchasing group:

Authorized by the Liability Risk Retention Act of 1986, a group formed to obtain liability coverage for its members, all of whom must have similar or related exposures. The Act requires a purchasing group to be domiciled in a specific state. In contrast to risk retention groups, purchasing groups are not risk-bearing entities.

Pure Captive Insurance Company:

Any company that insures risks of its parent and affiliated companies.

Pure Premium:

That portion of the premium which covers losses and related expenses, i.e. includes no loading for commissions, taxes, or other expenses.

Pure risk:

The risk involved in situations that present the opportunity for loss but no opportunity for gain. Pure risks are generally insurable, whereas speculative risks (which also present the opportunity for gain) generally are not. See speculative risk.


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Q

Quota share reinsurance:

A form of reinsurance whereby the reinsurer accepts a stated percentage of each exposure written by the ceding company on a defined class of business.


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R

Reciprocal or Reciprocal Risk Retention Group:

An unincorporated association; reciprocal insurance is that which results from an interchange among subscribers of reciprocal agreements of indemnity, the interchange being effectuated through an attorney-in-fact common to all subscribers.

Reinstatement Clause:

When the amount of reinsurance coverage provided under a treaty is reduced by the payment of a reinsurance loss as the result of one catastrophe, the reinsurance cover is automatically reinstated usually by the payment of a reinstatement premium.

Reinstatement Premium:

An additional premium paid to replenish the limit consumed in the event of a loss

Reinsurance:

Insurance in which one insurer, the reinsurer, accepts all or part of the exposures insured in a policy issued by another insurer, the ceding insurer. In essence, it is insurance for insurance companies.

Reinsurance assumed:

That portion of a risk that a reinsurer accepts from an original insurer (also known as a "primary" insurer) in return for a stated premium.

Reinsurance ceded

That portion of a risk that an original insurer (also known as a "primary" insurer) transfers to a reinsurer in return for a stated premium.

Reinsurance intermediaries:

Brokers who act as intermediaries between reinsurers and ceding companies. For the reinsurer, intermediaries operate as an outside sales force. They also act as advisers to ceding companies in assessing and locating markets that meet their reinsurance needs

Reinsurer:

An insurer that contracts with a reinsurer to share all or a portion of its losses under reinsurance contracts it has issued in return for a stated premium. Also called "ceding company."

Reinsurer:

An insurer that accepts all or part of the liabilities of the ceding company in return for a stated premium.

Rent-a-captive:

An arrangement in which a captive insurer "rents" its facilities to an outside organization, thereby providing the benefits that captives offer without the financial commitments that captives require. In return for a fee (usually a percentage of the premium paid by the renter), certain captives agree to provide underwriting, rating, claims management, accounting, reinsurance, and financial expertise to unrelated organizations.

Reporting lag:

The span of time between the occurrence of a claim and the date it is first reported to the insurer.

Reserve:

An amount of money earmarked for a specific purpose. Insurers establish unearned premium reserves and loss reserves indicated on their balance sheets. Unearned premium reserves show the aggregate amount of premiums that would be returned to policyholders if all policies were canceled on the date the balance sheet was prepared. Loss reserves are estimates of outstanding losses, loss adjustment expenses, and other related items. Self-insured organizations also maintain loss reserves.

Retention:

Assumption of risk of loss, generally through the use of noninsurance, self-insurance, or deductibles. This retention can be intentional or, when exposures are not identified, unintentional. In reinsurance, it is the net amount of risk the ceding company keeps for its own account or that of specified others.

Retrocession:

A transaction in which a reinsurer transfers risks it has reinsured to another reinsurer.

Risk-based capital (RBC) requirements:

A method developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of capital required of an insurer to support its operations and write coverage. The insurer's risk profile (i.e., the amount and classes of business it writes) is used to determine its risk-based capital requirement. Four categories of risk are analyzed in arriving at an insurer's minimum capital requirement: asset, credit, underwriting, and off-balance sheet.

Retrospective Rating Plan:

A method of establishing a premium on large commercial accounts, one in which the final premium is based on the insured's actual loss experience during the policy term, subject to a minimum and maximum premium, with the final premium determined by a formula.

Revenue Rulings:

Public administrative rulings by the Internal Revenue Service (IRS) of the United States federal government that apply the law to particular factual situations. A revenue ruling can be relied upon as precedent by all taxpayers. Revenue rulings are published both in the Internal Revenue Bulletin and in the Federal Register.

Risk financing:

Achievement of the least-cost coverage of an organization's loss exposures, while assuring post-loss financial resource availability. The risk financing process consists of five steps: identifying and analyzing exposures, analyzing alternative risk financing techniques, selecting the best risk financing technique(s), implementing the technique(s), and monitoring the selected technique(s). Risk financing programs can involve insurance rating plans, such as retrospective rating, self-insurance programs, or captive insurers.

Risk purchasing group:

A group formed in compliance with the Liability Risk Retention Act of 1986 for the purpose of negotiating for and purchasing insurance from a commercial insurer. Unlike a risk retention group which actually bears the group's risk, a risk purchasing group merely serves as a vehicle for obtaining coverage, typically at favorable rates and coverage terms.

Risk retention:

Planned acceptance of losses by deductibles, deliberate noninsurance, and loss-sensitive plans where some, but not all, risk is consciously retained rather than transferred.

Risk Retention Act:

Federal legislation that facilitates the formation of purchasing groups and group self-insurance for commercial liability exposures.

Risk retention group:

A group self-insurance plan or group captive operating under the auspices of the Liability Risk Retention Act of 1986. A risk retention group can cover the liability exposures, other than workers compensation, of its owners.

Risk sharing:

Also known as "risk distribution," risk sharing means that the premiums and losses of each member of a group of policyholders are allocated within the group, based on a predetermined formula. Risk is considered to be shared if there is no policyholder-specific correlation between premiums paid into a captive, for example, and losses paid from the captive's reserve pool.


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S

Salvage and Subrogation:

Those rights of the insured that, under the terms of the policy, automatically transfer to the insurer upon settlement of a loss. Salvage applies to any proceeds from the repaired, recovered, or scrapped property. Subrogation refers to the proceeds of negotiations or legal actions against negligent third parties and may apply to either property or casualty coverages.

Segregated Account Companies Act 2000 (SAC ACT 2000):

Assets and Liabilities are legally separated from General Account and other segregated account cells. Your assets and liabilities are statutorily insulated, or "walled –off" from other cells.

Segregated Account Companies, Amendment Act of 2002 (SAC 2002):

Permits contractual participation. Participant has shareholder rights (dividends paid) without reference to the General Account or other segregated account cells.

Read More:
Segregated Accounts Companies Act 2000

Segregated Accounts Companies Amendment Act 2002

Self-insurance:

A formal system whereby a firm pays out of operating earnings or a special fund any losses that occur that could ordinarily be covered under an insurance program. The moneys that would normally be used for premium payments may be added to this special fund for payment of losses incurred.

Self-insured retention:

The amount of each loss for which the insured agrees to be responsible before a commercial insurer begins to participate in a loss. This is in contrast to a deductible in that the commercial insurer is responsible for losses even within the deductible limit. Although the deductible insurer looks to the insured for reimbursement of such losses, the insurer's responsibilities are unaffected by the insured's failure to reimburse.

Settlement lag:

The span of time between the first report of a claim and the date on which it is ultimately settled.

Severity:

The amount of damage that is (or that may be) inflicted by a loss or catastrophe. Severity is sometimes quantified as a severity rate, which is a ratio relating the amount of loss to values exposed to loss during a specified period of time.

Sliding Scale Commission:

A ceding commission, which varies inversely with the loss ratio under the reinsurance agreement

Slip:

A binder often including more than one reinsurer.

Special Acceptance:

The facultative extension of a reinsurance treaty to embrace a risk not automatically included within its terms.

Sponsored Captive:

A captive insurance company in which the minimum capital and surplus required by applicable law is provided by one or more sponsors, insures the risks of separate participants through the contract, and segregates each participant's liability through one or more protected cells.

Soft market:

One side of the market cycle characterized by low rates, high limits, flexible contracts, and high availability of coverage. Contrast with hard market.

Speculative risk:

Uncertainty about an event under consideration that could produce either a profit or a loss, such as a business venture or gambling transaction. A pure risk is generally insurable, while a speculative risk is usually not.

Spread of risk

Consideration of the number of independent exposures to loss in a given time period. As the number of units exposed independently to loss increases, the spread of risk expands and the likelihood that all units will suffer loss diminishes. Predictive ability increases as the spread of risk increases. This is often called the "law of large numbers.

Sponsored Captive:

A captive insurance company in which the minimum capital and surplus required by applicable law is provided by one or more sponsors, insures the risks of separate participants through the contract, and segregates each participant's liability through one or more protected cells.

Stop loss reinsurance:

A form of reinsurance also known as "aggregate excess of loss reinsurance" under which a reinsurer is liable for all losses, regardless of size, that occur after a specified loss ratio or total dollar amount of losses has been reached.

Structured settlement:

A settlement under which the plaintiff agrees to accept a stream of payments in lieu of a lump sum. Structured settlements can be tailored to the individual's inflation-adjusted living costs, anticipated future medical expenses, education costs for children, and other lifetime needs. Annuities are usually used as funding mechanisms.

Subject Premium:

XA cedant's premiums to which the reinsurance premium rate is applied to calculate the reinsurance premium.

Surplus:

The excess of assets over liabilities. Surplus determines an insurer's or reinsurer's ability to write business.

Surplus Share:

A form of proportional reinsurance where the reinsurer assumes pro rata responsibility for only that portion of any risk, which exceeds the company's traditional retentions.


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T

Tax Reform Act of 1984:

One section of this act redefined income related to the insurance of US-based risks as US-source income instead of foreign-source income. Another section made income from the insurance of related risks in foreign countries taxable in the current year. The net effect of these two changes was to eliminate most tax advantages for an offshore single parent captive.

Tax Reform Act of 1988:

The major change imposed by this act affected offshore group captives in that the definition of a U.S. shareholder was changed from an ownership interest of 10 percent or more to any shareholding interest.

Third-party administrator (TPA):

A firm that handles various types of administrative responsibilities on a fee-for-services basis for organizations involved in cash flow programs. These responsibilities typically include claims administration, loss control, risk management information systems, and risk management consulting.

Treaty:

An agreement between an insurer and a reinsurer stating the types or classes of businesses that the reinsurer will accept from the ceding insurer.

Treaty reinsurance:

A form of reinsurance in which the ceding company makes an agreement to cede certain classes of business to a reinsurer. The reinsurer in turn agrees to accept all business qualifying under the agreement, known as the "treaty." Under a reinsurance treaty, the ceding company is assured that all of its risks falling within the terms of the treaty will be reinsured in accordance with treaty terms.


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U

Unallocated loss adjustment expense:

Salaries, overhead, and other related adjustment costs not specifically allocated to the expense incurred for a particular claim.

Ultimate Net Loss:

The total sum which the assured, or any company as his insurer, or both, become obligated to pay either through adjudication or compromise, and usually includes hospital, medical and funeral charges and 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 which 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.

Unearned Premium:

That portion of the original premium that applies to the unexpired portion of risk.

Unbundling:

The practice of separating risk handling and risk funding services either from a multiline insurer or from themselves. Captives that require a "front" may also be required to purchase all or some of the services from the same insurer. This is a "bundled" program. Unbundling indicates the ability to purchase services from any vendor, not just those associated with the fronting insurer.


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V

Valuation date:

The cutoff date for adjustments made to paid claims and reserve estimates in a loss report. For example, a workers' compensation loss report for the 1996 policy year that has a 1998 valuation date includes all claim payments and changes in loss reserves made prior to the 1998 valuation date.


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W

Weighted average loss forecasting:

A method of forecasting losses that assigns greater weight, typically to more recent years, when developing a forecast of future losses. Recent years receive a greater weight because they tend to more closely approximate current conditions (e.g., benefit levels, nature of company operations, medical expenses).

Working layer:

A dollar range in which an insured or, in the case of an insurance portfolio, a group of insureds, is expected to experience a fairly high level of loss frequency. For many organizations, this loss frequency is adequate to provide some degree of statistical credibility to actuarial forecasts of the total expected losses during a specific period of time, e.g., 1 year. This is the layer typically subject to deductibles, self-insured retentions, retrospective rating, and similar programs.


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X


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Y


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Z


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