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.

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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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Earned Premium

An insurer “earns” a portion of a policy’s premium as time elapses during the policy period.

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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.

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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.

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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.

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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.

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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.

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Excess of Loss Reinsurance

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

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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.

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Expense Ratio

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

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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.

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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.

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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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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Foreign Insurer

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

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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.

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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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