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.

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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.

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Per Risk Excess Reinsurance

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

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Peril

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

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Policy Year

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

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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”.

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Portfolio Reinsurance

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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Pure Captive Insurance Company

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

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Pure Premium

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

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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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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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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.

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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.

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Reinstatement Premium

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

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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.

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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.

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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.

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