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Glossary
Accredited Reinsurer
The Credit for Reinsurance Model Regulation provides that a reinsurer which is not licensed in a state may become accredited by showing that it meets the financial conditions of the state; it is licensed in at least one state; it submits to that state's jurisdiction and allows its books and records to be examined; and its directors and management personnel are of acceptable character and experience. A company ceding reinsurance to an accredited reinsurer will usually get full financial statement credit for reserves ceded.
Acquisition Costs
Expenses incurred by an insurer or reinsurer in the process of writing business, including producer commissions. For some purposes, such as the NAIC and statutory financial reporting, acquisition costs are defined as being only first year acquisition-related expenses. For other purposes, such as for US GAAP accounting, all acquisition-rated costs, including renewal commissions are included.
Actuarial Opinion
The statement signed by the appointed actuary attesting to the reserves based on an asset adequacy analysis performed in accordance to the applicable Actuarial Standards of Practice. Reinsurance must be considered in this analysis.
Actuarial Standards Board (ASB)
The Actuarial Standards Board is a body of actuaries charged with developing standards of actuarial standards of practice in the United States. ASB number 11 specifically addresses reinsurance transactions.
Actuarial Standards of Practice
Standards established by the Actuarial Standards Board that define what an actuary should consider, document, and disclose in performing actuarial duties in the US.
Admitted Assets
Cash and investments that meet criteria for liquidity and safety set by the National Association of Insurance Commissioners and by individual state commissioners. Only admitted assets are used in measuring the capacity and soundness of an insurer. Non‑admitted assets, such as overdue receivables, are excluded from statutory assets and surplus.
Admitted Reinsurance
Reinsurance that is provided by a reinsurer licensed, authorized or accredited in the jurisdiction in question. Ceding companies may automatically take credit in that jurisdiction for admitted reinsurance. A ceding company may take credit for non‑admitted reinsurance only if it is secured by a letter of credit, a trust agreement or funds withheld in a form acceptable to the regulators.
Aggregate Limit
The maximum sum of recoveries payable under those reinsurance agreements that provide an overall maximum loss limitation.
Aggregate Retention
In effect, a minimum retention sometimes kept by the ceding company of losses regardless of individual amounts that might otherwise be recoverable from the reinsurer. Only after the aggregate retention is exceeded can the ceding company recover from the reinsurer.
Alien Reinsurer
A non‑U.S. domiciled reinsurer writing reinsurance in the U.S.
Alphabet Split
A method of allocating automatic reinsurance among several reinsurers. Using this method, each reinsurer is assigned a series of letters, and reinsurance is ceded based on the first letter of the insured's surname.
Allowance
See Expense Allowance.
Appointed Actuary (AA)
The actuary who has the authority to opine on the adequacy of reserves and assets in the insurance company's annual statements. In the US, the NAIC's Actuarial Opinion and Memorandum Model describes the necessary qualifications. In Canada, Guideline E-15: Appointed Actuary: Legal Requirements, Qualification and Peer Review describes the qualifications.
Arbitration Clause
A provision in reinsurance agreements that provides for non-judicial but generally binding settlement of disputes between parties. The processes outlined in the arbitration clause vary significantly. Under some relatively rare clauses, an unsatisfied party may have the option to seek judicial relief following an arbitration finding.
Assume
To accept or take over a risk from the ceding company, the converse of cede.
Assuming Insurer
In an assumption arrangement, the company purchasing the policies.
Assuming Company
See Reinsurer.
Assumption
A form of reinsurance under which policy administration and the contractual relationship with the insured, as well as all liabilities, are permanently passed to the reinsurer. The novation of liability is evidenced by an assumption certificate issued to the insured by the assuming insurer. In some jurisdictions, the insured has the right to refuse the change in insurers. See Indemnity Reinsurance.
Assumption Certificates
The document given to the policyholders whose policies have been permanently transferred to another company in an assumption transaction. It provides the name and contact information for the assuming company as well as the effective date of the assumption and an affirmation of the policy benefits. The assumption certificate becomes a part of the original policy. It is normally approved by the state insurance department.
Assumption Agreement
The contract between the transferring insurer and the assuming insurer that contains the provisions defining the terms of the agreement. Sometimes called an assumption reinsurance agreement.
Attachment Basis
A provision in many stop loss reinsurance agreements that determines whether, and in what manner, a reinsurance agreement covers a specific loss.
Attachment Point
In a stop loss reinsurance arrangement, the attachment point is a specified amount of retained claims. The reinsurer reimburses the ceding company for a specified portion of all retained claims over this amount. It is usually expressed in terms of expected claims from all causes.
Authorized Reinsurer
A reinsurer which is licensed in the ceding company's state of domicile is said to be authorized. A company ceding reinsurance to an authorized reinsurer is usually allowed credit on its statutory financial statement for the reserves ceded.
Automatic Capacity
The amount of risk that a ceding company can cede to a reinsurer without review or individual approval by the reinsurer. The term automatic capacity may be used either in reference to a specific treaty or in reference to the combined capacity of all treaties relevant to a risk. See Binding Limit.
Automatic Reinsurance
A reinsurance agreement under which the reinsurer is obligated to accept or assume risks which meet certain specific criteria based on the ceding company's underwriting.
Binding Limit
The amount of risk over the ceding company's retention which can be automatically ceded if all other conditions are met. Treaties generally include a binding limit for that agreement between the ceding company and a specific reinsurer. Treaties may also include a total binding limit for all reinsurers combined.
Block Reinsurance
See Portfolio Reinsurance.
Bordereaux
A written schedule of insureds, premiums and losses submitted to reinsurers under certain types of reinsurance agreements. See SelfAdministration.
Brokerage Market
Reinsurers who write business through reinsurance intermediaries or brokers. Reinsurers who do not generally accept such business are referred to as professional or direct reinsurers.
Calendar Year YRT
A YRT scale where the annual premium is on January 1st each year.
Capacity
The amount of exposure that a reinsurer is willing to accept on a risk, program, line of business or entire book of business. Capacity is dictated by the reinsurer's own retention and binding limits with its retrocessionaires. Sometimes referred to as total capacity.
Captive
A captive reinsurance company is a closely held insurance company formed by its owners to reinsure risks emanating from the parent and/or affiliated companies, or the customers of the parent and/or affiliates. The business entity that owns the captive may be a single corporation, multiple corporations, a trade association, or a group of producers such as life insurance agents or car dealers.
Carryover Provisions
A multi‑year rating device found in some reinsurance agreements which provides that a loss to reinsurers in a given time period may be applied to the results of a previous period (loss carryback) or may be applied to a future period (loss carryforward).
Catastrophe
A disaster involving multiple insureds and/or locations. Hurricanes, tornadoes, explosions and earthquakes are the most common catastrophe examples. Catastrophe is also sometimes used to designate a single large loss‑generally $5,000,000 or more, or an event affecting a minimum number of lives, e.g., three. Catastrophe reinsurance indemnifies the ceding company for such losses, subject to an agreed retention, coinsurance, and maximum limit. It is sometimes known as cat cover.
Cede
To transfer an insurance risk from the company originally issuing the policy to another insurance company known as the reinsurer.
Ceding Commission
In a coinsurance or modified coinsurance arrangement, the amount paid by the reinsurer to the ceding company to cover the ceding company's acquisition costs and overhead expenses, taxes, licenses and fees, and, perhaps, a share of expected profits, usually expressed as a percentage of the gross reinsurance premium. This may also be referred to as the expense allowance, or just the allowance.
Ceding Company
An insurer which underwrites and issues an original policy to an insured and then contractually transfers (cedes) a portion of the risk to a reinsurer. A ceding reinsurer is a reinsurer which transfers (cedes) a portion of the underlying reinsurance to a retrocessionaire.
Certified Reinsurer
A non-US reinsurer that is domiciled and licensed in a qualified jurisdiction. The NAIC maintains a list of qualified jurisdictions. These reinsurers must maintain an acceptable level of capital and surplus and an acceptable financial strength rating from a known rating agency as defined in the Credit for Reinsurance Model Regulation.
Cession
The basic unit of reinsurance that is transferred to the reinsurer. Often called the individual cession.
Chargeback
A specified portion of the excess of reinsurance allowances paid over ceded premium which the ceding company returns to the reinsurer in the event of a lapse during a defined period. Chargebacks are used to protect the reinsurer in the event of early lapse.
Coinsurance
Also called original terms reinsurance, a form of indemnity life reinsurance under which the reserves as well as the risk are transferred to the reinsurer; the ceding company retains its liability to the contractual relationship with the insured. See Modified Coinsurance and Assumption Reinsurance.
Commercial Reinsurer
Another term used to describe a professional reinsurer. This term is more widely used in property and casualty reinsurance.
Commutation
The termination of all obligations between the parties to a reinsurance agreement, normally accompanied by a final cash settlement. Commutation may be required by the reinsurance agreement or may be effected by mutual agreement.
Co/Mod‑Co
See Partially Modified Coinsurance.
Conditional Automatic
A reinsurance arrangement where the reinsurer underwrites all cessions. Conditional automatic reinsurance is generally used only if the ceding company does not have underwriters or MIB facilities.
Conditional Receipt
A provision included in some life insurance policies providing coverage from the date of the application to the date at which the policy is either issued or declined.
Constant Retention
Retention method where the ceding company holds a fixed amount of the net amount at risk. The reinsurer absorbs all changes in the net amount at risk. Also call level retention.
Constant Risk Reinsured Retention
Retention method where the amount reinsured is fixed and the ceding company absorbs all changes in the net amount at risk.
Continuation
A new insurance policy that results in the termination of an existing policy. The new policy generally lacks at least one of the following: new business underwriting, full first year commissions, new suicide period, or new contestable period.
Convention Blank
In the US, a summary of an insurance company's financial operations for a particular calendar year, supported by detailed exhibits and schedules, and filed with the state insurance department in each jurisdiction where the insurance company is licensed. It is also referred to as the annual statement. The convention blank is developed by the National Association of Insurance Commissioners (NAIC) with refinements in most years. The completed statement is generally referred to as the company’s annual statement, but is sometimes referred to as its convention blank.
Cost of Insurance Rate (COI)
Mortality charges embedded in a life insurance policy.
Cover Note
Confirmation by the intermediary to the ceding company of terms and conditions and percentage placed with each reinsurer.
Credibility
A statistical measure of the reliability of experience data, based on the size of the sample.
Cut Through Agreement
The cut through provision in a reinsurance treaty provides that, the reinsurer, especially in the event of the ceding company's insolvency, can pay any loss covered under the reinsurance agreement directly to the insured (or a third party beneficiary). This clause is in conflict with the normally required clause that the reinsurer must pay all amounts due to the ceding company or its receiver which then pays the insured. The provision should be included in the original reinsurance treaty and should have direct approval of the regulators of the ceding company. Also called assumption endorsement or assumption of liability endorsement (ALE).
Direct Premium Written
An insurer's premium income calculated before reflecting reinsurance inward or outward.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Passed in 2001, this law established the Financial Stability Oversight Council to monitor the financial system and respond to risk and the Federal Insurance Office (FIO) analyze and monitor the insurance industry.
Enterprise Risk Management
A process of planning and controlling risk to minimize the effect of risk on a company's earnings and surplus.
Entire Agreement Clause
A clause included in reinsurance agreements stating that the document represents the entire agreement, indicating that any other correspondence, agreements and commitments, either written and oral, have no binding authority, only the terms and conditions of the signed document are relevant. The NAIC requires the inclusion of this clause as a condition of allowing ceded reserve credit on many types of reinsurance.
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.
Escrow Account
An instrument used to segregate assets of one company for the benefit of another company.
Excess Quota Share
A reinsurance arrangement where the ceding company maintains its normal retention and then cedes the excess proportionately among a group of reinsurers.
Excess Reinsurance
A form of reinsurance under which recoveries are available when a given loss exceeds the ceding company's retention defined in the agreement. Also called excess of loss reinsurance.
Expense Allowance
The amount a reinsurer provides to the ceding company in a coinsurance or modified coinsurance transaction to provide for underlying policy expenses and commissions.
Experience Rated
A reinsurance arrangement which allows the ceding company to share in a portion of any profits realized on the reinsurance.
Experience Refund
Under a reinsurance agreement, that part of the profits which is returned to the ceding company after recognition of contingency reserves, loss carryforward and loss carryback provisions. See Carryover Provision.
Experience Refund Reinsurance
A form of reinsurance, typically yearly renewable term, under which the premium rates are subject to an experience refund. Premiums for experience refund reinsurance are generally higher than the premiums for non–refund reinsurance.
Exposure
Measure of vulnerability to loss, usually expressed in dollars or units.
Extended Wait
A retention method used in conjunction with long term disability and medical expense policies. Under this method, the ceding company is responsible for claims up to a certain predetermined limit. After the limit is reached, the reinsurer pays all or part of the claim.
Extra Contractual Obligations (ECO)
A generic term that, when used in reinsurance agreement, refers to damages awarded by a court against an insurer which are outside the provisions of the insurance policy, due to the insurer bad faith, fraud or gross negligence in the handling of a claim. Examples are punitive damages and losses in excess of policy limits.
Facultative Reinsurance
Reinsurance under which the ceding company has the option (faculty) of submitting individual risks to the reinsurer for underwriting and the reinsurer has the option of accepting or declining individual risks.
Facultative Obligatory
A form of life reinsurance which is a hybrid between facultative and automatic. A risk ceded is submitted to the reinsurer which has limited rights to decline individual risks.
Federal Insurance Office
Office created by the Dodd-Frank Act to collect and analyze data on the insurance industry, identify risky insurers for Federal Reserve supervision, identify gaps in insurance regulations, and represent the federal government in international insurance issues.
Federally Regulated Insurers (FRI)
Canadian insurance companies incorporated under the Insurance Companies Act.
FEGLI
A reinsurance pool established for the Federal Employees Group Life Insurance
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board, better known as FASB, is a United States organization which makes pronouncements for the accounting profession regarding proper accounting procedures and guidelines. These standards are of importance to both GAAP and statutory accounting for life and health insurance and annuity providers in the United States.
Financial Reinsurance
A form of reinsurance in which the primary objective is typically the enhancement of the ceding company's financial statements or operating ratios.
First Dollar Quota Share
See Quota Share.
Flip‑flop
A method of allocating automatic reinsurance among several reinsurers used in conjunction with layering. Under this method, each reinsurer is assigned a portion of the alphabet and receives the first layer of reinsurance on all insureds with surnames falling in its portion of the alphabet. It will receive the second layer of reinsurance on a different portion of the alphabet, and so on depending on the number of layers.
Follow the Fortunes
A provision in some reinsurance agreements, not always specifically identified as such, in which it is agreed that the reinsurer is bound to the same fate as the ceding company with respect to risks covered.
Foreign Reinsurer
A reinsurer chartered (domiciled) in one state writing business in another state is considered to be foreign in the non‑domiciliary state. In its own state, the reinsurer is considered to be domestic.
Formula Retention
A method sometimes used with decreasing term policies where the net amount at risk and retention are calculated using an agreed upon formula.
Fronting
A situation where one insurance company issues policies to specified applicants and reinsures all or substantially all of the risks on the insurance to another insurance company for a fee or portion of the profits. Fronting typically is used in jurisdictions where the reinsuring company is not licensed to do business.
Funds Withheld
Assets that would normally be paid over to a reinsurer but are withheld by the ceding company to permit statutory credit for non‑admitted reinsurance, to reduce a potential credit risk or to retain control over investments. Under certain conditions, the reinsurer may withhold funds from the ceding company.
Funds Withheld Mod‑co
A form of modified coinsurance where the initial allowance which is normally paid to the ceding company is withheld by the reinsurer to lessen the reinsurer's exposure to risk.
Generally Accepted Accounting Principles (GAAP)
A method of reporting financial results in accordance with a going- concern basis.
Gentlemen's Agreement
A clause sometimes included in reinsurance agreements that implies that not all terms and conditions are included in the written agreement. The clause emphasized the reliance upon the mutual integrity and good will of the parties to the agreement as well as industry custom and practice in order to solve disputes. This concept is not applied broadly in later treaties. See Industry Custom and Practice.
Guaranteed Cost Reinsurance
A form of reinsurance which has no adjustable premium rate or experience refund features. The final premium rate for the coverage is exactly as set forth ab initio in the contract.
Honorable Undertaking
A clause in some older reinsurance agreements, usually in the following context: "This agreement is considered by the parties hereto as an honorable undertaking, the purpose of which is not to be defeated by a strict or narrow interpretation of the language thereof." This clause has largely disappeared from usage, with more detailed treaty language being used.
Incurred But Not Reported (IBNR)
The actuarial estimate for claims that have already occurred but have not yet been reported to the insurer.
Indemnity Reinsurance
A form of reinsurance under which the risk is passed to the reinsurer which indemnifies the ceding company for losses covered by the reinsurance agreement or treaty. The ceding company retains its liability to and its contractual relationship with the insured.
Individual Cession
See Cession.
Individual Cession Administration
A reinsurance arrangement where the reinsurer sets up individual records for each cession and calculates the reinsurance premium, inforce, and reserve information for its financial reports.
Industry Custom and Practice (ICP)
Reliance upon industry customs and practices rather than written terms in a reinsurance agreement. An ICP clause is sometimes included in a reinsurance agreement and called upon to determine how that agreement should be interpreted, particularly on issues where the treaty is silent. In order to overcome specific language in a treaty, ICP must be shown to be inviolate, that is, practiced 100% of the time in the industry.
Insolvency Clause
A provision in reinsurance agreements that provides the reinsurer continues to pay its obligations to the insolvent ceding company's liquidator or successor as though no insolvency had occurred. It is required in most states.
Insurance Companies Act of 1991 (ICA)
Canadian act that provides the Office of the Superintendent of Insurance the authority to regulate insurance companies.
Intermediary
A third party that designs, negotiates and administers reinsurance agreements on the behalf of ceding company. Also called a broker. See Brokerage Market.
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 (1) the ceding company's payments to the intermediary are deemed payments to the reinsurer, (2) the reinsurer's payments to the intermediary are not payments to the ceding company until actually received by the ceding company. This clause is mandatory in some states.
International Association of Insurance Supervisors (IAIS)
An international organization representing insurance regulators in over 200 jurisdictions in over 140 countries. It promotes effective and consistent supervision of the insurance industry around the world.
Jumbo Limit
A limit placed on the amount of coverage that may be inforce or applied for on an individual life for automatic reinsurance purposes. The limit allows the reinsurer to check its retention and capacity. If such insurance exceeds the limit, the risk must be submitted for facultative review.
Layer
A horizontal segment of the liability insured. The first layer is generally defined by the ceding company's retention and binding limit with the first reinsurer. The next layer with a second reinsurer would begin at the initial binding limit and go up to a negotiated limit, and so on.
Layering
A method of allocating automatic reinsurance among several reinsurers. Using this method, reinsurance is ceded in layers. The layers are defined in terms of amounts of insurance. One reinsurer will receive all reinsurance up to the limit of the first layer. A second reinsurer will receive all reinsurance in excess of the first layer up to the limit of the second layer, and so forth, depending on the number of layers.
Lead Reinsurer
The reinsurer who negotiates the terms, conditions and premium rates and first signs on to the agreements; reinsurers who subsequently accept those terms and conditions are considered following reinsurers. Uncommon in life reinsurance.
Letter of Credit
A financial guaranty issued by a bank that permits the party to which it is issued to draw funds from the bank in the event of a valid unpaid claim against the other party; in reinsurance, typically used to permit reserve credit to be taken with respect to non‑admitted reinsurance; an alternative to funds withheld and modified coinsurance. Also referred to as an LOC.
Level Retention
See Constant Retention.
Lloyds
An insurance or reinsurance organization in which individuals or groups of individuals, called syndicates, rather than corporations, are at risk.
Loss Event
Any trigger for a recovery under an insurance of reinsurance agreement. Examples include occurrence, claims made, death or disability.
Losses in Excess of Policy Limits
A term that, when used in reinsurance agreements, refers to damages awarded by a court against an insurer in favor of the insured, due to the insurer's having failed to settle a third party claim against the insured within the policy limits by reason of bad faith, fraud or gross negligence. See Extra Contractual Obligations and Punitive Damages.
Losses Portfolio Transfer
A form of financial reinsurance for property and liability insurers involving the transfer of loss obligations already incurred which, when ultimately paid, will exceed the consideration paid to the reinsurer for undertaking such obligations. The amount by which the transferred obligations exceed the consideration paid is the resultant increase to the ceding company's statutory surplus.
Loss Ratio
Incurred losses (including applicable IBNR) divided by earned premium for an accounting or treaty period. Loss ratios can be calculated on an accident year, calendar year, or underwriting year basis.
Loss Ratio Coverage
A form of stop loss reinsurance under which the reinsurer pays a portion of the claims represented by a loss ratio in excess of a specified loss ratio. For example, A20% on excess of 110%@ will result in claims between 100% and 130% of premium being paid by the reinsurer.
Medical Information Bureau
A service bureau which compiles underwriting information. Member companies submit coded underwriting information on applicants to the MIB and receive coded information concerning impairments on new applicants from the bureau based on information compiled by other insurance company members. The company receiving information regarding an impairment must independently verify the information.
Minimum Cession
The smallest cession that a reinsurer will accept automatically. The minimum size is set to avoid the expenses associated with small cessions.
Mirror Reserves
Some states require that the reinsurer's increase in liabilities is equal to the ceding company's reduction in liabilities so that the total liabilities of both companies equals what the ceding company would have held without reinsurance.
Mod‑co Interest Rate
The interest rate used to determine the interest credited on the beginning reserves in a mod‑co transaction.
Mod‑co Reserve Adjustment
The net of two modified coinsurance items: the interest on reserves (payable by the ceding company to the reinsurer) and the increase in the reserve (payable by the reinsurer to the ceding company).
Modified Coinsurance
Indemnity life reinsurance that differs from coinsurance only in that the ceding company holds the entire reserve while the ceded risk remains with the reinsurer. The ceding company is required to pay interest to replace the interest which would have been earned by the reinsurer if it had held the assets corresponding to the reserves in its own investment portfolio. It is primarily used to permit reserve credit to be taken if the reinsurer is not admitted, accredited, or certified, or to retain control of investments. See Funds Withheld Coinsurance and Assumption.
National Association of Insurance Commissioners (NAIC)
The US standard setting and regulatory support organization governed by the chief insurance regulators of all fifty state, the District of Columbia, and five US territories.
Net Amount at Risk (NAAR or NAR)
The excess of the death benefit of a policy over the policy reserve.
Non‑experience Rated
A reinsurance arrangement which does not allow the ceding company to share in any profits realized on the reinsurance. Premiums for nonexperience rated reinsurance generally have smaller loads than premiums for experience rated reinsurance.
Nonproportional Reinsurance
A form of reinsurance where the reinsurer's liability is not fixed in advance, but is dependent on the number or amount of claims incurred in a given period.
Normal Underwriting
One of the conditions for automatic reinsurance, normal underwriting may vary between products and treaties. The definition of what is normal for the plan is set at the inception of the agreement.
Notice of Transfer
A document given to a policyholder by the assuming insurer informing the policyholder that the policy has been transferred to the assuming insurer. A certificate of assumption is included with the notice.
Novation
The substitution of the policyholder's original insurance contract with the transferring insurer with a contract with the assuming insurer. This action discharges the responsibility of the replaced insurer.
Occasional Reinsurer
A reinsurer that does not actively seek recurring reinsurance, but acquires blocks of business or participates in reinsurance pools.
Occurrence
An adverse contingent accident or event that the insured neither expected nor intended. Catastrophe reinsurance agreements frequently define adverse events having a common cause and sometimes within a specified time frame, (for example, seventy‑two hours) as being one occurrence. This definition prevents multiple retentions and reinsurance limits from being exposed in a single catastrophe loss.
Office of the Superintendent of Financial Institutions (OSFI)
An independent agency of the Government of Canada that supervises and regulates federally registered banks and insurance companies, trusts and loan companies, and private pension plans subject to federal supervision.
Offset Clause
Most reinsurance treaties provides that mutual debits and credits may be offset against each other, even in the event of the insolvency of one of the parties to the treaty. Mutuality of capacity and mutuality of time must exist. An offset clause may not be necessary for offset to occur, but it may also be disallowed by some states even if the treaty contains an offset clause. It is also known as set-off.
Outstanding Surplus Account
A record kept by the reinsurer of the amount of surplus that it is carrying in a financial reinsurance arrangement.
Partially Modified Coinsurance (Part‑co)
A combination of coinsurance and modified coinsurance. In most situations a portion of the initial reserves equal to the initial allowance are held on a coinsurance basis, while the remaining reserves are held on a mod-co basis, eliminating any initial cash transfer. Also known as Co/Mod‑co, split co/mod-co, and COMB.
Participation Limit
A limit placed on the absolute amount of coverage that may be inforce or applied for on an individual life for reinsurance purposes. If the insurance exceeds the limit, the reinsurer will decline to assume any of the risk. This is most commonly applied to supplementary benefits such as accidental death coverage.
Persistency Bonus
An amount paid to the ceding company by the reinsurer if the reinsurance ceded in a given period meets certain persistency standards. Persistency bonuses are used to encourage the writing of persistent business.
Placement Ratio
The ratio of paid facultative cessions to number of facultative submissions. The placement ratio can be used to determine the effectiveness of the reinsurer's facultative underwriting and the cost per cession.
Point‑in‑Scale YRT
A term used in conjunction with a select and ultimate YRT scale. It refers to the premium rate appropriate for the insured's original issue age and duration.
Policy Expense Allowance
The amount payable to the ceding company by the reinsurer in lieu of actual commissions and expenses incurred by the ceding company.
Pool
A method of allocating reinsurance among several reinsurers. Using this method, each reinsurer receives a specified percentage of each risk ceded into the pool. Percentages may vary by reinsurer.
Premium (Written/Unearned/Earned)
Written premium is premium paid and registered on the books of an insurer of reinsurer in a given accounting period. The premium is considered to be earned proportionately during the policy term. Any premium paid past the current accounting period is considered unearned. For example, if an annual premium is paid, 1/12th of the premium is earned each month. If an annual premium were paid two months prior to the end of the accounting period, 10/12ths would be unearned and 2/12ths would be earned. Earned premium is income for the accounting period while unearned premium will be income in a future accounting period.
Producer Owned Reinsurance Company
There are two significant forms of producer owned reinsurance companies (PORC). In the first form, insurance companies reinsure a portion of business written by a group of insurance agents into a reinsurance company owned by the agents. In the second form, a bank, retailer, or other non-insurance company allows an insurance company access to its customer list for the purpose of soliciting insurance.
Production Bonus
An amount paid to the ceding company by the reinsurer if the amount of reinsurance ceded in a given period exceeds a specified amount. Production bonuses are used to encourage a ceding company to place reinsurance with a certain carrier.
Professional Reinsurers
Reinsurers that deal with the ceding company through their account executives, rather than through intermediaries. Also known as direct reinsurers. See Brokerage Market.
Profit Commission
A provision found in some reinsurance agreements which provides for profit sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurer's expenses, and the ceding company's share of such profit after expenses. See Adjustable Features, Risk Charge and Experience Refund.
Proportional
A form of reinsurance where the amount ceded is defined at the time of cession, although the amount of the cession may vary with time by formula.
Pro Rata Retention
Method where the ceding company holds a constant percentage of the net amount at risk reinsured. It differs from quota share in that the percentage varies by the original face amount and the amount reinsured.
Portfolio Reinsurance
The ceding of a defined group of policies. Normally the term applies to reinsurance of inforce risks, but it can apply to new risks as well. Also known as block reinsurance.
Punitive Damages
Damages awarded by a court against an insured or against an insurer in addition to compensatory damages, intended to punish the insured or the insurer for willful and wanton misconduct and to serve as a deterrent. Punitive damages are usually the related to conduct of the insurer in handling a claim.
Quota Share
A form of reinsurance in which premiums and losses are shared proportionately between ceding company and reinsurer.
Rate
The premium rate is the amount of premium charged per exposure unit, e.g., per $1,000.
Recapture
The process by which the ceding company recovers some portion of the liabilities transferred to a reinsurer subject to the terms of the reinsurance agreement.
Recapture Provision
A provision in a reinsurance contract that describes the conditions under which a ceding company is permitted to recover some or all of the liabilities ceded to a reinsurer.
Recurring Reinsurance
A reinsurance arrangement covering newly issued policies. It is generally anticipated at the inception of the arrangement that new policies will continue to be reinsured under the agreement in the future.
Reinsurance Pool
A multi‑reinsurer agreement under which each reinsurer in the group or pool assumes a specified portion of each risk ceded to the pool. Contrast with Reinsurance Wheel.
Reinsurance Treaty
See Treaty.
Reinsurance Wheel
A procedure for retroceding individual life insurance risks in excess of an insurer’s retention to a group of reinsurers (up to their subscribed limits) in rotation, the order being determined by their positions as spokes on an imaginary wheel. The amounts need not be the same. Contrast with Reinsurance Pool.
Reinsurer
A reinsurer contractually accepts a portion of the ceding company's risk.
Replacement
A type of Continuation, when a new life insurance policy is purchased, generally with less than full new business underwriting and the existing policy on the life of the insured is terminated. Replacement are often part of a formal program.
Retain
To keep a risk.
Retention Limit
The dollar amount or percentage of each loss retained by the ceding company under a reinsurance agreement. Also known as the retention.
Retrocede
To transfer a reinsurance risk assumed by the reinsurer to another insurance company.
Retrocessionaire
A reinsurer that contractually accepts from another reinsurer a portion of the ceding company's underlying reinsurance risk. The transfer is known as a retrocession.
Risk Based Capital
Risk-Based Capital (RBC) is a statutory measurement of the minimum amount of capital appropriate for an insurance company operate for the safety of policyholders. Regulators use RBC in conjunction with other measurements to determine the financial solvency of a company.
Risk Charge
An amount identified in some reinsurance agreements as specifically to be retained by the reinsurer for assuming the risk under the policies reinsured; a share of the profits in excess of the risk charge is returned to the ceding company as an experience refund. Also known as profit and expense charge, risk and profit charge, or risk and expense charge.
Risk Premium Reinsurance (RPR)
Another name for YRT reinsurance.
Risk Transfer
The fundamental principle of reinsurance is the transfer of economic insurable risk. Risks included mortality, morbidity, longevity, lapse, expense, and investment.
Securitization
The process of combining certain assets into a financial instrument which is then sold to investors. In the reinsurance world, this generally means packaging risks into tranches of lower risk for low cost capital.
Self Administration
A reinsurance arrangement where the ceding company provides the reinsurer with periodic reports for reinsurance ceded. The report provides information on premium, inforce, reserves, and any other information required by the reinsurer for its financial reports. This information is generally transmitted electronically. Also known as self-billed or insurer billed. Bulk, or Bordereaux, is an older form of self-administration that does not involve electronic data transfer.
SGLI
A reinsurance pool established for the Servicemen's Group Life Insurance.
Sliding Scale Commission
A ceding commission which varies inversely with the loss ratio under the reinsurance agreement. The scales are not always one‑to‑one: for example, as the loss ratio decreases by 1%, the ceding commission might increase only 1/2%. Sometimes used in reinsurance of credit insurance plans.
Solvency II
Solvency II Directive/2009/13/EC is an EU directive that codifies and harmonizes insurance regulations in the EU.
Special Purpose Vehicle
A special purpose vehicle (SPV) is a limited company used in structured financial transactions, such as asset securitizations, joint ventures, or to isolate certain company assets or operations. For reinsurance applications, SPVs are reinsurers, generally taking remote risks and establishing capital and reserves accordingly.
Spread Loss
A form of reinsurance under which premiums are paid during good years to build up a fund from which losses are recovered in bad years. This reinsurance has the effect of stabilizing a ceding company's loss ratio over an extended period of time.
Stop Loss Reinsurance
A form of reinsurance under which the reinsurer pays some of all of a ceding company aggregate retained losses in excess of a predetermined dollar amount or in excess of a percentage of premium. See Loss Ratio Coverage.
Surplus
The excess of assets over liabilities. Statutory surplus is an insurer's or reinsurer's capital as determined under statutory accounting rules. Surplus determines an insurer's or reinsurer's capacity to write business.
Surplus Relief
An increase in the ceding company's surplus through financial reinsurance. Ceding companies are able to use the increase in surplus to write more business while retaining reasonable operating ratios.
Surplus Strain
A situation that occurs when the acquisition costs and reserve requirements of newly issued business depresses statutory earnings.
Termination
The formal ending of a reinsurance agreement by its natural expiry, cancellation or commutation by the parties. Terminations can be either on a cutoff or runoff basis. Under cutoff provisions, the parties' obligations are fixed as of the agreed cutoff date. Otherwise, obligations incurred while the agreement was in force are run off to their natural extinction.
Third Party Administration
A situation where the direct insurance and reinsurance is administered by a third party.
Total Capacity
See Capacity.
Traditional Reinsurance
A reinsurance arrangement where risk sharing is the primary purpose.
Transferring Insurer
In an assumption transaction, the original company is known as the transferring insurer.
Treaty
The legal contract defining the reinsurance agreement. A treaty contains common contract terms, such as a specific risk definition, data on limit and retention, and provisions for premium and duration, and is signed by representatives of both parties.
Trivial Amount
See Minimum Cession.
Trust Agreement
An agreement under which certain assets are deposited by one party (the grantor), for the sole benefit of another party (the beneficiary), into an account managed by a third party (the trustee). In reinsurance, such an agreement is most frequently used to permit a ceding company to take credit for non‑admitted reinsurance up to the value of the assets in trust.
Unusual Expenses
In life reinsurance, non‑routine expenses of the ceding company for claims investigation, legal defense or rescission actions. The reinsurer typically agrees to pay such expenses as distinct from punitive, exemplary or other non-contractual expenses which it does not agree to pay.
Yearly Renewable Term (YRT)
A form of life reinsurance under which the mortality risks of the net amount at risk, but not the permanent plan reserves, are transferred to the reinsurer. The premium for a YRT risk varies each year with the amount at risk and the ages of the insureds. Sometimes referred to as risk premium reinsurance (RPR). YRT can also be applied to certain health risks, such as long term care and disability income, but that is rare.
Zero First Year YRT (ZFT)
A YRT scale with no premium in the first year.
[1] This glossary was developed by the authors but includes important contributions made by Robert Kaufman, Ardian Gill, and Kirk Roeser, in the form of an earlier glossary of reinsurance terms which they prepared for Gill and Roeser, Inc. The ACLI included in its sample reinsurance treaty a glossary from which certain terms were included in this glossary. Finally, the authors have included definitions developed by them when other definitions were not found or deemed appropriate. We gratefully acknowledge the contributions of these other individuals and the ACLI and their permission to incorporate that work into this glossary.
- ACTEX Publications
- Actuarial Standards Board
- American Academy of Actuaries
- American Council of Life Insurers
- AIDA Reinsurance and Insurance Arbitration Society-US
- American Arbitration Association
- Association for Cooperative Operations Research and Development
- Assuris
- Canada Revenue Agency
- Canadian Council of Insurance Regulators
- Canadian Institute of Actuaries
- Canadian Insurance Services Regulatory Organizations
- Canadian Life and Health Insurance Association
- Canadian Reinsurance Conference
- European Union
- Financial Standards Accounting Board
- Government of Canada
- International Association of Insurance Supervisors
- International Financial Reporting Standards
- Internal Revenue Service
- National Association of Insurance Commissioners
- National Association of Life and Health Guaranty Association
- Office of the Superintendent of Financial Institution
- Organization for Economic Cooperation and Development
- Reinsurance Administration Professionals Association
- Reinsurance Section, Society of Actuaries
- Reinsurance Association of America
- Society of Actuaries
International Regulatory Bodies
- Australian Prudential Regulatory Authority (APRA)
- Insurance Commission of the Bahamas.
- Barbados Insurance Division of the Financial Services Commission (FSC)
- Bermuda Monetary Authority (BMA)
- British Virgin Islands: The Financial Service Commission (FSC)
- Cayman Islands Monetary Authority
- China Insurance Regulatory Commission (CIRC)
- Germany: Federal Financial Supervisory authority (BaFin)
- Guernsey Financial Services Commission
- Italy: Institute for Supervision of Insurance Companies (IVASS)
- Life and General Insurance Supervision Divisions of the Central Bank of Ireland
- Japan: Commissioner of Financial Services Agency
- Luxembourg: Commissariat aux Assurances (CAA)
- Swiss Financial Market Supervisory Authority-FINMA
- United Kingdom: Prudential Regulation Authority
Glossary
Accredited Reinsurer
The Credit for Reinsurance Model Regulation provides that a reinsurer which is not licensed in a state may become accredited by showing that it meets the financial conditions of the state; it is licensed in at least one state; it submits to that state's jurisdiction and allows its books and records to be examined; and its directors and management personnel are of acceptable character and experience. A company ceding reinsurance to an accredited reinsurer will usually get full financial statement credit for reserves ceded.
Acquisition Costs
Expenses incurred by an insurer or reinsurer in the process of writing business, including producer commissions. For some purposes, such as the NAIC and statutory financial reporting, acquisition costs are defined as being only first year acquisition-related expenses. For other purposes, such as for US GAAP accounting, all acquisition-rated costs, including renewal commissions are included.
Actuarial Opinion
The statement signed by the appointed actuary attesting to the reserves based on an asset adequacy analysis performed in accordance to the applicable Actuarial Standards of Practice. Reinsurance must be considered in this analysis.
Actuarial Standards Board (ASB)
The Actuarial Standards Board is a body of actuaries charged with developing standards of actuarial standards of practice in the United States. ASB number 11 specifically addresses reinsurance transactions.
Actuarial Standards of Practice
Standards established by the Actuarial Standards Board that define what an actuary should consider, document, and disclose in performing actuarial duties in the US.
Admitted Assets
Cash and investments that meet criteria for liquidity and safety set by the National Association of Insurance Commissioners and by individual state commissioners. Only admitted assets are used in measuring the capacity and soundness of an insurer. Non‑admitted assets, such as overdue receivables, are excluded from statutory assets and surplus.
Admitted Reinsurance
Reinsurance that is provided by a reinsurer licensed, authorized or accredited in the jurisdiction in question. Ceding companies may automatically take credit in that jurisdiction for admitted reinsurance. A ceding company may take credit for non‑admitted reinsurance only if it is secured by a letter of credit, a trust agreement or funds withheld in a form acceptable to the regulators.
Aggregate Limit
The maximum sum of recoveries payable under those reinsurance agreements that provide an overall maximum loss limitation.
Aggregate Retention
In effect, a minimum retention sometimes kept by the ceding company of losses regardless of individual amounts that might otherwise be recoverable from the reinsurer. Only after the aggregate retention is exceeded can the ceding company recover from the reinsurer.
Alien Reinsurer
A non‑U.S. domiciled reinsurer writing reinsurance in the U.S.
Alphabet Split
A method of allocating automatic reinsurance among several reinsurers. Using this method, each reinsurer is assigned a series of letters, and reinsurance is ceded based on the first letter of the insured's surname.
Allowance
See Expense Allowance.
Appointed Actuary (AA)
The actuary who has the authority to opine on the adequacy of reserves and assets in the insurance company's annual statements. In the US, the NAIC's Actuarial Opinion and Memorandum Model describes the necessary qualifications. In Canada, Guideline E-15: Appointed Actuary: Legal Requirements, Qualification and Peer Review describes the qualifications.
Arbitration Clause
A provision in reinsurance agreements that provides for non-judicial but generally binding settlement of disputes between parties. The processes outlined in the arbitration clause vary significantly. Under some relatively rare clauses, an unsatisfied party may have the option to seek judicial relief following an arbitration finding.
Assume
To accept or take over a risk from the ceding company, the converse of cede.
Assuming Insurer
In an assumption arrangement, the company purchasing the policies.
Assuming Company
See Reinsurer.
Assumption
A form of reinsurance under which policy administration and the contractual relationship with the insured, as well as all liabilities, are permanently passed to the reinsurer. The novation of liability is evidenced by an assumption certificate issued to the insured by the assuming insurer. In some jurisdictions, the insured has the right to refuse the change in insurers. See Indemnity Reinsurance.
Assumption Certificates
The document given to the policyholders whose policies have been permanently transferred to another company in an assumption transaction. It provides the name and contact information for the assuming company as well as the effective date of the assumption and an affirmation of the policy benefits. The assumption certificate becomes a part of the original policy. It is normally approved by the state insurance department.
Assumption Agreement
The contract between the transferring insurer and the assuming insurer that contains the provisions defining the terms of the agreement. Sometimes called an assumption reinsurance agreement.
Attachment Basis
A provision in many stop loss reinsurance agreements that determines whether, and in what manner, a reinsurance agreement covers a specific loss.
Attachment Point
In a stop loss reinsurance arrangement, the attachment point is a specified amount of retained claims. The reinsurer reimburses the ceding company for a specified portion of all retained claims over this amount. It is usually expressed in terms of expected claims from all causes.
Authorized Reinsurer
A reinsurer which is licensed in the ceding company's state of domicile is said to be authorized. A company ceding reinsurance to an authorized reinsurer is usually allowed credit on its statutory financial statement for the reserves ceded.
Automatic Capacity
The amount of risk that a ceding company can cede to a reinsurer without review or individual approval by the reinsurer. The term automatic capacity may be used either in reference to a specific treaty or in reference to the combined capacity of all treaties relevant to a risk. See Binding Limit.
Automatic Reinsurance
A reinsurance agreement under which the reinsurer is obligated to accept or assume risks which meet certain specific criteria based on the ceding company's underwriting.
Binding Limit
The amount of risk over the ceding company's retention which can be automatically ceded if all other conditions are met. Treaties generally include a binding limit for that agreement between the ceding company and a specific reinsurer. Treaties may also include a total binding limit for all reinsurers combined.
Block Reinsurance
See Portfolio Reinsurance.
Bordereaux
A written schedule of insureds, premiums and losses submitted to reinsurers under certain types of reinsurance agreements. See SelfAdministration.
Brokerage Market
Reinsurers who write business through reinsurance intermediaries or brokers. Reinsurers who do not generally accept such business are referred to as professional or direct reinsurers.
Calendar Year YRT
A YRT scale where the annual premium is on January 1st each year.
Capacity
The amount of exposure that a reinsurer is willing to accept on a risk, program, line of business or entire book of business. Capacity is dictated by the reinsurer's own retention and binding limits with its retrocessionaires. Sometimes referred to as total capacity.
Captive
A captive reinsurance company is a closely held insurance company formed by its owners to reinsure risks emanating from the parent and/or affiliated companies, or the customers of the parent and/or affiliates. The business entity that owns the captive may be a single corporation, multiple corporations, a trade association, or a group of producers such as life insurance agents or car dealers.
Carryover Provisions
A multi‑year rating device found in some reinsurance agreements which provides that a loss to reinsurers in a given time period may be applied to the results of a previous period (loss carryback) or may be applied to a future period (loss carryforward).
Catastrophe
A disaster involving multiple insureds and/or locations. Hurricanes, tornadoes, explosions and earthquakes are the most common catastrophe examples. Catastrophe is also sometimes used to designate a single large loss‑generally $5,000,000 or more, or an event affecting a minimum number of lives, e.g., three. Catastrophe reinsurance indemnifies the ceding company for such losses, subject to an agreed retention, coinsurance, and maximum limit. It is sometimes known as cat cover.
Cede
To transfer an insurance risk from the company originally issuing the policy to another insurance company known as the reinsurer.
Ceding Commission
In a coinsurance or modified coinsurance arrangement, the amount paid by the reinsurer to the ceding company to cover the ceding company's acquisition costs and overhead expenses, taxes, licenses and fees, and, perhaps, a share of expected profits, usually expressed as a percentage of the gross reinsurance premium. This may also be referred to as the expense allowance, or just the allowance.
Ceding Company
An insurer which underwrites and issues an original policy to an insured and then contractually transfers (cedes) a portion of the risk to a reinsurer. A ceding reinsurer is a reinsurer which transfers (cedes) a portion of the underlying reinsurance to a retrocessionaire.
Certified Reinsurer
A non-US reinsurer that is domiciled and licensed in a qualified jurisdiction. The NAIC maintains a list of qualified jurisdictions. These reinsurers must maintain an acceptable level of capital and surplus and an acceptable financial strength rating from a known rating agency as defined in the Credit for Reinsurance Model Regulation.
Cession
The basic unit of reinsurance that is transferred to the reinsurer. Often called the individual cession.
Chargeback
A specified portion of the excess of reinsurance allowances paid over ceded premium which the ceding company returns to the reinsurer in the event of a lapse during a defined period. Chargebacks are used to protect the reinsurer in the event of early lapse.
Coinsurance
Also called original terms reinsurance, a form of indemnity life reinsurance under which the reserves as well as the risk are transferred to the reinsurer; the ceding company retains its liability to the contractual relationship with the insured. See Modified Coinsurance and Assumption Reinsurance.
Commercial Reinsurer
Another term used to describe a professional reinsurer. This term is more widely used in property and casualty reinsurance.
Commutation
The termination of all obligations between the parties to a reinsurance agreement, normally accompanied by a final cash settlement. Commutation may be required by the reinsurance agreement or may be effected by mutual agreement.
Co/Mod‑Co
See Partially Modified Coinsurance.
Conditional Automatic
A reinsurance arrangement where the reinsurer underwrites all cessions. Conditional automatic reinsurance is generally used only if the ceding company does not have underwriters or MIB facilities.
Conditional Receipt
A provision included in some life insurance policies providing coverage from the date of the application to the date at which the policy is either issued or declined.
Constant Retention
Retention method where the ceding company holds a fixed amount of the net amount at risk. The reinsurer absorbs all changes in the net amount at risk. Also call level retention.
Constant Risk Reinsured Retention
Retention method where the amount reinsured is fixed and the ceding company absorbs all changes in the net amount at risk.
Continuation
A new insurance policy that results in the termination of an existing policy. The new policy generally lacks at least one of the following: new business underwriting, full first year commissions, new suicide period, or new contestable period.
Convention Blank
In the US, a summary of an insurance company's financial operations for a particular calendar year, supported by detailed exhibits and schedules, and filed with the state insurance department in each jurisdiction where the insurance company is licensed. It is also referred to as the annual statement. The convention blank is developed by the National Association of Insurance Commissioners (NAIC) with refinements in most years. The completed statement is generally referred to as the company’s annual statement, but is sometimes referred to as its convention blank.
Cost of Insurance Rate (COI)
Mortality charges embedded in a life insurance policy.
Cover Note
Confirmation by the intermediary to the ceding company of terms and conditions and percentage placed with each reinsurer.
Credibility
A statistical measure of the reliability of experience data, based on the size of the sample.
Cut Through Agreement
The cut through provision in a reinsurance treaty provides that, the reinsurer, especially in the event of the ceding company's insolvency, can pay any loss covered under the reinsurance agreement directly to the insured (or a third party beneficiary). This clause is in conflict with the normally required clause that the reinsurer must pay all amounts due to the ceding company or its receiver which then pays the insured. The provision should be included in the original reinsurance treaty and should have direct approval of the regulators of the ceding company. Also called assumption endorsement or assumption of liability endorsement (ALE).
Direct Premium Written
An insurer's premium income calculated before reflecting reinsurance inward or outward.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Passed in 2001, this law established the Financial Stability Oversight Council to monitor the financial system and respond to risk and the Federal Insurance Office (FIO) analyze and monitor the insurance industry.
Enterprise Risk Management
A process of planning and controlling risk to minimize the effect of risk on a company's earnings and surplus.
Entire Agreement Clause
A clause included in reinsurance agreements stating that the document represents the entire agreement, indicating that any other correspondence, agreements and commitments, either written and oral, have no binding authority, only the terms and conditions of the signed document are relevant. The NAIC requires the inclusion of this clause as a condition of allowing ceded reserve credit on many types of reinsurance.
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.
Escrow Account
An instrument used to segregate assets of one company for the benefit of another company.
Excess Quota Share
A reinsurance arrangement where the ceding company maintains its normal retention and then cedes the excess proportionately among a group of reinsurers.
Excess Reinsurance
A form of reinsurance under which recoveries are available when a given loss exceeds the ceding company's retention defined in the agreement. Also called excess of loss reinsurance.
Expense Allowance
The amount a reinsurer provides to the ceding company in a coinsurance or modified coinsurance transaction to provide for underlying policy expenses and commissions.
Experience Rated
A reinsurance arrangement which allows the ceding company to share in a portion of any profits realized on the reinsurance.
Experience Refund
Under a reinsurance agreement, that part of the profits which is returned to the ceding company after recognition of contingency reserves, loss carryforward and loss carryback provisions. See Carryover Provision.
Experience Refund Reinsurance
A form of reinsurance, typically yearly renewable term, under which the premium rates are subject to an experience refund. Premiums for experience refund reinsurance are generally higher than the premiums for non–refund reinsurance.
Exposure
Measure of vulnerability to loss, usually expressed in dollars or units.
Extended Wait
A retention method used in conjunction with long term disability and medical expense policies. Under this method, the ceding company is responsible for claims up to a certain predetermined limit. After the limit is reached, the reinsurer pays all or part of the claim.
Extra Contractual Obligations (ECO)
A generic term that, when used in reinsurance agreement, refers to damages awarded by a court against an insurer which are outside the provisions of the insurance policy, due to the insurer bad faith, fraud or gross negligence in the handling of a claim. Examples are punitive damages and losses in excess of policy limits.
Facultative Reinsurance
Reinsurance under which the ceding company has the option (faculty) of submitting individual risks to the reinsurer for underwriting and the reinsurer has the option of accepting or declining individual risks.
Facultative Obligatory
A form of life reinsurance which is a hybrid between facultative and automatic. A risk ceded is submitted to the reinsurer which has limited rights to decline individual risks.
Federal Insurance Office
Office created by the Dodd-Frank Act to collect and analyze data on the insurance industry, identify risky insurers for Federal Reserve supervision, identify gaps in insurance regulations, and represent the federal government in international insurance issues.
Federally Regulated Insurers (FRI)
Canadian insurance companies incorporated under the Insurance Companies Act.
FEGLI
A reinsurance pool established for the Federal Employees Group Life Insurance
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board, better known as FASB, is a United States organization which makes pronouncements for the accounting profession regarding proper accounting procedures and guidelines. These standards are of importance to both GAAP and statutory accounting for life and health insurance and annuity providers in the United States.
Financial Reinsurance
A form of reinsurance in which the primary objective is typically the enhancement of the ceding company's financial statements or operating ratios.
First Dollar Quota Share
See Quota Share.
Flip‑flop
A method of allocating automatic reinsurance among several reinsurers used in conjunction with layering. Under this method, each reinsurer is assigned a portion of the alphabet and receives the first layer of reinsurance on all insureds with surnames falling in its portion of the alphabet. It will receive the second layer of reinsurance on a different portion of the alphabet, and so on depending on the number of layers.
Follow the Fortunes
A provision in some reinsurance agreements, not always specifically identified as such, in which it is agreed that the reinsurer is bound to the same fate as the ceding company with respect to risks covered.
Foreign Reinsurer
A reinsurer chartered (domiciled) in one state writing business in another state is considered to be foreign in the non‑domiciliary state. In its own state, the reinsurer is considered to be domestic.
Formula Retention
A method sometimes used with decreasing term policies where the net amount at risk and retention are calculated using an agreed upon formula.
Fronting
A situation where one insurance company issues policies to specified applicants and reinsures all or substantially all of the risks on the insurance to another insurance company for a fee or portion of the profits. Fronting typically is used in jurisdictions where the reinsuring company is not licensed to do business.
Funds Withheld
Assets that would normally be paid over to a reinsurer but are withheld by the ceding company to permit statutory credit for non‑admitted reinsurance, to reduce a potential credit risk or to retain control over investments. Under certain conditions, the reinsurer may withhold funds from the ceding company.
Funds Withheld Mod‑co
A form of modified coinsurance where the initial allowance which is normally paid to the ceding company is withheld by the reinsurer to lessen the reinsurer's exposure to risk.
Generally Accepted Accounting Principles (GAAP)
A method of reporting financial results in accordance with a going- concern basis.
Gentlemen's Agreement
A clause sometimes included in reinsurance agreements that implies that not all terms and conditions are included in the written agreement. The clause emphasized the reliance upon the mutual integrity and good will of the parties to the agreement as well as industry custom and practice in order to solve disputes. This concept is not applied broadly in later treaties. See Industry Custom and Practice.
Guaranteed Cost Reinsurance
A form of reinsurance which has no adjustable premium rate or experience refund features. The final premium rate for the coverage is exactly as set forth ab initio in the contract.
Honorable Undertaking
A clause in some older reinsurance agreements, usually in the following context: "This agreement is considered by the parties hereto as an honorable undertaking, the purpose of which is not to be defeated by a strict or narrow interpretation of the language thereof." This clause has largely disappeared from usage, with more detailed treaty language being used.
Incurred But Not Reported (IBNR)
The actuarial estimate for claims that have already occurred but have not yet been reported to the insurer.
Indemnity Reinsurance
A form of reinsurance under which the risk is passed to the reinsurer which indemnifies the ceding company for losses covered by the reinsurance agreement or treaty. The ceding company retains its liability to and its contractual relationship with the insured.
Individual Cession
See Cession.
Individual Cession Administration
A reinsurance arrangement where the reinsurer sets up individual records for each cession and calculates the reinsurance premium, inforce, and reserve information for its financial reports.
Industry Custom and Practice (ICP)
Reliance upon industry customs and practices rather than written terms in a reinsurance agreement. An ICP clause is sometimes included in a reinsurance agreement and called upon to determine how that agreement should be interpreted, particularly on issues where the treaty is silent. In order to overcome specific language in a treaty, ICP must be shown to be inviolate, that is, practiced 100% of the time in the industry.
Insolvency Clause
A provision in reinsurance agreements that provides the reinsurer continues to pay its obligations to the insolvent ceding company's liquidator or successor as though no insolvency had occurred. It is required in most states.
Insurance Companies Act of 1991 (ICA)
Canadian act that provides the Office of the Superintendent of Insurance the authority to regulate insurance companies.
Intermediary
A third party that designs, negotiates and administers reinsurance agreements on the behalf of ceding company. Also called a broker. See Brokerage Market.
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 (1) the ceding company's payments to the intermediary are deemed payments to the reinsurer, (2) the reinsurer's payments to the intermediary are not payments to the ceding company until actually received by the ceding company. This clause is mandatory in some states.
International Association of Insurance Supervisors (IAIS)
An international organization representing insurance regulators in over 200 jurisdictions in over 140 countries. It promotes effective and consistent supervision of the insurance industry around the world.
Jumbo Limit
A limit placed on the amount of coverage that may be inforce or applied for on an individual life for automatic reinsurance purposes. The limit allows the reinsurer to check its retention and capacity. If such insurance exceeds the limit, the risk must be submitted for facultative review.
Layer
A horizontal segment of the liability insured. The first layer is generally defined by the ceding company's retention and binding limit with the first reinsurer. The next layer with a second reinsurer would begin at the initial binding limit and go up to a negotiated limit, and so on.
Layering
A method of allocating automatic reinsurance among several reinsurers. Using this method, reinsurance is ceded in layers. The layers are defined in terms of amounts of insurance. One reinsurer will receive all reinsurance up to the limit of the first layer. A second reinsurer will receive all reinsurance in excess of the first layer up to the limit of the second layer, and so forth, depending on the number of layers.
Lead Reinsurer
The reinsurer who negotiates the terms, conditions and premium rates and first signs on to the agreements; reinsurers who subsequently accept those terms and conditions are considered following reinsurers. Uncommon in life reinsurance.
Letter of Credit
A financial guaranty issued by a bank that permits the party to which it is issued to draw funds from the bank in the event of a valid unpaid claim against the other party; in reinsurance, typically used to permit reserve credit to be taken with respect to non‑admitted reinsurance; an alternative to funds withheld and modified coinsurance. Also referred to as an LOC.
Level Retention
See Constant Retention.
Lloyds
An insurance or reinsurance organization in which individuals or groups of individuals, called syndicates, rather than corporations, are at risk.
Loss Event
Any trigger for a recovery under an insurance of reinsurance agreement. Examples include occurrence, claims made, death or disability.
Losses in Excess of Policy Limits
A term that, when used in reinsurance agreements, refers to damages awarded by a court against an insurer in favor of the insured, due to the insurer's having failed to settle a third party claim against the insured within the policy limits by reason of bad faith, fraud or gross negligence. See Extra Contractual Obligations and Punitive Damages.
Losses Portfolio Transfer
A form of financial reinsurance for property and liability insurers involving the transfer of loss obligations already incurred which, when ultimately paid, will exceed the consideration paid to the reinsurer for undertaking such obligations. The amount by which the transferred obligations exceed the consideration paid is the resultant increase to the ceding company's statutory surplus.
Loss Ratio
Incurred losses (including applicable IBNR) divided by earned premium for an accounting or treaty period. Loss ratios can be calculated on an accident year, calendar year, or underwriting year basis.
Loss Ratio Coverage
A form of stop loss reinsurance under which the reinsurer pays a portion of the claims represented by a loss ratio in excess of a specified loss ratio. For example, A20% on excess of 110%@ will result in claims between 100% and 130% of premium being paid by the reinsurer.
Medical Information Bureau
A service bureau which compiles underwriting information. Member companies submit coded underwriting information on applicants to the MIB and receive coded information concerning impairments on new applicants from the bureau based on information compiled by other insurance company members. The company receiving information regarding an impairment must independently verify the information.
Minimum Cession
The smallest cession that a reinsurer will accept automatically. The minimum size is set to avoid the expenses associated with small cessions.
Mirror Reserves
Some states require that the reinsurer's increase in liabilities is equal to the ceding company's reduction in liabilities so that the total liabilities of both companies equals what the ceding company would have held without reinsurance.
Mod‑co Interest Rate
The interest rate used to determine the interest credited on the beginning reserves in a mod‑co transaction.
Mod‑co Reserve Adjustment
The net of two modified coinsurance items: the interest on reserves (payable by the ceding company to the reinsurer) and the increase in the reserve (payable by the reinsurer to the ceding company).
Modified Coinsurance
Indemnity life reinsurance that differs from coinsurance only in that the ceding company holds the entire reserve while the ceded risk remains with the reinsurer. The ceding company is required to pay interest to replace the interest which would have been earned by the reinsurer if it had held the assets corresponding to the reserves in its own investment portfolio. It is primarily used to permit reserve credit to be taken if the reinsurer is not admitted, accredited, or certified, or to retain control of investments. See Funds Withheld Coinsurance and Assumption.
National Association of Insurance Commissioners (NAIC)
The US standard setting and regulatory support organization governed by the chief insurance regulators of all fifty state, the District of Columbia, and five US territories.
Net Amount at Risk (NAAR or NAR)
The excess of the death benefit of a policy over the policy reserve.
Non‑experience Rated
A reinsurance arrangement which does not allow the ceding company to share in any profits realized on the reinsurance. Premiums for nonexperience rated reinsurance generally have smaller loads than premiums for experience rated reinsurance.
Nonproportional Reinsurance
A form of reinsurance where the reinsurer's liability is not fixed in advance, but is dependent on the number or amount of claims incurred in a given period.
Normal Underwriting
One of the conditions for automatic reinsurance, normal underwriting may vary between products and treaties. The definition of what is normal for the plan is set at the inception of the agreement.
Notice of Transfer
A document given to a policyholder by the assuming insurer informing the policyholder that the policy has been transferred to the assuming insurer. A certificate of assumption is included with the notice.
Novation
The substitution of the policyholder's original insurance contract with the transferring insurer with a contract with the assuming insurer. This action discharges the responsibility of the replaced insurer.
Occasional Reinsurer
A reinsurer that does not actively seek recurring reinsurance, but acquires blocks of business or participates in reinsurance pools.
Occurrence
An adverse contingent accident or event that the insured neither expected nor intended. Catastrophe reinsurance agreements frequently define adverse events having a common cause and sometimes within a specified time frame, (for example, seventy‑two hours) as being one occurrence. This definition prevents multiple retentions and reinsurance limits from being exposed in a single catastrophe loss.
Office of the Superintendent of Financial Institutions (OSFI)
An independent agency of the Government of Canada that supervises and regulates federally registered banks and insurance companies, trusts and loan companies, and private pension plans subject to federal supervision.
Offset Clause
Most reinsurance treaties provides that mutual debits and credits may be offset against each other, even in the event of the insolvency of one of the parties to the treaty. Mutuality of capacity and mutuality of time must exist. An offset clause may not be necessary for offset to occur, but it may also be disallowed by some states even if the treaty contains an offset clause. It is also known as set-off.
Outstanding Surplus Account
A record kept by the reinsurer of the amount of surplus that it is carrying in a financial reinsurance arrangement.
Partially Modified Coinsurance (Part‑co)
A combination of coinsurance and modified coinsurance. In most situations a portion of the initial reserves equal to the initial allowance are held on a coinsurance basis, while the remaining reserves are held on a mod-co basis, eliminating any initial cash transfer. Also known as Co/Mod‑co, split co/mod-co, and COMB.
Participation Limit
A limit placed on the absolute amount of coverage that may be inforce or applied for on an individual life for reinsurance purposes. If the insurance exceeds the limit, the reinsurer will decline to assume any of the risk. This is most commonly applied to supplementary benefits such as accidental death coverage.
Persistency Bonus
An amount paid to the ceding company by the reinsurer if the reinsurance ceded in a given period meets certain persistency standards. Persistency bonuses are used to encourage the writing of persistent business.
Placement Ratio
The ratio of paid facultative cessions to number of facultative submissions. The placement ratio can be used to determine the effectiveness of the reinsurer's facultative underwriting and the cost per cession.
Point‑in‑Scale YRT
A term used in conjunction with a select and ultimate YRT scale. It refers to the premium rate appropriate for the insured's original issue age and duration.
Policy Expense Allowance
The amount payable to the ceding company by the reinsurer in lieu of actual commissions and expenses incurred by the ceding company.
Pool
A method of allocating reinsurance among several reinsurers. Using this method, each reinsurer receives a specified percentage of each risk ceded into the pool. Percentages may vary by reinsurer.
Premium (Written/Unearned/Earned)
Written premium is premium paid and registered on the books of an insurer of reinsurer in a given accounting period. The premium is considered to be earned proportionately during the policy term. Any premium paid past the current accounting period is considered unearned. For example, if an annual premium is paid, 1/12th of the premium is earned each month. If an annual premium were paid two months prior to the end of the accounting period, 10/12ths would be unearned and 2/12ths would be earned. Earned premium is income for the accounting period while unearned premium will be income in a future accounting period.
Producer Owned Reinsurance Company
There are two significant forms of producer owned reinsurance companies (PORC). In the first form, insurance companies reinsure a portion of business written by a group of insurance agents into a reinsurance company owned by the agents. In the second form, a bank, retailer, or other non-insurance company allows an insurance company access to its customer list for the purpose of soliciting insurance.
Production Bonus
An amount paid to the ceding company by the reinsurer if the amount of reinsurance ceded in a given period exceeds a specified amount. Production bonuses are used to encourage a ceding company to place reinsurance with a certain carrier.
Professional Reinsurers
Reinsurers that deal with the ceding company through their account executives, rather than through intermediaries. Also known as direct reinsurers. See Brokerage Market.
Profit Commission
A provision found in some reinsurance agreements which provides for profit sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurer's expenses, and the ceding company's share of such profit after expenses. See Adjustable Features, Risk Charge and Experience Refund.
Proportional
A form of reinsurance where the amount ceded is defined at the time of cession, although the amount of the cession may vary with time by formula.
Pro Rata Retention
Method where the ceding company holds a constant percentage of the net amount at risk reinsured. It differs from quota share in that the percentage varies by the original face amount and the amount reinsured.
Portfolio Reinsurance
The ceding of a defined group of policies. Normally the term applies to reinsurance of inforce risks, but it can apply to new risks as well. Also known as block reinsurance.
Punitive Damages
Damages awarded by a court against an insured or against an insurer in addition to compensatory damages, intended to punish the insured or the insurer for willful and wanton misconduct and to serve as a deterrent. Punitive damages are usually the related to conduct of the insurer in handling a claim.
Quota Share
A form of reinsurance in which premiums and losses are shared proportionately between ceding company and reinsurer.
Rate
The premium rate is the amount of premium charged per exposure unit, e.g., per $1,000.
Recapture
The process by which the ceding company recovers some portion of the liabilities transferred to a reinsurer subject to the terms of the reinsurance agreement.
Recapture Provision
A provision in a reinsurance contract that describes the conditions under which a ceding company is permitted to recover some or all of the liabilities ceded to a reinsurer.
Recurring Reinsurance
A reinsurance arrangement covering newly issued policies. It is generally anticipated at the inception of the arrangement that new policies will continue to be reinsured under the agreement in the future.
Reinsurance Pool
A multi‑reinsurer agreement under which each reinsurer in the group or pool assumes a specified portion of each risk ceded to the pool. Contrast with Reinsurance Wheel.
Reinsurance Treaty
See Treaty.
Reinsurance Wheel
A procedure for retroceding individual life insurance risks in excess of an insurer’s retention to a group of reinsurers (up to their subscribed limits) in rotation, the order being determined by their positions as spokes on an imaginary wheel. The amounts need not be the same. Contrast with Reinsurance Pool.
Reinsurer
A reinsurer contractually accepts a portion of the ceding company's risk.
Replacement
A type of Continuation, when a new life insurance policy is purchased, generally with less than full new business underwriting and the existing policy on the life of the insured is terminated. Replacement are often part of a formal program.
Retain
To keep a risk.
Retention Limit
The dollar amount or percentage of each loss retained by the ceding company under a reinsurance agreement. Also known as the retention.
Retrocede
To transfer a reinsurance risk assumed by the reinsurer to another insurance company.
Retrocessionaire
A reinsurer that contractually accepts from another reinsurer a portion of the ceding company's underlying reinsurance risk. The transfer is known as a retrocession.
Risk Based Capital
Risk-Based Capital (RBC) is a statutory measurement of the minimum amount of capital appropriate for an insurance company operate for the safety of policyholders. Regulators use RBC in conjunction with other measurements to determine the financial solvency of a company.
Risk Charge
An amount identified in some reinsurance agreements as specifically to be retained by the reinsurer for assuming the risk under the policies reinsured; a share of the profits in excess of the risk charge is returned to the ceding company as an experience refund. Also known as profit and expense charge, risk and profit charge, or risk and expense charge.
Risk Premium Reinsurance (RPR)
Another name for YRT reinsurance.
Risk Transfer
The fundamental principle of reinsurance is the transfer of economic insurable risk. Risks included mortality, morbidity, longevity, lapse, expense, and investment.
Securitization
The process of combining certain assets into a financial instrument which is then sold to investors. In the reinsurance world, this generally means packaging risks into tranches of lower risk for low cost capital.
Self Administration
A reinsurance arrangement where the ceding company provides the reinsurer with periodic reports for reinsurance ceded. The report provides information on premium, inforce, reserves, and any other information required by the reinsurer for its financial reports. This information is generally transmitted electronically. Also known as self-billed or insurer billed. Bulk, or Bordereaux, is an older form of self-administration that does not involve electronic data transfer.
SGLI
A reinsurance pool established for the Servicemen's Group Life Insurance.
Sliding Scale Commission
A ceding commission which varies inversely with the loss ratio under the reinsurance agreement. The scales are not always one‑to‑one: for example, as the loss ratio decreases by 1%, the ceding commission might increase only 1/2%. Sometimes used in reinsurance of credit insurance plans.
Solvency II
Solvency II Directive/2009/13/EC is an EU directive that codifies and harmonizes insurance regulations in the EU.
Special Purpose Vehicle
A special purpose vehicle (SPV) is a limited company used in structured financial transactions, such as asset securitizations, joint ventures, or to isolate certain company assets or operations. For reinsurance applications, SPVs are reinsurers, generally taking remote risks and establishing capital and reserves accordingly.
Spread Loss
A form of reinsurance under which premiums are paid during good years to build up a fund from which losses are recovered in bad years. This reinsurance has the effect of stabilizing a ceding company's loss ratio over an extended period of time.
Stop Loss Reinsurance
A form of reinsurance under which the reinsurer pays some of all of a ceding company aggregate retained losses in excess of a predetermined dollar amount or in excess of a percentage of premium. See Loss Ratio Coverage.
Surplus
The excess of assets over liabilities. Statutory surplus is an insurer's or reinsurer's capital as determined under statutory accounting rules. Surplus determines an insurer's or reinsurer's capacity to write business.
Surplus Relief
An increase in the ceding company's surplus through financial reinsurance. Ceding companies are able to use the increase in surplus to write more business while retaining reasonable operating ratios.
Surplus Strain
A situation that occurs when the acquisition costs and reserve requirements of newly issued business depresses statutory earnings.
Termination
The formal ending of a reinsurance agreement by its natural expiry, cancellation or commutation by the parties. Terminations can be either on a cutoff or runoff basis. Under cutoff provisions, the parties' obligations are fixed as of the agreed cutoff date. Otherwise, obligations incurred while the agreement was in force are run off to their natural extinction.
Third Party Administration
A situation where the direct insurance and reinsurance is administered by a third party.
Total Capacity
See Capacity.
Traditional Reinsurance
A reinsurance arrangement where risk sharing is the primary purpose.
Transferring Insurer
In an assumption transaction, the original company is known as the transferring insurer.
Treaty
The legal contract defining the reinsurance agreement. A treaty contains common contract terms, such as a specific risk definition, data on limit and retention, and provisions for premium and duration, and is signed by representatives of both parties.
Trivial Amount
See Minimum Cession.
Trust Agreement
An agreement under which certain assets are deposited by one party (the grantor), for the sole benefit of another party (the beneficiary), into an account managed by a third party (the trustee). In reinsurance, such an agreement is most frequently used to permit a ceding company to take credit for non‑admitted reinsurance up to the value of the assets in trust.
Unusual Expenses
In life reinsurance, non‑routine expenses of the ceding company for claims investigation, legal defense or rescission actions. The reinsurer typically agrees to pay such expenses as distinct from punitive, exemplary or other non-contractual expenses which it does not agree to pay.
Yearly Renewable Term (YRT)
A form of life reinsurance under which the mortality risks of the net amount at risk, but not the permanent plan reserves, are transferred to the reinsurer. The premium for a YRT risk varies each year with the amount at risk and the ages of the insureds. Sometimes referred to as risk premium reinsurance (RPR). YRT can also be applied to certain health risks, such as long term care and disability income, but that is rare.
Zero First Year YRT (ZFT)
A YRT scale with no premium in the first year.
[1] This glossary was developed by the authors but includes important contributions made by Robert Kaufman, Ardian Gill, and Kirk Roeser, in the form of an earlier glossary of reinsurance terms which they prepared for Gill and Roeser, Inc. The ACLI included in its sample reinsurance treaty a glossary from which certain terms were included in this glossary. Finally, the authors have included definitions developed by them when other definitions were not found or deemed appropriate. We gratefully acknowledge the contributions of these other individuals and the ACLI and their permission to incorporate that work into this glossary.