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Accident Year Experience
Underwriting result based on earned premiums and ultimate losses from loss events falling within the same twelve-month accounting period, regardless of when the losses are actually reported, booked or paid. See Calendar Year Experience and Underwriting Year Experience.

Acquisition Costs
Expenses incurred by an insurer or reinsurer in the process of writing new or renewal business, including producer commissions.

Adjustable Feature
A cost modification provision found in some reinsurance agreements. Parties agree to adjust final premium rate or final ceding commissions retrospectively, in accordance with the loss experience, by formulas set forth in the agreement.

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 or authorized in the jurisdiction in question. Cedants may automatically take credit in that jurisdiction for admitted reinsurance. A cedant may take credit for non-admitted reinsurance only if it is secured by a letter of credit, trust agreement or funds withheld. Also called authorized reinsurance.

Aggregate Limit
The maximum sum of recoveries payable under those reinsurance agreements that provide an overall maximum loss limitation.

Aggregate Retention
An additional retention kept net by the cedant of losses otherwise recoverable from the
reinsurer. There are two retentions in a program having an aggregate retention. The first
retention applies to each risk or occurrence. The second, or aggregate retention, applies to amounts that would normally be recoverable from the reinsurer. Only after the aggregate retention is exceeded can the cedant recover from the reinsurer.

Alien Reinsurer
A non-U.S. domiciled reinsurer writing reinsurance in the U.S.

Arbitration Clause
A provision in reinsurance agreements that provides for non-judicial settlement of disputes between parties. Generally, each party chooses an arbiter; the arbiters agree on an umpire and these three agree on a resolution of the dispute. Under some clauses, an unsatisfied party may have the option to seek judicial relief following an arbitration finding.

Assume
To take over a risk, the converse of cede.

Assumption Reinsurance
A form of reinsurance under which policy administration and the contractual relationship with the insured, as well as all liabilities, pass to the reinsurer; the novation of liability is evidenced by an assumption certificate issued to the insured who, in some jurisdictions, has the right to refuse the change in insurers. See Indemnity Reinsurance and Coinsurance.

Attachment Basis
A provision in reinsurance agreements that determines whether, and in what manner, a
reinsurance agreement covers a specific loss. See Claims Made and Occurrence Basis.

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Balance
A reinsurance underwriter's benchmark which measures premium volume against the limit
exposed under a reinsurance agreement.

Bank
An informal, non-contractual multi-year summing up of the total premiums ceded to reinsurers less losses paid by reinsurers over the duration of a layer or program - usually a catastrophe program. For instance, cessions of $10,000 in premiums for each of five loss-free years would be said to constitute a $50,000 bank.

Binder
In reinsurance, a preliminary contract signed by the accepting underwriter which summarizes terms and conditions of coverage, pending the issuance of a formal contract (which replaces the binder). See Slip and Cover Note.

Blended Reinsurance
Reinsurance that integrates in a single contract traditional risk transfer and financial reinsurance or finite risk reinsurance coverage components. An example would be a contract that combines catastrophe coverage on a per occurrence basis with casualty coverage having an aggregate limit and aggregate retention.

Bordereau
A written schedule of insureds, premiums and losses submitted to reinsurers under certain types of reinsurance agreements. See Facultative Automatic.

Brokerage Market
Reinsurers that write business through reinsurance intermediaries. Reinsurers who do not generally accept such business are referred to as the direct market.

Burning Cost Ratio
Historical incurred losses (usually excluding IBNR) to an existing or proposed reinsurance
agreement divided by subject premium. The burning cost ratio, adjusted for IBNR, other costs and a profit factor is a tool used in making rates for excess of loss reinsurance.

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Calendar Year Experience
Underwriting result based on earned premiums and booked incurred losses (paid losses plus beginning-of-year to end-of-year changes in case reserves and IBNR) for the same calendar year accounting period, regardless of the dates of the loss events. See Accident Year Experience and Underwriting Year Experience.

Capacity
The % of surplus or the dollar amount of exposure that an insurer or Reinsurers
is willing to place at risk. Capacity may apply to a single risk, a program, a line of business or an entire book of business.

Capitation
A risk arrangement in a managed care environment in which a health care provider is paid a fixed amount per month for each enrolled member in a health plan regardless of the actual number or nature of services provided to each person. The capitation contract may include a risk-sharing arrangement, in which there is an allocation of financial results, both favorable and unfavorable, among the participants to the agreement.

Captive
An insurance or reinsurance subsidiary of an industrial company, trade association, or not-for-profit organization. Captives insure or reinsure parent-related business, non-parent business, or both. Although the number of domestic captives is increasing, most captives are still located in tax-advantaged offshore domiciles such as Barbados, Bermuda or the U.K.'s Channel Islands.

Carryover Provision
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).

Case Reserve
Known also as outstanding loss reserves, case reserves are recorded estimates of
outstanding unpaid liabilities associated with specific reported claims. Case reserves may
pertain to losses, allocated loss adjustment expenses (ALAE), or both. Case reserves are
established by the cedant; if the reinsurer believes a case reserve is inadequate, it may
establish an additional amount known as the additional case reserve (ACR).

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 cedant for such losses, subject to an agreed retention and limit.

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

Ceding Commission
The cedant's acquisition costs and overhead expenses, taxes, licenses and fees, plus a
fee representing a share of expected profits sometimes expressed as a % of the gross reinsurance premium.

Claims Made Basis
A form of reinsurance under which the date of the claim report is deemed to be the date
of the loss event. Claims reported during the term of the reinsurance agreement are
therefore covered, regardless of when they occurred. A claims made agreement is said to "cut off the tail" on liability business by not covering claims reported after the term of the reinsurance agreement - unless extended by special agreement. See Occurrence Basis.

Clash Cover
A form of reinsurance covering a cedant's exposure to multiple retentions and a larger single loss than intended by reason of two or more insureds being involved in the same loss occurrence, or clash. A clash cover absorbs such additional retentions.

Coded Excess
A form of excess of loss reinsurance under which different premium rates are applied to
successive bands of primary coverage limits. Coded excess is considered more accurately to measure exposure than averaging methods.

Coinsurance
Indemnity life reinsurance under which the reserves as well as the risk are transferred to
the reinsurer; the cedant retains its liability to and contractual relationship with the
insured. See Modified Coinsurance and Assumption Reinsurance.

Combined Ratio
The sum of two ratios, one calculated by dividing incurred losses plus loss adjustment
expenses (LAE) by earned premiums (the calendar year loss ratio), and the other
calculated by dividing all other expenses by written premiums. When applied to a
company's overall results, the combined ratio is also referred to as the composite,
statutory or trade ratio. Used in both insurance and reinsurance, a combined ratio below
100 % is indicative of an underwriting profit.

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.

CoModCo
A combination of coinsurance and modified coinsurance under which some part of the
reserves, e.g. deficiency reserves, are a liability of the reinsurer ("co" portion) while some are returned to the cedant ("modco" portion).

Concurrency
Coordination of the coverage, terms and conditions of a reinsurance agreement with
those of a contract reinsured or between reinsurance agreements. Reinsurance
agreements are said to be concurrent when there are no gaps or overlaps.

Cover Note
Confirmation by the intermediary to the cedant of terms and conditions and %
placed with each reinsurer. In effect, a cover note is a receipt for slips or binders
received by the intermediary from underwriters on behalf of the cedant.

Credibility
A statistical measure of the reliability of experience data, based on the size of the sample.

Cut Through Endorsement
An endorsement to a reinsurance agreement which requires that, in the event of the
cedant's insolvency, any loss covered under the reinsurance agreement be paid by the
reinsurer directly to the insured (or a third party beneficiary). Also called assumption endorsement or assumption of liability endorsement (ALE).

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Direct Market
Reinsurers that deal with the cedant through their account executives, rather than
through intermediaries. See Brokerage Market.

Direct Premium Written
An insurer's premium income calculated before reflecting reinsurance inward or outward.

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Errors and Omissions Clause
A provision in reinsurance agreements which is intended to neutralize any change in
liability or benefits as a result of an inadvertent error by either party.

Excess of Loss
A form of reinsurance under which recoveries are available when a given loss exceeds the
cedant's retention defined in the agreement.

Experience Refund
Under a reinsurance agreement, that part of the profits which is returned to the cedant
after recognition of contingency reserves, loss carryforward and loss carryback
provisions. See Carryover Provision.

Exposure
Measure of vulnerability to loss, usually expressed in dollars or units.

Extra Contractual Obligations (ECO)
A generic term that, when used in reinsurance agreements, refers to damages awarded by a court against an insurer that is outside of the provisions of the insurance policy, due to the insurer's bad faith, fraud or gross negligence in the handling of a claim. Examples are punitive damages and losses in excess of policy limits.

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Facultative
Reinsurance under which the cedant has the option (faculty) of submitting and the
reinsurer has the option of accepting or declining individual risks.

Facultative Automatic
A form of property and casualty reinsurance that is a hybrid between facultative and
treaty. A bordereau of risks ceded is submitted to the reinsurer that has limited rights to
decline individual risks. See Bordereau

Financial Guaranty
Insurance which indemnifies an insured claimant, obligee or indemnitee for financial loss
resulting from (a) default or insolvency, (b) changes in interest rate levels, (c) changes in
currency exchange rates, (d) restrictions imposed by foreign governments, or (e) changes in the value of specific assets or commodities.

Financial Quota Share
A form of reinsurance that enables a cedant to increase its statutory surplus by the
amount of the ceding commission in the reinsured unearned premium reserve. Surplus
relief arises because statutory accounting requires insurers and reinsurers to charge
immediately all acquisition costs to the accounting period in which the business is written, even when the premium is unearned at the end of the period. Referred to as pre-paid
acquisition costs in the unearned premium reserve, or the equity in the unearned premium reserve.

Financial Reinsurance
A form of reinsurance which considers the time value of money and has loss containment
provisions. One of its objectives is the enhancement of the cedant's financial statements or operating ratios, e.g., the combined ratio; loss portfolio transfers and financial quota
shares are examples.

Finite Risk Reinsurance
A form of retrospectively-rated reinsurance in which the reinsurer's ultimate liability over
the term of the contract is typically limited to no more than 300 % of the premium ceded. Its primary objectives are to stabilize earnings and reduce reinsurance costs.

Follow the Fortunes
A provision in reinsurance agreements, not always specifically identified as such, in which it is agreed that the reinsurer is bound to the same fate as the cedant 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.

Funds Withheld
Assets that would normally be paid over to a reinsurer but are withheld by the cedant to
permit statutory credit for non-admitted reinsurance, to reduce a potential credit risk or to
retain control over investments.

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Gross Line
The maximum limit an insurer or reinsurer is willing to accept before taking reinsurance
into account. Such limits are usually expressed per insured, per line of business,
etc. See Net Line

Ground Up Loss
The entire amount of an insurance loss, including deductibles, before application of any retention or reinsurance. The original loss to the insured, after recognizing known salvage and subrogation.

Guaranteed Cost Reinsurance
A form of reinsurance that has no adjustable features. The final premium rate for the
coverage is exactly as set forth ab initio in the contract.

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Honorable Undertaking
A phrase in some 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."

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Incurred But Not Reported (IBNR)
The actuarial estimate of reserves required to pay ultimate net losses (UNL) after netting out existing reserves on reported but unpaid claims (case reserves). This estimate
includes an allowance for potential changes in such existing reserves as well as additional reserves for claims that have already occurred but are yet to be reported. See Long Tail Liability.

Indemnity Reinsurance
A form of reinsurance under which the risk but not the administration is passed to the
reinsurer which indemnifies the cedant for losses covered by the reinsurance agreement
or treaty. The cedant retains its liability to and its contractual relationship with the
insured.

Indexing, Indexation
The adjustment of a cedant's retention and the reinsurance limit by a measure of inflation such as the Consumer Price Index. Under indexation, the cedant's original retention and
the reinsurance limit are multiplied by the result of dividing the index on the settlement
date by the index as of the effective date of the reinsurance agreement.

Insolvency Clause
A provision in reinsurance agreements that provides for the continuance of payments of
the obligations of the reinsurer as though no insolvency had occurred, with appropriate
recognition of additional expenses of the reinsurer caused by the insolvency. Required in
New York and in certain other states.

Intermediary
A third party in the design, negotiation and administration of a reinsurance agreement.
Intermediaries recommend to cedants the type and amount of reinsurance to be
purchased and negotiate the placement of coverage with reinsurers. At Lloyd's of London, called a broker. See Brokerage Market and Direct Market.

Intermediary Clause
A provision in reinsurance agreements that identifies the intermediary negotiating the
agreement. Most intermediary clauses shift all credit risk to reinsurers by providing that:
1) the cedant's payments to the intermediary are deemed payments to the reinsurer, 2)
the reinsurer's payments to the intermediary are not payments to the cedant until
actually received by the cedant. This clause is mandatory in some states.

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Layer
A horizontal segment of the liability insured, e.g., the second $100,000 of a $500,000
liability is the first layer if the cedant retains $100,000, but a higher layer if it retains a
lesser amount. See Pro Rata.

Lead Reinsurer
The reinsurer that negotiates the terms, conditions and premium rates and first signs on
to the slip; reinsurers that subsequently sign on to the slip under those terms and
conditions are considered following reinsurers.

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.

Lloyds
An insurance or reinsurance organization in which individuals or groups of individuals,
called syndicates, rather than corporations, are at risk.

Long Tail Liability
The liability for claims that do not proceed to final settlement for some time, often a
decade or more; characterized by a high IBNR. The loss distribution curve by duration of
payment appears to have a "tail".

Loss Adjustment Expense (LAE)
All expenditures of an insurer associated with its adjustment, recording and settlement of
claims, other than the claim payment itself. The term encompasses both allocated loss
adjustment expenses (ALAE), which are loss adjustment expenses identified by a claim file in the insurer's records, such as attorney's fees; and unallocated loss adjustment
expenses (ULAE), which are operating expenses not identified by claim file but functionally associated with settling losses, such as salaries of the claims department.

Loss Development
An actuarial method used to predict ultimate net losses (UNL) and IBNR. The growth of
paid losses and case reserves is observed at regular intervals to arrive at age-to-age
development %. Also known as "triangulation" for the characteristic shape of
the tabular data employed.

Loss Event
Any trigger for a recovery under an insurance or 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.

Loss Portfolio Transfer
A form of financial reinsurance 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 cedant'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, "20% in excess of 110%" will result in claims between 110% and 130% of premium being paid by the reinsurer.

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Managed Care
Systems designed to integrate the delivery and financing of health care of the highest
possible quality at the lowest possible cost. In contrast to traditional fee-for-service
arrangements, under managed care, health care providers (1) agree to negotiated
payment levels for specified services to defined patient populations, (2) agree to more
aggressive utilization and quality assurance review, and (3) assume financial risk leading
to more severe restriction on patient choice to obtain services outside the network.

Market Cycles
Market-wide fluctuations in the prevailing level of insurance and reinsurance premiums. A
soft market, characterized by increased competition in which prices are depressed, is
usually attributed to excess capacity (more sellers than buyers) and/or high interest
rates. A hard market following a soft market is often triggered by a major catastrophe loss and/or a protracted period of operating losses, combined with declining investment income from falling interest rates and/or security market values.

Maximum Foreseeable Loss (MFL)
A property underwriter's estimate of the cost in the event of a total loss where all loss
control systems (e.g. sprinklers and firewalls) fail. See Probable Maximum Loss (PML).

ModCo Reserve Adjustment
The net of two modified coinsurance items: the interest on reserves payable by the
cedant to the reinsurer) less the increase in reserves (payable to the cedant by the
reinsurer).

Modified Coinsurance
Indemnity life reinsurance that differs from coinsurance only in that the reserves are
returned to the cedant while the risk remains with the reinsurer; the cedant is required to pay interest to replace that which would have been earned by the reinsurer if it had held
the assets corresponding to the reserves in its own investment portfolio. Originally
devised to permit reserve credit to be taken with respect to a non-admitted reinsurer, now also used to secure credit and retain control of investments. See Funds Withheld,
Coinsurance, and Assumption.

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Net Line
The maximum limit an insurer or reinsurer is willing to accept after taking reinsurance
into account. Such limits are usually expressed per insured, per line of insurance, etc.
See Gross Line.

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

Occurrence Basis
A form of reinsurance under which the date of the loss event is deemed to be the date of the occurrence, regardless of when reported. See Claims Made Basis.

Offset Clause
A provision in reinsurance agreements which permits each party to net amounts due
against those payable before making payment; especially important in the event of
insolvency of one party which ceases to remit amounts due to the other. This clause is
often challenged by state insurance departments, creditors and others interested in
maximizing the assets of the insolvent party.

Overline
An inadvertent reinsurance acceptance that results in a reinsurer committing more
capacity on a single risk than its intended exposure.

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Policy Expense Allowance
An amount payable to the cedant by the reinsurer in lieu of actual commissions and
expenses incurred by the cedant.

Portfolio Runoff
A form of reinsurance under which the inforce business is reinsured to the subsequent anniversaries of the underlying policies; often accomplished by ceding the unearned premium reserve on such business.

Premium (Written/Unearned/Earned)
Written premium is premium registered on the books of 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. Earned premium is income for the accounting period while unearned premium will be income in a future accounting period.

Probable Maximum Loss (PML)
A property underwriter's estimate of the cost in the event of a total loss where loss
control systems (e.g. sprinklers and firewalls) operate. Used in underwriting and in
determining reinsurance limits. See Maximum Foreseeable Loss (MFL).

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 cedant's share of such profit after expenses. See Adjustable Features, Risk Charge, and Experience Refund.

Pro Rata
A form of reinsurance in which premiums and losses are shared proportionately between
cedant and reinsurer. One such reinsurance agreement is quota share, in which the same
% applies to all policies reinsured. Another is surplus share, in which the
% may vary from policy to policy and usually increases as policy limits increase.

Provider Excess of Loss
Reinsurance for providers of health care services under capitation contracts, e.g.,
coverage limiting financial risk of health care providers for individual patients if the cost of care exceeds a pre-determined limit.

Punitive Damages
A term that, when used in reinsurance agreements, refers to damages awarded by a court against an insured or against an insurer in addition to compensatory damages. Punitive damages are intended to punish the insured or the insurer for willful and wanton
misconduct and to serve as a deterrent. When the award is against an insurer, it is
usually related to the conduct of the insurer in the handling of a claim, and can arise in
both first party and third party coverage situations. See Extra Contractual Obligations and Losses in Excess of Policy Limits.

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Quota Share
See Pro Rata.

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Rate
The premium rate is the amount of premium charged per exposure unit, (e.g., 10 cents per $1,000 of exposure).

Rate on Line
A % arrived at by dividing reinsurance premium by reinsurance limit; the inverse is known as the payback or amortization period. For example, a $10,000,000 catastrophe
cover with a premium of $2,000,000 would have a rate on line of 20% and a payback
period of five years.

Recapture
The process by which the cedant recovers the liabilities transferred to a reinsurer.

Reinstatement Premium
An additional premium paid to replenish (reinstate) the limit consumed in the event of a
loss.

Reinsurance
In effect, insurance that insurance companies buy for their own protection, "a sharing of
risk." Reinsurance enables an insurance company to (1) expand its capacity; (2) stabilize
its underwriting results; (3) finance its expanding volume; (4) secure catastrophe
protection against shock losses; (5) withdraw from a class or line of business, or a
geographical area, within a specified period of time.

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 Wheel
A procedure for retroceding individual life insurance risks in excess of a reinsurer's own
retention to a group of retrocessionnaires (up to their subscribed limits) in rotation, the
order being determined by their positions as spokes on an imaginary wheel. The spokes
need not be of the same length, i.e. limit, and a company may have more than one spoke. Contrast with Reinsurance Pool.

Reinsurer
A reinsurer contractually accepts a portion of the cedant's risk. A professional reinsurer is a reinsurer whose principal business is reinsurance, as opposed to the reinsurance
department of a primary company.

Reserve Adjustment Interest Rate
In modified coinsurance, the interest rate used to calculate the amount payable by the
cedant in consideration of the reserves being transferred back by the reinsurer. See
ModCo and Reserve Adjustment.

Retention
The dollar amount or % of each loss retained by the cedant under a reinsurance
agreement. The point at which the retention is used up is said to be the attachment point for the reinsurer.

Retrocessionnaire
A reinsurer that contractually accepts from another reinsurer a portion of the cedant's
underlying reinsurance risk. The transfer is known as a retrocession.

Retrospectively Rated Reinsurance
Reinsurance that provides for adjustments based on contract experience. Such
adjustments include additional premiums, experience refunds, and for multiple year
contracts, early termination penalties, or changes to coverage in subsequent years.

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 cedant as an experience refund.

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

Securitization of Insurance Risk
The transfer or sale, in the form of an investment security, of the underwriting and timing risks associated with one or more insurance policies. It is similar in concept to asset
securitization, which involves turning illiquid assets into liquid instruments that can be
traded freely on the open market (e.g., mortgage-backed securities).

Self-Insurance
Protecting against loss by setting aside one's own funds to provide for future
contingencies. Through self-insurance it is possible to protect against high-frequency,
low-severity losses. Utilizing self-insurance eliminates the various loadings such as
acquisition expense, taxes and general expenses that would be incurred if the same loss coverage were secured through an insurance company.

Sliding Scale Commission
A ceding commission that 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 %.

Slip
A binder often including more than one reinsurer. At Lloyd's of London, the slip is carried
from underwriter to underwriter for initialing and subscribing to a specific share of the risk. See Binder and Cover Note.

Special Acceptance
A risk that is not otherwise covered - due, for example, to underwriting class or limit - but is endorsed into the reinsurance agreement by specific written agreement with underwriters. Used in treaties and facultative automatics.

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 cedant's loss ratio over an extended period of time.

Stop Loss
A form of reinsurance under which the reinsurer pays some or all of a cedant's aggregate
retained losses in excess of a predetermined dollar amount or in excess of a % of premium. See Loss Ratio Coverage.

Subject Business
A shorthand way of saying "business of the class, size and limitations" covered under a
reinsurance agreement.

Subject Premium
The cedant's premiums (written or earned) to which the reinsurance premium rate is
applied to calculate the reinsurance premium. Often, subject premium is gross/net written premium income (GNWPI) or gross/net earned premium income (GNEPI) where the term
"gross/net" means gross before deducting reinsurance premiums for the reinsurance agreement under consideration, but net after all other adjustments, e.g., cancellations,
refunds, other reinsurance. Normally, subject premium refers to premium on subject
business. Also known as base premium.

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 cedant's surplus through financial reinsurance. Cedants are able to use the increase in surplus to write more business while retaining reasonable operating ratios, e.g. the combined ratio and the ratio of written premium to surplus.

Surplus Share
See Pro Rata.

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Target Risk
In personal lines casualty insurance, a phrase which refers to celebrities and wealthy individuals. At one time, the Target Risk Exclusion Clause in property reinsurance listed major bridges, tunnels and art collections but that clause has been replaced by the Total
Insured Value (TIV) exclusion clause.

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.

Time Value of Money
Relationship determined by the math of compound interest between monetary values at
one point in time and their values at other points in time. Implicit in any consideration of
time value of money are the rate of interest and the period of compounding.

Total Insured Value (TIV)
A provision in reinsurance agreements that excludes coverage of individual properties in
cases where total insured values across all property lines equal or exceed a certain level,
e.g., $200,000,000. This clause is used to prevent multiple exposures to reinsurers on
large single risks.

Treaty
A reinsurance agreement covering a book or class of business that is automatically
accepted on a bulk basis by a reinsurer. A treaty contains common contract terms along
with a specific risk definition, data on limit and retention, and provisions for premium and
duration.

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 typically established to permit a
licensed cedant to take credit for non-admitted reinsurance up to the value of the assets
in trust.

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Uberrimae Fidei
"Utmost good faith". A provision sometimes found in reinsurance agreements and
considered descriptive of the reinsurance relationship.

Ultimate Net Loss (UNL)
The loss amount, including covered loss adjustment expenses (LAE), against which the retention and the reinsurance limits apply.

Unbundled Services
Term that describes commercial insurance with no administrative services attached, or
alternatively, administrative services from an insurer without insurance coverage.
Unbundled services are frequently the domain of third party providers done on a
contractual basis.

Underwriter
An insurer or reinsurer (or an individual person employed by the insurer or reinsurer) that
assumes risks and "signs below" (underwrites) terms of the insurance or reinsurance
accepted.

Underwriting Year Experience
Underwriting result based on written premiums and ultimate losses from loss events falling within the same accounting period, where the accounting period is the period covered by the insurance policy or reinsurance agreement, regardless of when the premiums and losses are actually reported, booked or paid. See Accident Year Experience and Calendar Year Experience.

Unusual Expenses
In life reinsurance, non-routine expenses of the cedant 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 that it does not
agree to pay.

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Working Layer
The first layer above the cedant's retention wherein moderate to heavy loss activity is
expected by the cedant and reinsurer. Working layer reinsurance agreements often
include adjustable features to reflect actual underwriting results.

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Yearly Renewable Term
A form of life reinsurance under which the risks, but not the permanent plan reserves, are
transferred to the reinsurer for a premium that varies each year with the amount at risk
and the ages of the insureds; may be subject to an experience refund.

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A Final Word...
We would be happy to receive any suggestions for definitions to be included or changes
to be made in our next edition of the glossary.

Gill and Roeser, Inc.
535 Fifth Avenue
New York, New York 10017

Phone: (212) 972-4880
Fax: (212) 972-4885
Email: mgonyon@gillroeser.com