Glossary of Key Terms and Initials
This glossary is made up of definitions (some very old[1]) from a range of sources that I have been given over a period of some years. – the core ones probably being Lloyd’s, CII, Hiscox, Guy Carpenter, Communicade and many of my own.
As in anything, different people can see different words in different contexts
Although there is a good cross-section of words and definitions, there is likely to be more emphasis on Reinsurance (my background).
Bold
Where a word or words are shown in bold there should be(!) a further definition of that particular word.
THIS IS DEFINITELY WORK IN PROGRESS (seems everlasting), especially towards the higher letters in the Alphabet. Any corrections, additions greatly appreciated – please Contact Me
[1] e.g. Insurance Institute of Australia (1985)
Q
QUALIFYING QUOTA SHARE (Reinsurance)
These are quota share reinsurance contracts, which Lloyd’s allow in certain circumstances, that enable a syndicate to write gross premium in excess of its capacity by passing amounts of risk and premium under these arrangement thus bringing the syndicates retained premium back in line with their pre-agreed limits.
e.g. sudden change in ROE GBP to USD, creates increase in GBP Premium which could take a syndicate over their limits in GBP.
QUOTA SHARE TREATY (Reinsurance)
A form of proportional treaty under which the Reinsured is bound to cede (give), and the reinsurer is bound to accept, a fixed share of every risk which the cedant insures in an agreed class or classes of its business. The reinsurer agrees to accept a fixed percentage share of every risk in the class up to an pre-agreed limit. If a risk exceeds this limit, the percentage ceded will reduce. The percentage stated is always the percentage share being ceded. e.g. 60% Q/S = 60% of every risk (up to an agreed amount) being reinsured automatically.
As an example.
1,000,000 (100%)
40% Retained 60% Reinsured
400,000 (Max) 600,000 (Max)
Sum Insured 200,000
60% 40%
Sum Insured 800,000
60% 40%
Sum Insured 2,000,000 Facultative
400,000 600,000 1,000,000
2,000,000
20% 30% 50%
QUOTATION
A statement of Price/Terms and Conditions under which a (re)insurer will accept the
risk(s) on offer – if accepted by the (re)insured the (re)insurer is on risk.
R
RATE (Reinsurance) The percentage of the base premium required by the reinsurer to give cover. Normally expressed as x% of G.N.P.I. (Gross Net Premium Income) subject to a Minimum and Deposit Premium often payable Quarterly in advance e.g. 1st Jan, 1st April, 1st July, 1st October. There will then be an adjustment if necessary after the end of the period, once the final Base Premium is known.
RATE (Insurance) the percentage of a defined entity that is used to calculate the premium required by an insurer to give cover under and insurance. e.g.
Rate % x Sum Insured (Property Insurance)
Rate % x Value of Cargo Shipments (Marine Insurance)
Rate % of Turnover (Business Interruption Insurance)
RATE ON LINE In a non-proportional contract Premium for the Contract divided by the Limit. To understand it, think of it as Rate on Limit – the premium as a rate percent of the the limit. e.g. Premium 10,000 – Coverage 100,000 xs 25,000
rate on Line 10,000/100,000 x 100/1 = 10% ROL. Basically is used to express Market Price.
The inverse is called “payback” Coverage/Premium in years. 100,000/10,000 = payback 1:10.
RATING In a “non-proportional contract a price will need to be calculated, this is normally referred to as Rating. Three core methodologies. Experience Rating, Exposure Rating and Probability
RECAPTURE The action of a Reassured/Reinsured taking back risks onto its own books that had previously been ceded to a reinsurer. This is particularly common on Life Reassurance and Surplus Treaties
RECIPROCITY: An exchange of Proportional Treaty business between two insurers
e.g. 1% of “my” Fire 1st Surplus Treaty in exchange for 0.75% of “your” 1st Surplus Fire Treaty. This concept was very common from the mid 1920’s through to the early 1980’s. Plusses
Gross Premium is maintained.
What goes out in premium to a reinsurer is returned from the other party.
Balance, if business is bad in Country A it is hoped that it might be good in Country B.
Minuses
Less and Less Proportional Treaties to chose from globally.
Results globally tend to be more similar (when “mine” is bad the incoming will also be bad).
Need to employ specialists (underwriting skill is required).
Very high administration
Substantially less reciprocity is traded today that in the past.
REINSTATEMENT:
(1) Putting a lapsed policy back in force;
(2) The payment of a claim under some forms of insurance reduces the principal amount of the policy by the amount of the claim. Provision is usually made for a method of reinstating the policy to its original amount. In a competitive environment this is often granted free and automatically.
REINSTATEMENT (Reinsurance) After a loss on a Excess of Loss contract in normal circumstances, the amount of indemnity (Cover/Limit) provided is reduced down by the amount of the loss.
The reinstatement provision allows for the automatic re-establishment of the limit of indemnity to its original amount. An additional premium is normally payable to reinstate the limit of indemnity which is offset against the amount of loss payable by the reinsurers.
Sometimes the price of the reinstatement is included in the upfront price of the contract – historically called “Free” Reinstatement – today more likely to be referred to as a “Prepaid” Reinstatement.
The basic formulae is
Claim x ? x Min and Deposit
Limit Premium
(Pro-rata for amount) (Something for Time Left)
Reinstatements are normally calculated “Pro-rata for amount” (Claim over Limit)
BUT there are variations for the period of cover being rebought.
e.g. Pro-rata for time – number of days left in the period/365 (Rare)
100% for time = ignore date of loss, 12 months for time!
i.e.
500,000 xs 500,000 – Loss to layer 100,000 – Premium for Contract 20,000
Date of loss – 1st October (91 days to end of the period)
100,000 x 91/365 x 20,000 = 1,017
500,000
or
100,000 x 100% x 20,000 = 4,000
500,000
Other examples of Time might be 50%, 150%………
More than 1 reinstatement might be included in the Quotation
e.g. 1 @ Free, 1 @ 50%, 1@100%. All would be pro-rata for amount claimed.
REINSTATEMENT BACK UP (Reinsurance) Further reinstatements purchased in addition to those under the main reinsurance contract. Probably with different reinsurers.
REINSTATEMENT PREMIUM PREOTECTION (RPP) (Reinsurance) A contract which indemnifies the Reinsured with the cost of any reinstatement premium that they have had to pay on the specified X/L Contract or Contracts
REINSURANCE: (1) A contract of indemnity against liability by which the insurer purchases from another insurer or reinsurer insurance against loss or liability by reason of the original insurance; (2) Insurance by one insurer of all or part of a risk accepted by another insurer who agrees to reimburse the insurance company for the portion of the claim insured, as agreed in the contract. (3) Insurance of an Insurer.
REINSURANCE TO CLOSE— RITC (Lloyd’s)
Transferring of all risk from one underwriting year of a Lloyd’s Syndicate into the next “Open” underwriting year.
The reinsurance to close comprises a premium payable by the closing year’s syndicate’s investors (Names/Members) to the syndicate’s investors (Names/Members) on the next open year of account to cover all unexpired risk and a contract which transfers the liability for all claims including I.B.N.R. (Incurred but not reported losses) in respect of the closing year to the next open year. IF there is no following year in place the Syndicate will go into run off (An Open Year).
RITC is normally carried out after three years to allow losses to develop before finalising the figures. i.e. A figure for RITC would be taken from 20xx year of account and transferred to 20xx+1 year of account BUT the final calculation would not be done until after the end of 20xx+2.
REINSURANCE BROKERAGE: A deduction made from the premium due to the reinsurer by a reinsurance broker. Although the broker is the agent of the reinsured, in reality the broker is being paid by the reinsurer. (Production Commission for placing the business with that reinsurer.)
REINSURED
The insurer being protected by the reinsurance contract – also called Cedant or Ceding Company (A term mainly used in Proportional reinsurance)
REINSURER The acceptor of the reinsurance contract.
REINSURER’S EXPENSES (Also called Management Expenses)
A debit item which appears on the Profit Commission statement provided for under some proportional treaties to make allowance thereunder for the diminution of the reinsurer’s profit by its own management expenses, including any acquisition costs not otherwise debited in the profit commission statement. e.g. reinsurance brokerage.
The %age will be of the Written Premium
It is a fictitious item – goes nowhere.
e.g. Profit Commission 10%
Reinsurer’s Expenses / Management Expenses 5%
Written Premium $10,000,000
Management Expenses 5%
Treaty Profit $800,000
Less 5% $500,000
Profit for Profit Commission Calculation Purposes $300,000
Profit Commission 20% $ 60,000 back to the reinsured
Another way of seeing it. Reinsurer will only pay a profit commission if the profit exceeds 5% of the Written Premium
RESERVES (Reinsurance) PREMIUM AND LOSS
In proportional treaty reinsurance amounts of ceded premiums retained by the Reinsured (cedant) in order to provide the Reinsured with a form of collateral security for the due performance of the obligations of the reinsurers under the treaty. (Premium Reserve). Likewise an amount paid by the reinsurer to the reinsured to cover outstanding losses at the start of a given period (Loss Reserve)
Premium Reserve Deposit An amount of money retained from reinsurers by the reinsured under a proportional treaty – basically as a security reserve normally retained for 12 months and released plus interest in the similar quarterly account one year later. A new amount of Premium Reserve would then be retained from that years quarterly account – thus maintaining the retention of x% of 12 months premium at all times.
Might be accounted based on 1st / 2nd 3rd quarter accounts and then all released back to the reinsurer in the 4th quarter account. Start again in the 1st quarter. Whilst this method is good for the reinsurer it makes no sense as a security reserve as the reinsured is retaining nothing between the last Quarter and the first Quarter the following year
Loss Reserve Deposit Retained/Released Reinsurers “funding” a reinsured’s outstanding losses under a proportional treaty – not normally agreed to by reinsurers unless a legal requirement in the country concerned – basically a security reserve
Interest on Reserve (Deposits) (Premium or Loss Reserve Deposits) – because money can be invested, an item of interest will be included within the contract to reimburse the reinsurer for the loss of use of that money which is withheld as a deposit under a Treaty or provided in advance as a Loss Reserve. Normally a nominal amount.
Taxes on interest on deposit
– self explanatory
RETENTION (Reinsurance): The proportion of a risk retained by a (re)insurer. Traditionally used when referring to the amount retained on a risk in conjunction with proportional treaties. Today the word is also used to mean the fixed monetary amount kept by a reinsured under an excess of loss contract. (The correct terminology for this should be – deductible, excess point, priority).
A retention is how much is kept on a risk by a reinsured.
A deductible is how much a reinsured pays before reinsurers pay.
RETENTION TABLE (Reinsurance) A table listing the various retentions that a reinsured might have on different Risks, Classes depending on a range of Factors. (also known as Graded Retentions). Will influence the Capacity of a Surplus Treaty where the limits are based on a multiple of the retention.
RETROACTIVE DATE: Date on a “claims made” liability policy which triggers the beginning of insurance coverage. If a retroactive date is shown, any claim made during the policy period will not be covered if the loss occurred before the retroactive date.
RETROCEDE – to give/cede a retrocession – often today referred to as reinsurance
RETROCEDANT A reinsurer who retrocedes (reinsurance of reinsurance) – often today referred to as the reinsured
RETROCESSION
A reinsurance of a reinsurance
RETROCESSIONAIRE
An entity who accepts retrocession business – often referred to today as a reinsurers
RETROSPECTIVE RATING Pricing a contract at the end of the period based on known loss data e.g. Burning Cost/Swing Rate. (Inverse of Prospective Rating)
RETURN PERIOD: The likelihood of a loss event occurring
RISK: Used in (re)insurance in many ways.
The subject matter of the insurance
Uncertainty as to the outcome of an event
Probability of Loss
The peril insured against
Danger
RISK AND CAT X/L
This product which is a combination of Risk X/L and Cat X/L in one contract has varied names. RiskCat, Risk or Cat, and Risk and Cat. It is essential that any one involved in such a product is totally clear as to how it operates by having a very clear Treaty Wording. General consensus is that it operates as a Risk X/L OR a Catastrophe X/L.
e.g. 500,000 xs 500,000 any one risk or any one event.
Risk Loss 600,000 fgu – claim 100,000 from the Risk Section of the contract.
Event Loss involving 4 Risks of 600,000 fgu each. 4 x 600,000 = 2,400,000 from one event
Cat Section Deductible 500,000 claim $500,000 and the loss continues vertically to the rest of the Catastrophe programme
RISKS ATTACHING DURING (RAD) See PERIOD
RISK BASED CAPITAL A method used by insurance regulators to determine the minimum amount of capital required by an insurer to support is operations.
RISK EXCESS OF LOSS (Reinsurance) An excess of loss contract protecting the retention on a per risk basis against unexpectedly large individual losses
Where reinsurers anticipate a regular flow of losses to such a contract, it might be referred to as a Working Layer (likely to work – have claims)
Risk X/L contracts would be subject to the reinsured’s definition of ‘anyone risk’ for the purposes of the reinsurance contract. (N.B. Catastrophe X/L protects the reinsured against the accumulation of losses from 1 event)
RISK MANAGEMENT Identifying, analysing and quantifying risk, taking measures to avoid or minimise loss and deciding what financial measures are best calculated to minimise avoidable financial loss. e.g. Hedging, Insurance, Self Insurance…..
RISK PREMIUM The part of the total premium charge by the insurer that reflects the actual chance of loss. (e.g Not including running costs of the insurer)
RISK PROFILE: Statistics showing the number of risks or policies falling within selected bands of exposure, whether by sum insured, Estimated Maximum Loss (EML) or limit of indemnity, hopefully together with the total aggregate Sums Insured within the same bands and broken down as much as possible into differing types of risk, perils covered, location….. Can be used to help calculate Capacity required for Proportional Treaties, retained exposure for Cat X/L, pricing for a Risk X/L (exposure rating), as a minimum.
RISK TRANSFER Transfer of a risk or risks to other risk carriers.
The ROOM The official underwriting area in the Lloyd’s Building in the UK.
RUN OFF: Term applicable where the reinsurance contract has been terminated but where liability remains in force for cessions or risks accepted during the period of the contract. Losses could still occur on those cessions or risks for which reinsurers would be liable, even though they had cancelled before those losses had occurred.
RUN OFF ACCOUNT (Lloyd’s) At Lloyd’s, a year of account which is kept open after the date on which it would normally have been closed. A RITC (Reinsurance to Close) has NOT been carried out.
RUN OFF YEAR BASIS (Reinsurance) One of various methodologies of handling Proportional Treaty Accounts. All premiums and all claims fall onto the year in which the relevant risk incepted – see also Premium Bases.
S
SALVAGE: (1) Property taken over by an insurance company to reduce its loss; (2) Award recoverable by salvors under maritime law.
SALVAGE CHARGES: The award due to a salvor for services rendered in saving the insured property.
SALVAGE LOSS: Occurs when the Underwriter agrees to settle a cargo claim by paying the difference between the insured value and the proceeds realised by selling the damaged goods.
SCHEDULE: (1) A list of specified amounts payable for, usually, surgical procedures, dismemberments, ancillary expenses or the like in Health Insurance policies; (2) The list of individual items covered under one policy as the various buildings or animals and other property in property insurance; (3) In Marine policies, a list attached to a slip, open cover, policy or other document, usually detailing the rates of premium for various voyages, interests and risks. (4) A document attached to and forming part of a treaty wording listing all variable factors such as commissions, rates of premium, commencement and termination dates, reinsurer’s proportion, etc.
SECURITY: The Underwriters subscribing a risk. The (Re)insurers.
SECURITY DOWNGRADE CLAUSE A clause introduced after the WTC loss 11th Sept 2001, which allows the reinsured to automatically cancel the shares of any reinsurer if their Credit Rating is downgraded below a specific rating or to a specific e.g. SandP down to BBB+ or below. See also Special Cancellation Clause.
SELF INSURANCE An individual or an organisation who is willing to accept its own risks and pay its own claims. e.g. A group placing its insurance risks into a Captive Insurer.
SELF RATING COVER Often referred to as an Open Cover or Fac Open cover. A form of semi-automatic reinsurance whereby the reinsured makes individual declarations to the reinsurer, the reinsurer in many cases reserves the right to accept or decline the offer, perhaps having to agree to make a decision within X days or the risk is automatically bound. The self rating cover would include a pricing formula that the Reinsured would be expected to use.
SEVERALABILITY CLAUSE
A clause that makes it clear that if any part of the contract is found to be illegal or unenforceable this does NOT affect the rest of the contract. e.g. A court in country A says that provision XX is illegal in this country, does not mean that one of the parties can get out of the rest of the contract!
DO NOT CONFUSE WITH SEVERAL LIABILITY CLAUSE
SEVERAL LIABILITY CLAUSE e.g LMA3333
A clause that makes it very clear that if one (re)insurer become insolvent and unable to pays its shares of claims the other (re)insurers shares are not increased to pick up the shortfall. The original clause was LSW1001, which makes no specific reference to Lloyd’s, LMA3333 does and is standard on virtually all London Market slips.
SEVERE INFLATION CLAUSE (SIC)
This clause is a variation of the Stability Clause (Index Clause) by which the clause only allows indexation to come into effect after a certain predetermined amount of inflation (normally on a percentage basis) has taken place from the base date to the date the claim is paid.
SERVICE OF SUIT CLAUSE a clause which specifies who, in the event of s dispute will accept service of a Writ from the aggrieved party and in many cases specify the Law and Jurisdiction of any Dispute.
SHARIA LAW The Law of Islam – see also Takaful
SHORT TAIL (Re)insurance business where claims are expected to be settled comparatively quickly e.g. Weeks/Months NOT Years. Results on Short Tail business should be known comparatively quickly. e.g. Property, Personal Accident – see also Long Tail the converse, the liabilities…….
SIDE CAR A special purpose vehicle (SPV) set up to allow investors in the SPV to assume risk, share profits and losses by accepting a specific book of business (normally by way of a Quota Share Treaty. It enable the investors to be involved in reinsurance at suitable times without having to commit to a long term relationship or by forming a specific reinsurer themselves. A quick and comparatively simple method for “new” capital to enter the reinsurance market. In many cases these would be set up as Collateralised reinsurers. (No Credit Rating, put up collateral to cover any losses under the contract)
SIGNED LINE– see Written Line
SIGNING DOWN see Written Line
SIGN IN FULL see Written Line
SINGLE PARENT CAPTIVE – self explanatory. See CAPTIVE.
SLIDING SCALE OF COMMISSION: A commission particularly under a proportional treaty adjusted under a formula whereby the actual commission varies inversely with the loss ratio, subject to a specified maximum commission at a minimum loss ratio and probably a minimum commission at a maximum loss ratio. In some clauses there might also be a carry forward if the loss ratio exceeds the Maximum or X% or a falls below the Minimum of Y%. Text books will say that there should not be a Sliding Scale commission and a Profit Commission in the same Treaty. In a soft market this is not always followed.
Sliding Scale Low loss ratio – High commission
High loss ratio – Low commission
Scale has to deal with all loss ratios – not just those in the Scale
Commission X% for loss ratios Y% and above
Commission Z% for loss ratios below T%
Sliding Scale Adjustment
The calculation of the final commission under a treaty with a Sliding Scale of commission
Might result in a refund of commission retained by the reinsured to the reinsurers if the final L/R is high (results bad)
SLIP– see also MRC
Originally a term that used to describe a precis of the contract terms and conditions which was shown to an underwriter when a risk was offered.
Today it is more likely to be a fully claused offer – the full deal.
SOCIETY OF LLOYD’S – see Lloyd’s
SOFT MARKET
Where there is over supply and possibly less demand of insurance or reinsurance capacity – prices low, terms and conditions broad.
SOLVENCY The ability of insurers to ensure that they are always able to meet their liabilities for claims
SOLVENCY MARGIN The amount that the assets owned by the insurer exceed their liabilities. The calculation methodology is normally regulated by the Financial Regulator of the given country.
SPECIAL ACCEPTANCE
A term used to describe the specific acceptance by reinsurers of a risk normally excluded from a treaty.
SPECIAL CANCELLATION CLAUSE (Also called the Sudden Death Clause.) A clause in a contract that allows the Reinsurer or the Reinsured to cancellation their participation with immediate effect if a specified event happens. e.g. Change of ownership, substantial loss of Capital, War…… See also Security Downgrade Clause
SPECIAL PURPOSE VEHICLE See SPV
SPECIAL TERMINATION CLAUSE See SPECIAL CANCELLATION CLAUSE
SPILLOVER (Proportional Treaty) The amount of any loss that exceeds an Event Limit under a Proportional Treaty
SPILLOVER PROTECTION A specific reinsurance contract that pays if the Aggregate Limit or Event Limit under a Proportional Treaty is exceeded. Cover for the Spillover would in most cases be sought from Catastrophe X/L reinsurers
SPILLOVER (Excess of Loss) the amount of loss that exceeds an event limit on a Per Risk X/L. Any amount exceeding the Risk X/L Event Limit would be automatically added to the reinsured’s retained loss and possibly be recovered from Cat X/L reinsurers.
SPLIT PLACEMENT – See Non-Subscription Placement
SPREAD LOSS REINSURANCE
An American term used to describe a working cover which is subject to a rating plan, designed to arrive at the reinsurance rate and premium for a specified period by basing it in whole or in part on the loss experience of a prior period.
SPV (Special Purpose Vehicle) A legal entity created to fulfill narrow, specific or temporary objectives. SPEs are typically used by companies to isolate the firm from financial risk. i.e. An entity sitting between an insurer who has placed a catastrophe bond (Cat Bond) and the Financial Market who is lending the money under a Bond. Thus the Financial Market is lending money to the SPV (not doing reinsurance) and the reinsured is buying reinsurance from the SPV not borrowing money.
STOP LOSS: A form of Non-Proportional reinsurance under which the reinsurer reimburses the reinsured for losses in any year to the extent by which those losses exceed a specified percentage loss ratio (Excess of Loss Ratio) or amount, (Aggregate X/L) subject to the limit also being based on a specified percentage or monetary amount. In general the words Stop Loss replace the older description of Excess of Loss Ratio cover. Whilst an Aggregate X/L continues to be called an Aggregate X/L. A simple way to understand the Stop Loss is to call it its old fashioned name inserting a comma as shown. Excess of, Loss Ratio Cover. Loss Ratio Low, no claim but Loss Ratio high, claim.
STRIKE THROUGH CLAUSE – See Cut Through Clause
STRUCTURED REINSURANCE (Sometimes referred to as FINITE RISK. Very hard to get any one view on the meaning of this phrase.
In general a contract, probably multi year where the premiums paid to losses recovered are not that far apart, remembering that their must be risk transfer for such a deal to be accounted as Reinsurance. e.g. Burning Cost contract (Non-Proportional), Sliding Scale contract (Proportional)
SUBJECT PREMIUM See “Base Premium”.
SUB-BROKER A broker who should report in and handle the placement of a risk through a Flag or Main Broker.
SUBROGATION The right of the underwriter to ‘stand in the shoes of the insured’ and take over the Insured’s rights, following payment of a claim, to recover the payment of an incurred loss from a third party responsible for the loss. It is limited to the amount of loss paid by the insurance policy.
SUBROGATION WAIVER: A waiver by the named insured giving up any right of recovery against another party. Normally an insurance policy requires that subrogation (recovery) rights be preserved.
SUBSCRIBE To take a share of a contract
SUBSCRIPTION (Share) The extent to which an insurer or insurers is/are liable under a slip or policy
SUBSCRIPTION MARKET A market where a number of underwriters are available to consider and accept (re)insurances for subscription, (normally by a broker) e.g. London Market
“SUDDEN DEATH” CLAUSE
A “nick-name” for part of the termination clause. Can over-ride any period for notice of cancellation should a party to the reinsurance contract undergo structural changes such as:-
1) losing whole or any part of its paid up capital, or
2) going into liquidation or having a receiver appointed, or
3) being acquired or controlled by any other company.
Termination may be put in force by giving notice and takes effect immediately from the date nominated by the party giving notice.
SUE AND LABOR: Expenses incurred by the Assured or their representatives with the intention of preventing or minimizing a loss for which the Underwriter would have been liable. They do not include expenses incurred in general average or salvage acts; these being recoverable under the policy only as part of the Underwriters’ liability for contribution to general average or salvage, if any. Sue and labor charges are recoverable under a policy that incorporates a sue and labor clause (SG policy), or in accordance with the wording of the policy (e.g. under the “duty of the Assured” clause attached to a MAR policy).
SUM INSURED: The sum expressed in a policy as the maximum of the insurer’s liability under a contract or policy of indemnity.
SUNRISE CLAUSE A clause that is used to reactivate coverage that no longer exists under a Sunset Clause
SUNSET CLAUSE. In some contracts (Liability) especially in the US a Sunset Clause may be included in the conditions stating that any loss that is advised after 3/5/7 years is NOT Covered.
SUPPORTING QUOTA SHARE A quota share designed to offer premium income/ better results to a reinsurer who is participating in a less good/less balanced piece of business. e.g. 10% Quota Share to support the acceptance of an unbalanced Fac Oblig
SURETY: (1) A term loosely used to describe the business or suretyship or bonds. Suretyship is an arrangement whereby one party becomes answerable to a third party for the acts or neglect of a second party.
e.g. Construction Company A will complete the Building of this dam by 31/12/20XX for Company B. If it not completed by the agreed date Company C will recompense Company B.
(2) The party in a surety arrangement who holds himself responsible to one person for the acts of another e.g. Insurer
SURETY BOND: A bond in which the surety agrees to answer to the obligee for the non-performance of the principal (known as the obligor).
SURPLUS: (Proportional Treaty) – See Surplus Treaty.
SURPLUS LINES Excess and Surplus lines insurance is a segment of the US insurance market that allows consumers to buy insurance through a US state regulated insurer who can offer and design specific insurance coverages and negotiate price. Basically called “Freedom of rate and form”.
Standard insurance products have to approved by the State Insurance Regulator. The accepting insurer would be called an admitted insurer. For non-standard risks the accepting insurer would be termed an Excess and Surplus (E&S) lines carrier. Surplus Lines carriers are not required to be licensed by the specific state, but are allowed to do business in that state. They are financially stable companies that are regulated in other ways. They may only write a policy if it has been rejected by X (often three different admitted carriers) or is of a specific Class e.g. Energy, Marine, Aviation and only when the agent placing the business has a Surplus Lines License. Policies can only be written by insurers on an approved list. Largest Surplus Lines insurer, probably Lloyd’s. (London).
SURPLUS RELIEF COVER
A type of reinsurance, usually on a whole account basis, designed to relieve a cedant, by reducing premium volume, of the necessity to increase its capital in order to maintain solvency ratios.
SURPLUS TREATY Under this method of Proportional Treaty reinsurance, the reinsured decides that it will retain a certain amount on a specific risk and cede (give) the amount surplus to its retention to an automatic facility, known as a Surplus Treaty.” The overall Treaty Limit (per risk) will be expressed as a multiple of the reinsured’s retention (called a Line). Also known as Excess of Line Treaty (Marine)
e.g. Retention 1,000,000
5 Line Surplus = Max 5,000,000 per risk
All risk below 1,000,000 will be retained 100% by the reinsured. All risk above will be shared based on the percentage allocation of the risk.
e.g. Retention 1,000,000
Sum Insured 3,000,000
Retention 1,000,000 33.33%
Surplus 2,000,000 66.67%
Sum Insured 10,000,000
Retention 1,000,000 10%
Surplus 5,000,000 50%
Facultative 4,000,000 40%
SWING RATE – See Burning Cost (2)
SYNDICATE A group of individuals or businesses who group together to work on a Common venture, sharing Risk, Expenses, Profits or Losses in pre-agreed shares. e.g a Lloyd’s Syndicate
SYNDICATE CAPACITY (Lloyd’s) Also referred to as the ‘stamp capacity’. The maximum amount of premium volume that a syndicate in Lloyd’s can write per year, aggregated from all its members.
T
TABLE OF LIMITS
Under a Surplus Treaty – a table showing the various retentions that the reinsured might utilise depending on the Class of Business, Type of Construction or other criteria. Also know as Graded Retentions and/or Retention Table.
TAIL: This term has been used to describe both the exposure that exists after expiration of a policy and the coverage that may be purchased to cover that exposure. On “occurrence” forms a claims tail may extend for years after policy expiration, and the losses may be covered. On “claims made” forms tail coverage may be purchased to extend the period for reporting covered claims beyond the normal policy period.
TAKAFUL – Solidarity / Joint Guarantee “A form of insurance with characteristics and features that comply with Sharia requirements through addressing and resolving the objections against conventional insurance”
TAKAFUL Insurance based on Islamic principals (Sharia Law) e.g. No Interest to be paid as it is seen as usury.
Below, only in this one place, Core Words and phrases used within Takaful
Ahliyyat al adaa – legal capacity (over 18…)
Deya – Blood Money in the event of an unintentional killing (One of the original concepts of Takaful) – payable by the killer to the victim’s family – in many cases shared with family and friends as too much for one person to find (Acqela ) If killer is unknown money paid to the family from the Qasama fund – extended family (or tribe) of the deceased divide the cost of the Deya amongst themselves and give it to the closes relatives of the deceased
Dharurah – to do something because of necessity – does not mean that this over-rules core Islamic Principles
Fatwa Legal judgment or learned interpretation – can be issued by anyone – called a Mufti – may not always be followed though
Fiqh – Islamic jurisprudence, conferences, academies… – Fiq Al-Muamalat Al-Maliya – for Finance and Trade i.e Insurance
Fuqaha – Muslim jurists, religious experts – faqih – jurist
Gharar – as per fiqh scholars “a combination of the unknown and the doubtful” uncertainty and unclear terms in a contract Islam needs – proper fixation of price, quantity, quality or delivery date
Ghabn – fraud or deception that would unduly harm the interests of one party to an exchange to the benefit of the other – likely to render a contract invalid. (Minor Ghabn and Major Ghabn) Ghabn is a SIN
Haram – specific forbidden activities e.g. Pork, Prostitution, Arms, Gambling…..
Hadith – actual sayings of The Prophet (pbuh) (if you mention The Prophet or Mhmd please put pbuh after it) Peace be unto him.
Halal – permissible under Sharia
Ijtehad – the use of reasoning to come to an independent reasoning of the truth
ijab – offer
Ijarah A variation of Takaful (lease) (Jordan)
Ijama – consensus of muslims
Imam – an Islamic leadership position – takes prayers….
Jahalah – ignorance e.g. Serious loss of , or absence or serious imperfection of information concerning the subject matter of the agreement Would render the contract void ab initio(from the start) Jahalah is an important part of Gharar and Ghabn
Kafalah – Contract between shareholders in the Insurance Company and the “Participants Fund” to finance any deficit in the fund by giving Qard Hasan
Maisir – excessive risk taking – Gambling
Mudarabah – Takaful Model based on “sharing”
Mudareb – Manager
Mufti – someone issuing a Fatwa (editc)
Musharaka – partnership 2 or more people To mix wealth, funds, labour, or profession – in differing shares To jointly carry on trade…. To make a profit under Sharia Rules
Muwakeel – Principal (Wakeel – agent)
Nea’a – utmost sincerity of intention to follow the rules of Takaful
Qardh Hasan – interest free loan
Qasama – blood money (Deya) paid by his/her own tribe/family paid to the very close relatives of someone killed, when it is not known who made the kiling (by accident or design)
Qabul– acceptance
Qiyas – reasoning by analogy
Quran – The Holy (or Quoran or Koran) – the reading (revelation from God)
Riba an unequal exchange of money whether the parties have agreed to it or not
- – pay premium but No claim or a claim less than the premium paid
- – receipt and/or payment of interest – (usary)
- Hadith (sayings of the Prophet pbuh) “the only reward for a loan is the thanksgiving (to the lender) and the repayment
Roshd – rational behaviour within the framework of Islamic Creed (Sharia)
Rub ul mal– Owner of Capital – Participants’ contributions)
Sharia – Islamic Law – the way of the path
Shirikat Al Mudaraba (Partnership and Management) A partnership between to parties where one party provides capital – the capital owners (rub-ul-mal) – the participants contributions ? Other party(ies) (Takaful Operator) – provide Management (Mudareb)
Shirkat Al Musahama – joint stock company – limited liability
Sukuk – Sharia Based Bond
Sunnah – traditions of The prophet (pbuh), written by other people at a similar era to Mohammed pbuh) AD/CE 570/622
Takaful – Solidarity / Joint Guarantee “A form of insurance with characteristics and features that comply with Sharia requirements through addressing and resolving the objections against conventional insurance”
Tabarru – donation
Ta’awun – Cooperative
WAQF – trust. A variation of the Takaful Model in Pakistan and South Africa
Wa’d – a promise (does not constitute a contract) – probably binding on the person making it – per Fuqaha engaged in modern Islamic Financial services
Wakala – A Takaful Model based on the concept of a fee based agreement AND also the word meaning Fee
Wakeel – Agent
Zakat – Obligatory charitable donations imposed on rich muslims to purify their soul by giving to the needy
TARGET RISK
The largest/ most prestigious risks in a country, where it is likely that many insurers have a co-insurance share. Possible that a reinsurer will exclude these risks from being ceded to a proportional Treaty. Thus avoiding a huge accumulation on such a risk without awareness
TARIFF RATES A very common concept globally in the 20th C although started to wain in the latter parts. A table of agreed insurance rates across a class, where insurers within a specified Territory agreed that everyone would charge similar rates and just compete on Service. Meant that Insurance prices remained comparatively high. Lloyd’s in the UK has always been “Non-Tariff along with a few other insurers. With a growing trend for encouraging open markets and competition Tariffs have disappeared in most insurance markets in the world.
TAXES AND CHARGES e.g In many countries, insurance premiums incur charges either imposed by the government or market supervisors. If this business is then reinsured proportionally the reinsurer is expected to pay his share of such charges. e. Premium $100 Stamp Duty payable by the reinsured to the Government $10. Reinsurance 40%.
$100 – $10 = $90 x 40$ = $36 to reinsurers.
TERM LIFE A life policy taken out for a specific period of time, possibly covering the period of repayment a loan. If the Life Assured dies during the period the claims monies are paid out. If the do not die within the period of the policy. No claim and No refund of premium. (Should be cheap).
TERRITORIAL LIMITS/ TERRITORIAL SCOPE Geographical area covered by the contract
TERM 1. A period of insurance.
2. The time for which anything lasts
3. Word used in a specific and understood/defined sense.
THIRD PARTY: A person claiming against the original insured. In insurance terminology, the first party is the original insured and the second party is the insurance company. A third party is therefore not involved in the contract between the first and second parties.
THIRD PARTY LIABILITY: Liability of the original insured to persons (or other entities) who are not parties to the contract of insurance, nor are employees of the original insured.
THREE YEAR ACCOUNTING (Lloyd’s) Historically most Lloyd’s syndicates have operated a three year underwriting account according to which the profit or loss of an underwriting account is determined by the managing agent 36 months after the beginning of that account which is always the start of a calendar year. According to this system the normal closure date of the 2016 year of account (which commenced on 1 January 2016) was 31 December 2018 with the calculation of the reinsurance to close as at that date being finalised in or about February/March 2019
TONNER POLICIES
A style of reinsurance that was generally peculiar to the Lloyd’s marine and aviation market where an underwriter gambled on the incidence of total losses of a specific class of vessel or aircraft, e.g. supertankers or jumbo hulls, or on the total tonnage lost during the period. These policies were not enforceable at law because the underwriter seeking the policy may not be directly liable for any such losses and thus may have no insurable interest either at the time the policy is effected or when the claim is made.
Due to the lack of insurable interest, tonner policies are among those referred to as policies proof of interest (PPI). They were banned by Lloyd’s in the 1980’s
TOTAL LOSS What it says. N.B. See Constructive Total Loss
TREATY (Reinsurance)A reinsurance contract under which both the reinsured and the reinsurer agree to grant automatic cover within certain parameters. See also Facultative.
Originally created in the 1830’s / 1840’s (Proportional) and called a Treaty as it was an IMPORTANT Long Term, relationship.
TREATY COMPRESSION
Facultative reinsurance can be placed proportionally or non-proportionally. Therecan be issues when Fac X/L is placed in conjunction with Proportional Treaties. This is called Treaty Compression – a specific note follows.
| Fac X/L and Treaty Compression With pro-rata reinsurance, it is common knowledge that the primary insurer and the reinsurer follow the fortunes of a risk with regard to exposure, premium and losses, in accordance with the cession. An example of this structure is proportional capacity of $75 million, with a $5 million retention and a 14-line surplus. Given an insured risk of $100 million sum insured, a facultative requirement of $25 million arises. Traditionally, the primary insurer would cede $25m (25% of the risk) facultatively on a pro-rata basis. Then 70% of the original risk premium is apportionable to the surplus treaty, and also 70% of each original loss. As a result, the surplus treaty is not hit for its full capacity of $70 million until a total loss occurs. (See Figure 1.) In this scenario the Treaty reinsurers are receiving a 70% share of the risk, premium (less commission) and will pay 70% of any loss. Some reinsureds in considering Fac X/L organise their facultative requirement of $25 million for this risk on a non-proportional basis by placing it in excess of the Surplus treaty and the retention. The effect of this “compression” is that the treaty and the net retention will pay a higher percentage of every partial loss than they would pay if the facultative had been placed on a proportional basis. With a facultative cession on a pro-rata basis, the surplus treaty would have a 70% share of every loss. With a non-proportional facultative cession placed on this basis ($25 million xs $75 million), the treaty share increases to 93.3% (70:75) of all losses up to $75 million. However, the absolute liability of the surplus treaty remains unchanged. With both options the limit remains at $70 million although the operations are totally different. It can be argued that although the pro-rata treaty experiences higher exposure in percentage terms to small and smaller losses due to compression, the treaty reinsurer will be compensated by a correspondingly higher allocation of original premium. The problem is of course if the original premium is insufficient or pricing of the facultative layer does not leave sufficient premium for the increased frequency of smaller losses. IF only a relatively small number of policies are placed in this way on a Fac X/L basis in relation to the overall portfolio, there is usually not much impact on a pro-rata treaty. Given a well-balanced treaty portfolio and isolated facultative non-proportional covers, the fluctuations in the first loss area might not be not particularly marked. Treaty reinsurers still need to be asked! If an insurer wants to use non-proportional facultative on this basis reinsurance rarely or occasionally, special acceptances under the treaty remain an alternative. What About the Non-Proportional Treaty? Sharing information on the number and nature of possible non-proportional facultative covers sitting on top of a Risk X/L is an important part of the risk profile discussion and may affect treaty pricing going forward. Summary |
TREATY LIMIT (Reinsurance) The limit fixed in monetary amount being the max amount that that the reinsured can automatically cede to the Treaty (Proportional) OR the amount of cover that the reinsured can be liable up to under a Non-Proportional Treaty.
TREATY TYPES (Reinsurance)
Proportional
Quota Share – share of all risks – automatically
Surplus – share of larger risks – automatically
Facultative Obligatory! – share of larger risks – IF reinsured wishes to cede
Non-Propotional
Risk X/L – protecting against losses larger than expected – per risk
Cat X/L – protecting against losses larger than expected – per event
Stop Loss (Excess of, Loss Ratio Cover) – protecting against a poor overall loss ratio
Aggregate X/L – protecting against an accumulation of losses in the period (year)
And the newest, produc
Cat Aggregate X/L
If event losses only
Bigger than $x,xxx,xxx each
Exceed $xxx,xxx,xxx in the aggregate in the year IT pays
TRENDING The necessary adjustment of historical statistics (both premiums and losses) to present to fair picture at “todays” prices. Should include a range of factors including economics, demographics, inflation and possibly even changes in policy conditions e.g. reducing deductibles