marketing system underwriting reinsurance

marketing system, underwriting,reinsurance

Marketing Systems in Life Insurance: Agency Building System

                                           Marketing systems refer to how insurance is sold

                                          With agency building system, the insurer is responsible for its agency force

1. General agency system

o Independent contractors paid on commission who represents only one insurer

o General agent is responsible for recruiting, training, and motivating new agents

o Insurer may provide some financial assistance

2. Managerial system

o Branch offices are managed by employee of the company

o The branch manager is responsible for agent development

o Insurer pays expenses of the branch office

Marketing Systems in Life Insurance: Other

A nonbuilding agency system is when insurer contracts with established agents

       e.g., a personal-producing general agent

Under a direct response system, insurance is sold directly to customers without agents

     Web, TV, mail, or telephone

     Generally lower acquisition costs

Property and Liability Insurance Marketing Systems

Exclusive (captive) agents represent only one insurer

                                          Similar to general agents for life insurers

                Renewal commissions are typically lower than new business

Direct writers are where the salesperson is an employee of the insurer

           Employees are usually compensated on a “salary plus” arrangement

Independent agents represent several unrelated insurers

           Commissions vary widely by line of insurance

           Some larger agents may provide loss control and other services

Direct response insurers sells directly to the consumer by television or some other media

Many property and casualty insurers use multiple distribution systems

Underwriting

 Underwriters select, classify, and determine pricing for potential policyholders

          They make accept/reject decision for an applicant

 Different insurers have different underwriting philosophies

      Statement of underwriting policy establishes what is acceptable

Principles of Underwriting

1. Strive to attain underwriting profit

  Charge a premium sufficient to pay future claims

2. Selection of prospective insureds should meet company’s underwriting standards

  Protect insurer against adverse selection

3. Maintain equity among the policyholders

  No group should subsidize another

   Not much variation with in a “class”

Agent as the first underwriter

 In P/C insurance, agent can bind the company

 Based on underwriting standard of company, agent knows which applicants are:

  Acceptable

  Borderline (need company approval)

  Prohibited

 Agent may share in profitability of their business

Sources of Underwriting Information

 The application provides info on policyowner and/or insured property (with agent report)

 An external inspection report regarding the applicant

 Physical inspection of property

 A physical examination (life/health)

 Medical information bureau (MIB) report

Underwriting Decisions

 Accept at standard rates

 Accept subject to restrictions/modifications

 Reject the application

  Do not want to aggravate agents who brought the application

 Many decisions are quicker with computerized underwriting

Underwriting Issues

 Underwriting cycle is historical fluctuations in insurer profitability

   Underwriting is more conservative (stricter) when recent experience is “bad” (this is

                                                      called a “hard” market)

   Availability of reinsurance can aggravate this

 Renewal underwriting can allow insurer to cancel P/C policy

     Usually not in life insurance

Types of Claims Adjustors

 Determining claim amount is responsibility of an adjustor

 Agents often can settle small claims

 Company adjustors are insurer employees

  Claims offices are typically regional

 Independent adjustors and adjustment bureaus

  External professionals hired by insurers

  Used for specialized cases

 Public adjustors represent the insured

Claims Settlement Process

1. Begins with a notice of loss

2. Claim is investigated by the company

  Claims adjustor verifies the loss is covered and determines the amount of the loss

3. The adjustor may require a proof of loss before the claim is paid

4. The adjustor pays or denies the claim

  Policy describes resolution of disputes

Reinsurance Defined

 Insurance for insurance companies

 Two parties

   The primary (ceding) insurer is the initial insurance writer who wishes to transfer

                                                                    (excess) risk to

   A reinsurer who insures the experience of the primary company

 Amount of insurance kept by ceding company is the “retention limit”

Reasons for Reinsurance

 Increase underwriting capacity

 Stabilize profits by capping losses, especially in the event of catastrophes

 Obtain underwriting advice on a new line

 Retire from a line of insurance or territory

 Reduce the unearned premium reserve (UPR)

Forms of Reinsurance

 Facultative reinsurance is case-by-case reinsurance

   Used when application for insurance exceeds initial insurer’s desired retention

 Treaty reinsurance is a standing reinsurance relationship between the primary insurer and the

         reinsurer

  Reinsurer has no knowledge of individual applications

Reinsurance Arrangements

 Quota-share (pro rata) treaty

   Ceding insurer and reinsurer agree to share premiums and losses based on some

proportion

 Surplus-share treaty is a pro rata reinsurance on a per policy basis

   o First, amount of retention set by primary insurer (a “line”)

   o The maximum amount of reinsurance set by reinsurer (# of lines)

   o For each policy, premiums and losses are split

 Excess-of-loss (stop loss) has reinsurer pay for losses above ceding insurers retention

    o Stop loss could be per policy, per catastrophe, or aggregate annual loss

 A reinsurance pool underwrites insurance on a joint basis for large risks too big for one insurer

Reinsurance Alternatives

 Given its size, the capital markets have become an alternative to traditional reinsurance

 Securitization of risk means creating a financial security whose return is linked to insurer losses

 Catastrophe bonds are debt securities where investors forgive an insurer’s interest payments (or

principal) if catastrophic losses occur

o Losses typically tied to industry, not specific insurer

Moral hazard

Moral hazard

It is usually applied to the insurance industry. Insurance companies worry that by offering payouts to protect against losses from accidents, they may actually encourage risk-taking, which results in them paying more in claims. Insurers fear that a "don't worry, it's insured" attitude leads to policyholders with collision insurance driving recklessly or fire insured homeowners smoking in bed. 

The idea of a corporation being too big or too important to fail also represents a moral hazard. If the public and the management of a corporation believe that the company will receive a financial bailout to keep it going, then the management may take more risks in pursuit of profits. Government safety nets create moral hazards that lead to more risk taking, and the fallout from markets with unreasonable risks - meltdowns, crashes, and panics - reinforces the need for more government controls. Consequently, the government feels the need to strengthen these nets through regulations and controls that increase the moral hazard in the future. 

The alternative to creating a moral hazard is to simply let corporations fail when they risk too much and let the stronger corporations buy up the wreckage. This theoretical free-market approach should remove any moral hazard. In a true free market, companies would still fail, just as houses burn down whether they’re insured or not, but the impact would be minimized. There would be no industry-wide meltdowns because most companies would be more cautious just as most people choose not to smoke in bed whether or not they are insured. In both cases, the risk of burning up is enough to prompt serious second thought on any risk taking behavior. 

True free market capitalism doesn't exist, so the taxpayers of many countries are the unwilling insurers for markets. The problem is that insurers profit by selling policies, whereas taxpayers gain little or nothing for footing the bill on the policies and bailouts that create moral hazards. 
Moral hazard can arise in the insurance industry when insured parties behave differently as a result of having insurance. There are two types of moral hazard in insurance: ex ante and ex post.

 Ex-Ante Moral Hazard - Ed the Aggressive Driver: Ed, a driver with no auto insurance, drives very cautiously because he would be fully responsible for any damages to his vehicle. Ed decides to get auto insurance and, once his policy goes into effect, he begins speeding and making unsafe lane changes. Ed's case is an example of ex-ante moral hazard. As an insured motorist, Ed has taken on more risk than he did without insurance. Ed's choice reflects his new, reduced liability.

Ex-Post Moral Hazard - Marie and Her Allergies: Marie has had no health insurance for a few years and develops allergy symptoms each spring. This winter she starts a new job that offers insurance and decides to consult a physician for her problems. Had Marie continued without insurance, she may never have gone to a doctor. But, with insurance, she makes an appointment and is given a prescription for her allergies. This is an example of ex-post moral hazard, because Marie is now using insurance to cover costs she would not have incurred prior to getting insurance.

Morale hazard

Circumstance that increases the probability of occurrence of a loss, or a larger than normal loss, because of an insurance-policy applicant's indifferent attitude after the issuance of policy. For example, he or she might be careless in locking the doors and windows when leaving home. In common usage, morale hazard indicates that the insured party unconsciously  changes their actions or behaviors, as opposed to a deliberate change in order to cheat the system or benefit from his or her circumstances. Compare with moral hazard.

Difference between Morale Hazard and Moral hazard

Morale hazard:

An attitude that increases the probability of loss from a peril. In insurance context, the attitude of insured; Attitude of insured to think “Its insured so why should I worry about safety of my house/property/own health. If anything goes wrong, insurer is there to indemnify me. So, Why should I worry about safety?” is an example of a morale hazard. Insured with this kind of attitude tend to act carelessly. Insurance companies often try to stem the problem of morale hazard by risk reduction measures, such as insisting on the ownership of fire extinguishers (in the case of fire insurance), or offering price reductions (for example, if a burglar alarm is installed in a home). Refers to individual’s Carelessness – Ex ample – Rash driving after getting auto insurance or keeping doors open after purchasing a insurance for house.

Moral hazard:

A condition of morals or habits that increase the probability of a loss from a peril. This hazard to an insurance company resulting from uncertainty about the honesty of the insured. Ex ample – Insured giving false information to insurer to get or to purpose an insurance policy in favor of i nsured or raising a claim with exaggerated loss.

Insurance Retention

An insurance retention is the portion of an insurance claim paid by the insured instead of the insurance company. A deductible is a common example of a retention although there are other types of retentions. Retentions allow the insured to reduce insurance premiums while assuming a portion of the risk being insured.

Self-Insured Retention

A self-insured retention (SIR) is a portion of each insurance claim that is not insured by the policy and requires the insured to pay before insurance becomes effective. For example, if there is a Rs.6,500 self-insured retention on a Rs 650,000 general liability policy, the insured must pay the first Rs 6,500 of any claim before the insurer will respond.

Deductible

A deductible on a liability policy is an amount that must be reimbursed by the insured to the insurer for each paid claim. Unlike a self-insured retention, insurers are obligated to immediately handle third party claims and seek reimbursement from their insureds. Insurers may not resist paying third-party claims even if their insureds do not reimburse deductible obligations.

Retrospective Rated Policies

Instead of a defined retention that applies on every claim, insureds may arrange for a retrospectively rated policy to share a proportion of all losses with the insurer. These retentions may vary by claim type and often have a maximum amount of aggregate retention thereby providing some cap on exposure to loss.

Moral Effect

Insurers benefit from retentions because their insureds have a financial stake in preventing or minimising the effect of claims. This eliminates the fear that insureds would act recklessly knowing they are fully insured with no financial impact other than potentially increased annual premiums. Some insurers require all policies to have some level of retention as a method of loss control.

Insurance Claims Handling Process

The Insurance Claims Handling Process

Insurance coverage is something that nearly everyone has to purchase to provide financial protection from catastrophes. When you actually experience a catastrophe, the process of getting money from your insurance company can be confusing. Filing a claim and then going through the process requires a certain amount of patience and knowledge on your part.

Filing the Claim

o    Every insurance company is a little different when it comes to how it handles claims that are filed. Some insurance companies have a call center that you have to get in touch with to file a claim. Other companies would prefer that you call your insurance agent to get the process started. Regardless of who you have to talk to, you will have to provide information about the property that is damaged as well as what type of loss occurred. You have to be as detailed as possible during this process.

Small Claims

o    If you have a small claim, the adjuster could have the authority to settle almost immediately. For example, if you file a homeowners insurance claim for damage to your flooring, the adjuster will come out from the insurance company and take a look at it. If the damage is only a few hundred dollars, the adjuster might offer to simply give you a check. You can take the check and use it any way that you please at that point. While this is the quickest way to resolve the issue, you might get less money than you are entitled.

Large Claims

o    If you have a large claim, the process will typically take a little bit longer. The insurance company will send the adjuster to look at the damage and it might also want to get some professional opinions on how much it will cost to repair. For example, if you have damage to your car, you may have to get estimates from several mechanics to give to the insurance company. Some insurance companies also employ experts that can look at the damage to a house and determine how much it would cost to fix.

Time Frame

o    Once your claim is initiated, it could take some time to resolve. Adjusters like to get claims resolved quickly because they reflect positively on them. At the same time, they have to go through the appropriate processes to make sure that you are taken care of fairly. If you do not like the settlement that you are offered, you can hold off on accepting it. If you prolong the process and dispute the amount of the settlement, you may be able to negotiate a higher amount.

INSURANCE CLAIM NOTIFICATION

An Insurance Claim Notification contains information about a loss or injury that is necessary for an insurance company to create a First Notice of Loss (FNOL) or First Report of Injury (FROI) claim notification. A claimant is a person who asks for a reimbursement for any damage done to life or property. A claim is when damage is informed and refund is requested. A claim could be of many kinds:

1. Car insurance claim
2. Health insurance claim
3. Life insurance claim
4. Claim against theft
5. Claim against fire
6. Accidental claim
7. Compensatory claim
8. Deposit refund claim
9. Retrenchment reimbursement claim

But a claim can be requested only when there has been a prior understanding between the claimant and the company who is expected to clear the claim. A Claim Letter is a tool informing a company of the partial or full damage done and requesting a decent reimbursement against it. It however may either be written by the claimant informing about the loss or the company giving the reimbursement informing the claimant of the reimbursement that is on its way may also write it.

DOS AND DON’T’S OF CLAIM LETTER

·         A Claim Letter should be written by the claimant as soon as the damage is done

·         It should be written by the company as soon as the reimbursement is being sent

·         The letter must bear the date on the top left corner indicating details of its origin

·         It should be brief and to the point

·         Only the details of the policy and reimbursement requested/agreed should be dealt with in the letter

·         A Claim Letter should always have a reference number against which the claim is being requested/agreed so that it becomes easy to track its past record

·         The letter should always be only addressed to the person with the full name and address who is being given the claim or to the company with its full address who is being requested for the reimbursement against the claim

·         A Claim Letter should give all details about the policy against which the claim is being made. For example, the claim reference number, date when the policy was taken, terms of the policy, how much reimbursement is due, what is the timeframe within which the reimbursement will come through

·         A Claim Letter has to always be accompanied by documents supporting the damage or loss, for example the police report, death certificate, etc 

Claim process

Filling a life insurance claim

Claim settlement is one of the most important services that an insurance company can provide to its customers. Insurance companies have an obligation to settle claims promptly. You will need to fill a claim form and contact the financial advisor from whom you bought your policy. Submit all relevant documents such as original death certificate and policy bond to your insurer to support your claim. Most claims are settled by issuing a cheque within 7 days from the time they receive the documents. However, if your insurer is unable to deal with all or any part of your claim, you will be notified in writing.

Types of claims Maturity Claim - On the date of maturity life insured is required to send maturity claim / discharge form and original policy bond well before maturity date to enable timely settlement. Most companies offer/issue post dated cheques and/ or make payment through ECS credit on the maturity date. Incase of delay in settlement kindly refer to grivence redressal Death Claim (including rider claim) - In case of death claim or rider claim the following procedure should be followed. Follow these four simple steps to file a claim: 1. Claim intimation/notification The claimant must submit the written intimation as soon as possible to enable the insurance company to initiate the claim processing. The claim intimation should consist of basic information such as policy number, name of the insured, date of death, cause of death, place of death, name of the claimant. The claimant can also get a claim intimation/notification form from the nearest local branch office of the insurance company or their insurance advisor/agent. Alternatively, some insurance companies also provide the facility of downloading the form from their website. 2. Documents required for claim processing The claimant will be required to provide a claimant's statement, original policy document, death certificate, police FIR and post mortem exam report (for accidental death), certificate and records from the treating doctor/hospital (for death due to illness) and advance discharge form for claim processing. Based on the sum at risk, cause of death and policy duration, insurance companies may also request some additional documents.| 3. Submission of required documents for claim processing For faster claim processing, it is essential that the claimant submits complete documentation as early as possible. A life insurer will not be able to take a decision until all the requirements are complete. Once all relevant documents, records and forms have been submitted, the life insurer can take a decision about the claim. 4. Settlement of claim As per the regulation 8 of the IRDA (Policy holder's Interest) Regulations, 2002, the insurer is required to settle a claim within 30 days of receipt of all documents including clarification sought by the insurer. However, the insurance company can set a practice of settling the claim even earlier. If the claim requires further investigation, the insurer has to complete its procedures within six months from receiving the written intimation of claim.

Claim intimation

In case a claim arises you should:

Contact the respective life insurance branch office. Contact your insurance advisor Call the respective Customer Helpline

Claim requirements

For Death Claim: Death Certificate Original Policy Bond Claim Forms issued by the insurer along with supporting documents For Accidental Disability / Critical Illness Claim: Copies of Medical Records, Test Reports, Discharge Summary, Admission Records of hospitals and Laboratories. Original Policy Bond Claim Forms along with supporting documents For Maturity Claims: Original Policy Bond Maturity Claim Form In case of delay in settlement kindly refer to grievance redressal

Glossary of Reinsurance Terms

Glossary of Reinsurance Terms

Admitted Reinsurance - A company is “admitted” when it has been licensed and accepted by appropriate insurance governmental authorities of a state or country. In determining its financial condition a ceding insurer is allowed to take credit for the unearned premiums and unpaid claims on the risks reinsured if the reinsurance is placed in an admitted reinsurance company.

Arbitration Clause - Language providing a means of resolving differences between the reinsurer and the reinsured without litigation. Usually, each party appoints an arbiter. The two thus appointed select a third arbiter, or umpire, and a majority decision of the three becomes binding on the parties to the arbitration proceedings.

Bordereau (plural Bordereaux) - A form providing premium or loss data with respect to identified specific risks which is furnished the reinsurer by the reinsured.

Burning Cost - A term most frequently used in spread loss property reinsurance to express pure loss cost or more specifically the ratio of incurred losses within a specified amount in excess of the ceding company’s retention to its gross premiums over a stipulated number of years.

Cancellation - (a) Run-off basis means that the liability of the reinsurer under policies, which became effective under the treaty prior to the cancellation date of such treaty, shall continue until the expiration date of each policy; (b) Cut-off basis means that the liability of the reinsurer under policies, which became effective under the treaty prior to the cancellation date of such treaty, shall cease with respect to losses resulting from accidents taking place on and after said cancellation date. Usually the reinsurer will return to the company the unearned premium portfolio, unless the treaty is written on an earned premium basis.

Capacity - The percentage of surplus or the dollar amount of exposure that an insurer or reinsurer 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.

Catastrophe Reinsurance -  A form of reinsurance that indemnifies the ceding company for the accumulation of losses in excess of a stipulated sum arising from a catastrophic event such as conflagration, earthquake or windstorm. Catastrophe loss generally refers to the total loss of an insurance company arising out of a single catastrophic event.

Cede - When a company reinsures its liability with another, it “cedes” business.

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 percentage of the gross reinsurance premium.

Ceding Company - The original or primary insurer; the insurance company which purchases reinsurance.

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.

Commission - In reinsurance, the primary insurance company usually pays the reinsurer its proportion of the gross premium it receives on a risk. The reinsurer then allows the company a ceding or direct commission allowance on such gross premium received, large enough to reimburse the company for the commission paid to its agents, plus taxes and its overhead. The amount of such allowance frequently determines profit or loss to the reinsurer.

Commutation Clause - A clause in a reinsurance agreement, which provides for estimation, payment and complete discharge of all future obligations for reinsurance losses incurred regardless of the continuing nature of certain losses such as unlimited medical and lifetime benefits for Workers’ Compensation.

Contingent Commissions (or Profit Commission) - An allowance payable to the ceding company in addition to the normal ceding commission allowance. It is a pre-determined percentage of the reinsurer’s net profits after a charge for the reinsurer’s overhead, derived from the subject treaty.

Contributing Excess - Where there is more than one reinsurer sharing a line of insurance on a risk in excess of a specified retention, each such reinsurer shall contribute towards any excess loss in proportion to his original participation in such risk. Example: Retention $100,000, Reinsurer A accepts one-half contributing share part of $1,000,000 in excess of said $100,000. Reinsurer B accepts remaining one-half contribution share part of $1,000,000.

Earned Premium - (1) That part of the premium applicable to the expired part of the policy period, including the short-rate premium on cancellation, the entire premium on the amount of loss paid under some contracts, and the entire premium on the contract on the expiration of the policy. (2) That portion of the reinsurance premium calculated on a monthly, quarterly or annual basis which is to be retained by the reinsurer should there cession be canceled. (3) When a premium is paid in advance for a certain time, the company is said to “earn” the premium as the time advances. For example, a policy written for three years and paid for in advance would be one-third “earned” at the end of the first year.

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.

Ex Gratia Payment - A payment made for which the company is not liable under the terms of its policy. Usually made in lieu of incurring greater legal expenses in defending a claim. Rarely encountered in reinsurance as the reinsurer by custom and for practical reasons follows the fortunes of the ceding company.

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

Experience - (1) The loss record of an insured or of a class of coverage. (2) Classified statistics of events connected with insurance, of outgo, or of income, actual or estimated. (3) What figures show to have happened in the past.

Experience may be compiled on different bases to provide various means of appraisal, viz. Accident Year, Calendar Year, or Policy Year, but, for underwriting purposes, should always compare earned premium with incurred losses after the latter have been modified by an allowance for loss development and incurred but not reported losses (I.B.N.R.).

Extra Contractual Obligations (ECO) - A generic term that, when used in reinsurance agreements, refers to damages awarded by a court against an insurer which are outside 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.

Facultative - Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.

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.

Flat Rate - In reinsurance, a percentage rate applied to a ceding company’s premium writings for the classes of business reinsured to determine the reinsurance premiums to be paid the reinsurer.

Following the Fortunes - The clause stipulating that once a risk has been ceded by the reinsured, the reinsurer is bound by the same fate thereon as experienced by the ceding company.

Incurred Loss Ratio - The percentage of losses incurred to premiums earned. (See Experience.)

Inflation Factor - A loading to provide for increased medical costs and loss payments in the future due to inflation.

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.

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 cedant’s payments to the intermediary are deemed payments to the reinsurer; and

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.

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.

Lead Reinsurer - The reinsurer who negotiates the terms, conditions, and premium rates and first signs on to the slip; reinsurers who 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; and alternative to funds withheld and modified coinsurance.

Loss Adjustment Expense - 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 claims department.

Loss Development - The difference between the original loss as originally reported to the reinsurer and its subsequent evaluation at a later date or at the time of its final disposal. A serious problem to reinsurers who, being involved in the more serious cases, must frequently wait many years for the final disposition of a loss.

Loss Event - The total losses to the ceding company or to the reinsurer resulting from a single cause such as a windstorm.

Loss Ratio - Proportionate relationship of incurred losses to earned premiums expressed as a percentage.

Non-Admitted Reinsurance - A Company is “non-admitted” when it has not been licensed and thereby recognized by appropriate insurance governmental authority of a state or country. Reinsurance is “non-admitted” when placed in a non-admitted company and therefore may not be treated as an asset against reinsured losses or unearned premium reserves for insurance company accounting and statement purposes.

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 72 hours, as being one occurrence. This definition prevents multiple retentions and reinsurance limits from being exposed in a single catastrophe loss.

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.

Participating or Pro Rata Reinsurance - Includes Quota Share, First Surplus, Second Surplus, and all other sharing forms of reinsurance where under the reinsurer participates pro rata in all losses and in all premiums.

Peril - This term refers to the causes of possible loss in the property field - for instance: Fire, Windstorm, Collision, Hail, etc. In the casualty field the term “Hazard” is more frequently used.

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

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

Pool - An organization of insurers or reinsurers through which particular types of risks are underwritten with premiums, losses, and expenses shared in agreed ratios.

Portfolio Reinsurance - In transactions of reinsurance, it refers to all the risks of the reinsurance transaction. For example, if one company reinsures all of another’s outstanding Automobile business, the reinsuring company is said to assume the “portfolio” of Automobile business and it is paid the total of the unearned premium on all the risks so reinsured (less some agreed commission).

Portfolio Run-off - The opposite of Return of Portfolio - permitting premiums and losses in respect of in-force business to run to their normal expiration upon termination of a reinsurance treaty.

Premium, Deposit - When the terms of a policy provide that the final earned premium be determined at some time after the policy itself has been written, companies may require tentative or “deposit” premiums at the beginning which are readjusted when the actual earned charge has been later determined.

Premium, Pure - The portion of the premium calculated to enable the insurer to pay losses and, in some cases, allocated claim expenses or the premium arrived at by dividing losses by exposure and in which no loading has been added for commission, taxes, and expenses.

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.

Professional Reinsurer - A term used to designate a company whose business is confined solely to reinsurance and the peripheral services offered by a reinsurer to its customers as opposed to primary insurers who exchange reinsurance or operate reinsurance departments as adjuncts to their basic business of primary insurance. The majority of professional reinsurers provide complete reinsurance and service at one source directly to the ceding company.

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.

Quota Share - The basic form of participating treaty whereby the reinsurer accepts a stated percentage of each and every risk within a defined category of business on a pro rata basis. Participation in each risk is fixed and certain.

Reinstatement Clause - When the amount of reinsurance coverage provided under a treaty is reduced by the payment of a reinsurance loss as the result of one catastrophe, the reinsurance cover is automatically reinstated usually by the payment of a reinstatement premium.

Reinstatement Premium - A pro rata reinsurance premium is charged for the reinstatement of the amount of reinsurance coverage that was reduced as the result of a reinsurance loss payment under a catastrophe cover.

Reinsurance - The practice whereby one party called the Reinsurer in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.

Reinsurer - An insurer or reinsurer assuming the risk of another under contract.

Retention - The net amount of risk which the ceding company or the reinsurer keeps for its own account or that of specified others.

Retrocession - A reinsurance of reinsurance. Example: Company “B” has accepted reinsurance from Company “A”, and then obtains for itself, on such business assumed, reinsurance from Company “C”. This secondary reinsurance is called a Retrocession. The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.

Retrospective Rating - A plan or method which permits adjustment of the final reinsurance ceding commission or premium on the basis of the actual loss experience under the subject reinsurance treaty - subject to minimum and maximum limits.

Risks - A term used to denote the physical units of property at risk or the object of insurance protection and not Perils or Hazard. Reinsurance by tradition permits each insurance company to frame its own rules for defining units of Risks. The word is also defined as chance of loss or uncertainty of loss.

Salvage and Subrogation - Those rights of the insured which, 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.

Self-Insurance - Setting aside of funds by an individual or organization to meet his or its losses, and to absorb fluctuations in the amount of loss, the losses being charged against the funds so set aside or accumulated.

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 ratiodecreases by 1%, the ceding commission might increase only 5%.

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.

Special Acceptance - The facultative extension of a reinsurance treaty to embrace a risk not automatically included within its terms.

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 percentage of premium.

Subject Premium - A 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, or 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 Share - A form of proportional reinsurance where the reinsurer assumes pro rata responsibility for only that portion of any risk which exceeds the company’s established retentions.

Treaty - A general reinsurance agreement which is obligatory between the ceding company and the reinsurer containing the contractual terms applying to the reinsurance of some class or classes of business, in contrast to a reinsurance agreement covering an individual risk.

Ultimate Net Loss - This term usually means the total sum which the assured, or any company as his insurer, or both, become obligated to pay either through adjudication or compromise, and usually includes hospital, medical and funeral charges and all sums paid as salaries, wages, compensation, fees, charges and law costs, premiums on attachment or appeal bonds, interest, expenses for doctors, lawyers, nurses, and investigators and other persons, and for litigation, settlement, adjustment and investigation of claims and suits which are paid as a consequence of the insured loss, excluding only the salaries of the assured’s or of any underlying insurer’s permanent employees.

Unearned Premium - That portion of the original premium that applies to the unexpired portion of risk. A fire or casualty insurer or reinsurer must carry a reserve against all unearned premiums as a liability in its financial statement, for if the policy should be canceled, the company would have to pay back the unearned part of the original premium.

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 includeadjustable features to reflect actual underwriting results