Reinsurance glossary

ADDENDUM

A document setting out detailed agreed amendments to an insurance (reinsurance) contract.

ADJUSTMENT PREMIUM

An adjustment premium is paid after the contract expires and, together with the deposit paid in advance, makes up the premium required under the contract.

BORDEREAU

A detailed list of premiums or claims provided to reinsurers to inform them of losses incurred and risks covered. Bordereaux are usually prepared monthly or quarterly.

BROKERAGE

Also known as broker's commission. The commission is paid by the insurer or reinsurer to the broker for the intermediary services rendered in concluding an insurance or reinsurance contract.

BURNING COST

One of the methods of calculating the premium for non-proportional reinsurance (excess of loss) contracts. It is the ratio of incurred losses to the cedant's net insurance premium. The resulting average annual percentage is multiplied by a fraction, e.g. 100/80, to obtain the premium for reinsurers. To apply the burning cost method, one needs loss statistics covering many years.

CANCELLATION

Termination of a contract before its expiry, or of a contract concluded for an indefinite period. A contract may contain a cancellation clause setting out the conditions under which it may be cancelled by appropriate notice.

CAPACITY

The maximum exposure an insurer or reinsurer can accept.

CAPTIVE

A type of insurance company set up by large industrial or commercial organisations to insure their own risks. A captive arises when potential clients of insurance companies are dissatisfied with what is on offer in terms of rates, services, etc.

CASH LOSS

A clause in a reinsurance contract under which large losses are paid by reinsurers immediately, outside the settlement periods agreed in the contract.

CLAIMS CONTROL CLAUSE

A clause in reinsurance contracts stating that the cedant (insurer) may not settle a loss without the reinsurer's consent.

CLAIMS COOPERATION CLAUSE

A clause obliging the cedant to notify the reinsurer of any loss that may be settled under the terms of the contract. The reinsurer may, at its discretion, take part in the loss adjustment.

CO-INSURANCE

The distribution of the sums insured for a given risk among several insurers (co-insurers). Each co-insurer has a contractual relationship with the insured.

CUT THROUGH CLAUSE

A clause under which the reinsurer may make a payment directly to the insured, bypassing the reinsured (cedant).

DEFICIT CLAUSE

A clause used in reinsurance contracts stating that losses are to be carried forward and offset through profit participation in the following underwriting year.

DEPOSIT PREMIUM

A premium paid in advance under a reinsurance contract, subject to adjustment at a later agreed date. Minimum and deposit premium — a minimum premium is paid in the case of Excess of Loss contracts.

DEPOSITS RETAINED BY A CEDANT (RESERVES)

Amounts due to reinsurers under a reinsurance contract but retained by the original insurer as a guarantee of the reinsurers' solvency.

EPI ….

The premium estimated by the cedant for a certain period of time.

ESCAPE CLAUSE

A clause contained in reinsurance contracts allowing the reinsurer to terminate the contract for various, sometimes quite specific, reasons.

EXCESS OF LOSS (XL cover)

A type of non-proportional reinsurance in which the insurer limits its share of a loss for individual risks or groups of risks to certain limits.

FACULTATIVE REINSURANCE

Reinsurance of individual risks on terms negotiated with the reinsurer.

FOLLOW THE FORTUNES

A clause in a reinsurance contract stating that the reinsurer shares the fortunes of the original insurer.

FOLLOW THE LEAD

A custom accepted in the reinsurance market whereby, if the leader of a reinsurance contract accepts changes to the contract, the other reinsurers will do the same.

FRONTING

A type of reinsurance in which an insurer accepts a risk under its own name and then reinsures it in full with another insurer or reinsurer. This happens for political or legal reasons. The reason may also be the interests of the insured.

GNEPI – GROSS NET EARNED PREMIUM INCOME

The premium that serves as the basis for quoting a contract on a non-proportional basis, net of cessions under other reinsurance contracts that operate for the benefit of the non-proportional contract.

GROSS PREMIUM

The written gross premium before various deductions (e.g. brokerage). After deductions — the net premium.

INWARDS REINSURANCE

Reinsurance business consisting in the reinsurer accepting part of the risks ceded by the ceding insurer.

LEADING UNDERWRITER (LEADER)

An insurer or reinsurer specialising in a given class of insurance, which sets the terms of insurance or reinsurance and is the first to take part in that insurance (reinsurance). The terms set by the leader are binding on the other participants.

LIMIT

The maximum liability of the insurer or reinsurer under an issued policy or per event.

LINE

The proportional share of a risk accepted by the reinsurer, which determines its maximum participation in any risk. The term is used in so-called surplus treaties.

MAXIMUM POSSIBLE LOSS

The maximum possible loss that could occur if the fire protection system at a facility failed but the fire was put out by the fire brigade.

NON-PROPORTIONAL REINSURANCE

Types of reinsurance contracts in which insurers and reinsurers do not share losses in fixed proportions, and some losses may not be shared at all. The insurer covers all losses within a certain limit (priority).

OBLIGATORY TREATY

A reinsurance contract under which the cedant undertakes to cede all risks falling within the reinsured portfolio, and the reinsurer is obliged to accept these risks.

ORIGINAL TERMS

A term used in reinsurance meaning that the reinsurance cover provided is subject to conditions and rates identical to those of the original insurance.

OVERPLACEMENT

A situation arising from the actions of a broker who has obtained reinsurers' approval for a given risk in excess of 100%. To close the placement, the shares of individual reinsurers must be reduced.

OVERRIDING COMMISSION

An additional commission received by the insurance or reinsurance company ceding the risk, offsetting the costs of servicing that risk.

POOL

An organisation of insurers or reinsurers set up to insure risks of a special type, whose members share premiums, losses and possibly expenses in agreed proportions.

PROBABLE MAXIMUM LOSS -

The maximum loss that could occur with a properly functioning fire protection system and with the fire brigade taking part in the response.

PROFIT COMMISSION

An additional premium in reinsurance contracts, where profit participation is defined as the cedant's percentage share in the reinsurer's profit.

PROPORTIONAL REINSURANCE

Reinsurance contracts in which the insurer and the reinsurer share the risk, premiums and losses in the same proportions.

QUOTA SHARE REINSURANCE

An obligatory proportional reinsurance contract under which the insurer cedes, and the reinsurer accepts, the portfolios or groups of risks listed in the contract in a fixed proportion.

RECIPROCITY

Cooperation between reinsurers consisting in the mutual exchange of reinsurance.

REINSTATEMENT

Restoration of the original sum insured through payment of a so-called reinstatement premium. Used in non-proportional reinsurance.

REINSURANCE PROGRAM

A combination of different reinsurance contracts (proportional and non-proportional) protecting a certain insurance portfolio of the cedant (e.g. a property portfolio may be protected by a quota share and a surplus treaty, while the cedant's own retention may at the same time be protected by a non-proportional per-risk contract; a non-proportional per-event contract is often arranged in parallel)

RENEWAL

Continuation of a reinsurance contract.

RETENTION

The part of the risks that remains in the insurer's own retention after reinsurance cessions have been made.

RETROCESSION

The onward sale of a reinsurer's risk to other reinsurers (retrocessionaires).

SCHEDULE

An annex to an obligatory reinsurance contract setting out the detailed terms of the contract.

SIGNED LINE

The participation of reinsurers in a given reinsurance contract as confirmed by the broker. It may be lower than originally offered as a result of so-called overplacing.

SLIDING SCALE COMMISSION (sliding scale)….

A method of commission payment by the reinsurer to the reinsured (cedant) under a proportional reinsurance contract, the amount of which varies with the loss ratio: it rises as the loss ratio falls and vice versa, within set limits (the sum of the loss ratio and the commission paid).

SLIP

An offer or a document confirming the conclusion of a reinsurance contract.

SPECIAL ACCEPTANCE…

an agreement with the reinsurer on additional cover under a reinsurance contract for a particular risk that would normally not be protected under the terms of the contract (because of the scope of cover or the sum insured).

STOP LOSS

The purpose of this type of contract is to protect insurers against the consequences of an excessive loss ratio resulting from the accumulation of smaller losses. Unlike an excess of loss reinsurance contract, which protects individual risks, stop loss covers the entire portfolio of a given class of insurance or the insurer's entire business.

SURPLUS TREATY

A type of proportional reinsurance contract in which the insurer does not cede a share in all risks to the reinsurer. For individual risks, the insurer sets its maximum own participation (retention) at a certain amount per risk and cedes the surplus to the reinsurer.

WRITTEN LINE

The percentage share of liability that the reinsurer is willing to accept. It may be reduced to a so-called signed line.