Reinsurance glossary

Adjustment premium

An additional payment or return of premium at the end of a period, where the final premium depends on the actual volume of the ceded portfolio.

Aggregate limit

The maximum amount of the reinsurer's payments under the contract for its entire term, regardless of the number of losses.

Bordereau

A regular report from the cedent to the reinsurer listing ceded risks (premium bordereau) or losses (loss bordereau).

Captive company

An insurance or reinsurance company established by a group of companies to insure their own risks.

Catastrophe excess of loss (Cat XL)

An excess of loss treaty that protects the cedent against the accumulation of losses across many risks caused by a single event (earthquake, flood, hurricane).

Cedent

An insurance company that transfers (cedes) a risk or part of it to reinsurance. Also called the reinsured or ceding company.

Cession

The transfer of a risk (or part of a risk) from the cedent to the reinsurer under a reinsurance contract.

Cover note

A document confirming the placement of a risk in reinsurance before the main contract is issued.

Event

In catastrophe reinsurance, the aggregate of losses arising from a single cause within a specified period of time (e.g. 72 hours for a hurricane).

Excess of loss (XL)

A non-proportional treaty under which the reinsurer indemnifies the portion of each loss exceeding the priority, up to the limit.

Facultative-obligatory reinsurance (fac/oblig)

A mixed form: the cedent is free to choose which risks to cede, while the reinsurer is obliged to accept the ceded risks within the scope of the contract.

Facultative reinsurance

Reinsurance of an individual risk: the cedent offers the risk, and the reinsurer is free to accept or decline it. Used for large and non-standard risks.

Follow the fortunes clause

A contract condition under which the reinsurer follows the cedent's loss settlement decisions within the terms of the contract.

Fronting

An arrangement in which a local insurer issues the policy and cedes almost the entire risk to reinsurance (e.g. to a foreign reinsurer), keeping only a minimal retention.

Insolvency clause

A condition under which the reinsurer pays its share of losses regardless of the cedent's insolvency or bankruptcy.

Layer

A portion of liability in non-proportional reinsurance between a lower and an upper boundary, e.g. "5 million xs 5 million". Large programmes are divided into several layers placed with different reinsurers.

Lead reinsurer (leader)

The reinsurer that is first to accept a risk and agrees the terms that the other participants in the placement then follow.

Loss deposit

An amount deposited by the reinsurer with the cedent to secure its share of reported but unsettled losses.

Maximum possible loss (MPL)

The largest loss that can arise on a risk under the worst combination of circumstances (total loss of the property).

Non-proportional reinsurance

A type of reinsurance in which the reinsurer's liability arises when a loss exceeds the cedent's priority; the premium is calculated separately rather than as a share of the cedent's premium.

Obligatory (treaty) reinsurance

A contract under which, during its term, the cedent is obliged to cede and the reinsurer is obliged to accept all risks falling within the terms of the contract.

Pool (reinsurance pool)

An association of insurers for the joint insurance or reinsurance of large homogeneous risks, with liability distributed according to shares.

Premium deposit

The portion of the reinsurance premium that the cedent withholds as a guarantee that the reinsurer will fulfil its obligations.

Priority (retention)

In non-proportional reinsurance, the amount of loss that the cedent pays itself; the reinsurer is liable only for the amount in excess of the priority, up to the limit.

Probable maximum loss (PML)

An estimate of the maximum loss that may occur on a risk or portfolio under adverse but realistic circumstances. Used to calculate reinsurance protection.

Profit commission (tantieme)

An additional commission based on profit: a share of the reinsurer's positive financial result under the contract that is returned to the cedent.

Proportional reinsurance

A type of reinsurance in which the reinsurer receives a share of the premium and pays the same share of each loss (quota share and surplus reinsurance).

Quota share reinsurance

A proportional treaty under which the cedent transfers a fixed percentage of all risks in the portfolio to the reinsurer; premiums and losses are shared in the same proportion.

Rate on line (ROL)

The ratio of the reinsurance premium to the limit of liability under a non-proportional reinsurance contract.

Reinstatement

The restoration of the limit of liability under an excess of loss treaty after a claim payment, usually for an additional premium.

Reinsurance

Insurance of an insurer's own liability: an insurance company (the cedent) transfers part of an accepted risk to another insurance or reinsurance company (the reinsurer) in exchange for part of the insurance premium. It allows the insurer to accept large risks while maintaining financial stability.

Reinsurance broker

A professional intermediary who, on behalf of the cedent, selects reinsurers, negotiates terms and services the reinsurance contract.

Reinsurance commission (ceding commission)

Remuneration paid by the reinsurer to the cedent in proportional reinsurance to cover the costs of concluding and administering insurance contracts.

Reinsurance market capacity

The maximum amount of liability that reinsurers are prepared to accept for a given class of risk or region.

Reinsurance premium

The payment made by the cedent to the reinsurer for accepting a risk in reinsurance.

Reinsurance protection (programme)

The set of reinsurance contracts an insurer arranges for its portfolio: retention, proportional and non-proportional layers.

Reinsurance treaty

An agreement to reinsure a portfolio of risks for a specified period (usually one year) on pre-agreed terms.

Reinsurer

An insurance or specialized reinsurance company that accepts a risk in reinsurance and undertakes to reimburse the cedent for its share of claims payments.

Reinsurer's limit of liability

The maximum amount the reinsurer pays under the contract (per loss, per event or for a period).

Reinsurer financial strength rating

An assessment by an independent rating agency (S&P, A.M. Best, Moody's, Fitch) used by the cedent and the regulator to judge the reinsurer's reliability.

Retention (net retention)

The portion of a risk (amount of liability) that the insurer keeps on its own balance sheet and does not cede to reinsurance. It is determined based on capital, reserves and risk management policy.

Retrocession

The onward transfer by a reinsurer of an accepted risk to another reinsurer (the retrocessionaire). Reinsurance of a reinsurer.

Retrocessionaire

A reinsurer that accepts risks in retrocession from another reinsurer.

Risk accumulation

The concentration of insured risks in one area or exposed to one cause, such that a single event gives rise to many losses.

Slip

A document setting out the main terms of reinsurance, sent by the broker or cedent to reinsurers; the reinsurer's signature on the slip records its acceptance of its share.

Stop loss (excess of loss ratio)

A non-proportional treaty that protects against the portfolio's overall annual loss ratio exceeding a set level (for example, above 105% of premium).

Surplus reinsurance

A proportional treaty under which the portion of the sum insured in excess of the cedent's retention is ceded to reinsurance; the reinsurer's share varies for each risk.