This Glossary contains some of the terms commonly referred to in insurance. A more comprehensive dictionary of insurance should be used where a more detailed definition of a term is needed. The website of the Financial Services Authority (www.fsa.gov.uk) also contains a useful Glossary.
ABI: Association of British Insurers, the principal
representative body for companies, including some foreign
companies, authorised to carry on insurance business in the UK.
Acceptance: the agreement by an insurer to accept a proposal
for insurance which ordinarily concludes the contract even though
the policy may not be issued until later (see also notification).
Accident basis: a basis of reporting for general insurance
business in the Accounts and Statements Rules, according to the
calendar or accounting year in which an accident or loss occurred
(compare with underwriting basis).
Accounts and Statements Rules: the requirements for making
returns to the Financial Services Authority, commonly referred to
as the regulatory return, to be found in the Interim Prudential
Sourcebook for Insurers (see Integrated Prudential Sourcebook).
Accounting class: a category of business for which separate
figures have to be given at certain points in the regulatory return
made to the Financial Services Authority (some accounting classes
group together several classes of general business, whilst others
are a sub- division of one or more classes).
Acquisition cost: cost associated with the underwriting of
new business, including commission paid to brokers and agents (and
to the cedant company in the case of reinsurance)
Active underwriter: in the Lloyd's market, an underwriter
who is authorised to accept risks on his/her own account and on
behalf of names in the syndicates for whom he/she acts.
Actuary: a person qualified to apply the mathematical
doctrines of probability and compound interest to the statistics on
which life insurance and pension business etc. are based; in the UK
an actuary will normally have qualified as a member of the
Institute of Actuaries or Faculty of Actuaries in Scotland.
Adjuster (loss): an independent professional individual who
is engaged by insurers to settle large or complex claims.
Agent (insurance): a person who introduces insurance
business to the insurer, in law an insurance agent is agent, if at
all, for the prospective policy holder although remunerated by the
insurer; the term is also used of the employees of an insurance
company who seek business for the company.
Aggregate: in a reinsurance policy, the aggregate amount
that the insurer must retain before anything is paid by the
reinsurer; for example £200,000 XS £100,000 with an
aggregate retention of £500,000 means that a £150,000
loss would erode £50,000 of the aggregate; once the aggregate
has gone, the reinsurance policy begins paying out, subject to the
excess.
Aggregate excess of loss: a form of excess of loss
reinsurance which indemnifies the ceding company against the amount
by which the ceding company's losses incurred during a specified
period exceeds either a predetermined sum or a percentage of the
premium income for the class of business concerned; also known as
stop loss or excess of loss ratio reinsurance.
Allocation: an appropriation of surplus, generally to
policyholders, by way of, for example, a reversionary bonus.
Alternative Risk Transfer: methods of transferring insurance
risk, other than by conventional reinsurance.
Annual basis: accounting for general insurance business
whereby a result is determined at the end of the accounting period
reflecting the profit or loss from providing insurance cover in
that period (compare with fund basis).
Appropriation: earmarking for the benefit of policyholders
or shareholders what was formerly ascertained but unappropriated
surplus.
Arbitration: an alternative to litigation for the settlement
of insurance disputes; contracts often specify the place of
arbitration in the event of a dispute.
Assessor: an independent professional who advises and
negotiates on behalf of policyholders on the settlement of their
claims.
Assignment: the transfer of rights under an insurance policy
to a third party, often as security for a loan. In English law,
obligations under an insurance policy may not, except in an
insurance business transfer scheme under Part 7 FISMA, be assigned
without the consent of the insured, such a process being known as
novation.
Assurance: a term commonly used to distinguish insurance
business providing benefits related to the duration of human life
from other types of insurance (but for practical purposes the terms
assurance and insurance are interchangeable).
AUTH: the FSA’s Authorisation manual.
Average: the clause which protects an insurer against the
undesirable effects of under- insurance, indemnity being scaled
down in the proportion that the sum insured was less than the true
value of the property.
Benefit: an amount payable by an insurer as a consequence of
liabilities assumed under an insurance contract.
Bid price: the price at which an insurer will redeem the
units associated with a unit-linked assurance policy.
Bonus: the share of surplus allocated to holders of
with-profits policies.
Bordereau: information submitted by a cedant to a reinsurer
giving details of individual risks insured under a reinsurance
treaty.
Bornhuetter-Ferguson: a method of claims reserving for
general insurance, similar to chain ladder technique, which
involves setting an initial expected loss for the class of
business.
Broker: a professional adviser who assists a client to
obtain the insurance cover sought; although strictly an agent for
the insured, the broker is remunerated by way of commission from
the insurer.
Brokerage: the commission received by a broker or other
intermediary for placing insurance risks.
Burning cost: a method of calculating the premium in
non-proportional reinsurance, in particular excess of loss and stop
loss reinsurance, whereby the premium is directly related to the
insured's claims experience; the reinsurer reviews the cedant's
claims experience to ascertain what proportion of premium income
would have been "burned up" by the reinsurance claims (see also
Swing rated policies).
Capital redemption: business other than life insurance whereby
in return for one or more premiums a sum or series of sums is to
become payable to the insured in the future.
Captive insurance company: a company whose business is
wholly or mainly derived from a company or group of companies of
which it is usually a subsidiary or associated company.
Case reserve: reserves for outstanding claims built up on a
case by case basis with the amount likely to be paid out on each
claim being separately estimated.
Catastrophe: an event leading to substantial losses, such as
an explosion, hurricane or earthquake.
Catastrophe insurance: a form of excess of loss reinsurance
under which the ceding insurer is indemnified, subject to a
specified retention and an over-riding limit, against an
accumulation of losses arising from a catastrophic event (for
example, an earthquake or hurricane).
Cedant: the company which cedes the business covered by a
reinsurance contract.
Cedant's commission: the commission paid by a reinsurer to
the ceding company, in recognition of the acquisition costs borne
by that company.
Cede: to obtain reinsurance cover for insurance business,
the company obtaining reinsurance is said to "cede" the business in
question.
Certificate of insurance: a document certifying that an
insurance contract exists (usually met where there is a legal
obligation to insure, for example, motor insurance which complies
with the terms of the Road Traffic Act).
Cession: (1) in reinsurance, the act of ceding business to a
reinsurer, (2) a block of business so ceded.
Chain ladder: the traditional technique of reserving for
future claims in general insurance business which compares the
emergence of claims year by year for each underwriting year, to
arrive at an ultimate loss estimate by applying development factors
to losses already paid or incurred; the relevant data are set out
in triangular arrays (whence the alternative term triangulation).
Claim: invocation of a right to a payment under a contract
of insurance; also the amount set aside in the accounts of an
insurers respect of payments made or anticipated.
Claims handling expenses: expenses incurred in negotiating
and settling claims, including the direct expenses of the claims
department (loss adjusters’ fees, court fees, etc.) and any
part of general administration expenses associated with the claims
function.
Claims made: a term referring to liability policies covering
all claims notified in the policy period, regardless of the time of
the occurrence (contrast losses occurring).
Class: a category of insurance business, as set out for
regulatory purposes in Schedules 1 (general business) and 2 (long
term business) to the Regulated Activities Order (Contracts of
Insurance).
Closed line: the amount for which an insurer becomes liable
in the event of a slip being over- subscribed (see written line).
Cluster policies: a group of identical life policies aimed
primarily at investment and designed to facilitate flexibility in
making partial surrenders; sometimes referred to as an investment
bond.
COB: the FSA’s Conduct of Business manual, containing
the rules, evidential provisions and guidance relating (in the
main) to forms carrying on regulated activities under FISMA.
Cohort: a body of claims, for example, claims grouped by
accident year, report year or underwriting year.
Co-insurance: the insurance, usually of large risks, by two
or more direct insurers as a means of spreading the risk; also used
in North America to describe certain types of reinsurance.
Commission: the remuneration paid to an agent or broker for
the introduction of business, usually in the form of a percentage
of the premium (see also cedant's commission and contingent
commission).
Commutation: in relation to reinsurance, the termination by
mutual agreement of all past, present and future liabilities
between the parties to a reinsurance contract, in consideration of
a final, usually cash, settlement. May also apply, less commonly,
to an insurance contract.
Composite: a company authorised to carry on both long term
and general insurance business.
Contingent commission: an amount payable to a broker or
ceding company, in addition to the normal percentage commission,
calculated as a percentage of the insurer's or reinsurer's net
profit on the business after allowing for overheads; also known as
profit commission.
COND: the FSA’s Threshold Conditions manual, the
minimum standards for becoming and remaining authorised.
Contribution: the amount paid by each insurer in respect of
a loss where two or more insurers cover the same insured in respect
of the same risk, this division of a loss between insurers arises
from the principle of indemnity and ensures equitable distribution
of losses between insurers.
Convertible term assurance: a term insurance policy
containing an option to convert to a whole of life or life and
endowment policy without further evidence of health.
Corporate member: an underwriting member of Lloyd’s
that is not an individual member; under Lloyd’s rules a
corporate member may be a company, a Scottish limited partnership
or a limited liability partnership.
Cover note: a document issued as evidence of a contract of
insurance, pending the issue of a policy.
Curve fitting: a method of claims reserving that uses the
deterioration that has already occurred in business written in the
year in question to forecast how it will continue, by fitting a
standard type of curve to the pattern of deterioration to date, and
using the fitted curve to predict the final loss (contrast with
chain ladder, which uses the experience of older years to predict
what will happen to newer years).
Damages: financial compensation for loss suffered.
Debt: a device the effect of which is to reduce the amount
payable under a life policy effected on a sub- standard life in the
case of death from a specified cause, or from natural causes as
opposed to accidental death.
Decreasing term assurance: a variety of term assurance under
which the sum assured decreases during the term of the policy,
often in line with repayment of mortgage debt.
Deductibles: an amount which the insured is prepared to, or
has to, bear on any one claim: when the loss exceeds the deductible
only the excess is recoverable under the policy (see also excess
and retention).
Deposit back: in reinsurance, a deposit of the whole or part
of the premiums paid by a cedant company with that company as
surety for payment by the reinsurer (also called treaty deposit).
Development year: (1) in one year accounting, in relation to
any underwriting year, any year or years following the end of that
year until the claims for that year have been run off, (2) in
general business funded accounting the year or years between the
underwriting year and the closing of the account.
Direct insurer: an immediate insurer of a risk, as opposed
to a reinsurer who insures derivative risks, that is the risks
assumed by a direct insurer.
Directive society: a friendly society which is subject to
the provisions of the EC Insurance Directives, as implemented in UK
law.
Discounting: a term used to describe adjustments made to
general business reserves so that they reflect the present value of
the future contingent liabilities; such an adjustment may be made
for accounting purposes, and may in certain circumstances be
required for tax purposes where the reserves are initially
calculated by reference to the likely ultimate cost of settlement
after taking into account monetary inflation, and also the tendency
for court awards for damages to increase by more than the rate of
inflation; the adjustment is usually made by discounting the
ultimate cost of settlement by reference to a suitable rate of
interest, thus reflecting the time value of money.
Distribution network: the means by which a direct insurer
markets its products to prospective policy holders (for example,
agents, brokers, branches).
D & O: Directors' and Officers' liability.
Earned premium: that part of an insurance premium receivable
which is attributable to the period of cover which has already gone
by.
Endorsement: any writing on a policy, in addition to the
original wording, which changes the terms of the contract, or any
rider additional to the main text.
Endowment assurance: a policy under which the benefit is
payable on a predetermined date; the description is often applied
to what are strictly ‘life or endowment’ policies where
benefit is payable on the earlier of death or the predetermined
date.
Equalisation provision: an amount set aside out of past or
current underwriting profits to meet future underwriting losses, in
particular losses arising from claims due to the occurrence of
events of an exceptional nature, that is events not normally
occurring every year.
Escalation: provision for automatic increases on a defined
basis in premiums and sums insured.
Estimated maximum loss (EML): an estimate of the monetary
loss which could be sustained by insurers on a single risk as a
result of a single fire or explosion considered by the underwriter
to be within the realms of possibility (an expression used only in
fire, explosion and material damage policies).
Excess: the first part of the cost of a claim which the
insured or reinsured has to bear in accordance with the terms of
the policy.
Excess of loss: a form of non-proportional reinsurance under
which the reinsurer agrees to indemnify the cedant for losses in
excess of a specified amount (the cedant's retention), either in
respect of each risk or for claims in aggregate arising from a
particular occurrence.
Excess of loss ratio: see stop loss.
Exclusion: a peril or contingency specifically excluded from
the cover afforded by a policy.
Ex gratia: without legal obligation.
Experience refund: a refund of premiums made to the insured
when the claims payable under the contract are at a lower level
than anticipated by the insurer.
External Name: an underwriting member of Lloyd’s who
plays no active part in the underwriting (contrast Active
Underwriter).
E&O (Errors and Omissions): another term for
professional liability insurance; an 'errors and omissions' clause
in reinsurance treaties, designed to protect the reinsured party
against minor errors in drafting or administration of the
treaty.
Facultative obligatory treaty: a contract for reinsurance
whereby the ceding company may cede risks of any agreed class which
the reinsurer must accept if ceded
Facultative reinsurance: the reinsurance of risks on an
individual basis (contrast treaty reinsurance).
Financial insurance/reinsurance: a contract which is in form
a contract of insurance or reinsurance and under which the insured
ultimately recovers the premiums paid plus the interest earned on
their investment less an amount designed to cover the insurer's or
reinsurer's expenses and profit, the time value of money thus
entering explicitly into the calculation of the premiums charged;
the financial element of such contracts often does not involve the
transfer of any underwriting risk so there is doubt whether they
are in law contracts of insurance (see also finite risk insurance).
Financial Ombudsman Service: an independent organisation set
up under the Financial Services and Markets Act 2000, covering
firms and activities regulated by the Financial Services Authority,
which replaced a number of former complaints handling schemes.
Financial Services and Markets Act 2000 (FISMA or FSMA): the
Act which created a unified regulatory framework in the UK for
financial services, including insurance, under which functions and
powers are conferred on the Financial Services Authority.
Financial Services Authority: an independent body that
regulates the financial services industry in the UK; it was set up
by the Financial Services and Markets Act 2000 and is accountable
to Treasury Ministers; it is financed by the financial services
industry; its statutory objectives are to maintain confidence in
the financial system, promote public understanding of the financial
system, secure appropriate degrees of consumer protection for
consumers, and reduce financial crime.
Financial Services Compensation Scheme: a statutory fund of
last resort for customers of regulated firms, set up under the
Financial Services and Markets Act 2000.
Finite risk insurance/reinsurance: general business
contracts which include both underwriting risk and elements of
financial insurance/reinsurance.
FISMA: see Financial Services and Markets Act 2000
Follow the fortunes: a clause in reinsurance contracts under
which the reinsurer is committed to following the decisions on
claims made by the direct insurer.
Free reserves: the excess of the value of an insurer's
assets over the sum of its liabilities and its minimum solvency
margin.
Friendly society: (1) an unincorporated association set up
under the provisions of the Friendly Societies Act 1974, or similar
earlier legislation, and carrying on certain types of insurance
business allowed by that Act; (2) an incorporated society set up
under the provisions of the Friendly Societies Act 1992 and allowed
to carry on a wider range of insurance and other financial
activities than is permitted under the 1974 and earlier
legislation.
Fronting: an arrangement whereby one insurer agrees to
accept business on behalf of others, or to cede the business to
others; such an arrangement may be used in markets where the
fronting company is well established and finds it easier to obtain
business than the companies for which it agrees to front, or to
conceal the identity of the company to which the business is being
channelled.
FSA: see Financial Services Authority.
FSA Handbook: the Financial Services Authority’s
handbook of rules and guidance which contains regulatory material
relating to the financial services industry.
FSMA 2000: see Financial Services and Markets Act 2000.
Fund (1): for life insurers, an accounting concept
expressing the balance of its actuarially calculated liabilities to
policyholders (‘mathematical reserves’) together with
miscellaneous liabilities and unappropriated surplus; may also be
used to mean the assets representing the fund.
Fund (2): in funded basis, the balance of premiums received
less claims and expenses paid in respect of business accounted for
on a two or three year basis the profits of which have not been
struck.
Funded basis: accounting for general insurance business on
the basis that premiums, claims and expenses are related to the
underwriting year in which the policy incepts and recognition of
profits is deferred until a subsequent accounting period, receipts
and payments being carried forward in a fund; not permitted with
effect for accounting periods beginning on or after 1 January
2004.
GAD: Government Actuary's Department. Note the functions of GAD
examining periodical returns previously performed for the DTI are
now performed by actuaries within the FSA.
General annuity business: annuity business other than
pension annuity business or overseas life assurance business. Not a
separate tax category since 1991.
General insurance: the classes of insurance business set out
in Part I of Schedule 1 to the Regulated Activities Order and
consisting of various types of indemnity insurance, as distinct
from long term insurance (including life insurance).
Gross retention: the total limit of liability accepted by an
insurer together with quota share reinsurers on an individual risk
(also known as "gross line").
Hazard: a condition which may create or increase the likelihood
of a loss arising from a given peril.
High level reinsurance: (1) reinsurance with a large excess;
(2) in the context of a reinsurance spiral, it means that the
reinsurer is many steps away from the direct insurer.
Hypothecation: the establishment, by statute or contract, of
a legal charge over a particular asset or group of assets as
security for the performance of an obligation assumed under a
contract or class of contracts.
IARD: incendie, accidents et risques divers; meaning fire,
accident and other risks, the French equivalent of general
insurance.
IBNR: incurred but not reported, referring to potential
claims where the incident giving rise to a claim has or may have
occurred but has not been reported to the insurer or reinsurer.
ICOB: the FSA’s Insurance Conduct of Business Rules,
relating to the business processes involved in selling and
administering non-investment insurance.
Inception: the coming into force of an insurance contract.
Increasing term assurance: the premiums and sum assured are
increased by a predetermined proportion each year calculated on the
original sum assured.
Incurred loss: (1) in relation to the totality of an
insurer's general insurance business, or a given class of such
business, the claims paid in a given year less the claims reserve
at the beginning of the year plus the claims reserve at the end of
the year; (2) in relation to a cohort of claims originating in a
given policy year or accident year the amounts paid to date on
settled or partly settled claims plus the reserve for open claims
(that is, excluding the BNR element).
Incurred loss ratio: the ratio of losses incurred to
premiums earned, expressed as a percentage.
Indemnify: to provide indemnity.
Indemnity: security against financial loss, a policy of
indemnity is designed to place the insured in the same financial
position as he/she would have been in had the insured peril not
occurred.
Indemnity commission: commission paid to an agent in advance
but subject to the condition that it shall be repaid if the premium
by reference to which it is calculated is not paid by the policy
holder, for example, because the policy is allowed to lapse.
Independent financial adviser (IFA): an intermediary who
provides potential investors and policy holders with advice on a
range of products from different companies (contrast tied agent).
Index clause: see stability clause.
Industrial assurance: life assurance, formerly of far more
significance, run on ‘home service’ lines, with
premiums collected at the door at regular intervals.
Inherited estate: any part of a life insurer’s assets
which is not required for smoothing purposes or to pay terminal
bonuses; sometimes referred to as ‘orphan estate’.
Insurable interest: a legal or equitable financial interest,
in property or in the happening of some event; such an interest is
essential for the validity of a contract of insurance; in life
insurance the policy holder must have a financial interest in the
life assured at the time the policy is issued.
Integrated Prudential Sourcebook (‘PRU’): the
part of the FSA Handbook that contains most of the rules that must
be followed by insurers in maintaining adequate financial
resources; some material applicable to insurers, especially the
Accounts and Statements Rules, is in another part of the FSA
Handbook, the ‘Interim Prudential Sourcebook for
Insurers’ (‘IPRU(INS)’). Material applicable to
non-directive friendly societies is in the ‘Interim
Prudential Sourcebook for Friendly Societies’
(‘IPRU(FSOC)’).
Intermediary: an agent or broker through whom a contract is
arranged.
Investment bond: diffuse term often applied to a single
premium whole of life or endowment policy providing minimal
guaranteed death benefits and with little or no contractual penalty
for early surrender; often applied to a ‘cluster’ of
identical life policies designed to facilitate flexibility on
making partial surrenders.
Investment-linked assurance: long term business with
investment content whose return is linked to the performance of a
specified asset, group of investments, or index.
Investment reserve: colloquial term that broadly describes
the excess of the admissible value (essentially the market value)
of an insurer’s assets over its recognised liabilities to
policyholders, shareholders and others; before 1995 it often
appeared explicitly in the insurer’s accounts, but in the
periodical return means the valuation difference shown in Form 14
Line 51 in a case where assets are given a book value below their
market value.
IPRU(INS): see Integrated Prudential Sourcebook.
IPRU(FSOC): see Integrated Prudential Sourcebook.
Issued and renewed: a term used in accounting for excess of
loss (reinsurance) treaties whereby all claims under policies
issued or renewed in the treaty year are covered, no matter in what
year they may occur; the reinsurer is at risk until all policies
covered by the treaty for that year have expired and all losses
have been settled.
Layer: a term used in mainly in reinsurance to denote a stratum
of cover, for example, claims between £10,000 and £50,000
(which might be expressed as £40,000 excess of £10,000);
insurance cover may be arranged in a number of successive layers,
with different layers being covered by different insurers or
reinsurers.
Leading underwriter: in the Lloyd's market, one of the
experts in a particular type of business; a broker seeing cover
presents the slip in the first place to a leading underwriter who
sets the premium and signifies the extent of participation in the
risk by syndicates on whose behalf he/she is authorised to accept
risks; other underwriters are obliged to follow the lead as regards
the rate of premium.
Life assured: the individual on whose death or survival the
death benefit under a life assurance policy becomes payable; may
not be the same as the assured meaning the holder of the
policy.
Line: (1) individual class or type of insurance business; (2) in
reinsurance, an amount equal to the ceding company's retention (a
proportional treaty may have a total capacity expressed as X lines
of which a reinsurer's share may be Y lines).
Link ratio: another term for chain ladder.
LLD: the FSA’s Lloyd’s manual, setting out rules
for Lloyd’s and members of Lloyd’s.
LMX: London market excess of toss (a type of reinsurance).
Long tail business: general insurance business characterised
by lengthy delay between the period of cover and either the
emergence or settlement of claims, or both (contrast short tail
business).
Long term business: the classes of insurance business set
out in Part II of Schedule 1 to the Regulated Activities Order and
characterised by the long term nature of the contracts; for the
most part this business comprises various types of life insurance,
annuity and pension business, together with capital redemption
business and permanent health insurance.
Loss: (1) event giving rise to a claim, (2) financial
disadvantage incurred by the insured as a result of an adverse
contingency; (3) cost of settlement of a claim (4) in the term
underwriting loss, an excess of amounts payable over amounts
receivable (in the usual accounting sense) referable to
underwriting.
Loss adjuster: an independent expert who negotiates claims
settlements as an intermediary between the insurer and the insured.
Loss assessor: see assessor.
Losses occurring: a basis that applies to most liability
insurance, in which the trigger for liability is a loss occurring
in the policy period, regardless of the time of negligence or the
date of claim (contrast claims made).
Loss event: the total losses to the ceding company or to the
reinsurer resulting from a single cause such as a storm or flood,
subject to any time limitations imposed by the reinsurer.
Loss portfolio: an amount payable by a reinsurer to a cedant
in consideration of the release of the reinsurer from all or part
of the liability arising under a reinsurance contract in respect of
claims incurred prior to a specified date (see also outstanding
claims portfolio and premium portfolio).
Loss portfolio reinsurance: a type of reinsurance whereby a
reinsurer agrees to indemnify the cedant for all claims outstanding
in a particular type or class of business, or the totality of the
insurer's business.
Loss ratio: the proportion of claims paid or payable to the
premiums earned or written.
Loss ratio reinsurance: see stop loss.
Loss reserve: reserve or provision in accounts in respect of
claims which have not been settled.
Managing agent: at Lloyd's, the person (individual or corporate)
who manages a syndicate, conducts the underwriting, invests
syndicate funds and prepares syndicate accounts.
Margin of solvency: see solvency margin.
Market Value Reduction (MVR): reduction that may be applied
by an insurer to the value of a with-profits policy (sum assured
plus accumulated bonuses) on withdrawal prior to termination,
designed to reflect the situation where the value of the underlying
assets falls short; sometimes called Market Value Adjustment (MVA)
or Market Level Adjustment (MLA).
MAT business: marine, aviation and transport business
(classes of general insurance).
Material fact: a fact which influences a prudent underwriter
in deciding whether to accept or decline a risk, and in determining
the rate of premium or the imposition of any special conditions.
Mathematical reserves: a life insurer’s actuarially
calculated assessment of its obligations to policyholders; broadly
the difference between the present value of anticipated
policyholder benefits and present value of future premiums.
Maturity: the end of the term of, for example, an endowment
policy.
Maximum probable loss (MPL): the largest loss thought
probable under an insurance policy; normally applied to material
damage risks where the total sum insured is not considered to be at
risk from one loss event: also referred to as probable maximum loss
(PML).
Minimum solvency margin: the solvency margin which an
insurance company is required by regulatory legislation to
maintain; failure to maintain the required margin leads to
intervention by the regulators and possibly to a ban on taking on
new business
Moral hazard: a factor arising from the character or
circumstances of the policy holder, including carelessness or the
nature of the business, which may increase the risk assumed by the
insurer.
Mortality cover: the pure protection element in a life
assurance contract; the insurer may fund it by appropriating part
of the premiums or, in the case of investment-linked business, by
cancellation of part of the policy value.
Mortgage protection policy: a decreasing term assurance
designed to pay off the anticipated outstanding balance of a
repayment mortgage.
Mutual company: a company without shareholders which carries
on business on a mutual basis, that is in such a way that the
policy holders are entitled to the surplus arising from the
business (contrast proprietary company).
Name: an underwriting member of Lloyd's; the term is often used
to refer to individual rather than corporate members.
Negligence: the omission to do something which a reasonable
person, guided by those considerations which ordinarily regulate
the conduct of human affairs, would do; or the doing of something
which a prudent and reasonable person would not do.
Non-proportional reinsurance: any form of reinsurance which
is not proportional reinsurance.
Notification: usually in the sense of the notification by an
insurer of acceptance of a proposal, and an essential element of
acceptance unless specifically waived.
Novation: a process whereby a new contract is substituted
for an existing contract, the latter being cancelled; such a
process requires the agreement of all parties to the original
contract.
Offer price: the price at which an insurer allocates to a
policyholder the units associated with a unit-linked policy.
Operative clause: defines the class and nature of business
covered by a specific reinsurance treaty.
Ordinary business: all long term, including life, business
other than industrial business.
Original terms: reinsurance granted on the same conditions
and the same rate of premium as the original insurance.
Orphan estate: any part of a life insurer’s assets
which is not required for smoothing purposes or to pay terminal
bonuses; sometimes referred to as ‘inherited estate’.
Orphan syndicate: a syndicate which is unable to find
another syndicate to accept an RITC premium at the three year
point, and goes into run-off.
Outstandings: in Lloyd’s, claims which have been
notified to an insurer syndicate by the end of the year, but not
yet paid; in general insurance the provision for claims outstanding
includes both claims notified but not yet settled, and IBNR.
Outstanding claims portfolio: an amount payable by a cedant to a
reinsurer in consideration of the reinsurer accepting liability in
respect of all or part of claims incurred and arising prior to a
specified date.
Overall premium limit (OPL): the maximum amount of premium a
member may accept for an underwriting year under the rules of
Lloyd’s.
Overriding commission: an allowance paid to a ceding company
over and above the acquisition cost to allow for additional
expenses.
Package policy: a policy covering several different types of
insurance.
Paid-up policy: a policy kept in force for a reduced sum
assured after the premiums have ceased prematurely; a fully paid-up
policy is one remaining in force after payment of all the premiums
due under the terms of the policy.
Pension business: tax-exempt annuity, death in service and
other business contracted with the managers of occupational pension
schemes or in connection with personal pensions.
PERG: the Perimeter Guidance manual, one of the FSA’s
series of Regulatory Guides.
Peril: the actual or potential cause of loss.
Permanent health insurance (PHI): insurance, on a group or
individual basis, having a duration of at least five years and
providing a benefit of a fixed amount or proportion of earnings for
individuals prevented from working by sickness, accident etc.
Person assured (or insured): the policyholder or person
effecting a policy (not necessarily the same person as the life
assured or the beneficiary).
Personal lines: insurance bought by individuals for their
personal insurance needs, for example, private car, household,
holiday etc.
PHI: permanent health insurance i.e. business falling within
Class IV of Part II of Schedule I to the RAO providing cover for at
least five years or to retirement against incapacity arising from
accidental injury or sickness.
Physical hazard: risk associated with the subject matter of
insurance.
PI: professional indemnity (insurance).
P & I Clubs: Protection and Indemnity Clubs; mutual
insurance associations carrying on MAT business whose membership is
composed of UK and foreign ship owners.
PMI: private medical insurance.
PML: probable maximum loss, see maximum probable loss.
Policy: any document containing written evidence of the
contract between the insurer and the insured; if the full terms of
the contract are located in more than one document, all relevant
documents taken together constitute the policy.
Policy loan: a loan made by a life insurer to a policyholder
on the security of the surrender value of the policy.
Pool: a group of insurers through which particular risks are
insured, normally by each insurer assuming an agreed proportion of
the risk, premiums, losses and expenses being shared in the same
proportion (see also reinsurance pool).
Portfolio: (1) an identifiable and usually homogeneous group
of risks for which an insurer has assumed liability; (2) a parcel
of investments associated with such a collection of risks.
Portfolio commission: an additional commission based on the
results of business covered by a reinsurance treaty (see contingent
commission).
Premium: sum paid by the policy holder to the insurer as
consideration for the assumption of risk by the insurer (originally
the additional interest paid on a bottomry bond as consideration
for the loan being written off in the event of the loss of the
cargo or vessel on which the loan was secured).
Premium portfolio: an amount payable by a reinsurer to a
cedant in consideration of the release of the reinsurer from all or
part of the liability arising under a reinsurance contract for
claims occurring after a specified date under all or certain
underlying contracts incepting prior to that date.
PRH: product related hazard.
PRIN: the FSA’s Principles for Businesses manual,
setting out the fundamental obligations for all firms under the
regulatory system.
Principles and Practices of Financial Management (PPFM):
document the FSA requires life insurers to produce showing how they
run with-profits business; its aim is to improve policyholder
protection, insurer governance and transparency.
Profit commission: at Lloyd's, remuneration received by an
underwriting agent based on the results of a year's underwriting
(but see also contingent commission).
Property and casualty insurance: the North American term for
general insurance.
Proportional reinsurance: any form of reinsurance whereby
the reinsurer participates proportionately in the premiums
receivable and claims payable by the cedant.
Proposal: an application by a person (known as the proposer)
for insurance, generally by presentation of a printed form, and
constituting an offer in contract law; the proposer becomes the
insured when the application has been accepted and the contract
brought into being.
Proposal form: standard form used in most classes of
business to elicit basic information about the proposer and the
risk for which cover is sought.
Proposer: a person who makes a proposal for insurance.
Proprietary company: company owned by shareholders (contrast
mutual).
Prospectus: a form giving details of the cover available
under a policy, optional additional benefits, rebates etc, often
printed as part of the proposal form.
Provision: see reserve.
PRU: see Integrated Prudential Sourcebook.
Pure reinsurer: an insurer who carries on only
reinsurance.
Quota share: in the insurance industry generally, a form of proportional reinsurance indemnifying the ceding company against a fixed percentage of each risk; in Lloyd’s, a contract under which a member makes arrangements for another person to take over their rights or liabilities from syndicate participations, usually as a means to exit the market.
RAO: see Regulated Activities Order.
Rate per cent: a rate per £100 at which premiums are
charged; a premium for a sum assured of £50,000 at 25p per
cent is £125.
Reciprocity: the practice of requiring inwards reinsurance
business in exchange for reinsurance ceded, the cedant only
offering a share of its reinsurance to a reinsurer able and willing
to offer suitable reinsurance business in return.
Recognised: income or gains are said to be recognised when
credit is taken for them in, for example, the life revenue account;
recognised gains are not necessarily realised gains.
Regulated Activities Order: Order (the Financial Services
and Markets Act 2000 (Regulated Activities) Order 2001; SI2001/544)
made under the Financial Services and Markets Act 2000 that
specifies the activities, including insurance, regulated by the
Financial Services Authority.
Regulatory return: see Accounts and Statements Rules.
Reinstatement: re-establishment of the sum insured to its
original figure after it has been reduced by the amount of a loss
payment, usually in return for the payment of an additional
premium.
Reinsurance or reassurance: the insurance of the risks
assumed by or potential losses of another insurer (the direct
insurer) whereby the latter covers a proportion of the risks
assumed or the eventuality of atypically large losses (see also
retrocession).
Reinsurance pool: a group of reinsurers who agree to share
certain types of business in specified proportions (such a pool is
sometimes operated by way of cession and retrocession).
Reinsurance to close (RITC): a reinsurance premium paid by
the members of a closing syndicate, usually to the members of the
same numbered syndicate for the following year of account, 36
months after the start of the year of account, to enable the profit
or loss of the year of account to be reported; the amount of the
premium covers all liabilities arising from the year of account
including outstanding claims, IBNR and claims handing expenses.
Reinsurer: an insurer who accepts insurance from another
insurer or reinsurer
Renewal: the continuation of cover beyond the original term
of the policy (usually involving, in strictness, a new contract).
Renewal notice: the notice sent to the policy holder to
remind him/her that an insurance is due for renewal.
Reserve: an amount built up in the early years of a group of
policies, when the level of premiums is greater than required to
meet claims, expenses etc, and used to pay claims in later years
when the premiums are less than required; often also referred to as
a provision (see technical provisions and equalisation provision).
Retention: the maximum liability an underwriter is prepared
to assume on his/her own account; the proportion of risk retained
by a ceding company.
Retrocedant: a reinsurer who cedes business.
Retrocede: to cede a risk assumed under a reinsurance
contract.
Retrocession: the reinsurance of reinsurance business,
providing cover for the business in excess of that which the
reinsurer wishes to retain for its own account.
Retrocessionaire: the reinsurer who accepts retroceded
business.
Reversionary bonus: the share of surplus allocated to
holders of with-profits policies at the insurer’s year-end;
sometimes called annual or guaranteed bonus, and payable in the
same circumstances as the sum assured. Once declared it cannot be
taken away and is added to the sum assured; but see Market value
reduction.
Risk: (1) the possibility of adverse deviation from the
predicted outcome of underwriting; (2) the peril or adverse
contingency insured.
Risk excess: an excess of loss reinsurance applicable to
claims arising on individual risks.
Risks attaching: a type of reinsurance; in excess of loss
property reinsurance, a risks attaching clause means that cover
continues until the expiry of the original risk.
Run-off: the continuing liability of an insurers in respect
of a block of past business, for example where a reinsurance
contract has been terminated but a liability remains in respect of
risks or cessions accepted during the period of the agreement, or
where an insurer has ceased to accept new business but has not
settled all outstanding claims arising on old business.
Run-off syndicate: a Lloyd’s syndicate which has been
unable to close in the normal way by paying a reinsurance to close
premium.
Short tail business: types of general insurance business in
which claims are generally reported and settled within a short time
after the occurrence (contrast long tail business).
Signed line: same as closed line (see also written line).
Sliding scale commission: a commission adjusted under a
formula whereby the actual commission varies inversely with the
loss ratio, subject to specified maximum and minimum.
Slip (Lloyd's): a document used in the Lloyd's market which
sets out the details of the risk for which cover is sought and is
presented by the broker to the underwriter, the latter signifies on
the slip the extent of his/her intended participation in the risk
and, in the case of the leading underwriter, the premium to be
charged.
Smoothing: process by which an insurer may protect holders
of with-profits policies against market swings by adding to and
drawing from a smoothing account created as part of the
“investment reserve”.
Solvency margin: the excess of an insurance company's assets
over its liabilities, both being valued in accordance with the
relevant regulatory legislation (see also minimum solvency margin).
SORP: see Statement of Recommended Practice on Accounting
for Insurance Business.
Special perils: additional risks frequently added to a
commercial fire policy, either individually or as a group.
Spiral: the situation that can arise when risks are
repeatedly reinsured between a number of reinsurers who end up
indirectly reinsuring themselves.
Stability clause: a clause used in reinsurance contracts
which is intended to protect the relative value of cover from
inception, thus taking into account the effects of inflation on
claims (also known as index clause).
Statement of Recommended Practice on Accounting for
Insurance Business (SORP): the accounting standard published by the
ABI, which reconciles generally accepted accounting practice, the
requirements of Schedule 9A of the Companies Act 1985 and the
regulatory requirements of the Financial Services Authority.
Stop loss: a form of reinsurance under which the reinsurer
reimburses the cedant's losses in any year to the extent by which
they exceed a specified loss ratio or amount, subject to some
specified limit (see also aggregate excess of loss cover and loss
ratio reinsurance).
Structured settlement: a method of settling claims in
respect of damages for personal injury under which the casualty
insurer, instead of paying a lump sum to the plaintiff, makes a
series of periodic payments which are usually funded by the
purchase of an annuity on the life of the injured person.
Subrogation: the right of one person to stand in the place
of another and avail him/herself of the rights and remedies of that
other person, whether already enforced or not (for example, the
right of an insurer who has indemnified a claimant to seek
compensation from the person who caused the insured damage).
Sum assured: the cash benefit guaranteed by a life assurance
policy; may be added to by the allocation of reversionary bonuses.
Sum insured: the sum expressed in a policy as the amount
payable on the occurrence of the contingency insured against, or as
the maximum amount of the insurer's liability under a contract of
indemnity.
SUP: the FSA’s Supervision manual
Surplus (1): for a life insurer, its actuarial surplus,
being that part of the fund in excess of its liabilities to
policyholders and shareholders; holders of with-profits policies
expect, in accordance with the insurer’s duty of fairness, to
receive a share in the surplus usually by allocation as a
reversionary bonus added to the sum assured and payable with it.
Surplus (2): in reinsurance, the amount by which the gross
sum insured accepted by a ceding company exceeds the cedant's own
retention.
Surplus reinsurance: a form of reinsurance under which the
cedant decides the limit of the liability which it wishes to retain
on any risk or class of risk, this being its maximum retention; the
surplus above the retention is allotted to reinsurers; the limit of
the liability which may be ceded to the reinsurer is normally
expressed in term of lines (that is multiples of the cedant's
retention).
Surrender value: cash value of a whole of life or endowment
assurance policy when discontinued.
Swing rated policies: policies of insurance or reinsurance
where the initial premium is subject to variation depending upon
claims experience (see also Burning cost).
Syndicate: a member or group of members of Lloyd’s on
whose behalf insurance is accepted by an underwriting agent; a
syndicate trades for a single underwriting year and usually closes
two years after the end of that year by payment of a reinsurance to
close premium to the same numbered syndicate formed for the
following underwriting year..
Tail Factor: a factor applied in a link ratio projection, to
arrive at a loss estimate where the claims business may deteriorate
beyond the point for which there is historic data, for example
where the oldest year is, say, 10 years old but it is appropriate
to assume that the ultimate loss will be higher than the year 10
loss.
Takaful: Islamic form of insurance where participants come
together to share risk on a co- operative basis in a manner that
does not contravene Shari’a law. May be mutual, but some more
complex non-mutual varieties exist.
Technical provisions: the provisions and reserves shown in
the regulatory return in respect of general insurance; the term is
also used of the equivalent accounts provisions/reserves.
Term assurance: life assurance under which benefit is
payable only on death of the life assured on a predetermined date;
sometimes called temporary assurance.
Terminal bonus: the share of surplus allocated to holders of
with-profits policies at the insurer’s discretion to policies
maturing or otherwise terminating.
Third party liability: liability incurred by the insured to
another party but excluding contractual liability.
Time & distance: a form of reinsurance that includes a
timing risk, that is the risk that the reinsurer might become
liable before sufficient funds had accumulated to meet the
liability; an early form of financial reinsurance and arguably not
insurance at all.
Time policy: a type of marine insurance in which a ship is
insured for a specific period of time, rather than a specific
voyage.
TLO: Total Loss Only, a type of marine insurance.
Tort: a civil breach of a personal duty owed to one's fellow
citizens in general, as opposed to breach of contract; the injured
person has a potential right to damages from the wrongdoer (the
tortfeasor).
Total loss: the complete loss or destruction of all the
property insured under a particular policy.
Treaty deposit: see deposit back, meaning (1).
Treaty reinsurance: a type of reinsurance under which the
reinsurer agrees in advance to accept a specified proportion of all
risks or losses falling within a category defined in the contract
(contrast facultative reinsurance).
Treaty year: a period of twelve months covered by a
reinsurance treaty or contract and used to determine the risks
covered by the contract.
Triangulation: see chain ladder.
Uberrima fides, or uberrimae fidei: see utmost good faith.
Ultimate net loss: the loss suffered by the insurer for his
net account after all reinsurance or other recoveries have been
made.
Under-insurance: the situation where the sums insured
represent less than the total value of the property at risk.
Underwriter: (1) an insurer, anyone who accepts an insurance
risk (from the act of writing one's name under the details of the
risk set out in the policy); (2) an individual who, on behalf of an
insurer, determines the acceptability of an insurance or
reinsurance risk and specifies the terms on which the risk can be
accepted; (3) in the Lloyd's market, an active underwriter is the
person who runs a syndicate and accepts risks on behalf of the
members of the syndicate.
Underwriting agent: (1) a person who is authorised under a
binding agreement to accept insurance risks on behalf of another
person; (2) (same as active underwriter) more particularly, a
person authorised to fulfil this function on behalf of underwriting
members of Lloyd's; most Lloyd's syndicates are managed by an
incorporated underwriting agency which employs the underwriters and
other professional staff.
Underwriting basis: a form of reporting for general
insurance business used in the Accounting and Statements Rules,
according to the underwriting year in which the business incepts
(compare with accident basis).
Underwriting member (of Lloyd's): an individual who assumes
risks in the Lloyd's market; underwriting members, or names, are
grouped in syndicates; they may not accept business except through
underwriting agents or active underwriters.
Underwriting risk: the possibility that the amount which a
general insurer will have to pay to indemnify policy holders in
respect of the perils covered by the insurance will exceed the
amount anticipated in calculating the premiums (in life insurance
this definition only applies to the mortality risk).
Underwriting year: the accounting year of an insurer or
Lloyd's syndicate to which insurance business relates, usually
determined by the date of inception; reinsurance contracts may be
written by reference to the insurer's business of a particular
underwriting year, and will remain in force until all the claims
referable to that underwriting have been settled.
Unearned premium portfolio: an amount payable by a cedant to
a reinsurer in consideration of the reinsurer accepting liability
for all or part of the liability arising under a contract of
reinsurance for claims occurring after a specified date under all
or certain underlying contract incepting prior to that date.
Unearned premiums provision: an amount representing a pro
rata spread of premiums (sometimes less acquisition costs) carried
forward from one accounting period to the next in recognition of
the unexpired period of contracts remaining at the balance sheet
date.
Unexpired risks provision: (1) a provision for claims
expected to arise in respect of the unexpired period of contracts
in existence at the balance sheet date; (2) the excess of the
amount of unexpired risks over the unearned premiums.
Unit-linked assurance: long term business with an investment
content whose return is linked to the performance of investments
(or an index of them) comprised in a fund divided into units.
UPP: see unearned premiums provision.
URP: see unexpired risks provision.
Utmost good faith: (uberrima fides, or uberrimae fidei, of
the utmost good faith) a duty laid on the parties to an insurance
contract, especially the proposer, of greater force than ordinary
good faith, requiring full disclosure of all facts which are or
might be material to the contract; this duty subsists throughout
negotiations over the terms of the contract and until the contract
has been concluded, and may be maintained during the period of the
contract if the policy so provides.
Whole of life assurance: assurance under which benefit is
payable on death whenever it occurs; may be with- or
without-profits.
With-profits: assurances whose policyholders have an
expectation of sharing in surplus, with a minimum sum assured to
which bonuses are added.
Without-profits: assurances providing only a fixed sum
assured.
Working cover: an excess of loss reinsurance in which loss
frequency is anticipated because the specified limits fall well
within the insurer's underwriting limit for any one risk or loss
occurrence.
Written line: the maximum amount of insurance that an insurer has agreed to accept when initialling a slip; it may be more than the amount actually insured by an individual insurer if the broker obtains more than 100% cover for the risk, in which case each insurer's liability will be reduced proportionately (written down) to a closed line or signed line.
