General Insurance Terms Glossary

Glossary of General Insurance Terms

• The glossary defines principal terms in general insurance, aligning with syllabus objective 0.1.
• Many terms vary by company, business class, market, or country.
• Verification of the precise meaning of important terms is an important part of actuarial work.
• The glossary includes terms from Subjects SP7, SP8, and SA3, with asterisks marking terms specific to SA3.
• Some terms are defined even if not used elsewhere in core readings for background knowledge.
• A source of confusion arises in the term applied to denote liabilities value.
• Accountants use "provision" for known liabilities at the accounting date and "reserve" for estimates of additional liabilities.
• Insurers and actuaries often apply "reserve" to both categories.
• In the European Union provisions and reserves are distinguished in shareholder accounts and statutory returns after adopting the Insurance Accounts Directive.
• In North America and Lloyd's market, the term "reserve" often covers both categories.
• The use of "reserves" for what are often called "provisions" is likely to persist.

24ths Method

• An unearned premium reserve estimation method.
• Assumes annual policies are evenly written each month and risk spreads evenly over the year.
• For instance, policies from the first month contribute 1/24th of that month's written premium to the unearned premium reserve by year-end.

365ths Method

• An unearned premium reserve estimation method.
• Assumes annual policies are evenly written over a year and risk spreads evenly over the 365 days of cover.
• For example, if a policy was written 100 days ago, 265/365ths of the premium is unearned.

8ths Method

• A method used to estimate the unearned premium reserve.
• Assumes annual policies are evenly written each quarter and risk spreads evenly over the year.

Accident Year

• A method of grouping claims.
• Groups all claims related to loss events within a 12-month period (usually a calendar year).
• Grouping is irrespective of reporting/payment dates and the policy's commencement year.
• Underwriting year and reporting year are alternative grouping methods.

Accident-Year Accounting

• A basis of accounting.
• Presents the estimated technical account for accidents at the balance sheet date.
• Includes accidents occurring on or before the balance sheet date, which is also referred to as annual accounting.

Accumulation of Risk

• Occurs when a single event leads to claims under multiple policies or from many risks under a single policy.
• Examples: a single event causing claims under several property insurance policies, or many risks covered under the same employers' liability policy.

Acquisition Costs

• Costs arise from writing insurance contracts, such as commission expenses.

Act of God

• A natural event, like a storm or flood, that is unexpected, outside human control, and causes insurance losses.

Actual Total Loss

• In marine insurance, deemed to occur in one of three ways:
• Total destruction of the insured item.
• The item is so damaged it cannot be classified as its originally insured type.
• The insured is irretrievably deprived of the insured item.
• Constructive total loss is related.

Additional Unexpired Risk Reserve (AURR)

• A reserve held in excess of the unearned premium reserve.
• Allows for any expectation that the unearned premium reserve will be insufficient to cover claims and expenses during the unexpired risk period.
• Is typically held at an entity level rather than by reserving class.

Adjustment Premium

• An additional premium, which is payable at the end of a cover period.
• Potentially resulting from retrospective experience rating or instances where exposure cannot be adequately determined at the start of the cover period.

Adverse Development Cover

• A reinsurance agreement.
• A reinsurer covers the ultimate settled amount of business exceeding a pre-agreed amount in exchange for a premium.

Agents' Balances

• Monies, often premiums, which belong to an insurer but are held by an agent.

Aggregate Excess of Loss Reinsurance

• A reinsurance form.
• It covers the aggregate of losses exceeding a certain point and up to a limit during a defined period, usually one year.
• This can be an aggregation of losses from either a single insured event or a defined peril.

All Risks

• A cover, which is not restricted to specific perils such as fire, storm, and flood.
• Coverage applies to loss, destruction, or damage caused by any peril not specifically excluded.
• Exclusions often include inevitabilities, like wear and tear.
• Exclusions may also include events covered by other policies like terrorism.
• The term describes a policy covering a high number of specified risks.

Allocated Loss Adjustment Expenses (ALAE)

• Claims handling expenses are related.

Annual Accounting

• One of two statutory accounting bases.
• The other base is fund accounting.
• Annual accounting is based on cover during the accounting period, when insurance contracts start and end.
• It is also termed accident-year accounting.
• When first implemented by Lloyd's in 2004, it was "one-year accounting" to differentiate from three-year accounting.

Anti-Selection

• Arises from asymmetry of information between a policyholder and an insurer.
• Policyholder has more knowledge of presented risk's negative aspects than insurer.
• Policyholders in higher risk groups can buy insurance on same terms as those in lower risk groups.
• This is typically caused by underwriting requirements not differentiating between the two groups.

Asset Liability Modelling (ALM)

• An actuarial projection form.
• Analyzes future flows of asset income versus liability outgo.

ATAFs - Age to Age Factors

• Used by the CAS to refer to link ratios or development factors.

ATUFs - Age to Ultimate Factors

• Used by the CAS in triangulation reserving methods to refer to the factor to get from an intermediate development period to ultimate.

Available Capital

• The capital amount, which can be used for regulatory purposes.
• Depending on the regulatory regime, not all assets may be allowable; for example, own shares held could be excluded.
• Under Solvency II the available capital is referred to as Own funds.

Average

• In Non-Marine Insurance: relates to reducing claim amounts in proportion to the extent of underinsurance.
• In Marine Insurance: generally describes damage or loss.

Average Cost Per Claim Method (ACPC)

• A reserving method, relying on the average cost of claims paid or incurred.

Balance of a Reinsurance Treaty

• Ratio of total premiums a reinsurer receives under a surplus treaty to the reinsurer's maximum liability for one claim.
• It is based on Estimated (or Expected) Maximum Loss (EML).

Bancassurance

• A partnership between a bank and an insurance company.
• Allows the insurance company to sell its products to the bank's client base.
• The partnership can be profitable for both.

Benchmark

• Any statistic derived from external sources.
• Examples: loss ratio, expense-related measure, and claim reporting or payment development pattern.

Binding Authorities

• A contractual arrangement.
• Cover holders enter insurance contracts and issue documents of insurance on behalf of insurers.
• Lloyd's managing agents act under delegated authority.
• Defined parameters exist for the types of risk that can be insured.
• There is also authority to handle claims on behalf of the insurer.

Bonus Hunger

• Describes when a policyholder with a no-claim discount or bonus-malus system is reluctant to notify claims.
• This is due to potential premium increases and also known as hunger for bonus.

Bonus-Malus

• Arating system
• The base premium is discounted or loaded depending on policyholder claims experience.

Bordereau

• A detailed premiums list, claims, and important statistics.
• Provided to reinsurers from ceding insurers or to insurers in direct insurance from coverholders.
• Supports calculation of payments due under reinsurance treaties or delegated authority schemes in direct insurance.

Bornhuetter-Ferguson Method (BF)

• A reserving method.
• Uses weighted averages based on an a priori loss ratio and claims development.

Break-Up Basis

• A valuation basis assumes writing new business ceases, and cover on current policies is terminated.
• Current policyholders are entitled to a proportionate return of the original gross premium.
• Deferred acquisition costs are probably written off.
• Alternative to a going-concern basis.

Broker

• An intermediary between the seller and buyer of a particular insurance contract not tied to either party.
• A reinsurance broker is similarly defined in reinsurance contracts.
• See Lloyds Broker.

Burning Cost

• Actual costs of claims paid or incurred during an earlier period of years.
• Expressed as an annual rate per unit of exposure.
• Is used to calculate premiums for types of risks or monitor experience, after adjustments for incurred but not reported claims or inflation.
• Examples are non-proportional reinsurance and motor fleets.

Business Interruption Insurance

• Insurance cover for financial losses following damage to business premises.
• It is also called loss of profits or consequential loss insurance.
• Sometimes referred to as B.I. Insurance, not to be confused with bodily injury insurance.

Cancellation

• Occurs with a mid-term cessation of a policy.
• May involve a partial return of premium.

Capacity

• The amount of premium income written is permitted.
• The maximum exposure is permitted to accept.
• Can refer to an insurance company, a Lloyd's Name, a Lloyd’s syndicate, or a whole market.

Cape Cod Method

• Employs historical experience from the chain ladder method's origin years.
• Adjusts for rate changes and claims inflation.
• Weights years more developed and where exposure is higher based on the incurred chain ladder method.
• Exposure is usually measured by written premium.

Captive

• An insurer wholly owned by an industrial or commercial enterprise.
• It Is set up to insure parent or associated group companies primarily and to retain premiums and risk within the enterprise.
• Some sell insurance to the parent's customers.
• These are known as captives, but this is not correct if they write third-party business.
• Without qualification, a "captive" insures only its parent or associated groups.
• Lighter captive reinsurers' capital requirements apply if cover is exclusively for the group and does not cover third parties.

Casualty Actuarial Society (CAS)

• A professional society of actuaries based in the U.S.
• Its members are primarily involved in the property and casualty fields of the actuarial profession.

Case by Case Estimation

• Estimating reserves for outstanding claims.
• Each outstanding claim is individually assessed to estimate total payments.
• "Case estimation" is often used with estimates referred to as "case estimates."

Casualty Insurance

• Used especially in the United States.
• Used to a lesser extent in the UK; an alternative to liability insurance.
• Covers all non-life insurance within a wider setting.

Catastrophe

• A single event in general insurance.
• Results in an exceptionally large aggregation of losses.
• It can be either man-made or natural.

Catastrophe Reinsurance

• A form of aggregate excess of loss reinsurance, providing coverage for very high aggregate losses from a single event.
• Often includes an hours clause, limiting claims to a set number of hours, frequently 24 or 72.

Catastrophe Reserve

• A reserve built up over periods between catastrophes.
• It smooths the reported results over a number of years.
• The purpose of a catastrophe reserve is smoothing profit, not solvency.

Ceding Company (Cedant)

• An insurer or reinsurer that passes a risk to a reinsurer.
• The insurer or reinsurer may be a company or a Lloyd's syndicate.

Central Fund (Lloyd's)

• Specific to Lloyd's.
• Contingency reserve built from Lloyd's Names contributions.
• Held by Lloyd's to protect policyholders.
• Demonstrates the overall solvency to the regulator.
• This capital is added to member capital resources.
• Related to Funds at Lloyd's (FAL).

Chain Ladder Method (CL)

• A statistical method of estimating outstanding claims.
• Past claim development is projected into the future using a weighted average.
• Uses cumulative claims ratios for successive development years.
• The earliest year of origin must be fully run-off.
• Also known as development factor modelling (DFM).
• The method that is sometimes referred to as the Basic Chain Ladder method (BCL) is when it is applied without adjustment.
• One that can be explicitly adjusted for past rates of inflation that is referred to as the Inflation Adjusted Chain Ladder method.

Claim

• A term with a variety of meanings.
• As a noun: An assertion by a policyholder that an insurer must pay according to policy terms.
• As a verb: To make a payment request from an insurer.
• Discovering the precise meaning in context is more important.
• Discovering whether the reference is related to numbers or costs.

Claim Amount Distribution

• A statistical frequency distribution describing the total amount of claims.

Claim Cohort

• Group of claims with origin in a common period.
• Common period is usually monthly, quarterly, or annually.
• Origin varies but it is usually defined by incident, reporting, payment date or the date period of cover commenced.

Claim Cost Inflation

• The increase rate of like-for-like claim payments.

Claim Frequency

• The claim numbers for a period and unit of exposure.
• This frequency is the number of claims per vehicle year for a calendar year.
• Also can be described as the number of claims per policy over some period.

Claim Frequency Distribution

• A statistical frequency distribution for claim occurrence.

Claim Size Distribution

• A statistical distribution describing the size of individual claims.

Claims Handling Expenses (CHE)

• Expenses incurred in handling and settling claims and alternately termed "loss adjustment expenses."
• Loss adjustment expenses (LAE) are split into allocated (ALAE) and unallocated (ULAE) based on whether the expenses can be allocated to specific claims.
• ALAE covers expenses like legal fees for settling claims.
• ULAE covers staffing costs for claims departments.

Claims Incurred

• The CLAIMS MADE POLICY is a related concept
• CLAIMS INCURRED is defined as claims that have been reported
• the term is related to claims being reported during an accounting period
• may refer to the cost of the claims, or the number of claims being reported

Claims Made Policy

• Covers claims reported to an insurer within the policy period.
• Claims must take place after a specific retroactive date, usually when the policy was first bought.
• The coverage provided by such is known as claims made cover.

Claims Occurring Policy

• Covers claims occurring within the policy period, irrespective of claim-made dates.

Claims Reported

• Claims incurred reported to the insurer.
• This term relates to claims reported in the accounting period.
• It may refer to the number of claims or their cost.

Claims Run-Off Analysis

• A tabulation.
• Shows speed of reporting or settlement for cohorts of claims.
• This can be termed a delay table or a run-off triangle.
• Analysis of claim numbers or amounts that is often presented as an intermediate step of chain ladder projection.

Clash Cover

• Excess of loss cover for liability business.
• limits insurers’ exposure to risk from one event leading to claims on more than one policy.

Closed Year

• An underwriting year, reaching the closure period in fund accounting.
• At Lloyd's, it is closed by reinsurance to close (RITC).

Coinsurance

• An arrangement between two+ insurers entering a single contract with the insured.
• They cover risk at agreed portions and a premium
• Each insurer is proportionally liable for the total risk.
• It applies in the London Market where the lead insurer manages the outturn on fixed terms.
• Arrangement where the cedant or insured retains a portion of their risk. That term is related to the slip system.

Combined Ratio or Combined Operating Ratio

• The sum of loss ratio and expense ratio.
• Not actually a ratio unless both have the same denominator.
• Denominators for each ratio are usually different, leading to anomalies.

Commercial Lines

• Classes of insurance for commercial and business policyholders.
• Is in contrast to personal lines.

Committee of Lloyd's

• Responsible for administrative matters under the Council of Lloyd's delegation.
• It had sole responsibility before the Council of Lloyd's by the Lloyd's Act 1982.

Commutation

• Premature termination, settling all future and current claims by agreeing to an amount in a reinsurance contract.

Commutation Account

• A register of inflows and outflows to the treaty is registered; occurs after commutation has taken place.

Commutation Clause

• A clause allowing contract commutation within certain conditions.
• It works with commutation accounts used to calculate relevant numbers.

Composite Insurer

• A single insurance company writing both life and non-life business.

Consequential Loss Insurance

• Related to business interruption insurance.

Constructive Total Loss

• Applies to Marine insurance.
• It occurs when the insured abandons the said insured item.
• Occurs because 'actual total loss' is unavoidable and the costs of preventing a loss exceed the value saved.

Co-Reinsurance

Similar to coinsurance, but referring to reinsurance of a risk, as opposed to insurance.

Council of Lloyd's

• Responsible for overall Lloyd's direction.
• Established by the Lloyd's Act 1982, consisting of working, external, and nominated members.
• Appointments confirmed by the Governor of the Bank of England.
• One nominated member is the Chief Executive.

Cover Note

• Note from an insurance company verifying that insurance coverage exists.
• It occurs pending formal policy documentation issuance.

Credibility

• The statistical measure of the weight a statistic should be given.

CRESTA Zones

• The Global Catastrophe Risk Evaluating and Standardizing Target Accumulations (CRESTA) zone data is a collection of information.
• It assists the brokers and reinsurers in assessing and presenting the risks.
• Based on a zoning system and seismic activity, although flood, drought and wind storms are also considered.
• Considers the distribution of insured values.

Deductible

• The amount deducted per the policy terms.
• Is deducted from the claim amount, that the policyholder would have otherwise been paid.
• The service reduces cover.
• Excess is referred to as related.

Deep Pocket Syndrome

• Claims are made based on the defendant's ability to pay, not their share of blame.
• Injured parties may primarily blame wealthier parties.

Deferred Acquisition Costs (DAC)

• Acquisition costs tied to unexpired contracts periods at the balance sheet date.
• Acquisition costs related to unexpired periods of contracts in force at balance sheet date.
• They are carried forward as an asset from accounting periods, in the expectation that future margins will recover costs.

Delay Table

• Claims run-off analysis is referred to as related.

Deposit Premium

• Occurs if exposure or rating information is unknown during initial policy period or if premiums are claims experience dependent.
• Includes initial deposit premiums at the beginning, followed by an adjustment at the end, when information becomes available.
• If adjustment is upward only, it becomes "minimum and deposit premium."
• Where retrospective rating is included, referred to as swing rates premiums.

Development Factors

• Factors extracted from a chain ladder calculation; claim ratios in successive development periods, sometimes termed link ratios.

Direct Businesses

• Business acquired without an intermediary being involved.
• Also the cover provided to an original policyholder by an insurer.
• In opposition to reinsurance cover, which is specifically for the insurers.

Discovery Period

• It is usually defined in the policy's wording but also can be defined through legal precedent, and within which claims must be reported. It generally applies to business classes, for example, D&O insurance where a number of years may elapse between both: the event happening or being aware and reporting to the insurer.

Dynamic Financial Analysis (DFA)

• A phrase given to any form of actuarial modelling in financial services sector.

Earned Premiums

• Total premiums with attribution to exposure at risk during the accounting period.
• Can be gross, net of acquisition expenses, or related to reinsurance.

Economic Capital

• An insurers required capital to fulfill its objectives.

Endorsement

• A change in a policy's wordi