Adjustable Feature—A cost modification provision found in some reinsurance agreements. Parties agree to adjust final premium rate or final ceding commissions retrospectively, in accordance with the loss experience, by formulas set forth in the agreement.

Admitted Assets—Cash and investments that meet criteria for liquidity and safety set by the National Association of Insurance Commissioners (NAIC) and by individual state commissioners. Only admitted assets are used in measuring the capacity and soundness of an insurer. Non-admitted assets, such as overdue receivables, are excluded from statutory assets and surplus.

Admitted Reinsurance—Reinsurance that is provided by a reinsurer licensed or authorized in the jurisdiction in question. Cedants may automatically take credit in that jurisdiction for admitted reinsurance. A cedant may take credit of non-admitted reinsurance only if it is secured by a letter of credit, trust agreement, or funds withheld.

Aggregate Limit—The maximum sum of recoveries payable under those reinsurance agreements that provide an overall maximum loss limitation.

Aggregate Retention—An additional retention kept net by the cedant of losses otherwise recoverable from the reinsurer. There are two retentions in a program having an aggregate retention. The first retention applies to each risk or occurrence. The second, or aggregate retention, applies to amounts which would normally be recoverable from the reinsurer. Only after the aggregate retention is exceeded can the cedant recover from the reinsurer.

Alien Reinsurer—A non-U.S. domiciled reinsurer writing reinsurance in the U.S.

Arbitration Clause—The provision in reinsurance agreements that provides for non-judicial settlement of disputes between parties. Generally, each party chooses an arbiter; the arbiters agree on an umpire; and these three agree on a resolution of the dispute. Under some clauses, an unsatisfied party may have the option to seek judicial relief following an arbitration finding.

Assume—To take over a risk; the converse of cede.

Assumption Reinsurance—A form of reinsurance under which policy administration and the contractual relationship with the insured, as well as all liabilities, pass to the reinsurer; the novation of liability is evidenced by an assumption certificate issued to the insured who, in some jurisdictions, has the right to refuse the change in insurers. See Indemnity Reinsurance and Coinsurance.

Attachment Basis—A provision in reinsurance agreements that determines whether, and in what manner, a reinsurance agreement covers a specific loss. See Claims Made and Occurrence Basis.

Balance—A reinsurance underwriter's benchmark which measures premium volume against the limit exposed under a reinsurance agreement.

Bank—An informal, non-contractual multi-year summing up of the total premiums ceded to reinsurers less losses paid by reinsurers over the duration of a layer or program—usually a catastrophe program. For instance, cessions of $10,000 in premiums for each of five loss-free years would be said to constitute a $50,000 bank.

Binder—In reinsurance, a preliminary contract signed by the accepting underwriter which summarizes terms and conditions of coverage, pending the issuance of a formal contract (which replaces the binder). See Slip and Cover Note.

Blended Reinsurance—Reinsurance that integrates in a single contract traditional risk transfer and financial reinsurance or finite risk reinsurance coverage components. An example would be a contract which combines catastrophe coverage on a per occurrence basis with casualty coverage having an aggregate limit and aggregate retention.

Bordereau (plural Bordereaux)—A written schedule of insureds, premiums, and losses submitted to reinsurers under certain types of reinsurance agreements. See Facultative Automatic.

Brokerage Market—Reinsurers who write business through reinsurance intermediaries. Reinsurers who do not generally accept such business are referred to as the direct market.

Burning Cost Ratio—Historical incurred losses (usually excluding IBNR [incurred but not reported]) to an existing or proposed reinsurance agreement, divided by subject premium. The burning cost ratio, adjusted for IBNR, other costs, and a profit factor is a tool used in making rates for excess of loss reinsurance.

Calendar Year Experience—Underwriting result based on earned premiums and booked incurred losses (paid losses plus beginning-of-year to end-of-year changes in case reserves and IBNR) for the same calendar year accounting period, regardless of the dates of the loss events. See Accident Year Experience and Underwriting Year Experience.

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

Capacity—The percentage of surplus or the dollar amount of exposure that an insurer or reinsurer is willing to place at risk. Capacity may apply to a single risk, a program, a line of business, or an entire book of business.

Capitation—A risk arrangement in a managed care environment in which a health care provider is paid a fixed amount per month for each enrolled member in a health plan regardless of the actual number or nature of services provided to each person. The capitation contract may include a risk sharing arrangement, in which there is an allocation of financial results, both favorable and unfavorable, among the participants to the agreement.

Captive—An insurance or reinsurance subsidiary of an industrial company, trade association, or not-for-profit organization. Captives insure or reinsure parent-related business, non-parent business, or both. Though the number of domestic captives is increasing, most captives are still located in tax-advantaged offshore domiciles, such as Barbados, Bermuda, or the U.K.'s Channel Islands.

Carryover Provision—A multi-year rating device found in some reinsurance agreements which provides that a loss to reinsurers in a given time period may be applied to the results of a previous period (loss carryback) or may be applied to a future period (loss carryforward).

Case Reserve—Known also as outstanding loss reserves, case reserves are recorded estimates of outstanding unpaid liabilities associated with specific reported claims. Case reserves may pertain to losses, allocated loss adjustment expense (ALAE), or both. Case reserves are established by the cedant; if the reinsurer believes a case reserve is inadequate, it may establish an additional amount known as the additional case reserve (ACR).

Catastrophe—A disaster involving multiple insureds and/or locations. Hurricanes, tornadoes, explosions, and earthquakes are the most common catastrophe examples. Catastrophe is also sometimes used to designate a single large loss—generally $5 million or more. Catastrophe reinsurance indemnifies the cedant for such losses, subject to an agreed retention and limit.

Cedant—A ceding insurer or ceding reinsurer. A ceding insurer is an insurer which underwrites and issues an original, primary policy to an insured and contractually transfers (cedes) a portion of the risk to a reinsurer. A ceding reinsurer is a reinsurer which transfers (cedes) a portion of the underlying reinsurance to a retrocessionnaire.

Ceding Commission—The cedant's acquisition costs and overhead expenses, taxes, licenses and fees, plus a fee representing a share of expected profits—sometimes expressed as a percentage of the gross reinsurance premium.

Claims-Made Basis—A form of reinsurance under which the date of the claim report is deemed to be the date of the loss event. Claims reported during the term of the reinsurance agreement are therefore covered, regardless of when they occurred. A claims made agreement is said to "cut off the tail" on liability business by not covering claims reported after the term of the reinsurance agreement—unless extended by special agreement. See Occurrence Basis.

Clash Cover—A form of reinsurance covering a cedant's exposure to multiple retentions and a larger single loss than intended by reason of two or more insureds being involved in the same loss occurrence, or clash. A clash cover absorbs such additional retentions.

Coded Excess—A form of excess of loss reinsurance under which different premium rates are applied to successive bands of primary coverage limits. Coded excess is considered more accurately to measure exposure than averaging methods.

Coinsurance—Indemnity life reinsurance under which the reserves as well as the risk are transferred to the reinsurer; the cedant retains its liability to and contractual relationship with the insured. See Modified Coinsurance and Assumption Reinsurance.

Combined Ratio—The sum of two ratios, one calculated by dividing incurred losses plus loss adjustment expense (LAE) by earned premiums (the calendar year loss ratio); and the other calculated by dividing all other expenses by written premiums. When applied to a company's overall results, the combined ratio is also referred to as the composite, or statutory, or trade ratio. Used in both insurance and reinsurance, a combined ratio below 100% is indicative of an underwriting profit.

Commutation—The termination of all obligations between the parties to a reinsurance agreement, normally accompanied by a final cash settlement. Commutation may be required by the reinsurance agreement or may be effected by mutual agreement.

CoModCo—A combination of coinsurance and modified coinsurance under which some part of the reserves, e.g., deficiency reserves, are a liability of the reinsurer ("co" portion) while some are returned to the cedant ("modco" portion).

Concurrency—Coordination of the coverage, terms, and conditions of a reinsurance agreement with those of a contract reinsured or between reinsurance agreements. Reinsurance agreements are said to be concurrent when there are no gaps or overlaps.

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

Cover Note—Confirmation by the intermediary to the cedant of terms and conditions and percentage placed with each reinsurer. In effect, a cover note is a receipt for slips or binders received by the intermediary from underwriters on behalf of the cedant.

Credibility—A statistical measure of the reliability of experience data, based on the size of the sample.

Cut through Endorsement—An endorsement to a reinsurance agreement which requires that, in the event of the cedant's insolvency, any loss covered under the reinsurance agreement be paid by the reinsurer directly to the insured (or a third party beneficiary). Also called assumption endorsement or assumption of liability endorsement (ALE).

Direct Market—Reinsurers that deal with the cedant through their account executives, rather than through intermediaries. See Brokerage Market.

Direct Premium Written—An insurer's premium income calculated before reflecting reinsurance inward or outward.

Errors and Omissions Clause—A provision in reinsurance agreements which is intended to neutralize any change in liability or benefits as a result of an inadvertent error by either party.

Excess of Loss—A form of reinsurance under which recoveries are available when a given loss exceeds the cedant's retention defined in the agreement.

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

Experience Refund—Under a reinsurance agreement, that part of the profits which is returned to the cedant after recognition of contingency reserves, loss carryforward, and loss carryback provisions. See Carryover Provision.

Exposure—Measure of vulnerability to loss, usually expressed in dollars or units.

Extra Contractual Obligations (ECO)—A generic term that, when used in reinsurance agreements, refers to damages awarded by a court against an insurer which are outside the provisions of the insurance policy, due to the insurer's bad faith, fraud, or gross negligence in the handling of a claim. Examples are punitive damages and losses in excess of policy limits.

Facultative—Reinsurance under which the cedant has the option (faculty) of submitting and the reinsurer has the option of accepting or declining individual risks.

Facultative Automatic—A form of property and casualty reinsurance which is a hybrid between facultative and treaty. A bordereau of risks ceded is submitted to the reinsurer which has limited rights to decline individual risks.

Financial Guaranty—Insurance which indemnifies an insured claimant, obligee, or indemnitee for financial loss resulting from:

1.     default or insolvency;

2.     changes in interest rate levels;

3.     changes in currency exchange rates;

4.     restrictions imposed by foreign governments; or

5.     changes in the value of specific assets or commodities.

Financial Quota Share—A form of reinsurance which enables a cedant to increase its statutory surplus by the amount of the ceding commission in the reinsured unearned premium reserve. Surplus relief arises because statutory accounting requires insurers and reinsurers to charge immediately all acquisition costs to the accounting period in which the business is written, even when the premium is unearned at the end of the period. Referred to as pre-paid acquisition costs in the unearned premium reserve, or the equity in the unearned premium reserve.

Financial Reinsurance—A form of reinsurance which considers the time value of money and has loss containment provisions. One of its objectives is the enhancement of the cedant's financial statements or operating ratios, e.g., the combined ratio; loss portfolio transfers; and financial quota shares are examples.

Finite Risk Reinsurance—A form of retrospectively rated reinsurance in which the reinsurer's ultimate liability over the term of the contract is typically limited to no more than 300% of the premium ceded. Its primary objectives are to stabilize earnings and reduce reinsurance costs.

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

Follow the Fortunes—A provision in reinsurance agreements, not always specifically identified as such, in which it is agreed that the reinsurer is bound to the same fate as the cedant with respect to risks covered.

Foreign Reinsurer—A reinsurer chartered (domiciled) in one state writing business in another state is considered to be foreign in the non-domiciliary state. In its own state, the reinsurer is considered to be domestic.

Funds Withheld—Assets that would normally be paid over to a reinsurer but are withheld by the cedant to permit statutory credit for non-admitted reinsurance, to reduce a potential credit risk or to retain control over investments.

Gross Line—The maximum limit an insurer or reinsurer is willing to accept before taking credit for reinsurance coverage. Such limits are usually expressed per insured, per line of business, etc. See Net Line.

Ground Up Loss—The entire amount of an insurance loss, including deductibles, before application of any retention or reinsurance. The original loss to the insured, after recognizing known salvage and subrogation.

Guaranteed Cost Reinsurance—A form of reinsurance which has no adjustable features. The final premium rate for the coverage is exactly as set forth ab initio in the contract.

Honorable Undertaking—A phrase in some reinsurance agreements, usually in the following context: "This agreement is considered by the parties hereto as an honorable undertaking, the purpose of which is not to be defeated by a strict or narrow interpretation of the language thereof."

Incurred But Not Reported (IBNR)—The actuarial estimate of reserves required to pay ultimate net losses (UNL) after netting out existing reserves on reported but unpaid claims (case reserves). This estimate includes an allowance for potential changes in such existing reserves as well as additional reserves for claims that have already occurred but are yet to be reported. See Long Tail Liability.

Indemnity Reinsurance—A form of reinsurance under which the risk but not the administration is passed to the reinsurer which indemnifies the cedant for losses covered by the reinsurance agreement or treaty. The cedant retains its liability to and its contractual relationship with the insured.

Indexing, Indexation—The adjustment of a cedant's retention and the reinsurance limit by a measure of inflation, such as the Consumer Price Index. Under indexation, the cedant's original retention and the reinsurance limit are multiplied by the result of dividing the index on the settlement date by the index as of the effective date of the reinsurance agreement.

Insolvency Clause—A provision in reinsurance agreements that provides for the continuance of payments of the obligations of the reinsurer as though no insolvency had occurred, with appropriate recognition of additional expenses of the reinsurer caused by the insolvency. Required in New York and in certain other states.

Intermediary—A third party in the design, negotiation, and administration of a reinsurance agreement. Intermediaries recommend to cedants the type and amount of reinsurance to be purchased and negotiate the placement of coverage with reinsurers. At Lloyd's of London, called a broker. See Brokerage Market and Direct Market.

Intermediary Clause—A provision in reinsurance agreements which identifies the intermediary negotiating the agreement. Most intermediary clauses shift all credit risk to reinsurers by providing that:

1. the cedant's payments to the intermediary are deemed payments to the reinsurer; and
2. the reinsurer's payments to the intermediary are not payments to the cedant until actually received by the cedant.

This clause is mandatory in some states.

Layer—A horizontal segment of the liability insured, e.g., the second $100,000 of a $500,000 liability is the first layer if the cedant retains $100,000, but a higher layer if it retains a lesser amount. See Pro Rata.

Lead Reinsurer—The reinsurer who negotiates the terms, conditions, and premium rates and first signs on to the slip; reinsurers who subsequently sign on to the slip under those terms and conditions are considered following reinsurers.

Letter of Credit—A financial guaranty issued by a bank that permits the party to which it is issued to draw funds from the bank in the event of a valid unpaid claim against the other party; in reinsurance, typically used to permit reserve credit to be taken with respect to non-admitted reinsurance; an alternative to funds withheld and modified coinsurance.

Lloyds—An insurance or reinsurance organization in which individuals or groups of individuals, called syndicates, rather than corporations, are at risk.

Long Tail Liability—The liability for claims that do not proceed to final settlement for some time, often a decade or more; characterized by high IBNR. The loss distribution curve by duration of payment appears to have a "tail."

Loss Adjustment Expense (LAE)—All expenditures of an insurer associated with its adjustment, recording, and settlement of claims, other than the claim payment itself. The term encompasses both allocated loss adjustment expenses (ALAE) which are loss adjustment expenses identified by a claim file in the insurer's records, such as attorney's fees; and unallocated loss adjustment expenses (ULAE), which are operating expenses not identified by claim file, but functionally associated with settling losses, such as salaries of claims department.

Loss Development—An actuarial method used to predict ultimate net losses (UNL) and IBNR. The growth of paid losses and case reserves is observed at regular intervals to arrive at age-to-age development percentages. Also known as "triangulation" for the characteristic shape of the tabular data employed.

Loss Event—Any trigger for recovery under an insurance or reinsurance agreement. Examples include occurrence, claims made, death, or disability.

Losses in Excess of Policy Limits—A term that, when used in reinsurance agreements, refers to damages awarded by a court against an insurer in favor of the insured, due to the insurer's having failed to settle a third party claim against the insured within the policy limits by reason of bad faith, fraud, or gross negligence. See Extra Contractual Obligations and Punitive Damages.

Loss Portfolio Transfer—A form of financial reinsurance involving the transfer of loss obligations already incurred which, when ultimately paid, will exceed the consideration paid to the reinsurer for undertaking such obligations. The amount by which the transferred obligations exceed the consideration paid is the resultant increase to the cedant's statutory surplus.

Loss Ratio—Incurred losses (including applicable IBNR) divided by earned premium for an accounting or treaty period. Loss ratios can be calculated on an accident year, calendar year, or underwriting year basis.

Loss Ratio Coverage—A form of stop loss reinsurance under which the reinsurer pays a portion of the claims represented by a loss ratio in excess of a specified loss ratio. For example, "20% in excess of 110%" will result in claims between 110% and 130% of premium being paid by the reinsurer.

Managed Care—Systems designed to integrate the delivery and financing of health care of the highest possible quality at the lowest possible cost. In contrast to traditional fee for service arrangements, under managed care, health providers:

1.  agree to negotiated payment levels for specified services to defined patient populations;
2.  agree to more aggressive utilization and quality assurance review; and
3.  assume financial risk leading to more severe restriction on patient choice to obtain services outside the network.

Market Cycles—Market-wide fluctuations in the prevailing level of insurance and reinsurance premiums. A soft market, characterized by increased competition in which prices are depressed, is usually attributed to excess capacity (more sellers than buyers) and/or high interest rates. A hard market following a soft market is often triggered by a major catastrophe loss and/or a protracted period of operating losses.

Maximum Foreseeable Loss (MFL)—A property underwriter's estimate of the cost in the event of a total loss where all loss control systems (e.g., sprinklers and firewalls) fail. See Probable Maximum Loss (PML).

ModCo Reserve Adjustment—The net of two modified coinsurance items: the interest on reserves (payable by the cedant to the reinsurer) less the increase in reserves (payable to the cedant by the reinsurer).

Modified Coinsurance—Indemnity life reinsurance that differs from coinsurance only in that the reserves are returned to the cedant while the risk remains with the reinsurer; the cedant is required to pay interest to replace that which would have been earned by the reinsurer if it had held the assets corresponding to the reserves in its own investment portfolio. Originally devised to permit reserve credit to be taken with respect to a nonadmitted reinsurer, now also used to secure credit and retain control of investments. See Funds Withheld, Coinsurance and Assumption.

Net Line—The maximum limit an insurer or reinsurer is willing to accept after taking credit for reinsurance coverage. Such limits are usually expressed per insured, per line of insurance, etc. See Gross Line.

Occurrence—An adverse contingent accident or event neither expected nor intended from the point of view of the insured. With regard to limits on occurrences, property catastrophe reinsurance agreements frequently define adverse events having a common cause and sometimes within a specified time frame, for example 72 hours, as being one occurrence. This definition prevents multiple retentions and reinsurance limits from being exposed in a single catastrophe loss.

Occurrence Basis—A form of reinsurance under which the date of the loss event is deemed to be the date of the occurrence, regardless of when reported. See Claims-Made Basis.

Offset Clause—A provision in reinsurance agreements which permits each party to net amounts due against those payable before making payment; especially important in the event of insolvency of one party which ceases to remit amounts due to the other. This clause is often challenged by state insurance departments, creditors, and others interested in maximizing the assets of the insolvent party.

Overline—An inadvertent reinsurance acceptance which results in a reinsurer committing more capacity on a single risk than its intended exposure.

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

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

Policy Expense Allowance—An amount payable to the cedant by the reinsurer in lieu of actual commissions and expenses incurred by the cedant.

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

Portfolio Runoff—A form of reinsurance under which the in-force business is reinsured to the subsequent anniversaries of the underlying policies; often accomplished by ceding the unearned premium reserve on such business.

Premium (Written/Unearned/Earned)—Written premium is premium registered on the books of an insurer or reinsurer at the time a policy is issued and paid for. Premium for a future exposure period is said to be unearned premium. For an individual policy, written premium minus unearned premium equals earned premium. Earned premium is income for the accounting period, while unearned premium will be income in a future accounting period.

Probable Maximum Loss (PML)—A property underwriter's estimate of the cost in the event of a total loss where loss control systems (e.g., sprinklers and firewalls) operate. Used in underwriting and in determining reinsurance limits. See Maximum Foreseeable Loss (MFL).

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

Profit Commission—A provision found in some reinsurance agreements which provides for profit sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurer's expenses, and the cedant's share of such profit after expenses. See Adjustable Features, Risk Charge, and Experience Refund.

Pro Rata—A form of reinsurance in which premiums and losses are shared proportionately between cedant and reinsurer. One such reinsurance agreement is quota share, in which the same percentage applies to all policies reinsured. Another is surplus share, in which the percentage may vary from policy to policy and usually increases as policy limits increase.

Provider Excess of Loss—Reinsurance for providers of health care services under capitation contracts, e.g., coverage limiting financial risk of health care providers for individual patients if the cost of care exceeds a predetermined limit.

Punitive Damages—A term that, when used in reinsurance agreements, refers to damages awarded by a court against an insured or against an insurer in addition to compensatory damages. Punitive damages are intended to punish the insured or insurer for willful and wanton misconduct and to serve as a deterrent. When the award is against an insurer, it is usually related to the conduct of the insurer in the handling of a claim, and can arise in both first party and third party coverage situations. See Extra Contractual Obligations and Losses in Excess of Policy Limits.

Quota Share—See Pro Rata.

Rate—The premium rate is the amount of premium charged per exposure unit, e.g., per $1,000.

Rate on Line—A percentage arrived at by dividing reinsurance premium by reinsurance limit; the inverse is known as the payback or amortization period. For example, a $10 million catastrophe cover with a premium of $2 million would have a rate on line of 20% and a payback period of five years.

Recapture—The process by which the cedant recovers the liabilities transferred to a reinsurer.

Refund Reinsurance—A form of reinsurance, typically yearly renewable term, under which the premium rates are subject to an experience refund as opposed to being fixed (non-refund).

Reinstatement Premium—An additional premium paid to replenish (reinstate) the limit consumed in the event of a loss.

Reinsurance—In effect, insurance that insurance companies buy for their own protection, "a sharing of risk." Reinsurance enables an insurance company to:

1.     expand its capacity;

2.     stabilize its underwriting results;

3.     finance its expanding volume;

4.     secure catastrophe protection against shock losses;

5.     withdraw from a class or line of business, or a geographical area, within a specified period of time.

Reinsurance Pool—A multi-reinsurer agreement under which each reinsurer in the group or pool assumes a specified portion of each risk ceded to the pool. Contrast with Reinsurance Wheel.

Reinsurance Wheel—A procedure for retroceding individual life insurance risks in excess of a reinsurer's own retention to a group of retrocessionnaire (up to their subscribed limits) in rotation, the order being determined by their positions as spokes on an imaginary wheel. The spokes need not be of the same length, i.e. limit, and a company may have more than one spoke. Contrast with Reinsurance Pool.

Reinsurer—A reinsurer contractually accepts a portion of the cedant's risk. A professional reinsurer is a reinsurer whose principal business is reinsurance, as opposed to the reinsurance department of a primary company.

Reserve Adjustment Interest Rate—In modified coinsurance, the interest rate used to calculate the amount payable by the cedant in consideration of the reserves being transferred back by the reinsurer. See ModCo.

Retention—The dollar amount or percentage of each loss retained by the cedant under a reinsurance agreement. The point at which the retention is used up is said to be the attachment point for the reinsurer.

Retrocession, Retrocessionnaire—A reinsurance of reinsurance. Example: Company "B" has accepted reinsurance from Company "A", and then obtains for itself, on such business assumed, reinsurance from Company "C". This secondary reinsurance is called a Retrocession. The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed. A retrocessionnaire is a reinsurer that contractually accepts from another reinsurer a portion of the cedant's underlying reinsurance risk. Retrospectively Rated Reinsurance—Reinsurance that provides for adjustments based on contract experience. Such adjustments include additional premiums, experience refunds, and for multiple year contracts, early termination penalties, or changes to coverage in subsequent years.

Risk Charge—An amount identified in some reinsurance agreements as specifically to be retained by the reinsurer for assuming the risk under the policies reinsured; a share of the profits in excess of the risk charge is returned to the cedant as an experience refund.

Salvage and Subrogation—Those rights of the insured which, under the terms of the policy, automatically transfer to the insurer upon settlement of a loss. Salvage applies to any proceeds from the repaired, recovered, or scrapped property. Subrogation refers to the proceeds of negotiations or legal actions against negligent third parties and may apply to either property or casualty coverages.

Securitization of Insurance Risk—The transfer or sale, in the form of an investment security, of the underwriting and timing risks associated with one or more insurance policies. It is similar in concept to asset securitization which involves turning illiquid assets into liquid instruments that can be traded freely on the open market (e.g., mortgage backed securities).

Self Insurance—Protecting against loss by setting aside one's own funds to provide for future contingencies. Through self insurance it is possible to protect against high frequency, low severity losses. Utilizing self insurance eliminates the various loadings such as acquisition expense, taxes, and general expenses that would be incurred if the same loss coverage were secured through an insurance company.

Sliding Scale Commission—A ceding commission which varies inversely with the loss ratio under the reinsurance agreement. The scales are not always one to one: for example, as the loss ratio decreases by 1%, the ceding commission might increase only .5%.

Slip—A binder often including more than one reinsurer. At Lloyd's of London, the slip is carried from underwriter to underwriter for initialing and subscribing to a specific share of the risk. See Binder and Cover Note.

Special Acceptance—A risk which is not otherwise covered—due, for example, to underwriting class or limit—but is endorsed into the reinsurance agreement by specific written agreement with underwriters. Used in treaties and facultative automatics.

Spread Loss—A form of reinsurance under which premiums are paid during good years to build up a fund from which losses are recovered in bad years. This reinsurance has the effect of stabilizing a cedant's loss ratio over an extended period of time.

Stop Loss—A form of reinsurance under which the reinsurer pays some or all of a cedant's aggregate retained losses in excess of a predetermined dollar amount or in excess of a percentage of premium. See Loss Ratio Coverage.

Subject Business—A shorthand way of saying "business of the class, size, and limitations" covered under a reinsurance agreement.

Subject Premium—A cedant's premiums (written or earned) to which the reinsurance premium rate is applied to calculate the reinsurance premium. Often, subject premium is gross/net written premium income (GNWPI) or gross/net earned premium income (GNEPI), where the term "gross/net" means gross before deducting reinsurance premiums for the reinsurance agreement under consideration, but net after all other adjustments, e.g.,  cancellations, refunds, or other reinsurance. Normally, subject premium refers to premium on subject business. Also know as base premium.

Surplus—The excess of assets over liabilities. Statutory surplus is an insurer's or reinsurer's capital as determined under statutory accounting rules. Surplus determines an insurer's or reinsurer's capacity to write business.

Surplus Relief—An increase in the cedant's surplus through financial reinsurance. Cedants are able to use the increase in surplus to write more business while retaining reasonable operating ratios, e.g., the combined ratio and the ratio of written premium to surplus.

Surplus Share—See Pro Rata.

Target Risk—In personal lines casualty insurance, a phrase which refers to celebrities and wealthy individuals. At one time, the Target Risk Exclusion Clause in reinsurance listed major bridges, tunnels, and art collections, but that clause has been replaced by the Total Insured Value (TIV) exclusion clause.

Termination—The formal ending of a reinsurance agreement by its natural expiry, cancellation, or commutation by the parties. Terminations can be either on a cutoff or runoff basis. Under cutoff provisions, the parties' obligations are fixed as of the agreed cutoff date. Otherwise, obligations incurred while the agreement was in force are run-off to their natural extinction.

Time Value of Money—Relationship determined by the math of compound interest between monetary values at one point in time and their values at other points in time. Implicit in any consideration of time value of money are the rate of interest and the period of compounding.

Total Insured Value (TIV)—A provision in reinsurance agreements which excludes coverage of individual properties in cases where total insured values across all property lines equal or exceed a certain level, e.g, $200 million. This clause is used to prevent multiple exposures to reinsurers on large single risks.

Treaty—A reinsurance agreement covering a book or class of business which is automatically accepted on a bulk basis by a reinsurer. A treaty contains common contract terms along with a specific risk definition, data on limit and retention, and provisions for premium and duration.

Trust Agreement—An agreement under which certain assets are deposited by one party (the grantor), for the sole benefit of another party (the beneficiary), into an account managed by a third party (the trustee). In reinsurance, such an agreement is typically established to permit a licensed cedant to take credit for non-admitted reinsurance up to the value of the assets in trust.

Uberrimae Fidei—"Utmost good faith." A provision sometimes found in reinsurance agreements and considered descriptive of the reinsurance relationship.

Ultimate Net Loss (UNL)—The loss amount, including covered loss adjustment expenses (LAE), against which the retention and the reinsurance limits apply.

Unbundled Services—Term that describes commercial insurance with no administrative services attached, or alternatively, administrative services from an insurer without insurance coverage. Unbundled services are frequently the domain of third party providers done on a contractual basis.

Underwriter—An insurer or reinsurer (or an individual person by the insurer or reinsurer) that assumes risks and "signs below" (underwrites) terms of the insurance or reinsurance accepted.

Underwriting Year Experience—Underwriting result based on written premiums and ultimate losses from loss events falling within the same accounting period, where the accounting period is the period covered by the insurance policy or reinsurance agreement, regardless of when the premiums and losses are actually reported, booked, or paid. See Accident Year Experience and Calendar Year Experience.

Unusual Expenses—In life reinsurance, non-routine expenses of the cedant for claims investigation, legal defense or rescission actions. The reinsurer typically agrees to pay such expenses as distinct from punitive, exemplary or other non contractual expenses which it does not agree to pay.

Working Layer—The first layer above the cedant's retention wherein moderate to heavy loss activity is expected by the cedant and reinsurer. Working layer reinsurance agreements often include adjustable features to reflect actual underwriting results.

Yearly Renewable Term—A form of life reinsurance under which the risks, but not the permanent plan reserves, are transferred to the reinsurer for a premium that varies each year with the amount at risk and the ages of the insureds; may be subject to an experience refund.