Captive Insurance & Captive Insurance Company Services by WMS,LLC Captive Insurance Management , Captive Insurance Taxation , Captive Insurance Feasibility Studies , Captive Insurance Risk Pools , Captive Reinsurance , Captive Insurance Underwriting , Captive Insurance Accounting , IRS Letter Rulings, Turnkey Captive Insurance Services
|
|
|
Glossary of Captive Insurance Terms com
A
mathematician employed by an
insurance company to calculate
premiums, reserves, dividends,
and insurance, pension, and
annuity rates, using risk
factors obtained from experience
tables.
Alternative risk transfer (ART)
is an alternative to traditional
insurance. A company’s risks are
funded by means other than the
purchase of insurance through an
agent broker from an admitted
insurer. ART forms include
surplus lines placement,
self-insured trusts, risk
retention groups and captives.
The alternative market seeks to
avoid costs associated with insurance brokerage and allow a
business to finance its own
risk.
Language providing a means of
resolving differences between
the reinsurer and the reinsured
without litigation. Usually,
each party appoints an arbiter.
The two thus appointed select a
third arbiter, or umpire, and a
majority decision of the three
becomes binding on the parties
to the arbitration proceedings.
Any legal organization of sole
proprietorships, corporations,
partnerships, limited liability
companies or associations that
has been in continuous existence
for at least one year and has
the power to vote all of the
outstanding voting securities
for its captive.
The dollar
amount under an excess of loss
reinsurance contract at which a
ceding (primary) insurer's
retention requirements have been
met, and the point at which the
reinsurance will respond to a
loss.
A form providing premium or loss
data with respect to identified
specific risks which is
furnished the reinsurer by the
reinsured.
A term most frequently used in
spread loss property reinsurance
to express pure loss cost or
more specifically the ratio of
incurred losses within a
specified amount in excess of
the ceding company’s retention
to its gross premiums over a
stipulated number of years.
(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 is determined by the
amount of surplus an insurer is
willing to put at risk for the
payment of losses experienced by
their insureds. An insurer has a
fixed amount of premium they are
willing to write associated with
their capacity.
A form of reinsurance that
indemnifies the ceding company
for the accumulation of losses
in excess of a stipulated sum
arising from a catastrophic
event such as conflagration,
earthquake or windstorm.
Catastrophe loss generally
refers to the total loss of an
insurance company arising out of
a single catastrophic event.
To cede is to transfer part or
all of a risk to another company
(reinsurer). A fee is charged
for the service of accepting
that risk.
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.
The original or primary insurer;
the insurance company which
purchases reinsurance.
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.
In reinsurance, the primary
insurance company usually pays
the reinsurer its proportion of
the gross premium it receives on
a risk. The reinsurer then
allows the company a ceding or
direct commission allowance on
such gross premium received,
large enough to reimburse the
company for the commission paid
to its agents, plus taxes and
its overhead. The amount of such
allowance frequently determines
profit or loss to the reinsurer.
A clause in a reinsurance
agreement, which provides for
estimation, payment and complete
discharge of all future
obligations for reinsurance
losses incurred regardless of
the continuing nature of certain
losses such as unlimited medical
and lifetime benefits for
Workers’ Compensation. Contingent Commissions (or Profit Commission)
An allowance payable to the
ceding company in addition to
the normal ceding commission
allowance. It is a
pre-determined percentage of the
reinsurer’s net profits after a
charge for the reinsurer’s
overhead, derived from the
subject treaty.
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.
“Domicile” means the place (
e.g. State, Country, Territory,
etc) where the Captive Insurance
Company resides and under whose
laws the Captive has been
incorporated, formed, licensed
as an insurer or reinsurer, and
regulated.
(1) That part of the premium
applicable to the expired part
of the policy period, including
the short-rate premium on
cancellation, the entire premium
on the amount of loss paid under
some contracts, and the entire
premium on the contract on the
expiration of the policy. (2)
That portion of the reinsurance
premium calculated on a monthly,
quarterly or annual basis which
is to be retained by the
reinsurer should there cession
be canceled. (3) When a premium
is paid in advance for a certain
time, the company is said to
“earn” the premium as the time
advances. For example, a policy
written for three years and paid
for in advance would be
one-third “earned” at the end of
the first year.
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.
A form of reinsurance under
which recoveries are available
when a given loss exceeds the
cedant’s retention defined
in the agreement.
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.
The percentage of premium used
to pay all the costs of
acquiring, writing and servicing
insurance and reinsurance.
(1) The loss record of an
insured or of a class of
coverage. (2) Classified
statistics of events connected
with insurance, of outgo, or of
income, actual or estimated. (3)
What figures show to have
happened in the past.Experience
may be compiled on different
bases to provide various means
of appraisal, viz. Accident
Year, Calendar Year, or Policy
Year, but, for underwriting
purposes, should always compare
earned premium with incurred
losses after the latter have
been modified by an allowance
for loss development and
incurred but not reported losses
(I.B.N.R.). 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 coverage is a form
of reinsurance where the
reinsurer accepts or rejects
individual risks. If a member of
a group captive has an
individual need for additional
coverages not shared by the
group, these coverages can be
placed facultatively with the
captive’s reinsurance treaty.
Revised and enacted in 1981,
this law makes allowances for
captive and risk retention
groups to form and operate. The
legislation preempts restrictive
and prohibitive state laws that
would preclude insurers from
giving preferential rates, terms
and conditions to groups seeking
liability insurance coverage.
The act provides definitions to
aid in gaining an understanding
of RRGs.
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.
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.
The clause stipulating that once
a risk has been ceded by the
reinsured, the reinsurer is
bound by the same fate thereon
as experienced by the ceding
company.
A fronting company is a
commercial insurance company
licensed and admitted in the
state(s) where a risk to be
insured is located. The captive
contracts with the front to
issue its policy to the
insured(s). The front then
transfers all that risk to the
captive and/or reinsurers
through a reinsurance agreement
known as a fronting agreement.
Fronting companies provide
various levels of involvement
from simply providing the paper
for the policies to complete
underwriting and issuance. Of
course, their fees vary to match
the depth of their services. The
result is insurance policies
issued on admitted paper, but
with the risk associated with
the coverage retained by the
captive.
The
percentage of losses incurred to
premiums earned. (See
Experience.)
Indemnify means “to make whole,”
or return one to the state that
occurred before the loss
incident. Insurers generally
indemnify two parties: persons
damaged by a liability loss, and
the insured damaged by a
property loss.
An insured which procures the
insurance of any risk or risks
by use of the services of a
full-time employee acting as an
insurance manager or buyer. An
industrial insured must have
aggregate annual premiums for
insurance on all risks totaling
at least $25,000 and have at
least 25 full-time employees.
A loading to provide for
increased medical costs and loss
payments in the future due to
inflation.
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. 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.
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.
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.
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;
and alternative to funds
withheld and modified
coinsurance.
LAE means all expenditures of an
insurer associated with the
adjustment, recording and
settlement of claims other than
the indemnity itself. There are
two types of LAE. Allocated Loss
Adjustment Expense (ALAE) is
identified by the claim file in
the insurers record, such as
attorney’s fees. (ULAE)
Unallocated Loss Adjustment
Expense is the fixed cost an
insurer bears to be able to
process claims regardless of the
individual claims.
The difference between the
original loss as originally
reported to the reinsurer and
its subsequent evaluation at a
later date or at the time of its
final disposal. A serious
problem to reinsurers who, being
involved in the more serious
cases, must frequently wait many
years for the final disposition
of a loss.
The total losses to the ceding
company or to the reinsurer
resulting from a single cause
such as a windstorm.
The loss ratio is the incurred
losses of a captive compared to
the earned premiums expressed as
a percentage.
A member organization is a sole
proprietorship, corporation,
partnership, or association as a
mutual insurer.
A Company is “non-admitted” when
it has not been licensed and
thereby recognized by
appropriate insurance
governmental authority of a
state or country. Reinsurance is
“non-admitted” when placed in a
non-admitted company and
therefore may not be treated as
an asset against reinsured
losses or unearned premium
reserves for insurance company
accounting and statement
purposes.
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.
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.
A parent is a corporation,
partnership, or individual that
directly or indirectly owns,
controls or holds with power to
vote more than 50% of the
outstanding voting securities of
a pure captive insurance
company. 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.
This term refers to the causes
of possible loss in the property
field - for instance: Fire,
Windstorm, Collision, Hail, etc.
In the casualty field the term
“Hazard” is more frequently
used.
Retention and amount of
reinsurance apply “per risk”
rather than on a per accident or
event or aggregate basis.
The year commencing with the
effective date of the policy or
with an anniversary of that
date.
An organization of insurers or
reinsurers through which
particular types of risks are
underwritten with premiums,
losses, and expenses shared in
agreed ratios.
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).
The opposite of Return of
Portfolio - permitting premiums
and losses in respect of
in-force business to run to
their normal expiration upon
termination of a reinsurance
treaty.
When the terms of a policy
provide that the final earned
premium be determined at some
time after the policy itself has
been written, companies may
require tentative or “deposit”
premiums at the beginning which
are readjusted when the actual
earned charge has been later
determined. 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.
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.
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.
The portion of the premium that
covers losses and related
expenses.
A form of insurance wherein all
insurance parties (primary and
reinsurers) share a portion of
all losses on an individual
basis. Quota share is credited
with being the original form of
insurance. The story goes that a
group of ship owners and
financiers were sitting around
in a little coffee shop in
London called Lloyd’s
When the amount of reinsurance
coverage provided under a treaty
is reduced by the payment of a
reinsurance loss as the result
of one catastrophe, the
reinsurance cover is
automatically reinstated usually
by the payment of a
reinstatement premium.
A pro rata reinsurance premium
is charged for the reinstatement
of the amount of reinsurance
coverage that was reduced as the
result of a reinsurance loss
payment under a catastrophe
cover.
Reinsurance is the concept of
one insurance company being
insured by another. There exists
a primary insurer and then a
secondary insurer to guarantee
that a business can cover its
claims in case of a crisis.
An agreement between a reinsurer
and a ceding insurer setting
forth details of the reinsurance
agreement.
An insurer or reinsurer assuming
the risk of another under
contract.
The net amount of risk which the
ceding company or the reinsurer
keeps for its own account or
that of specified others.
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 plan or method which permits
adjustment of the final
reinsurance ceding commission or
premium on the basis of the
actual loss experience under the
subject reinsurance treaty -
subject to minimum and maximum
limits.
A term used to denote the
physical units of property at
risk or the object of insurance
protection and not Perils or
Hazard. Reinsurance by tradition
permits each insurance company
to frame its own rules for
defining units of Risks. The
word is also defined as chance
of loss or uncertainty of loss.
A form of captive insurance
specifically designed for those
insureds who share the same
risks. An example of those
forming RRGs would be doctors.
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.
The amassing of funds by an
individual or organization to
meet his or its insurance needs
and to absorb fluctuations in
the amount of loss, the losses
being charged against the funds
accumulated. 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%Top
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.
The facultative extension of a
reinsurance treaty to embrace a
risk not automatically included
within its terms.
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.
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.
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 known as base premium.
Surplus is an insurance
company’s assets in excess of
its liabilities. Captives are
subject to statutorily required
minimum surplus levels as well
as practical requirements for
premium to surplus ratios.
A form of proportional
reinsurance where the reinsurer
assumes pro rata responsibility
for only that portion of any
risk which exceeds the company’s
established retentions. Third Party Administrator (TPA)
A TPA is an independent company
which provides services to the
insurance company (captive) for
a fee. Typical services provided
include claims reporting,
administration, and management;
and/or underwriting and policy
issuance. Typical TPA firms
include claims adjusting firms
and managing general
underwriters (MGU) and managing
general agents (MGA).
A general reinsurance agreement
which is obligatory between the
ceding company and the reinsurer
containing the contractual terms
applying to the reinsurance of
some class or classes of
business, in contrast to a
reinsurance agreement covering
an individual risk.
This term usually means the
total sum which the assured, or
any company as his insurer, or
both, become obligated to pay
either through adjudication or
compromise, and usually includes
hospital, medical and funeral
charges and all sums paid as
salaries, wages, compensation,
fees, charges and law costs,
premiums on attachment or appeal
bonds, interest, expenses for
doctors, lawyers, nurses, and
investigators and other persons,
and for litigation, settlement,
adjustment and investigation of
claims and suits which are paid
as a consequence of the insured
loss, excluding only the
salaries of the assured’s or of
any underlying insurer’s
permanent employees.
Underwriting refers to the
issuing and signing of an
insurance policy by a party to
assume liability in case of
specified losses.
That portion of the original
premium that applies to the
unexpired portion of risk. A
fire or casualty insurer or
reinsurer must carry a reserve
against all unearned premiums as
a liability in its financial
statement, for if the policy
should be canceled, the company
would have to pay back the
unearned part of the original
premium.
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.
|
|
|
