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Termsort icon Definition Randy Comment
Calendar Year Experience

The matching of all losses incurred (not necessarily occurring) within a given twelve-month period, usually beginning on January 1, with all premium earned within the same period of time. Incurred losses will include the change in IBNR.   More specifically, the total value of all losses incurred (not necessarily occurring) during the calendar year is divided by the earned premium for this same exposure period. Losses incurred are equal to the sum of losses paid, plus the outstanding loss reserves at the end of the year, less the outstanding loss reserves at the beginning of the year. Once calculated for a given period, Calendar Year experience never changes.  Analysis of Casualty lines of business on a Calendar Year basis is quite difficult.

Capacity

The measure of an insurer's or reinsurer's financial strength to issue contracts of insurance, usually determined by the largest amount of insurance issuable for a given risk or, in certain other situations, by the maximum volume of insurance (or reinsurance) business it is prepared to accept.

In reinsurance, a term used as a measurement of the aggregate limit a reinsurer will expose, to a reinsurance program, cedent, region, or in total.

Example:  A reinsurer may comment, "I am out of wind capacity in the Northeast", meaning he has reached his aggregate limit for that region.

Captive Insurance Company

An insurer which is wholly-owned by another organization (generally noninsurance), the main purpose of which is to insure the risks of the parent organization. 

Carrier

Synonym for insurer.  Also, Insurance Carrier.

Cash Call

A reinsurance contract provision, which allows a reinsured company to make claim and receive immediate payment for a large loss outside of periodic payment provisions detailed elsewhere in the contract.

Casualty Catastrophe Cover

Casualty reinsurance program which is not exposed on a policy limit basis, i.e., the attachment point of the treaty is equal to or exceeds the reinsured's maximum net exposure on any one policy. Such treaties protect against the infrequent loss involving two or more insureds in the same loss occurrence - a clash loss.  They can also provide coverage for runaway loss adjustment expense, and/or Extra Contractual Obligations and Excess Policy Limits judgments. 

 

Casualty Catastrophe Cover is an expansion from the traditional Casualty Clash Cover.

Catastrophe Number

A serial number assigned by Property Claims Services to a disaster which meets the PCS Catastrophe definition - $25 million or more in direct insured losses andy that affect a significant number of policyholders and insurers.  These serial numbers are recognized throughout the insurance and reinsurance industry, aiding in properly coding losses to correct occurrences and aggregating losses for cession to catastrophe reinsurance programs.

Catastrophe Reinsurance

A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the reinsured company for the amount of loss in excess of a specified retention with respect to an accumulation of losses resulting from a single event or occurrence.

Cede

To transfer specific insured liabilities to another party (reinsurer) in consideration of an agreed amount of premium. The terms and conditions of that transfer are documented in a reinsurance contract.

 

Examples

80% quota share between cedent A and reinsurer B. 80% of the losses emanating from the reinsured policies are ceded from A to B, as is 80% of the premium of those policies.

$500,000 XS $250,000 excess of loss reinsurance structure with a 10% rate. All losses excess of $250,000, up to $750,000, are ceded to the reinsurer. In return, the reinsurer receives 10% of the premium of the reinsured policies.

(these are intentionally basic examples, recognizing other terms and conditions would also apply)

Cedent

The party within a reinsurance contract transferring (ceding) liabilities to the reinsurer.

Synonymous with Ceding Company

Ceding Commission

An allowance (usually a percentage of gross reinsurance premium) within a reinsurance contract for part or all of a ceding company's acquisition and operating expenses.  The ceding commission is paid to the cedent by the reinsurer.

 

Examples

80% quota share with a 30% ceding commission.  The reinsurer receives 80% of the gross premium relating to the subject policies, minus 30% paid back to the ceding company in consideration of expenses.  The reinsurer would therefore actually receive 56% (80% x (1-30%)) of the gross subject premium.

$500,000 XS $250,000 at a 10% gross rate with a 30% ceding commission.  The reinsurer receives 10% of the gross subject premium relating to the covered policies, minus a 30% ceding commission.  The reinsurer would actually receive 7% (10% x (1-30%)) of the gross subject premium.  The 7% is often referred to as the Net Rate after ceding commission.

Ceding Company

Synonymous with Cedent.  The reinsured party in a reinsurance contract.

 

Certificate of Reinsurance (Facultative Certificate)

A short-form documentation of a reinsurance transaction outlining terms and conditions, used especially for facultative reinsurance transactions to document the purchase of reinsurance.

Cession

Noun form of Cede.  Unit of reinsurance transferred from the cedent to the reinsurer. 

 

Clash Cover

A reinsurance casualty excess of loss contract requiring two or more coverages or policies, issued by the reinsured and involved in the same loss, for coverage to apply The attachment point of the reinsurance contract is usually above the limits of any one policy.

Common clash scenarios include multiple insured automobiles involved in the same accident, multiple insured contractors involved in an accident on a job site, multiple insureds along the manufacturing and distribution chain of a product named in a products liability suit.  Multiple policies written for the same insured can also result in a clash, such as automobile liability and general liability, or general liability and workers compensation.

 

Example

$5,000,000 XS $1,000,000 Casualty Clash.  Two contractors, each with a $1,000,000 general liability policy written by the reinsured, worked on a job site and were involved in a loss.  If a total of $2,000,000 in losses was incurred by the reinsured from these insureds, reinsured would recover $1,000,000 from the Casualty Clash reinsurers.

Closed Without Payment (CWP or CWOP)

A claim which was closed without any loss incurred. 

Combined Ratio

The sum of loss ratio and expense ratio. 

Common Account Excess

Excess of loss reinsurance structured to inure to the benefit of another reinsurance, protecting the interests of both the cedent and reinsurers of that reinsurance.  The premium charged for the Common Account would be shared by the reinsured and those reinsurers.

 

Example

80% quota share of up to $5,000,000 reinsured by reinsurer A.  $4,000,000 xs $1,000,000 Common Account Excess placed on the quota share.  The reinsured and A would be protected against gross losses greater than $1,000,000 by the Common Account.  In the event of a $3,000,000 gross loss, $2,000,000 would be ceded to the Common Account Excess.  Loss subject to the Quota Share would be reduced to $1,000,000.  Reinsurer A would be liable for  $800,000, and the reinsured would be liable for $200,000. 

The subject premium base for the Common Account is the same as the subject premium of the Quota Share.  Supposing the rate for the Common Account is 10%, reinsurer A would be responsible for 8% (80% of 10%) and reinsured 2%.

Commutation Clause

A clause in a reinsurance agreement which provides for discharge of all obligations under the contract, including future obligations. Specific calculations relating to valuation of premium and losses are included in the clause 

Trigger of this clause varies.  It may be optional by one or both parties, or mandatory at a given point in time.

Company

In a reinsurance contract, the reinsured.

Conflagration

A massive fire which destroys many contiguous properties.

Contingent Commission

Allowance from the reinsurer to share in ceded profit with the reinsured.  The Contingent Commission terms are usually included in the Ceding Commission article, or as a separate clause in the contract.

Example

80% quota share with a 30% ceding commission and a 25% contingent commission after 20% reinsurer's expense.  Assuming $1,000,000 in gross subject premium and a 40% ceded loss ratio, contingent commission calculated as follows: 




Gross Subject Premium  $  1,000,000  
Ceded Premium  $     800,000 80%
Ceding Commission  $     240,000 30%
Reinsurer's Expense  $     160,000 20%
Reinsurance Loss Ratio 40%  
Reinsurance Losses  $     320,000  
Reinsurance Profit  $       80,000  
Contingent Commission  $      20,000

25%

 

It is important to note all of the deductions prior to application of Contingent Commission percentage. 

 

A shortcut in calculating is to add loss ratio, ceding commission percentage and reinsurer's expense percentage (40%+30%+20%=90%).  Subtract result from 100% (100%-90%=10%) to see total profit subject to contingent commission percentage.   In above axample, 2.5% (10% x 25%) is the contingent commission as a percentage of ceded premium at a 40% loss ratio.

 

 

A spreadsheet for use in calculating contingent commissions is attached below.

Convention Blank

Another name for the Annual Statement form prescribed by NAIC (National Association of Insurance Commissioners) of Kansas City, Missouri. See Annual Statement. 

Coreinsurance (Co-Reinsurance)

A provision in an excess of loss reinsurance contract requiring the reinsured to retain net and unreinsured otherwise (or to co-reinsure) a part of the loss within the reinsurance, the purpose of which is to promote good claims handling by the reinsured. For example, when the reinsurer covers 95% of an excess of loss layer, the reinsured's 5% share of the excess losses is co-reinsurance, a proportional sharing of the layer losses.

 

Counsel and Concur

A phrase stating the reinsured company's obligation to obtain the counsel and concurrence of the reinsurer in making claims decisions. Most typically applied to claims decisions made in connection with extra contractual obligations or judgments (loss) in excess of policy limits.

Cover Note or Covernote

A summary of the terms and conditions of a reinsurance transaction, along with a list of the participating reinsurers and their shares, provided to the cedent by the intermediary at the conclusion of a placement.

 

While commonly used in the past, stricter regulations concerning timeframes for execution of contracts have reduced the use of slips and cover notes.  Most reinsurances are now placed using complete, or almost complete, contracts.

Credibility

The measure of credence or belief that is attached to a particular body of statistical experience for rate-making purposes, frequently defined in terms of specific mathematical formulas. Generally, as the body of experience increases in volume, the corresponding credibility also increases.  Also referred to as Statistical Credibility.

Credit for Authorized Reinsurance

The legal right of an insurer to include the impact of a reinsurance transaction in its Annual Statement based on the participating reinsurer(s) being authorized by the state and the transaction being executed subject to state regulations.

 

If a reinsurer is not authorized in the cedent's state of domicile, the reinsurer is required to post collateral equalling 100% of ceded outstanding liabilities (primarily unearned premium and loss reserves). 

 

Any shortfall in collateral, or lack of collateral, results in the insurer being subject to a penalty in the form a of a liability on its Annual Statement equal to that shortfall.
 

Cut-Off Cancellation or Termination

A provision included in the termination clause (or endorsement) which provides that the reinsurer shall not be liable for losses occurring after the termination date of the reinsurance. It is common on pro rata reinsurance contracts or excess of loss contracts rated on a written premium basis that any ceded unearned premium be returned to the reinsured at cut off.  Cut-off cancellation differs from commutation, as reinsurers remain liable for emergence and development of losses occurring prior to the cut off date.