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Termsort icon Definition Randy Comment
Early Warning Tests

Financial ratio and performance criteria designed by the National Association of Insurance Commissioners to identify insurance companies which may need closer surveillance by state insurance departments.

Also referred to as Insurance Regulatory Information System (IRIS).

Earned Premium

Portion of written premium associated with the exposure assumed by the risk bearing entity (insurer or reinsurer).

Earnings are often associated with time. For example, a traditional insurance policy written for a one year period is 50% earned after six months.

 

Unearned Premium is the inverse of earned premium - the portion of written premium which has no associated exposure.

 

Written Premium = Unearned Premium + Earned Premium

At policy inception, Unearned Premium = 100% of Written Premium, and Earned Premium = 0%

Half way through the policy period, Unearned Premium and Earned Premium are each 50%.

At policy expiration, Earned Premium = 100%, and Unearned Premium = 0%

 

Reinsurance contracts earn at differing rates based on the coverage basis.  Policy or risk attaching basis treaties earn over a longer period of time than treaties placed on a Losses Occurring During basis.

Errors and Omissions Clause

Article regularly included in reinsurance contracts which states that an inadvertant delay, error or omission will not be held to relieve either party from liability under the contract if such delay, error, or omission had not been made, provided that such error or omission is rectified upon discovery.

Errors and Omissions Clause

Article regularly included in reinsurance contracts which states that an inadvertant delay, error or omission will not be held to relieve either party from liability under the contract if such delay, error, or omission had not been made, provided that such error or omission is rectified upon discovery.

Evergreeen Clause

A provision in a Letter of Credit that calls for the LOC to renew each year for an additional year unless written notice of non-renewal is sent by the bank within a required period of time prior to the LOC's anniversary date.

 

Ex Gratia Payment

 A claim payment not necessarily required by an insurance policy but made as a commercial accommodation by the insurer to the policyholder.

 

Excess of Loss Reinsurance

Reinsurance which responds once a specific retention is reached, subject to a specified limit of coverage.  Also known as non-proportional reinsurance.

 

There are various forms of Excess of Loss Reinsurance - Per Occurrence (Property Catastrophe and Casualty Clash/Catastrophe), Per Risk (Property), Per Policy (Liability), Per Principal (Surety) or Aggregate (Stop Loss).

 

Examples:

$750,000 XS $250,000 Per Policy Excess of Loss covers losses on a per policy basis.  If a covered policy incurred a $900,000 loss, the reinsurance would pay $650,000, and the reinsured would retain $250,000.

 

$5,000,000 XS $2,500,000 Per Occurrence Property Excess of Loss responds to all losses emanating from the same loss occurrence.  Assume a hurricane damaged  four buildings separately owned but insured by a single insurer, and the insured losses were $1,000,000, $1,500,000, $3,000,000, and $750,000.  The losses would be added together prior to cession, equaling $6,250,000.  The recovery from reinsurance would be $3,750,000.

 

Exclusions

Clause in a reinsurance contract specifying those risks, perils, or classes of insurance with respect to which the reinsurer will not pay loss or provide reinsurance.

 

Expense Ratio

Expenses (other than loss Adjustment Expenses) incurred during a specific period of time, divided by premiums written during the same period.

 

Experience Rating

A methodology employed in both insurance and reinsurance whereby past losses are considered in pricing the prospective period of coverage.

Extra Contractual Obligations

In reinsurance, monetary awards required by a court of law against an insurer for its negligence to its insured. Such payments required of an insurer to its insured are extra contractual in that they are beyond the insurance contract between insurer and insured.

Reinsurance has evolved over the past twenty years in that claims related extra contractual obligations are often covered to some extent under reinsurance treaties.  The typical example where coverage may be available is bad faith claims against the reinsured.  Treaties which  provide such coverage will include both a definition of Extra Contractual Obligations, and a separate Extra Contractual Obligations clause stipulating the amount of coverage and restrictions to coverage.

Extra Contractual Obligations is often combined with Excess of Policy Limits Judgments into a single clause because of the historic grey area between the two. 

 

Extraction Factor

A fraction or percentage of a reinsured company's subject premium which is deducted from the reinsurance premium to recognize and measure that portion of any policies not covered by reinsurance when the policies are written by the reinsured on an indivisible premium basis. For example, if property excess reinsurance does not cover third-party liability or burglary in a reinsured company's Homeowners Policy, an extraction factor would adjust the reinsurance premium accordingly.