Glossary of Insurance Terms

Paid Losses - The amount of incurred losses which have actually been paid by the insurer.

Payout Pattern - A measurement or estimation of the timing of payments for losses under an individual policy of insurance or portfolio of risks. Usually used in log tail insurance such as third party liability, to allow for investment income on premiums and loss reserves to be assessed.

Peril - The cause of a loss insured against in a policy.

Personal Advice - A term used in Australia's Financial Services Reform legislation to define a statement which influences or is intended to influence a (defined) "Retail Client" to purchase a particular finance service or product, having considered the Retail Clients specific individual circumstances.

Personal Lines - A segment of insurance business (also known as domestic business) focused on individuals' requirements such as home and contents, private motor vehicle etc.

Plaintiff - An entity in a legal dispute which brings the action against another entity (the defendant).

Policy Schedule - The policy schedule issued each year by the insurer setting out the information regarding who / what is covered, the period of insurance, the level of cover etc. This attaches to and forms part of the insurance contract.

Pool - A collection of insurers who agree to collaborate under a specific entity to jointly insure risks, whereby premiums, losses and expenses are shared in accordance with their respective participation. Common for higher hazard risks such as nuclear, aviation etc.

Precedent - A decision made in a one court case which may be used in a future case to argue or distinguish a point.

Premium - The amount paid for a policy of insurance. The premium is the consideration under the contractual agreement.

Primary Insurance - 1) Insurance that must indemnify the insured before any other coverage that the insured may have in place. 2) The first layer of coverage in a multiple layer placement.

Probable Maximum Loss (PML) - This is an estimate of loss similar to Maximum Foreseeable Loss (MFL) or Maximum Possible Loss (MPL), but it assumes that the protective controls will operate as intended. May also be referred to as Normal Loss Expectancy (NLE).

Product Disclosure Statement (PDS) - A document required under Australia's Financial Services Reform legislation, to be provided when Advice is given to a client.

Proportional Reinsurance - Generic description for those reinsurance contracts where the reinsurer shares in the liability, premium and losses of an insurer on a proportional basis. Also known as pro rata reinsurance. The contracts may be arranged as treaty reinsurance or on a facultative basis. The two principal types of proportional reinsurance are quota share and surplus.

Proposal - This is the document which is completed by the insured, providing the relevant information to apply to the insurer for insurance coverage.

Proximate Cause - The dominating or primary cause of loss or damage which in an unbroken chain of events causes the loss or damage.

Punitive Damages - Court awarded amounts exceeding economic losses suffered by the third party, that are intended solely to punish the defendant.

Pure Loss Cost - A measurement of losses incurred against earned premiums, expressed as a percentage. Also known as the burning cost.

Pure Risk / Static Risk - Exposures which are not significantly affected by the business environment and have a constant level of uncertainty over time. Generally a static risk results only in a potential for loss. See also Dynamic Risk.

Quota Share Reinsurance - A form of proportional reinsurance where the reinsurer assumes an agreed percentage of the insurers risks, and shares all liability, premiums and claims on this basis. This can be on an individual risk or across an entire portfolio of business, with only risks which exceed an upper limit or risk classification excluded from the arrangement.

Rate - The pricing factor upon which a premium is based.

Rate on Line - A measurement of the amount of premium divided by the limit or amount of indemnity. Used to compare and assess the adequacy of premiums charged.

Recovery - An amount received to mitigate the payment made by an insurer in settlement of a loss. It can include salvage of damaged property, subrogation against third parties and recovery of amounts payable under reinsurance contracts.

Reinsurance - An arrangement between an insurer and a reinsurer to "reinsure" all or parts of the original insurance policy taken out with the insured. The insurer becomes a reinsured. This arrangement may be for specifically negotiated risks (facultative reinsurance) or for an agreed proportion of all risks (treaty reinsurance).

Renewal - Most policies are arranged for a fixed period, normally 12 months. The insurer may offer to "renew" the insurance policy for a further period, subject to a new premium and/or other policy conditions.

Reparations - are payments or other compensations made to a group of people who have been wronged or injured.

Reserve - The amount predicted and/or set aside by insurers to pay outstanding claim commitments under insurance policies issued by them. Also know as Loss Reserve.

Retail Client - A specific definition under Australia's Financial Services Reform legislation where the client is an individual, or the product sold is for use in a small business and either:

Retention - The amount of risk which an organisation holds to its own account (self insures) under an insurance contract - also referred to as self insured retention. Under a reinsurance contract it is the amount which the insurer accepts for itself before passing on the residual risk to the reinsurer.

Retroactive Date - The indemnity provided under professional indemnity policies may include retroactive cover for activities undertaken before the policy was taken out. This will rarely be unlimited, and will be subject to a specific date, known as the retroactive date. Retroactive cover will exclude circumstances that are known prior to inception of the policy.

Retrocedant - The term used for a reinsurer who accepts a risk from an insurer(s), then in turn reinsures some of that risk to another reinsurer (a retrocessionnaire).

Retrocessionnaire - The term used for a reinsurer who accepts risks (retrocessions) from another reinsurer - the reinsurer's reinsurer.

Retrocession - The process by which a reinsurer obtains reinsurance from another company, either on a per risk basis or across an entire portfolio of business.

Retrospective Rating - A formula for determining a premium under an insurance contract on the basis of future loss experience. The contract is usually arranged with a deposit premium, which is then adjusted at the end of the policy period (and/or at multiple points after that) based on agreed rating factors. There are often stipulated minimum and/or maximum premiums under the rating formula.

Romalpa Clauses - Are named after the decision in the Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd case which upheld the validity of a retention of title clause in contracts for the sale or supply of goods. Romalpa clauses are now commonly used by business as a form of protection against a customer becoming insolvent after taking delivery of goods, but prior to having paid for them.

Usually when a product is sold, the purchaser becomes the owner at the point at which they are taken. By including a Romalpa clause in a contract, the product taken by a customer remains the property of the business until the customer pays the full price.

This means that a seller of goods should then have priority over mortgages, charges and debenture registered against a buyer's assets. If the full price is not paid by the due date, the product may be taken back by the business. The business can then sell the product to another customer. A customer who does not return the goods can be sued for the amount that is not paid. The customercan also be prosecuted by the police for a criminal offence.

Run-off - Once a claims made policy expires, the insurer is not liable to provide indemnity for circumstances that have not been advised to them before expiry. A retiring partner, or business which has been sold, will need to ensure that cover is kept in force for a reasonable period of time to cover the "run-off" of potential incidents which have happened but are yet to be reported as claims. Insurers and reinsurers also have "run off' exposure where they cease underwriting certain types of risk but claims that occurred during the periods of insurance continue to be notified in subsequent years.

Salvage - Property recovered by the insurer after they have made a settlement under a policy.

Self Insured Retention - The amount of risk which an organisation assumes responsibility to self insure.

Short Tail Business - Description for types of insurance where the final amount of incurred losses are generally known at then end of the policy period, or within a short period of time thereafter. Usually risks such as property and motor vehicle damage. Opposite of Long Tail Business.

Sidecar - A special purpose investment vehicle which allows third party investors to provide additional funds to an existing reinsurer outside its existing shareholders capital. These funds are generally used to generate extra underwriting capacity for property catastrophe reinsurance and other short term business.

Signed Line - The percentage shown on a placing slip for insurance or reinsurance which indicates the final agreed proportion for each insurer / reinsurer.

Signing Down - A term used to explain the process where the original "line" indicated by an insurer / reinsurer for a placement is reduced so that each participants "signed line" adds up to 100%.

Slip - A document used to summarise the terms and conditions under which a contract of insurance or reinsurance has been entered into.

Soft Market - The stage in an underwriting cycle where capacity is plentiful, insurers compete aggressively and continue to lower premiums and broaden the cover provided, leaving insureds with many alternatives to arranging insurance. See also Hard Market.

Spread Loss Reinsurance - A form of non proportional reinsurance usually written on a stop loss or excess of loss basis, where the reinsurance premium is retrospectively adjustable based whole or in part on the loss experience during the nominated period.

Static Risk / Pure Risk - Exposures which are not significantly affected by the business environment and have a constant level of uncertainty over time. Generally a static risk results only in a potential for loss. See also Dynamic Risk.

Statute of Limitations - Legislation which specifies a maximum period of time in which an entity can commence a legal action against another entity.

Stop Loss Reinsurance - A form of non proportional reinsurance where the reinsurer indemnifies the insurer for the total amount of losses for stipulated classes of business which exceed a pre-agreed retention amount in any one period. Also known as aggregate excess of loss reinsurance.

Subrogation - When an insurer has provided indemnity under the policy, they are entitled to assume the rights of the insureds to pursue recovery against a negligent third party, to try and mitigate their losses. (Australia's Insurance Contracts Act legislation imposes some limits on the insurers rights of subrogation).

Sunset Clause - A provision in an insurance contract limiting the indemnity available to losses which occur or are reported within a specified period of time during and/or after expiration of the contract.

Surplus - The amount by which an insurers assets exceed their liabilities. Some measurements exclude certain categories of assets in the calculation.

Surplus Lines - Primarily used in the USA to describe risks for which there is no standard insurance market available and are therefore written by non-admitted insurance companies.

Surplus Reinsurance - A form of proportional reinsurance where the amount of risk ceded to the reinsurer is based on a formula which takes into account:

Syndicate - Most notably used at Lloyd's of London, but describes the formal association of individuals or organisations, who pool capital and resources to underwrite insurance risks.

Surety / Surety Bond - An agreement under which an insurance company or financier commits to compensate a third party in the event that a nominated party to a contract fails to perform their responsibilities. A surety is often used in lieu of a cash bond or letters of credit.


Extract from "The Executives Guide To Insurance and Risk Management", © QR Consulting 2002.