What is Reinsurance?
Reinsurance is insurance for insurance companies. Many insurers around the world purchase reinsurance to reduce
their exposure to the risks they have underwritten in order to provide better protection to their clients. While the
concept may be simple, like most industries, reinsurance has a terminology that can be difficult to interpret for
those who do not use it on a daily basis.
At PartnerRe, we thought a glossary of reinsurance terms might help de-mystify the business and its language.
Acquisition Costs
Expenses incurred by the insurer or the reinsurer in assessing business, including producer commissions and
brokerage.
Adjustable Rate
A percentage rate applied to a cedent’s sums insured or premium income which is used to determine the final
premium payable.
Aggregate Deductible
A loss limit which is retained by the cedent and is gradually eroded by frequency of loss activity.
Aggregate Limit
The maximum sum of recoveries payable under a reinsurance agreement.
Alternative Risk Transfer (ART)
Non-traditional methods of insurance or reinsurance, for example, securitization.
Assume
The term used for accepting a risk; the opposite of cede.
Attachment Basis
A provision that determines whether, and in what manner, a reinsurance agreement covers a specific loss.
Attachment Point
In excess of loss reinsurance, the loss level at which reinsurers begin to pay.
Balance
A reference point used to measure premium volume against the maximum exposure for a reinsurance agreement.
Bank
The sum of the total premiums paid to reinsurers over a multi-year period, less any losses paid by reinsurers on a
layer. For example, payments of $10,000 premiums over five loss-free years would be called a $50,000 bank.
Broker Market
When business is written through reinsurance intermediaries (brokers), it is referred to as business obtained
in the Broker Market.
Broker of Record
The appointed broker for a contractual reinsurance agreement.
Burning Cost Ratio
A tool used in determining rates for excess of loss reinsurance. Also called the ‘pure loss cost’, it is the ratio
of historical incurred losses (usually excluding IBNR and indexed to portfolio growth) of a reinsurance
agreement to the subject premium.
Capacity
The maximum dollar amount of exposure that an insurer or reinsurer can underwrite. Capacity may be used
when referring to a single risk, a program, a line of business or an entire book of business.
Captive
An insurance or reinsurance company, formed by a large, often multi-national corporation, which insures or
reinsures the risks of its parent corporation. Most captives are located in tax-advantaged locations.
Bermuda is the leading domicile for captives followed by Cayman, Vermont and Guernsey.
Casualty Reinsurance
Liability or third party business.
Catastrophe
High severity events such as hurricanes, earthquakes and other disasters, involving multiple insureds
and/or locations. Catastrophe reinsurance indemnifies the insurer for portions of such losses.
Cedent
An insurance company which contractually transfers (cedes) a portion of risk to a reinsurer. The term
can also refer to a reinsurer which transfers (cedes) a portion of its portfolio to a retrocessionnaire.
Ceding Commission
The costs incurred by the cedent in negotiating a reinsurance contract including 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.
Clash Cover
A form of reinsurance protecting a cedent’s exposure to multiple retentions and a larger single loss than intended
due to losses incurred by two or more insureds for the same event, or clash.
Coinsurance
The part of the reinsurance cover that the insurance company retains and does not reinsure.
Combined Ratio
The sum of the loss ratio and the expense ratio. The combined ratio is used in both reinsurance and insurance to
indicate whether the company is making a profit on its underwriting operations. A combined ratio below 100% is
representative of a profitable underwriting portfolio.
Commutation
The conclusion of all obligations between the parties to a reinsurance agreement, often completed with
a lump sum cash settlement.
Cover Note
The document or receipt issued by the intermediary to the cedent confirming terms and conditions and
the percentage share placed with each reinsurer.
Direct Market
When reinsurance business is written directly by a reinsurer, rather than through a third party or broker,
it is referred to as business obtained in the Direct Market.
Direct Written Premium
An insurer’s premium income before taking outward reinsurance into account.
Earned Premium
The portion of a reinsurer’s premium income which has been allocated to the current accounting period.
Estimated Maximum Loss (EML)
An underwriter’s or insurer’s assessment of the worst possible loss scenario that might be experienced by an
individual risk or collection of risks.
Event / Occurrence
A natural or man-made disaster which gives rise to a large loss.
Excess of Loss Reinsurance
A form of reinsurance where the reinsurer’s liability only takes effect when an event involving several risks
exceeds a certain figure and then is only liable in excess of that amount.
Expense Ratio
The percentage of premium income that goes to expenses, calculated by dividing incurred expenses by written
premiums. A reinsurance company’s expense ratio reflects how much it costs a company to acquire its premiums.
Exposure
The measure of an insurer’s or reinsurer’s possible losses.
Extra Contractual Obligations (ECO)
A term used to refer to damages awarded by a court against an insurer which are outside the conditions of the
insurance policy. Examples are punitive damages and losses in excess of policy limits.
Facultative Reinsurance
A form of reinsurance where the insurer has the option (faculty) of submitting individual risks and the reinsurer
has the option of accepting or declining those risks on an individual basis.
Financial Guaranty
Insurance which indemnifies an insured against asset impairment due to counter-party default, adverse currency or
interest rate movements, or political acts such as government expropriation.
Financial / Structured Risk Transfer
A form of reinsurance in which underwriting risk transfer between cedent and reinsurer is substantially reduced
through contractual provisions requiring loss payments to be matched against premiums and investment income.
First Loss
The first part of a loss. This is the most likely part to be retained by the reinsured.
Follow the Fortunes
A condition in a reinsurance contract where it is agreed that the reinsurer is bound to the same experience as the
cedent, in terms of the risks covered.
Franchise
A term used to describe the amount that triggers a policy.
Gross Line
The maximum limit an insurer or reinsurer is willing to accept before ceding portions of their exposures to a
reinsurer or retrocessionnaire. Such limits are usually expressed per insured, per line of business. See Net Line.
Gross Net Premium Income (GNPI)
Total of all gross premiums after deductions for reinsurance costs but before deductions for commissions.
Ground Up Loss
The total measure of an insurance loss, including deductibles and before any retention or reinsurance is applied.
Hard Market
A fluctuation in the insurance/reinsurance market characterized by an increase in the pricing level of insurance and
reinsurance coverage. A hard market follows a soft market and is often triggered by a major catastrophe loss
and/or a prolonged period of operating losses.
IBNR (Incurred But Not Reported)
Insured losses that have occurred but have not been reported, and that are accounted for by an estimated reserve.
See Long Tail Liability.
Layer
A term which refers to a segment of a reinsurance cover.
Lead Reinsurer
The reinsurer who first signs the slip after negotiating the terms, conditions and pre- mium rates; reinsurers who
subsequently sign on to the slip under those terms and conditions are considered “following reinsurers”.
Letter of Credit
A document issued to an insurer or reinsurer by a bank, guaranteeing the withdrawal of funds in the event of a
valid claim.
Lloyd’s
A London-based insurance and reinsurance organization in which individuals, called “Names”, or groups of
individuals, called “Syndicates”, rather than a single corporation, are at risk. Membership has now been extended
to corporations, called “Corporate Capital”, underwriting under limited liability.
London Market
A collective term to describe all underwriting companies (insurance and reinsurance) and Lloyd’s, based in the
City of London.
Long-Tail Liability
A liability that takes time to become known or a claim which has been separated by the circumstances that caused
it by more than ten years. Characterized by a high IBNR.
Loss Adjustment Expense (LAE)
Expenses incurred by an insurer during its adjustment, recording and settlement of claims, additional to the claim
payment itself.
Loss Development
The difference in the amount of losses between the beginning and end of a time period.
Losses in Excess of Policy Limits (XPL)
A term used to refer to damages awarded by a court against an insurer, due to the insurer having failed to settle a
third party claim within the policy limits. See Extra Contractual Obligations and Punitive Damages.
Loss Ratio
The relationship of losses incurred (including applicable IBNR) plus loss adjustment expenses to earned premiums
for an accounting period.
Maximum Foreseeable Loss (MFL)
Worst case scenario under which an estimate is made of the maximum dollar value that can be lost if a catastrophe,
such as a hurricane or earthquake, occurs.
Net Line
The maximum limit an insurer or reinsurer is willing to accept after ceding portions of their exposures to a
reinsurer or retrocessionnaire. Such limits are usually expressed per insured, per line of insurance, etc. See Gross
Line.
Non-proportional Reinsurance
An arrangement in which a reinsurer makes payments to an insurer whose losses exceed a predetermined retention
level. Non-proportional reinsurance is either facultative or treaty. See Catastrophe, Excess of Loss Reinsurance,
Stop Loss.
Obligatory Treaty
A treaty where the cedent is obligated to cede the defined business and the reinsurer is required to accept.
Over-line
Coverage that exceeds the normal capacity of an insurer or reinsurer.
Probable Maximum Loss (PML)
An estimate of the maximum dollar value that can be lost usually assuming that loss control systems (.
sprinklers and firewalls) operate. See Maximum Foreseeable Loss (MFL).
Professional Reinsurer
A reinsurance carrier that is focused on writing reinsurance business only.
Profit Commission
A profit allowance payable to a reinsured from the reinsurer. This is a pre-determined percentage agreed by both
parties and payable when the contract period is closed and the results are finalized.
Program
A series of, usually consecutive, reinsurance layers.
Pro Rata/Proportional Reinsurance
A form of reinsurance where the reinsurer shares losses in the same proportion as it shares premiums. Proportional
reinsurance can be divided into two basic forms: quota share, in which the same percentage applies to all policies
reinsured, and surplus, in which the percentage may vary from policy to policy.
Punitive Damages
A term that refers to damages awarded by a court against an insurer in addition to compensatory damages.
See Extra Contractual Obligations and Losses in Excess of Policy Limits.
Quota Share Reinsurance
See Pro Rata/Proportional Reinsurance.
Rate on Line
Reinsurance premium divided by indemnity. The rate which, when multiplied by the indemnity, would
produce the premium. The inverse is known as the payback period. For example, a $10,000,000 catastrophe
cover with a pre- mium of $2,000,000 would have a rate on line of 20% and a payback period of five years.
Reinstatement
The restoration of a reinsurance cover limit once it has been exhausted (used up) by a loss.
Reinstatement Premium
An additional reinsurance premium paid to restore (reinstate) the portion of limit used in the event of a loss.
Reinsurance
A form of insurance for insurance companies. By purchasing reinsurance, an insurer can reduce its exposure by
ceding a portion of its liability to the reinsurer.
Reinsurance Intermediary/Broker
A third party used in the design, negotiation and administration of a reinsurance agreement. Intermediaries consult
cedents on the type and amount of reinsurance coverage they need and negotiate the placement of coverage with
reinsurers. See Broker Market and Direct Market.
Reinsurer
A company which contractually assumes all or part of an insurer’s or reinsurer’s risk.
Renewal Season
The period during which most reinsurance policies are renewed. The majority of reinsurance policies have a
January 1st inception date.
Reserves
An estimated amount put aside in the insurer’s or reinsurer’s accounts for claims that have not been paid.
Retention
The portion of a loss retained by the cedent under a reinsurance agreement. The level at which the retention is used
up is the attachment point for the reinsurer.
Retrocession
The transfer of all or part of a reinsurance risk from one reinsurer to another (retrocessionnaire).
Retrocessionnaire
A reinsurer that contractually assumes all or part of a reinsurance risk from another reinsurer. The transfer is
known as retrocession.
Salvage and Subrogation
Certain rights of the insured which automatically transfer to the insurer upon settlement of a loss. Salvage
applies to any proceeds from the recovery of damaged property, while subrogation refers to the proceeds of
negotiations or legal actions against negligent third parties.
Securitization
Risk transfer techniques in finance and insurance often resulting in the creation of securities (. bonds), that are
backed by cash flows from a pool of assets or liabilities.
Slip
A binding contract authorizing the acceptance of risk, often including more than one reinsurer.
Soft Market
A fluctuation in the insurance/reinsurance market, characterized by increased competition in which prices are
depressed, and is usually attributed to excess capacity (more sellers than buyers) and/or high interest rates. See
Hard Market.
Special Acceptance
A risk which, due to underwriting class or limit, would not otherwise be covered but is attached to the
reinsurance agreement by specific written agreement between the cedent and the reinsurer.
Spiral/LMX
An LMX contract is excess of loss reinsurance for London Market companies. These retrocessional contracts are
placed without coinsurance or significant retention and the same loss may therefore be passed backwards and
forwards between the various participants never diminishing in size. This is colloquially called the “spiral.”
Stop Loss Reinsurance
A form of reinsurance under which the reinsurer protects a cedent against an aggregate amount of claims which
exceed a pre-determined level of the cedent’s earned premium income during that year.
Subject Premium
Also known as ‘base premium’, a ceding company’s premium (written or earned) to which the adjustable rate is
applied in order to calculate the reinsurance premium.
Surplus Reinsurance
See Pro Rata/Proportional Reinsurance.
Treaty
A reinsurance agreement covering a book or class of business which is automatically accepted on this basis by a
reinsurer. A treaty contains contract terms along with specific risk definition, definitions of limit and retention, and
provisions for premium, commission and duration.
Ultimate Net Loss (UNL)
The total payments resulting from a claim, including covered loss adjustment expenses to which the retention and
the reinsurance limits apply.
Underwriter
An insurer or reinsurer (or a person employed by the insurer or reinsurer) that examines, accepts or rejects risks
and classifies those accepted in order to charge the proper premium. The underwriter assumes contractual
responsibility for the risk and “signs below” (underwrites) the terms of the insurance or reinsurance accepted.
Unearned Premium
The portion of a reinsurer’s premium income which will be allocated to a future accounting period.
Written Premium
The total of all premiums generated by all contracts written by a reinsurer in a certain period of time. See
Earned/Unearned Premium.
Wording
A contractual and authoritative document between two parties that outlines and confirms the acceptance of pre-
determined terms and conditions on the referenced business obligations.
