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Captive InsuranceGlossary

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From Captives and the Management of Risk and Captive Practices and Proceduresby Kathryn A. Westover

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Captive.com’s Captive Insurance CE Learning Center,featuring online courses on capti ve insurance and reinsurance, is an effi cient way to learn and sati sfy conti nuing educati on requirements. These online courses are approved in most states for all of these conti nuing educati on requirements: CPE for CPAs, insurance CE, and PACE.

Captives as Risk Retention MechanismsThe fi rst in a series of courses covering the fundamentals of risk fi nance and capti ve insurance, this course discusses the concept of “cost of risk” (COR) and how capti ve insurance can be used to reduce these costs. Aft er completi ng this course, you will understand what a capti ve is, how it can be used to reduce COR, and the diff erent types of capti ves that are in use today. You’ll also understand the various functi ons that must be performed by a capti ve to be eff ecti ve. Lastly, you will be introduced to the tax and accounti ng issues that impact the eff ecti veness of a capti ve in managing the fi nancial impact of risk.

Property and Casualty Reinsurance Fundamentals Property and Casualty Reinsurance Fundamentals provides a “macro” overview of the key themes associated with reinsurance. It is intended as an introducti on to reinsurance for CFOs, risk managers, insurance buyers,brokers, insurance underwriters, and insurance executi ves who would like to bett er understand the reinsurance mechanism and the industry that supports it without trying to become reinsurance experts. The course highlights some key aspects of reinsurance as well as some of the more vexing issues. The goal is to provide a generic under-standing of reinsurance and the reinsurance industry, which is somewhat apart from the general insurance industry.

Captives as Risk Transfer MechanismsThe second in a series of courses covering the fundamentals of risk fi nance and capti ve insurance, this course focuses on how capti ves are used when risks are transferred between risk takers to improve riskfi nancing effi ciency. You will learn about the types of risk that can be placed in a capti ve, techniques used to quanti fy risk and develop insurance rates, the underwriti ng processes, and how reinsurance is used to protect the capti ve. The fl exibility of capti ve insurance allows capti ves to fi nance risk off or on balance sheet, depending on which approach delivers the most fi nancial benefi t. The course will also provide an overview of some of the approaches of accomplishing this, such as with fi nite risk protecti on, loss portf olio transfers, and special purpose vehicles.

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Forming and Operating a Captive Insurer The third in a series of courses covering risk fi nance and capti ve insurance, Forming and Operati ng a Capti veInsurer examines three aspects of capti ves with emphasis on the legal environment in which capti ves must operate: the formati on of a capti ve, capti ve operati ons, and the issue of unrelated business. Students who successfully complete this intermediate-level course will understand the risk management purposes of using a capti ve,the diff erences between various types of capti ves, the factors aff ecti ng the choice of domicile for a capti ve,the fi ling procedures involved in forming a capti ve, and the responsibiliti es of a capti ve’s board members.

IRMICaptive Insurance

Glossary

International Risk Management Institute, Inc.

Dallas, Texas

www.captive.com

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IRMI Captive Insurance Glossary

ii

PREFACE

IRMI Captive Insurance Glossary is a compilation of terms and definitions thatoriginated in IRMI’s two captive resources written by Kathryn A. Westover—Captives and the Management of Risk and Captive Practices and Procedures. Ms.Westover developed these books for IRMI to satisfy our mutual desire toprovide the industry with a comprehensive source of knowledge on using acaptive to transfer risk and how to operate a captive insurance program thatwithstands economic and market cycles.

Understanding the terminology unique to the captive industry is essential tounderstanding what captives are and how they are used to manage risk. Ms.Westover documented and collected these terms for her IRMI publications,and we expanded upon them with more terms that had been published on ourCaptive.com website. The result is this IRMI Captive Insurance Glossary, whichwe are proud to offer you free of charge.

We hope that you find this glossary useful in advancing your success in thecaptive industry, and we invite you to become familiar with all of our captiveand risk financing resources, and see how they can help you achieve your andyour clients’ goals.

Copyright 2014. All Rights Reserved.

Fifth Printing May 2018

International Risk Management Institute, Inc.®

12222 Merit Drive, Suite 1600 • Dallas, TX 75251 • (972) 960–7693 • www.IRMI.com

International Risk Management Institute, Inc.® the owl logo, and IRMI® are registered trademarks.

IRMI Captive Insurance Glossary accident—allocated

A

accident year experience: Incurred losses and loss adjustmentexpenses (LAE) for only those claims incurred (reported forclaims-made policies) within a specific calendar year perioddivided into the earned premium for that same period. This lossamount is not final until all losses incurred (reported if claims-made) are settled. The premium amount does not change.

accreditation: A process developed by the National Associa-tion of Insurance Commissioners (NAIC) to review whether astate has a sound regulatory infrastructure. It includes a peri-odic examination of an insurance department’s policies andprocedures followed by issuance of a report. An insurer do-miciled in a nonaccredited state is more likely to be examinedby other states.

accumulation: In property and casualty insurance, the totalnumber of risks that could be involved in the same loss event(involving one or more insured perils).

accumulation period: In life insurance, the time duringwhich an annuitant makes premium payments.

acquisition costs: All expenses incurred that are directly at-tributable to acquiring accounts and issuing policies (e.g., com-missions to producers, ceding commissions paid to frontingcompanies to cover their profit and expense, premium taxesand other regulatory expenses such as residual market loads).

actual cash value (ACV): The cost of repairing or replacingdamaged property with other of like kind, quality, and in thesame physical condition; replacement cost less physical depre-ciation based on age, condition, time in use, and obsolescence.

actuarial report: An analysis intended to project ultimateloss costs using probability theory and other methods of sta-tistical analysis. Used to determine the adequacy of a proper-ty and casualty insurer’s statutory loss reserves and a life in-surer’s unearned premium (technical) reserves. May be thebasis of rate development.

additional insured endorsement: Policy endorsement to in-clude coverage for additional insureds by name, e.g., mort-gage holders or certificate holders in general. (Rather thannaming each additional insured, a blanket additional insuredendorsement can be attached to the policy.)

additional insureds: Names added to the insuring clause of apolicy, at the request of the insured, stating the interests in-volved. Additional insureds may be affiliated with the namedinsured and provided full coverage under the policy. Unaffili-ated entities will have an interest in the policy limited to aspecific exposure or time period.

adhesive contract: Contract issued by one party that does notrequire signature by the other party to be valid. The courts

will interpret contract conditions in favor of the party who ac-cepted the contract, rather than the one who constructed it.

adjuster: A person who settles claims for insurers or self-insurance pools who may be either an employee of the insur-ance company or an independent contractor engaged by the in-surer or self-insured. See also third-party administrator (TPA).

admitted/authorized reinsurance: Reinsurance for whichcredit is given in the ceding company’s annual statement be-cause the reinsurer is licensed or approved to transact busi-ness in the jurisdiction where the risk is located. See alsononadmitted balance.

admitted company: A company licensed or authorized to sellinsurance to the general public. In the United States, admittedcompanies are licensed on a state-by-state basis and differen-tiated from surplus lines insurers, which are authorized to sellinsurance in a state on a nonadmitted basis.

admitted insurance: The insurer is licensed in the state orcountry where the risk is located.

adverse selection: A situation in which an insurer or self-insurance pool fails to get an adequately broad cross sectionof risks and the result is greater-than-average exposure.

affiliated risk: The risks of the owners of the captive or theiraffiliates or of the participant in a captive cell when describ-ing risks insured in a captive. Can be either first-party orthird-party risk.

agent: Individuals working for the insurer to sell insurance;therefore, they are compensated by the insurer. May be com-pany employees of independent contractors. Must be licensedin all states where the insurance is written.

aggregate: The greatest amount recoverable under a policy orreinsurance agreement from a single loss or all losses incurredduring the contract period. May be multiyear or annual.

aggregate excess: Short for aggregate excess of loss. Amethod by which an insurer may recover excess losses after apolicy or reinsurance aggregate or underlying deductible hasbeen exhausted.

aggregate stop loss: Insurance purchased to attach excess ofan aggregate loss limit. See also stop loss.

aleatory contract: A contract where performance is in a fu-ture period. An insurance policy is aleatory—payment of pre-mium today for payment of future losses.

alien: An insurer domiciled outside the United States. (“For-eign” in the U.S. insurance regulatory system means an insur-er domiciled in another state.)

allocated loss adjustment expenses (ALAE): Defense and costcontainment expenses (e.g., legal defense costs, investigations,

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all—boards IRMI Captive Insurance Glossary

external experts, surveillance, etc.). Typically external costs,but can include internal costs. These costs may or may not beincluded within the policy limits.

all risks insurance: A term used to refer to any property orinland marine insuring form that insures against damage by“all risks” of loss, except those that are specifically excluded(as opposed to insuring against damage caused by specifical-ly “named perils”). Also called “special risks.”

alternative risk financing mechanism: A legal entity, suchas a captive insurance company, which assumes from one ormore entities the liability to pay their future losses; used as analternative to commercial insurance.

alternative risk transfer (ART): Financing risks outside ofthe commercial insurance regulatory system, which is de-signed to protect unsophisticated insurance buyers. Also re-fers to transferring risk using nontraditional methods, e.g.,combining insurance and noninsurance techniques.

A.M. Best rating: An evaluation published by A.M. BestCompany of all life, property, and casualty insurers domiciledin the United States and U.S. branches of foreign property in-surer groups active in the United States. The ratings are oftenused to determine the suitability, service record, and financialstability of insurance companies. Other rating agencies in-clude Standard & Poor’s.

annuitant: The person or persons (two or more) that receivean income benefit for life or during a specified period (theliquidation period) under an annuity contract.

arbitration clause: A provision found in many reinsurancecontracts whereby the parties agree to submit their disputes toan unofficial tribunal of their own choosing rather than acourt of law, generally subject to selection criteria and proce-dures set out in the clause, which produces an opinion ulti-mately enforceable by a court of law.

association captive: A captive insurance company that has asits primary purpose the insurance of the risks of the membersof an association that either sponsors or owns the captive.

assumed premiums: Premiums received or receivable forcoverage provided under a reinsurance agreement.

assumed reinsurance: Insurance accepted from another in-surer, e.g., an admitted (policy-issuing) company.

assumption of liability endorsement (ALE): An endorse-ment added to an insurance policy to provide that, in theevent of insolvency of the insurance company, the amount ofany loss that would have been recovered from the reinsurerby the insurance company will be paid instead directly to thepolicyholder by the reinsurer. Also referred to as a cut-through or assumption of risk endorsement.

attachment point: The dollar threshold or loss and expenseratio above which the reinsurer or excess insurer pays losses.

automobile liability insurance: Insurance that protects theinsured against financial loss because of legal liability forautomobile-related injuries to others or damage to their prop-erty by an auto.

automobile physical damage insurance: Automobile insur-ance coverage that insures against damage to the insured’sown vehicle. Coverage is provided for perils such as colli-sion, vandalism, fire, and theft.

B

back-to-back deductible: The deductible under the policyequals the policy limits.

bankassurance: Use of bank capital to underwrite and dis-tribute insurance.

base premium: See subject premium.

basic premium: The underwriting and administrative ex-pense component of premium; amounts required for adjustingof expected losses (see unallocated loss adjustment expenses(ULAE)). It is added to the pure premium to produce thestandard premium. In life insurance, the basic premium alsoincludes agent’s commissions.

basis risk: The random variation in values between a hedgeinstrument (i.e., the “hedge recovery”) and the actual loss ex-perience of the hedger (investor).

basket aggregate: An annual aggregate loss limit on a multi-line basis.

binder: A temporary insurance contract indicating coverageis in place pending execution of the actual contract. Usuallyissued for a limited time period such as 30 or 60 days.

blanket limits: Property insurance limits applying to multipleinsured locations, stated as the sum of all exposures or a fixedamount covering property wherever it is located.

blended finite risk: An insurance or reinsurance agreementthat combines risk transfer with financial insurance by insur-ing against multiple causes of loss, one or more of which isunderwritten on a finite basis.

Blue Book: The regulatory report filed by life, accident, andhealth insurers in the United States, named for its cover. Seealso convention statement.

boards and bureaus: As part of an insurer’s acquisition ex-pense, the amount of premium allocated to pay for participa-tion in rating agencies and for filing policies for approval byregulators.

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bond: A three-party contract under which the insurer agreesto pay losses caused by criminal acts (e.g., fidelity bonds) orthe failure to perform a specific act (e.g., performance orsurety bonds). The principal (i.e., the party paying the bondpremium) is also called the obligor, i.e., the party with theobligation to perform. If there is a default, the surety (i.e.,the insurer) pays the loss of the third party (the obligee).The obligor must then reimburse the surety for the amountof loss paid.

bordereau: A report provided periodically by the reinsureddetailing the reinsurance premiums and/or reinsurance losseswith respect to specific risks ceded under a treaty reinsuranceagreement.

Bornhuetter-Ferguson technique: An actuarial method offorecasting losses, using loss development and loss ratio.

broker: An intermediary who represents the insured in thepurchase of insurance or reinsurance. Therefore, the broker’scompensation should be from the insured, not the insurer, toprevent conflicts of interest.

buffer layer: The loss layer between an insured’s predictableworking layer losses and the attachment point of excess insur-ance. Losses are within the insured’s or an insurer’s retentioncapacity but not predictable.

builders risk: A type of fire insurance that indemnifies forloss of, or damage to, a building under construction; the lossmust be caused by specified or named perils.

bulk reserves: An amount of reserves established using a for-mula or loss ratio, rather than specifically identified case re-serves. The insurer records movements in losses in aggregatefor a period. Used with a loss portfolio transfer.

burning cost: The maximum probable amount of excess loss-es, used by excess of loss and catastrophe reinsurers as amethod of calculating amount of pure premium required overtime to pay reinsured losses.

business interruption: Coverage generally written as part ofa property policy, providing protection against losses result-ing from a temporary shutdown because of fire or other in-sured peril, e.g., computer virus. The insurance provides re-imbursement for lost net profits and necessary continuingexpenses. Limits and deductibles are stated as amount of daysthe business is interrupted.

business risks: Risks that are not “pure” but speculative, i.e.,the outcome could be loss, no loss, or profit.

C

calendar year experience: Incurred losses and loss adjust-ment expenses (LAE) for all losses (regardless of when re-ported) related to a specific calendar year divided into the ac-counting earned premium for that same period. Oncecalculated and established, this amount does not change.

cancellation: (a) Runoff basis means that the liability of thereinsurer under policies, which became effective under thetreaty prior to the cancellation date of such treaty, shall con-tinue until the expiration date of each policy. (b) Cutoff basismeans that the liability of the reinsurer under policies, whichbecame effective under the treaty prior to the cancellationdate of such treaty, shall cease with respect to losses resultingfrom accidents taking place on and after said cancellationdate. Usually the reinsurer will return to the company the un-earned premium portfolio, unless the treaty is written on anearned premium basis.

capacity: The largest amount of insurance or reinsuranceavailable from a company or the market in general. Capacityis determined by financial strength and is also used to refer tothe additional amount of business (premium volume) that acompany or the total market could write based on excess (un-used) capital, i.e., surplus capacity.

capital: The difference between a company’s assets and lia-bilities, often referred to as “net worth.” The source of capitalcan be amounts contributed by investors or the company’s re-tained earnings. For an insurance company, the assets used to

IRMI Captive Insurance Glossary bond—capital

capital—certificate IRMI Captive Insurance Glossary

calculate capital may be restricted as to amount and type. Forexample, minimum paid-in capital may need to be in the formof cash, and the captive statute will specifically define whatconstitutes “cash.” See also capital at risk; nonadmitted asset;paid-in capital; statutory capital; surplus.

capital at risk: Capital that is available to support the reten-tion of risk by a self-insurer or underwriter of risk. Such“risk capital” may be required in a captive insurance com-pany for payment of losses, in the event that premium col-lected is insufficient to pay losses and expenses. Typically itis an amount in excess of statutory capital, and can thereforebe used as collateral to ceding companies. May also be re-ferred to as surplus funds or risk bearing capital. See alsosurplus.

captive: An insurance company that has as its primary pur-pose the financing of the risks of its owners or participants.Typically licensed under special purpose insurer laws and op-erated under a different regulatory system than commercialinsurers. The intention of such special purpose licensing lawsand regulations is that the captive provides insurance to so-phisticated insureds that require less policyholder protectionthan the general public.

captive facility: An insurance or reinsurance company, li-censed under either commercial or captive insurance laws,used to provide captive insurance to insureds that may sharein the facility’s ownership or have no ownership position.

captive value added (CVA): The financial benefit to an orga-nization resulting from participation in a captive program as ashareholder and/or an insured. One formulaic approach tocalculating CVA uses net present value (NPV) program costcomparisons to show a captive’s contribution to an organiza-tion’s retention ability, i.e., the capacity creation effect, aswell as the lower after-tax cost, compared to self-insurance orcommercial insurance. The “value added” approach can alsobe used to recognize subjective as well as objective benefits.

case reserves: Reserves for losses and allocated loss adjustmentexpenses (ALAE) for specific claims reported to the insurer.

cash call: Provision whereby large losses can be collectedfrom reinsurers, rather than paid by the insurer on account orfrom funds withheld or a loss escrow account.

cash flow underwriting: Rating a risk based on an expecta-tion that any incurred losses will pay out slowly providing forthe insurer to earn investment income on reserves adequate tocover any rate deficiency. Common during “soft” marketswhen interest rates are high and insurers are competing formarket share.

casualty insurance: Insurance of losses arising when an acci-dent involving the insured’s property (e.g., a boiler) or ac-tions (e.g., as an employer) cause injury or damage to third

parties. Unlike liability insurance, there is no requirement fornegligence for a loss to be covered. The casualty policy alsocovers loss to the insured’s own property that caused the loss.

catastrophe bond: A debt instrument where the promise to payinterest on the loan and return of principal is contingent on for-tuitous events of a catastrophic nature, such as a natural disaster.May be used instead of purchase of catastrophe reinsurance.

catastrophe reinsurance: Protects against multiple losses un-der one policy class in one occurrence, e.g., a 72-hour periodof a natural disaster. Also known as “cat cover.”

causes of loss: Used in casualty insurance to identify an ac-tion or accident that, when combined with an exposure andhazard, creates risk of loss. Can be direct (the action immedi-ately precedes the loss) or indirect (part of an uninterruptedchain of events leading to the loss).

cede: When a company reinsures its liability with another, it“cedes” business.

ceded premiums: Premiums paid or payable by the captive toanother insurer for reinsurance protection.

cedent: The reinsured or ceding company.

ceding commission: A fixed percent of original gross premi-um, or a flat dollar amount, paid by the assuming reinsurer toa ceding company to cover acquisition costs and other policyexpenses.

ceding company: The insurer that buys the reinsurance(cedes the risk).

cell captive: A sponsored captive or rent-a-captive, whichmaintains underwriting accounts separately for each partici-pant. May be called protected cell captive (PCC) or segregat-ed cell insurer. If the cells are legally segregated, it may beused to securitize risk.

certificate holder: An additional insured, as evidenced by is-suance of a certificate of insurance.

certificate of compliance: Statement issued by an insurancedepartment or other regulatory authority confirming that an in-surer is in compliance with applicable statute and regulation.

certificate of insurance: Written verification from an insur-ance company of the existence of insurance, the policyamount, the insured(s), and the period for which coverage iseffective. A certificate may simply provide evidence of thenamed insured’s insurance, or may evidence coverage for ad-ditional insureds.

certificate of reinsurance: A record of reinsurance coveragepending replacement by a formal reinsurance contract, whichis usually a facultative certificate. Opportunity is given forthe ceding company to acknowledge acceptance of terms,

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IRMI Captive Insurance Glossary cession—contingent

with the reinsurer’s obligation contingent on validity of keyinformation stated in the certificate.

cession statement: A periodic statement of subject premiumsand the losses and expenses incurred under the reinsured pol-icies, provided by the ceding company to a reinsurer.

claims-made basis: A form of reinsurance under which thedate of the claim report is deemed to be the date of the lossevent. Claims reported during the term of the reinsuranceagreement are therefore covered, regardless of when they oc-curred. A claims-made agreement is said to “cut off the tail”on liability business by not covering claims reported after theterm of the reinsurance agreement—unless extended by spe-cial agreement. See also occurrence basis.

claims-made insurance: Insurance that provides coveragefor claims made against an insured within the policy period,regardless of when the action or accident giving rise to theclaim occurred. The insured must have been notified of theclaim after the retroactive date and must report it to the insur-er before the expiration of the policy or any extended report-ing period.

clash cover: Excess of loss reinsurance on a per-event or ac-cident basis to protect against losses in more than one class ofbusiness in a single occurrence.

class of business: Types of insurance, classified according tothe perils insured and the exposure. The purpose is to grouphomogeneous risks for purposes of rate development. See al-so line of business.

coinsurance: 1. A provision in a property insurance policyunder which the insured agrees to carry a certain amount ofinsurance expressed as a percentage of the value of the prop-erty. It provides for the full payment, up to the amount of thepolicy, of all losses if the insurance carried is at least equal tothe specified percentage. However, if the insured fails to car-ry the necessary amount of insurance, he or she assumes aproportionate share of each loss, regardless of the size of theloss, up to the policy limit. 2. In health insurance and somecasualty lines, the percentage share of losses that an insuredretains. It is a form of deductible.

collateral: Assets that are provided as security to ensure sat-isfaction of a future liability. Often required by ceding com-panies, to minimize their credit risk, or offset a nonadmittedbalance. A direct writing captive writing deductible reim-bursement coverage may provide collateral to the insurancecompany that has issued a deductible policy to the captive’sinsureds. The most common form of collateral posted by cap-tives or captive insureds or captive shareholders is the bankletter of credit (LOC), but insurance trust funds may be used.See also letter of credit; Regulation 114 Trust.

combined ratio: An insurer’s incurred losses, loss adjustmentexpenses (LAE), acquisition costs, and general and administra-tive costs compared to earned premiums for the same period.

commercial multiple peril (CMP) policy: A package type ofinsurance that includes a wide range of essential liability andproperty coverages for businesses.

commercial risks: The risks arising from the operations offor-profit and tax-exempt organizations (as opposed to therisks of individuals and households).

commission: In reinsurance, the primary insurance companyusually pays the reinsurer its proportion of the gross premiumit receives on a risk. The reinsurer then allows the company aceding or direct commission allowance on such gross premi-um received, large enough to reimburse the company for thecommission paid to its agents, plus taxes and its overhead.The amount of such allowance frequently determines profitor loss to the reinsurer.

commutation agreement: An agreement between the cedinginsurer and the reinsurer that provides for the valuation, pay-ment, and complete discharge of all obligations between theparties under particular reinsurance contract(s). Used if an in-surer is withdrawing from underwriting a class of business.

commutation clause: Provision in a reinsurance agreementthat allows for payment of cash by one party to release theother from all future obligations to pay claims after a certainperiod of time. Common in long-term disability insurance,where the reinsurer wishes to settle and discharge all futureobligations for claims that have a very long payment pattern.Also used in finite risk reinsurance.

compensatory damages: Payments to a plaintiff to indemnifythe plaintiff for actual losses sustained as a result of an in-sured’s negligence.

confidence level: The credibility attached to loss projectionsin an actuarial analysis.

consequential loss: A loss not directly caused by a peril in-sured against but instead resulting indirectly following a losscaused by an insured peril.

consideration: The value received to bind a contract; also,payment for an annuity.

consolidation: 1. financial—Combining the financial results ofa subsidiary company with its shareholder, resulting in the elim-ination of intercompany accounting entries (transactions be-tween affiliates offset each other). 2. tax—The filing of a singleincome tax return for all companies within a corporate group.

contingent commission: Commission based on the profitabil-ity of the ceded risk. Can be fixed or sliding scale.

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contingent liability: Coverage for losses to a third party forwhich the insured is vicariously liable. Contingent liabilitycan be assumed, e.g., for losses arising from product or ser-vice failure, where the insurer has assumed liability by pro-viding a performance warranty. Also written as a contingentbusiness interruption form.

continuous contract: A form of reinsurance contract for ac-cepting new business that does not terminate automaticallybut rather is intended to continue from year to year unless oneof the parties delivers notice of intent to discontinue, or termi-nation is mutually agreed to in accordance with the termina-tion provisions of the contract.

contractual liability: An obligation assumed by contract topay damages for which another is legally liable; the liabilitywould not exist in the absence of the contract.

contributing excess: Where there is more than one reinsurersharing a line of insurance on a risk in excess of a specifiedretention, each such reinsurer shall contribute toward any ex-cess loss in proportion to its original participation in suchrisk. Example: Retention $100,000, Reinsurer A accepts one-half contributing share part of $1 million in excess of said$100,000. Reinsurer B accepts remaining one-half contribu-tion share part of $1 million.

controlled unrelated business: Risks that are not owned bythe captive shareholder but, because of an existing businessaffiliation, e.g., a franchise or joint venture relationship, theowner of the captive exercises risk management control overthe risk.

convention statement: The annual report format developedby the National Association of Insurance Commissioners(NAIC) and adopted by member states as the standard for allcommercial insurers. Convention statements are filed by aninsurer in its domicile and copied to the NAIC for InsuranceRegulatory Information System (IRIS) ratios and risk-basedcapital calculations to be published. See also Blue Book andYellow Book.

convergence: In the financial services industry, the coming to-gether of credit institutions and insurance companies to devel-op products that combine the elements of each industry sector.

core capital: The statutory capital of a sponsored captive, asdistinct from the capital and surplus available to support theunderwriting of risk in a captive cell.

corridor deductible: A deductible applied to an excess losslayer, calculated as a percent of the loss above the attachmentpoint, or as a per occurrence or aggregate dollar amount.

cost of risk: The financial impact on an organization of un-dertaking activities with an uncertain outcome. The cost ofmanaging risks and incurring losses.

countersignature: State insurance laws that require an insur-ance policy to be signed not only by the insurer issuing thepolicy but an agent residing in the state where the risk is lo-cated. Risk retention groups (RRGs) have resisted compli-ance with countersignature laws, since this increases the costof policy issuance.

cover notes: A binding reinsurance confirmation in the form ofan “adhesive contract,” i.e., not requiring signature by the ced-ing company to be valid. Operates like a binder/declarationspage, providing details about the type of reinsurance, form ofcontract, lines of business reinsured, effective date, cancellationprovisions and territory, commissions, and exclusions.

credibility: The weight assigned to specifically analyzed da-ta, compared to a broader set of data. A measure of the rela-tive predictive value of the data being reviewed. The weightassigned generally increases with the increase in the numberof risks in the data analysis. A lower weighting (credibilityfactor) means higher levels of variability in outcomes for theanalyzed data.

credit for reinsurance: A statutory accounting procedurepermitting a ceding company to treat amounts due from rein-surers as assets or reductions from liability based on the sta-tus of the reinsurer. See also nonadmitted balance.

contingent—credit IRMI Captive Insurance Glossary

IRMI Captive Insurance Glossary credit—direct

credit insurance: Coverage against insolvency of a customer,which provides protection against payment default on loan,interest, or scheduled payments. Also known as “bad debts”insurance.

credit life insurance: Term life insurance that pays off thebalance of a loan if the creditor dies. Usually sold by banks orfinance companies to their customers at the point of sale.

credit wrap: A form of financial guarantee insurance, cover-ing not all debts of the creditor, but a specific loan, debt issu-ance, or other financial transaction.

cut-through clause: Used with retrocessions. The primary in-surer has the ability to receive reinsurance payments directlyfrom the retrocessionaire if unable to recover from the reinsurer.

D

declarations: Statements to the insured specifying informationabout the risks insured and the premium. Usually a part of theapplication in life insurance; in property and casualty policies,the declarations are the first page or pages of the policy.

deductible: The amount of loss deducted from the limit of in-surance, not payable by the insurer.

deductible plan: In workers compensation, a policy form filedwith state regulators that allows employers meeting certain fi-nancial strength or size criteria to have specified per-claim reten-tions. The insurer remains responsible for claim payment if theinsured defaults. Also known as a filed deductible policy.

deferred acquisition cost (DAC): The amount of an insurer’sacquisition costs incurred as premium is written but earnedand expensed over the term of the policy. The unearned por-tion is capitalized and recognized as an asset on the insurer’sbalance sheet. Under statutory accounting all acquisitioncosts are 100 percent earned and expensed at inception of thepolicy, creating an immediate reduction in surplus. In life in-surance, acquisition costs are recognized as premium isearned, creating a tax effect referred to as the DAC tax.

deferred tax asset: The amount of loss reserves or unearnedpremium that is not deducted from an insurer’s income whencalculating income taxes. The deferral in the tax deductionarises because of the requirement to discount loss and un-earned premium reserves. The insurer records an asset equalto the expected future amount of the tax deduction.

Department of Labor (DOL): Federal governmental bodywith oversight over employment-related issues including em-ployee benefits covered under the Employee Retirement In-come Security Act (ERISA).

deposit: See funds withheld.

deposit accounting: The method of accounting for premiumwhen the policy or reinsurance agreement does not qualify asinsurance. The premium is not recognized as income but as adeposit or contribution to the insurer’s surplus. Losses paidare not an expense but rather return of capital. Since premiumdoes not flow though the income statement, the insurer can-not reduce income by the increase in loss reserves.

deposit premium: The amount of premium (usually for an ex-cess of loss reinsurance contract) that the ceding company paysto the reinsurer on a periodic basis during the term of the con-tract. This amount is generally determined as a percentage ofthe estimated amount of premium that the contract will producebased on the rate and estimated subject premium. It is often thesame as the minimum premium but may be higher or lower. Thedeposit premium will be adjusted to the higher of the actual de-veloped premium or the minimum premium after the actualsubject premium has been determined by audit or reporting ofthe actual exposures insured during the coverage period.

derivative contract: A financial contract (i.e., a promise to payan amount to the holder of the contract at a specified time or un-der specified conditions) where the value of the contract isbased on certain variables, e.g., an index of commodity prices.

development factor: The percentage amount by which re-ported losses for a given time period must be multiplied toadjust for claims development, which is the amount of lossunknown at the time the initial loss reserves were established.

difference-in-conditions (DIC): A policy that insures againstperils excluded in a special risk policy or supplements cover-ages in a named perils policy. Often used to provide flood andearthquake cover.

difference-in-limits (DIL): A DIL policy provides additionalloss limits for risks already covered under other policies.Captives may write combined DIC/DIL policies.

direct loss: Loss resulting directly and immediately from thehazard insured against. A policy may insure direct loss or di-rect and indirect (consequential) loss. Also used sometimes bycaptives to identify losses under policies directly insured by thecaptive, as opposed to losses assumed from a front company.

directors and officers (D&O) liability insurance: Protectsdirectors and officers against suits arising from their actions.May or may not cover shareholder derivative actions.

direct premiums: The gross premium income for coverageunder policies issued by the captive.

direct procurement: The purchase of insurance by an insureddirectly from an insurer, rather than accessing coveragethrough a broker. This procedure is commonly used by largecommercial buyers of insurance that reside in states or coun-tries that permit insureds to purchase nonadmitted insurance.

7Copyright © 2014 International Risk Management Institute, Inc.

direct—expense IRMI Captive Insurance Glossary

direct writer: An insurer or reinsurer that accepts businessdirectly from insureds or reinsureds without requiring busi-ness to be submitted through a broker or intermediary.

direct writing: The insurance company issues the insurancepolicies to its named insureds.

direct writing captive: A captive that issues policies of insur-ance to its insureds. See also reinsurance captive.

directors and officers (D&O) liability insurance: Protectsdirectors and officers against suits arising from their actions.May or may not cover shareholder derivative actions.

discovery period: The time allowed the insured after termi-nation of a policy to report a loss that occurred during the pe-riod covered by the contract and that would have been recov-erable had the contract continued in force.

distributions: See policyholder dividends.

distribution system: The method by which an insurancecompany reaches its insureds, i.e., as direct writer, wholesal-er, agency system, or broker market.

domicile: The state or country that licenses an insurancecompany, and has primary regulatory oversight over that in-surer. A captive domicile may or may not have special pur-pose legislation under which it licenses special purpose insur-ers referred to as “captives.”

dynamic financial analysis: Statistical modeling techniquesthat project an outcome not on a static basis, i.e., under one setof defined assumptions or the same assumption with one ortwo variables changed, but to project a range of possible out-comes assuming constant movements in interrelated variables.

dynamic risk: Risks that arise as a result of organizationalchange.

E

earned premium: The amount of premium covering the pe-riod a policy has been in force. Usually property, casualty,and health premium is earned in equal proportion to theamount of time elapsed since policy inception, i.e., 1/12 permonth, but life insurance and some property and casualtypolicies insuring seasonal risks may earn in proportion to theamount of exposure.

effective date: The date and time at which an insurance bind-er, policy, or contract goes into effect.

effective tax rate: The sum of federal and state taxes applicableto an insured’s income, taking into account loss carry forwards.

831(b) captive: A captive that may be taxed under Internal Rev-enue Code § 831(b), which provides that a captive qualifying to

be taxed as a U.S. insurance company may pay tax on invest-ment income only in any year that its written premium is $2.2million or less (subject to inflation adjustments). Such captivesare also known as “microcaptives.”

Employee Retirement Income Security Act (ERISA) of1974: Federal law that established rules and regulations togovern employer-provided pensions and other employee ben-efits provided to U.S. employees.

endorsement: An amendment to an insurance policy that insome way modifies the original contract provisions. May be at-tached to the policy at the time of issuance or added during thecontract period. May or may not require premium adjustment.

engineering: See loss control.

enterprise risk management: A strategy for identifying,controlling, and financing of all sources of risk within an or-ganization in a coordinated manner; an effort to provide in-surance solutions to business risks not historically insuredunder property and casualty policies.

errors and omissions (E&O) insurance: Coverage protect-ing insureds for damages arising out of the insureds’ acts, er-rors, or omissions when performing their duties, like profes-sional liability coverage.

event: A loss occurrence where there are multiple claimswith a single cause of loss. Could affect one or more insuredsand one or more policy.

excess insurance: Insurance over a self-insured retention or aprimary insurance policy. If the latter, it only raises the limit butdoes not provide wider coverage, as does an umbrella policy.

excess of loss: The reinsurance limit attaches above a per oc-currence or aggregate limit.

excess point: The dollar attachment point for the reinsurer.

exclusions: Specific perils and exposures identified as not be-ing covered under a particular policy.

exemplary damages: See punitive damages.

ex gratia payment: A payment made for which the company isnot liable under the terms of its policy. Usually made in lieu ofincurring greater legal expenses in defending a claim. Rarely en-countered in reinsurance as the reinsurer by custom and for prac-tical reasons follows the fortunes of the ceding company.

expediting expense: Costs to complete repairs to put the in-sured back in business as rapidly as possible, even if a tem-porary arrangement. Used chiefly with boiler and machineryinsurance.

expense load: The amount of acquisition and other costs in-cluded in premium in addition to the pure premium. This

8 Copyright © 2014 International Risk Management Institute, Inc.

IRMI Captive Insurance Glossary expense—financial

factor provides for overhead expense and profit margin in-cluded in the gross premium (or rate).

expense ratio: The percentage of premium used to pay allthe costs of acquiring, writing, and servicing insurance andreinsurance.

experience: The loss record of an insured, including all in-curred losses, whether insured or not.

experience modifier (“mod”): Factor based on loss experi-ence by which insurance premiums are adjusted. Used in cal-culating workers compensation rates.

experience rating (loss or merit rating): A method of ratingunder which the rate is based on the insured’s own experi-ence, rather than on industry statistics or filed rates for an un-derwriting class as a whole. See also prospective rating andretrospective rating.

exposure data: Information about an insured’s operations,e.g., revenues, property values, payroll, vehicle, or employeehead count; the number by which rates are multiplied to cal-culate premium.

exposure rating: A method of rating, usually applied to ex-cess of loss reinsurance, under which the rate is determinedbased on an analysis of the exposure inherent in the businessto be covered and not on the loss experience the business hasdemonstrated in the past. Both exposure rating and loss ratingcan be used by the reinsurance underwriter to determine theprice that is quoted.

exposures: A measurable unit by which premium is to be cal-culated (e.g., revenues, payroll, vehicles, property values).

extended coverages: Additional coverages added to a firepolicy. Protection for the insured against property damagecaused by windstorm, hail, smoke, explosion, riot, strike, civ-il commotion, vehicle, and aircraft. Provided in such packagepolicies as commercial multiperil.

extended reporting period (ERP): A provision contained inmost claims-made policies that provides coverage under anexpired claims-made policy for claims first made after thepolicy has expired. The period of time allowed to reportclaims is often limited. Additional premium may be requiredto extend the reporting period.

extra contractual obligations (ECOs): The requirement un-der a policy that the insurer pay certain losses or expenses notarising from the insuring agreement but from externally im-posed obligations, e.g., fines from a court or regulatory body.If ECOs are covered under a reinsurance agreement, the rein-surer pays punitive damages imposed on the insurer.

extra expense insurance: Coverage that pays for extra coststo maintain vital operations after a loss. Business interruption

insurance also covers such expense, but only up to the pointthat the costs reduce loss of profits.

F

facultative reinsurance: Per risk reinsurance, i.e., the rein-surer underwrites each risk (insured location) separately andretains the right to decline a specific piece of business.

Federal Liability Risk Retention Act: Preempts some statefunctions. For example, the Act does not allow a state insur-ance regulator to prohibit risk retention groups domiciled inother states from operating within the regulator’s state, thuseliminating the need for a fronting company.

fidelity bond: A bond that guarantees honesty of an employee.

fiduciary: A person entrusted to act for another, which includeshaving the responsibility for protection of another’s assets.

field service advice (FSA): Information provided by the In-ternal Revenue Service to field agents to guide them in con-duct of tax audits. The IRS also issues the Technical AdviceMemorandum (TAM).

filed forms: Insurance policies that have been approved bythe state insurance department and that are required in a statewhere the risk is located for certain types of coverage.

Financial Accounting Standards Board (FASB): Promul-gates Financial Accounting Standards (FAS) for generally ac-cepted accounting principles (GAAP).

financial consolidation: Combining the financial results of asubsidiary company with its shareholder, resulting in theelimination of intercompany accounting entries (transactionsbetween affiliates offset each other).

financial guarantee insurance: Insurance against losses aris-ing from the bankruptcy of the insured. The insurer guaran-tees the performance of the insured, e.g., for debt repayment.

financial reinsurance: The contract is multiyear and the re-insurance has an aggregate limit over the entire contract pe-riod. Premium will be equal to the ultimate net loss and dis-counted to net present value, so the reinsured pays all lossesover a stated time period and recovers the underwriting andinvestment income. Contract may restrict loss settlements tospecified times and amounts to reduce the reinsurer’s timingrisk and will contain a commutation clause to end the cover-age period.

financial responsibility: The legal requirement for an in-sured to evidence ability to pay losses, either through pur-chase of insurance or by providing other proof of financialstrength. Used to ensure that drivers carry adequate auto lia-bility insurance.

9Copyright © 2014 International Risk Management Institute, Inc.

10 Copyright © 2014 International Risk Management Institute, Inc.

finite risk: An insurance or reinsurance program where theperiod of insurance is fixed; all premium and losses will bepaid within that period. A contract may contain sufficientunderwriting risk to qualify as insurance but has the sameobjective as financial insurance, which is to enhance thecurrent presentation of the insured’s or reinsured’s financialcondition.

first-party risk: Insurance of the income or assets of thenamed insured (e.g., property insurance).

flat rate: In reinsurance, a percentage rate applied to a cedingcompany’s premium writings for the classes of business rein-sured to determine the reinsurance premiums to be paid thereinsurer.

floater: A property insurance policy covering articles that do notnecessarily have a fixed location, e.g., jewelry and cameras.

follow form policies: Insuring (coverage) terms, conditions,and exclusions are as stated in a lead policy. The policy thatfollows has only its own limits, deductible, and premium andissues a declarations page with the lead policy form attached.

follow the fortunes: The reinsurer must agree to the adjustedloss amount as determined by the reinsured.

forced placed: Insurance that must be purchased to complywith terms of a contract, e.g., a mortgagee can purchase in-surance on mortgaged properties and charge the premium tothe mortgagor.

foreign: A U.S.-domiciled insurer that is domiciled in astate other than the jurisdiction where the risk is located.See also alien.

Foreign Account Tax Compliance Act (FATCA): The For-eign Account Tax Compliance Act of 2009 establishes rulesfor the reporting of foreign financial assets held by U.S. tax-payers in a foreign financial institution (FFI) or a nonfinan-cial foreign entity (NFFE). FATCA imposes a 30 percentFATCA withholding tax on withholdable payments made toan FFI or an NFFE unless the FFI or the NFFE meets certainstipulated conditions.

front company: An insurer that issues a policy and reinsures allor a substantial part of the risk to another insurer. Certain typesof statutory coverages requiring evidence of insurance from ad-mitted insurers are fronted and reinsured to captives. A “purefront” is one that delegates underwriting and claims handling au-thority to the reinsurer or a managing general agent (MGA).Most insurers that front for captives are not pure fronts.

fronted captive: See reinsurance captive.

fronting: Most commonly refers to the practice of a nonad-mitted insurer (or an insured with a captive insurance compa-ny) contracting with a licensed insurer to issue an insurancepolicy for regulatory or certification purposes.

fundamental risk: A risk intrinsic to the state of being, or anabsolute hazard producing no uncertainty about whether theloss will occur, making the risk commercially uninsurable.

funded covers: Also known as “time and distance,” i.e., noreal underwriting risk to the reinsurer, only a credit risk, tim-ing risk, or investment risk. The lump sum prepaid premiumequals the reinsurance recoverable, recognizing the time val-ue of money.

funds withheld: A provision in a reinsurance treaty underwhich some or all of the premium due the reinsurer, usuallyan unauthorized reinsurer, is not paid but rather is withheldby the ceding company either to enable the ceding compa-ny to reduce the provision for unauthorized reinsurance inits statutory statement or to be on deposit in a loss escrowaccount for purposes of paying claims. The reinsurer’s as-set, in lieu of cash, is “funds held by or deposited with rein-sured companies.”

futures contract: An agreement made by a seller to deliver astated amount of product to a buyer at a future date for anagreed price.

finite—futures IRMI Captive Insurance Glossary

IRMI Captive Insurance Glossary General—industrial

G

General Adjustment Bureau (GAB): A national loss adjust-ing agency supported by property insurers that do not havetheir own nationwide loss adjusting capability.

generally accepted accounting principles (GAAP): Account-ing method designed to match revenue and expense on a “goingconcern” basis, i.e., assuming an entity continues in business.The principles are developed by the Financial Accounting Stan-dards Board (FASB). For insurers, the American Institute ofCertified Public Accountants (AICPA) publishes Audit and Ac-counting Guides, applying GAAP to an insurance entity.

gross loss reserves: Case reserves and IBNR before reinsur-ance credits or offsets.

gross written premium (GWP): The total premium (directand assumed) written by an insurer before deductions for re-insurance and ceding commissions. Includes additional and/or return premiums. Written does not imply collected, but thegross policy premium to be collected as of the issue date ofthe policy, regardless of the payment plan.

group captive: A captive that insures the risks of a heteroge-neous or homogeneous group of unrelated insureds. Could bea stock captive, a mutual captive, or a reciprocal. In the caseof a stock captive, shares could be owned by some or all ofthe insureds, or by noninsureds, subject to the captive domi-cile’s license classification.

group-owned captive: A captive owned by more than oneshareholder, or with more than one member, in the case of amutual or reciprocal form of organization.

guaranty fund: A state fund available to pay losses of an in-surer that is liquidated, funded by assessments on all licensedinsurers, in proportion to its business written in that state.Captive insureds are not protected by state guaranty funds.

H

hard market: In the insurance industry, the upswing in amarket cycle, when premiums increase and capacity for someof all types of insurance decreases. Can be caused by a num-ber of factors, including falling investment returns for insur-ers, increases in frequency or severity of losses, and regulato-ry intervention deemed to be against the interests of insurers.

hazard: The insured’s condition (e.g., financial, morale) orenvironment (e.g., regulatory, or geographic location) whichmakes a loss more likely to occur.

hedge instrument: A derivative contract used to reduce (off-set) volatility in asset values.

hold harmless clause: See indemnification agreement.

hurdle rate: The internal rate of return established in an or-ganization as necessary to justify investment in an operation,based usually on the short-term cost of borrowing. Often usedas the discount rate in a net present value cost analysis.

I

incurred but not enough (IBNE): Loss reserves to allow forthe increase to an existing reserve because there was “notenough reported”; also called incurred but not enough re-served (IBNER) or reserved but not enough (RBNE).

incurred but not reported losses (IBNR): Estimates ofamounts to be paid for losses incurred prior to a financial clos-ing date and not reported to the insurer as of that closing date.Also should include estimates for development on case reserves.For claims-made policies, IBNR is only for reported claims.

incurred losses: Paid losses, plus paid loss adjustment ex-penses, plus the net change in case and incurred but not report-ed reserves.

incurred loss ratio: The percentage of losses incurred to pre-miums earned. See also experience.

indemnification agreement: An agreement by one party tocompensate another, regardless of fault, if losses arise from aspecified activity. Often inserted as a hold harmless clause ina contract, to protect one party from the legal consequencesof actions required under the contract.

index: A number derived from a formula calculated from aset of data. See also risk index.

indexed deductible: The amount deducted from each losspayment is not fixed in relation to the policy limit but deter-mined by variables (the index) impacting the insured’s reten-tion ability.

industrial insured: A commercial insurance buyer presumedby virtue of its financial size to be able to negotiate insurancecontracts with insurers without the protection of insuranceregulators. Restrictions may apply on the ability of the in-sured to recover from a state’s guaranty funds. Under somestate insurance laws, an industrial insured must meet size cri-teria (net worth and number of employees) to be eligible topurchase nonadmitted insurance.

industrial insured captive insurance company: Any compa-ny that insures risks of the industrial insureds that comprisethe industrial insured group and their affiliated companies.

industrial insured group: A group of commercial insureds inthe same industry or involved in the same risk-taking activity.

11Copyright © 2014 International Risk Management Institute, Inc.

12 Copyright © 2014 International Risk Management Institute, Inc.

inflation factor: A loading to provide for increased medicalcosts and loss payments in the future due to inflation.

inland marine insurance: A broad form of insurance gener-ally covering articles that may be transported from oneplace to another, including items normally covered on float-er policies.

insolvency clause: A contractual provision, generally re-quired by statute or regulation as a prerequisite to receivingcredit for reinsurance, under which the reinsurer agrees, in theevent of the ceding insurer’s insolvency, to pay its reinsur-ance obligations under the contract whether or not the insurerhas paid its obligations.

inspection fees: Fees for statutory boiler inspections. Fullyearned when paid (not part of property policy premium orroutine engineering expenses).

insurable interest: A business or other relationship betweenthe named insured and the exposure. Must be present for aninsurance contract to be issued.

insurance line: A type of insurance business, grouped ac-cording to the reporting categories used when filing an insur-er’s statutory reports. See also monoline.

Insurance Regulatory Information System (IRIS): Themechanism developed by the National Association of Insur-ance Commissioners (NAIC) to assist states in overseeingthe financial condition of insurance companies. The IRIS ra-tios are a set of ratios designed to measure solvency and li-quidity. They are calculated from insurers’ annual state-ments that are filed with the NAIC, and insurers that fail oneor more tests can be placed under the supervision of theirdomicile regulator.

insurance risk: The possibility of the insurer experiencing aloss under an insurance or reinsurance contract. Under FAS113, insurance risk is explained as the presence of underwrit-ing risk in addition to timing and investment risk.

Insurance Services Office, Inc. (ISO): An insurer memberorganization that files rates and forms for insurance compa-nies. See also filed forms. Nonmember insurers may use ISOrates, endorsements, and certificate and binder formats, etc.

insurance to value: In property insurance, the requirementthat premium is based on the full amount of exposure.

insured: Person or organization covered by an insurancepolicy, including the “named insured” and any additional in-sureds for whom protection is provided under the policyterms.

insuring clause: The section of a policy that follows the dec-larations and states what risks are insured, i.e., the covered

perils and exposures and the amount of insurance. Limita-tions of coverage will be identified in the policy exclusions.

integrated disability management (IDM): Adjusting claimsfor both occupational (workers compensation) and nonoccu-pational (employee benefits-related) accidents and absence.

integrated risk: Insuring more than one type of risk in a sin-gle policy; may be part of an enterprise risk management pro-gram. See also blended finite risk.

intermediary: A third party in the design, negotiation, and ad-ministration of a reinsurance agreement. Intermediaries recom-mend to cedents the type and amount of reinsurance to be pur-chased and negotiate the placement of coverage with reinsurers.

intermediary clause: A contractual provision, generally re-quired by statute or regulation as a prerequisite to receivingcredit for nonadmitted reinsurance, in which the parties agreeto effect all transactions through an intermediary licensed inthe insurer’s domicile, and the credit risk of the intermediary,as distinct from other risks, is imposed on the reinsurer.

investment risk: The possibility that investment incomeearned on unearned premium or loss reserves will be lowerthan expected when calculating rates.

inflation—investment IRMI Captive Insurance Glossary

IRMI Captive Insurance Glossary joint—loss

J

joint and several liability: Liability for actions both as an in-dividual and as a member of a group or organization. The or-ganization is responsible for the actions of its members; themember is responsible for its own actions.

L

layer: A horizontal segment of the liability insured, e.g., thesecond $100,000 of a $500,000 liability, is the first layer ifthe cedent retains $100,000 but a higher layer if it retains alesser amount.

lead reinsurer: The “lead” sets the rates, terms, and conditionsthat other reinsurers follow. Also known as lead underwriter.

letter of credit (LOC): Within the context of insurance, apromise by a financial institution to pay the losses of a self-insurer or a reinsurer. If issued on a noncancelable (“ever-green”) by an acceptable financial institution and uncondi-tional basis, an LOC is an acceptable form of collateral to se-cure recoverables from nonadmitted reinsurers and enablesthe ceding company to reduce the provision for unauthorizedreinsurance in its statutory statement.

liability limits: The stipulated sum or sums beyond which aninsurance company is not liable for payments due to a thirdparty. The insured remains legally liable above the limits.

limit: The total amount of losses to be paid under an insur-ance policy or reinsurance agreement, expressed either on aper occurrence basis (e.g., per accident or event) or on an ag-gregate basis (e.g., all losses under a single policy, or for allpolicies during an underwriting period).

limitation of risk: The maximum amount an insurer or rein-surer must pay in any one loss event.

line: The retention limit (stated as a dollar amount) retainedby the ceding company under a surplus share agreement.Limits of liability for the reinsurer may be stated as a multi-ple of the line reinsured. For example, a five-line treaty isfive times the net retained.

line of business: Classes of insurance that are grouped into oneline for statutory reporting purposes. Also, the types of busi-ness an insurer is licensed to underwrite, such as personal lines.

line slip: The net line and reinsured multiple; i.e., the capaci-ty of a reinsurance treaty.

liquidity ratio: A measurement of key financial variables thatimpact an insurer’s ability to pay claims. In the InsuranceRegulatory Information System (IRIS), liabilities to liquid as-sets and agent’s balances to surplus are monitored.

loan-backs: A loan of assets from a captive to a shareholderor affiliated entity.

long-tail: In certain lines of insurance, the late reporting ofclaims or losses that pay out very slowly, with loss development.

long-term disability (LTD): Insurance to provide income to aperson permanently unable to work because of accident or ill-ness not work-related; usually terminated at age 65.

long-term insurance: In certain captive domiciles, long-duration contracts such as life insurance.

loss: The destruction, reduction, or disappearance of value oftangible or intangible property; bodily or emotional injury; orreduction in income.

loss adjustment expenses (LAE): All costs related to settlingclaims.

loss carry forward: A provision in the income tax code thatallows a taxpayer to spread a loss over more than one tax year.

loss control: Reducing or eliminating preventable losses.Under property policies, loss control inspections may beperformed by fire protection or boiler inspectors and are ac-counted for as engineering expense. (See also inspectionfees.) In workers compensation, loss control is called safetyexpense.

loss conversion factors (LCFs): See loss loading or “multiplier.”

loss development: The difference between the estimatedamount of loss(es) as initially reported to the insurer and theamount of an evaluation of the same loss(es) at a later date orthe amount paid in final settlement(s).

loss event: The total losses to the ceding company or to thereinsurer resulting from a single cause such as a windstorm.

loss loading or “multiplier”: Also known as loss conver-sion factor. A factor applied to the incurred losses underworkers compensation retrospectively rated policies tocalculate the amount to be paid to the insurer to offset lossadjustment expense.

loss payout curve: A series of factors showing the percentageof an incurred loss paid in the year incurred and each yearthereafter.

loss portfolio agreements: Retroactive reinsurance undertak-en for “surplus relief” or “spread loss”; i.e., the intent is ei-ther to transfer premiums from the primary company to a re-insurer as a means to increase policyholders surplus or toimprove cash flow and stabilize income, without actuallytransferring risk.

loss portfolio transfer (LPT): Sale of loss reserves by an in-surer or reinsurer to another insurer.

13Copyright © 2014 International Risk Management Institute, Inc.

loss—National IRMI Captive Insurance Glossary

loss rating: Developing premiums from the historical loss ex-perience of an insured (see rating).

loss ratio: A percentage derived by dividing the dollar amountof losses experienced by an insured risk by the premium collect-ed. (Also called loss and loss adjustment expense (LAE) ratio.)

loss reserve: An estimate of the value of a claim or group ofclaims not yet paid. See also case reserves; gross lossreserves; incurred but not reported losses (IBNR); net lossreserves; reserve.

loss triangle: Loss history showing incurred losses in theyear incurred and the incurred amount of the claim at periodicintervals thereafter until the claims are paid. The maturity ofthe losses is shown across the top of the table, and each newline is used for a new year’s incurred loss figure. Trianglescan be prepared on a paid claim basis also.

M

managing general agent (MGA): A licensed individual orcompany to whom the direct writing insurer has delegatedunderwriting authority, rating, premium collection, and poli-cy issuance.

manual rates: Rates that have been developed and filed for anunderwriting class rather than a specific insured (see rating).

marine insurance: Can be ocean, offshore, or inland; alsoavailable for aviation risks. Insures first-party risks (propertyinsured is the hull or owned cargo), carrier liability (non-owned cargo), and third-party liability (damage caused by thevessel to property of others).

market conduct: The way an insurer operates in relation toits customers and suppliers. Regulated strictly, to ensure norebating, for example.

market conduct exam: Investigation by insurance regulatorsto determine if an insurer has followed laws relating to the dis-tribution of products to consumers and settlement of claims.

market cycles: Fluctuations in insurance and reinsurancerates and surplus capacity.

master policy: An insurance policy insuring a group of in-sureds, each of which receives a certificate evidencing theircoverage under the master policy.

maturity: The age of a claim, expressed as the amount oftime in months from the beginning of an occurrence year.Used to measure the development of a group of claims in-curred in the occurrence year.

maximum foreseeable loss (MFL): Used in property insur-ance to identify the largest amount of loss likely to occur for

an exposure, usually based on inspections and reports of ex-posure values by the insured.

mean reserve: The average of the initial and ending reserve,used in life insurance reserve estimating.

medical payments insurance: A coverage, available in vari-ous liability insurance policies, in which the insurer agrees toreimburse the insured and others, without regard for the in-sured’s liability, for medical or funeral expenses incurred asthe result of bodily injury or death by accident under speci-fied conditions.

microcaptive: A captive operating with annual written premi-um of less than $2.2 million (subject to inflation adjustments).In the United States, such captives may be taxed under InternalRevenue Code § 831(b), which provides that a captive qualify-ing to be taxed as a U.S. insurance company may pay tax onlyon investment income.

minimum and deposit (M&D): Feature of excess of loss re-insurance; it requires initial premium payment in advance,adjusted annually in arrears, based on exposure audits. See al-so deposit premium.

model act: Legislation drafted by the National Association ofInsurance Commissioners (NAIC) to become a standard foradoption by states.

modification factor (the “mod”): The factor by which a stan-dard workers compensation premium is multiplied to reflectan insured’s actual loss experience.

monoline: An insurer licensed to write only one type of risk;common with surety or financial guarantee insurance.

mortgage insurance: Insurance to protect the bank from de-fault by mortgagees.

mutual insurer: An insurance company that is not ownedand controlled by shareholders but by its policyholders. Seealso stock captive.

N

named insured: The individual or legal entity that contracts tobuy the insurance, the one responsible for premium payment.

named perils: A policy issued specifically listing the perilsinsured against. Compare to special risks.

National Association of Insurance Commissioners (NAIC):A trade association of state’s insurance commissioners thatissues model insurance acts that can be adopted by the states.The NAIC accredits states that have enacted specific insur-ance legislation and demonstrate adequate regulatory over-sight over the insurers they license.

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15Copyright © 2014 International Risk Management Institute, Inc.

net loss: The amount of loss sustained by an insurer after de-ducting all applicable reinsurance, salvage, and subrogationrecoveries.

net loss reserves: Reserves for losses within the risk limita-tion. Gross loss reserves net of reinsurance credits and offsets.

net present value: The discounted value or current cost of anamount to be paid in the future, taking into account anticipat-ed investment income and the timing of tax deductions.

net retained liability: The amount of insurance that a cedingcompany keeps for its own account and does not reinsure inany way (except in some instances for catastrophe or clash re-insurance).

net risk (risk limitation): The per occurrence policy limit re-tained by the captive after purchase of reinsurance.

net written premium: Direct premiums written, plus premi-ums assumed, less premiums ceded.

nexus: The coming together of parties in a transaction. Usedby insurance regulators to determine if an insurer is writingbusiness in its state.

nonadmitted asset: An asset that may be accounted for in aninsurance company’s balance sheet, but not allowed to be

counted for purposes of calculating statutory capital or com-pliance with solvency ratios.

nonadmitted balance: Reinsured liabilities on an insurer’sbalance sheet (loss reserves and unearned premium reserves)for which no credit is given in the ceding company’s statutorystatement. This creates a reduction in surplus, unless the rein-surer provides acceptable collateral in the amount of the un-authorized balance.

nonadmitted insurer: A company that is not licensed or au-thorized to transact business in the state or country where theinsured risk is located. Under many state or country insurancelaws, a large commercial buyer may purchase insurance froma nonadmitted insurer.

nonadmitted reinsurance: A company is “nonadmitted”when it has not been licensed and thereby recognized by ap-propriate insurance governmental authority of a state or coun-try. Reinsurance is “nonadmitted” when placed in a nonad-mitted company and therefore may not be treated as an assetagainst reinsured losses or unearned premium reserves for in-surance company accounting and statement purposes.

noncontrolled foreign corporation (NCFC): A company thatis owned in such a way that its financial results are not consoli-dated with any of its shareholders, and the shareholders are notallocated any portion of the company’s income for tax purpos-es. If the NCFC is located in a jurisdiction that does not havean income tax, this creates income tax deferral, meaning no taxuntil such time as income is repatriated to its owners.

noncorrelated risks: Losses to an exposure caused by differ-ent perils and hazards.

nonfinancial foreign entity (NFFE): A defined term in For-eign Account Tax Compliance Act (FATCA) legislation, usedto denote any foreign entity that is not a financial institution.

nonproportional reinsurance: Also known as excess of lossreinsurance. Losses excess of the ceding company’s reten-tion limit are paid by the reinsurer, up to a maximum limit.Reinsurance premium is calculated independently of thepremium charged to the insured. The reinsurance is fre-quently placed in layers. Contracts may be continuous or fora specific term.

nonsubscriber workers compensation plan: A nonsubscriberis an employer that elects, by filing appropriate notices re-quired by state insurance authorities, to pay work-related inju-ry loss through some method other than statutory workers com-pensation. Three states—Texas, New Jersey, and Oklahoma—allow such an election. Note that the purchase of workers com-pensation insurance is elective in Texas. In New Jersey, em-ployers are required to purchase either workers compensationcoverage or employers liability coverage. In Oklahoma, em-ployers must either purchase workers compensation coverage

IRMI Captive Insurance Glossary net—nonsubscriber

novation—participant IRMI Captive Insurance Glossary

or become a qualified employer under the Oklahoma Employ-ee Injury Benefit Act (OEIBA).

novation: An agreement to replace one party to an insurancepolicy or reinsurance agreement with another company frominception of the coverage period. The novated contract re-places the original policy or agreement. Also known as can-cel and rewrite.

O

occurrence: An accident or incident, including continuous orrepeated exposure to conditions that result in a loss neitherexpected nor intended from the standpoint of the insured, oran act or related series of acts that result in the same.

occurrence basis: For coverage to be provided, the act givingrise to a claim needs to occur within the policy period. Theclaim does not need to be reported during the policy period.Used with liability policies. Compare to claims-made basis.

offset (setoff): The reduction of the amount owed by one par-ty to a second party by crediting the first party with amountsowed it by the second party. The existence and scope of offsetrights may be determined by reinsurance contract language aswell as statutory, regulatory, and judicial law.

offshore captive: A special purpose insurance company domi-ciled outside of the country where the insured risk is located.The motives for using an offshore captive may include tax plan-ning. Regulatory differences between onshore and offshore havebecome significantly less as the offshore captive industry hasmatured. Offshore domiciles popularly used for North Americansource business include Barbados, Bermuda, British Virgin Is-lands, and Grand Caymans. Offshore domiciles for Europeansource business include Dublin, Guernsey, Isle of Man, and Lux-embourg. Asian source business may use Hong Kong, etc.

onshore captive: A special purpose insurance company do-miciled in the country within which its insured risks are lo-cated. There are more than 30 onshore domiciles activelycompeting for U.S. source business, e.g., Vermont, SouthCarolina, Hawaii, and Washington DC. British Columbia isan example of an onshore domicile for Canadian source risks.European countries (with the exception of Dublin and Lux-embourg) do not actively promote themselves as captive do-miciles, i.e., have not passed special purpose legislation to fa-cilitate the formation of captives.

operating cash flow: Underwriting cash flow plus investmentincome, and plus or minus other income statement cash flows.

operational risk financing securities (ORFS): A debt orcredit instrument designed to provide liquidity or income tooffset changes in cash flows resulting from an occurrence re-lating to an entity’s operations.

option instruments: A derivative such as a put, call, swap, orfloor designed to manage basis risk by allowing the hedger todetermine when to liquidate the contract. If an option expires,it has no further value.

organizational documents: The legal documents used to in-corporate or form a company. In the United States they willinclude articles of incorporation and bylaws. In domiciles op-erating under English law, the same documents may be called“memorandum of association” and “articles of association,”or, collectively, the “corporate charter.”

organizational risk: The business, treasury, and pure risks ofan organization, i.e., all exposures, hazards, and perils,whether traditionally the subject of insurance or not, whichcollectively create uncertainty as to the financial outcome ofan enterprise. See also enterprise risk management.

original gross premium (OGP): Premium written for the en-tire risk. May include excess premium not subject to an ex-cess of loss reinsurance agreement; therefore, is not necessar-ily the same as gross written premium (GWP).

original insurer: Insurer that issues the policy to the insured.May also be called “primary company,” “direct company,” or“front company.”

other underwriting income: Ceding commissions or profitcommissions earned from reinsurers.

overall operating ratio: A ratio to show the insurer’s pre-income tax profitability, taking into account investment in-come. It includes total expenses as a percent of total income,before adjustments for federal taxes.

overriding commission: An allowance paid to the cedingcompany over and above the acquisition cost to allow foroverhead expenses and often including a margin for profit.

owners and contractors protective liability (OCP) insur-ance: An endorsement, which covers contractors and subcon-tractors, to commercial general liability insurance purchasedby the owner of a business with premium paid by the owner.

P

paid-in capital: Capital acquired by a corporation from sourc-es other than its business operations. The most common sourceof paid-in capital is the sale of the corporation’s own commonand preferred stock. The amount of paid-in capital becomespart of the stockholders’ equity shown in a balance sheet.

paid losses: Losses and allocated loss adjustment expenses(ALAE) paid to claimants during a financial reporting period.

participant: An insured that utilizes a captive insurance com-pany through a participant contract specifying the terms of

16 Copyright © 2014 International Risk Management Institute, Inc.

IRMI Captive Insurance Glossary participating—premium

participation, rather than through a shareholder or membercontract.

participating policy: An insurance policy that allows theinsured to receive policyholder dividends, not taxable dis-tributions, i.e., return of profits not treated as income bythe Internal Revenue Service (IRS) but instead as return ofpremium.

participating reinsurance: Includes quota share, first sur-plus, second surplus, and all other sharing forms of reinsur-ance under which the reinsurer participates pro rata in alllosses and in all premiums. See also pro rata reinsurance.

pass-through entity: A corporation that is disregarded forpurposes of calculating taxable income. The income earned ina pass-through entity is attributed to its shareholder or ulti-mate parent, and taxed at that level.

payout profile: The rate at which a reported claim is paid out,usually expressed as percentages paid each year. See also losspayout curve.

payroll audit: A yearly comparison of the estimated payrollreported for workers compensation purposes at the beginningof the policy year with the actual payroll for that period, de-termined at the close of the policy year.

performance bond: A bond to guarantee proper execution ofjob functions.

performance ratio: A test of an insurer’s or reinsurer’s fi-nancial strength, e.g., Standard & Poor’s solvency ratios,which track net premium to adjusted shareholder funds, andliquidity ratio, which looks at technical reserves to liquidassets.

perils: The cause of loss, e.g., fire, accident, negligence.

per-risk excess: Also known as specific, working layer, orunderlying excess of loss reinsurance. A method by whichan insurer may recover losses on an individual risk in excessof a specific per-risk retention. Has both property and casu-alty applications.

personal injury: Damage to a person caused by the wrongfulconduct of the insured; covers libel, slander, etc., as well asbodily injury. Insured under liability policies.

personal lines: Insurance purchased by an individual (as op-posed to an organization) to protect against personal risks.

personal risks: Losses arising from ownership of personalproperty; also loss of health and income.

placement slips: A general understanding of the terms andconditions of a reinsurance transaction—not a binding con-tract. Terms and conditions should be confirmed in a reinsur-ance confirmation or cover note.

policy conditions: A section of a policy that identifies the du-ties of the insured to keep coverage in effect.

policyholder dividends: Return of premium, under the termsof the policy, resulting from income in excess of losses andexpenses.

policyholder surplus: The net worth of the insurer as report-ed in the annual statement or statutory financial statements.The amount by which assets exceed liabilities.

policy registers: A historical listing of all policies issued byan insurer, showing reinsurance.

policy year experience: Incurred losses and loss adjustmentexpenses (LAE) for those claims incurred within a policy ef-fective period, regardless of when the claim was reported, di-vided into the earned premiums for all policies issued duringthat same period. The loss amount is not final until all lossesincurred (reported if claims-made) are settled. The premiumsearned amount is derived from all policies incepting duringthe defined period, and may be earned over more than one fi-nancial reporting period.

pool: Any joint underwriting operation of insurance or rein-surance in which the participants assume a predetermined andfixed interest in all business written.

portfolio: The book of business of an insurer or reinsurer, in-cluding all policies in force and open reserves.

portfolio reinsurance: In transactions of reinsurance, it re-fers to all the risks of the reinsurance transaction. For exam-ple, if one company reinsures all of another’s outstanding au-tomobile business, the reinsuring company is said to assumethe “portfolio” of automobile business and it is paid the totalof the unearned premium on all the risks so reinsured (lesssome agreed commission).

portfolio runoff: The opposite of return of portfolio—per-mitting premiums and losses in respect of in-force business torun to their normal expiration upon termination of a reinsur-ance treaty.

portfolio transfer: The cession of a book of business, e.g.,for an insurer withdrawing from writing a certain class ofrisk. Since the business has already been written, it is retroac-tive insurance, so it is a balance sheet only transaction (trans-fer of assets and liabilities). See also commutation agree-ment; loss portfolio transfer (LPT); novation.

premium: The sum paid for an insurance policy or consider-ation in the insurance contract. As income to the insurer, it istherefore the basis for taxes on the insurer.

premium audit: A survey of the insured’s payroll, sales, orvehicle count records to determine premium and premiumtaxes due.

17Copyright © 2014 International Risk Management Institute, Inc.

premium—punitive IRMI Captive Insurance Glossary

premium, deposit: When the terms of a policy provide thatthe final earned premium be determined at some time after thepolicy itself has been written, companies may require tentativeor “deposit” premiums at the beginning that are readjustedwhen the actual earned charge has been later determined.

premium, pure: The portion of the premium calculated to en-able the insurer to pay losses and, in some cases, allocatedclaim expenses or the premium arrived at by dividing lossesby exposure and in which no loading has been added for com-mission, taxes, and expenses.

premiums earned: The portion of the written premium allo-cable (usually pro rata) to the time already elapsed under thepolicy period.

premium tax: A tax, imposed by each state, on gross premi-um written by insurers allocable to risks located in that state.Gross written premium (GWP) means before reinsuranceceded but after salvage and subrogation.

premium, unearned: Premium for a future exposure period issaid to be unearned premium for an individual policy; writtenpremium minus unearned premium equals earned premium.Earned premium is income for the accounting period, while un-earned premium will be income in a future accounting period.

principle of indemnification: A defining characteristic of in-surance, providing that a loss payment will replace what is lost,putting the insured back to where it was financially prior to theloss without rewarding or penalizing the insured for its loss.

Private Letter Ruling: A ruling by the Internal Revenue Ser-vice (IRS) regarding how a specific transaction will be taxed.

producer-owned reinsurance company (PORC): A captiveor a rent-a-captive cell owned or used by a broker or manag-ing general agent (MGA) for reinsurance of selected risksthat it produces for the purposes of retaining the underwritingincome. May be set up by insurance companies to circumventstate laws regarding the amount of commissions that can bepaid to their producing agents.

product liability insurance: Protection against financial lossarising out of the legal liability incurred by an insured be-cause of injury or damage resulting from the use of a coveredproduct or out of the liability incurred by a contractor after ajob is completed (completed operations cover).

professional reinsurer: A term used to designate a companywhose business is confined solely to reinsurance and the pe-ripheral services offered by a reinsurer to its customers as op-posed to primary insurers who exchange reinsurance or oper-ate reinsurance departments as adjuncts to their basicbusiness of primary insurance. The majority of professionalreinsurers provide complete reinsurance and service at onesource directly to the ceding company.

profit center captives: A captive that has the primary functionof earning underwriting income by writing unrelated risk.

profit commission: A provision found in some reinsuranceagreements that provides for profit sharing. Parties agree to aformula for calculating profit, an allowance for the reinsurer’sexpenses, and the cedent’s share of such profit after expenses.

program business captive: A captive that insures or rein-sures a “program,” i.e., a group of homogeneous risks, noneof which is individually underwritten. It may or may not beowned by the program business agency or producer.

prohibited transaction exemption (PTE): A ruling by theDepartment of Labor (DOL), based on specific facts and cir-cumstances, that a transaction is allowable under EmployeeRetirement Income Security Act (ERISA) regulations. Re-quired by pure captives insuring shareholders’ employee ben-efit risks.

proportional liability: Members of a group are held respon-sible for the financial results of the group in proportion totheir participation. Compare to joint and several liability.

proportional reinsurance: The premium and losses are cal-culated on a pro rata basis. The reinsurer has a fixed percent-age of premium and the same percentage of losses.

pro rata cancellation: Provides for the return of all unearnedpremium, without the penalty associated with short-rate can-cellation.

pro rata reinsurance: The reinsurer receives a percentage ofpremium and pays a proportional share of losses, above theceding company’s retention.

prospective aggregates: Spread loss program giving accidentyear reinsurance for long-tail risks with premiums paid annu-ally over the expected life of the policy. (Any adjustments inpricing resulting from adverse loss development occur pro-spectively.)

prospective rating: Adjustments to premium based on pro-jections of future incurred losses. See also experience ratingand retrospective rating.

protected cell captive (PCC): See cell captive and specialpurpose vehicle (SPV).

provisional notice of cancellation (PNOC): Notice is givento allow the option of withdrawing from the reinsurance trea-ty if renewal terms are unacceptable. Issued with continuouscontracts.

punitive damages: Damages awarded to the plaintiff overand above what will compensate for the loss. Intended to so-lace the plaintiff for mental anguish or to punish and make anexample of the defendant. Not included in policy limits.

18 Copyright © 2014 International Risk Management Institute, Inc.

IRMI Captive Insurance Glossary pure—reinsurance

pure captive: A captive insurance company that has as itsprimary business purpose the insurance of the risks of itsshareholders and affiliates.

pure loss cost: The ratio of the retained losses incurred to theinsurer’s retained premium. Also known as burning cost ratio.

pure premium: The amount of premium calculated for therisk to be insured, net of policy expenses. The amount of pre-mium available to pay losses and allocated loss adjustmentexpenses (ALAE).

pure risk: The possibility that a loss may or may not occur,but with no possibility of a gain.

Q

qualified self-insurer: An employer meeting state financialand size criteria and approved to self-insure workers compen-sation. Each state has its own retention limits, filing, and se-curity requirements.

quota share: A fixed percent of all written premiums are ced-ed. The reinsurer pays the same proportion of all losses andloss adjustment expenses (LAE).

R

rate: The pricing factor per unit of exposure upon which thebasic premium is based. Usually stated as $x per $100.

rated insurer: An insurance company that has received a fi-nancial size and strength rating from a rating agency such asA.M. Best or Standard and Poor’s.

rate making: The process of using underwriting informationto calculate a premium for the exposure. See also ratingmethodology.

rate-on-line (ROL): The pricing for a proportional reinsur-ance share, e.g., a 10 percent ROL for a $2 million limitwould be $200,000.

rating: Determining the amount of premium to be paid toinsure or reinsure a risk. Guaranteed cost rates are fixedduring the policy period. Loss sensitive rates are those thatcan be adjusted after the end of a policy period, based up-on the insured’s actual loss experience. See also retrospec-tive rating.

rating experience: Computing a premium based on the lossexperience of the risk itself. Essentially a comparison of actu-al losses with expected losses. If actual losses are lower thanexpected, a premium credit to the manual rate or prior-yearpremium results. If actual losses are greater than expected, apremium surcharge results.

rating methodology: The method used by an underwriter whencalculating premiums. Principal methods are manual, experience(retrospective or prospective), burning cost, or judgment.

rebating: Returning a portion of the premium to the insuredor other inducements to place business with a specific insurer.Rebating is illegal for an agent or broker. Insurers must usefiled rate credits or have supporting methodology.

reciprocal: An unincorporated group of individuals or orga-nizations (subscribers) that agree to pool risks for the purposeof paying the cost of retained losses and purchasing reinsur-ance. Also known as interinsurance exchanges, they are man-aged by an attorney-in-fact. Subscribers have contingent lia-bility (several and proportionate) for paying the losses of thereciprocal, but if adequate capital exists, nonassessable poli-cies may be issued. Under federal tax law, subscribers’ sur-plus is not taxed; income is taxed when distributed.

redomiciling: Changing the insurer’s domicile. Requires per-mission from the existing domicile and a new license to be is-sued. Does not require formation of a new company if thenew domicile has redomestication laws allowing a license tobe issued to an existing insurer.

registered agent: In the United States, the person or firm le-gally appointed to accept service of process. Alien insurersmust appoint (by filed proxy) the insurance commissioner astheir agent, in states where they do business, to assure protec-tion of policyholder rights.

registers: See policy registers.

Regulation 114 Trust: A trust fund established to secure pay-ment of future losses, in a format prescribed by New YorkState Regulation 114.

reimbursement policies: The payment provisions in the poli-cy require the insured to first pay the loss and then be reim-bursed by the insurer. In reinsurance agreements, the insurertypically pays the loss and seeks reimbursement from the in-surer but some agreement may require reinsurance to be paidbefore the insured is reimbursed.

reinstatement: A provision in an excess of loss reinsurancecontract, particularly catastrophe and clash covers, that pro-vides for reinstatement of a limit that is reduced by the occur-rence of a loss or losses. The number of times that the limitcan be reinstated varies, as does the cost of the reinstatement.

reinstatement premium: A pro rata reinsurance premium ischarged for the reinstatement of the amount of reinsurancecoverage that was reduced as the result of a reinsurance losspayment under a catastrophe cover.

reinsurance: Insurance protection purchased by an insurancecompany, either for a group of policies (treaty reinsurance) orfor a specific risk (facultative reinsurance).

19Copyright © 2014 International Risk Management Institute, Inc.

20 Copyright © 2014 International Risk Management Institute, Inc.

reinsurance agreement: Agreement by which one insurancecompany transfers risk to another (buys reinsurance). Unlikean insurance policy, a reinsurance agreement is signed byboth parties.

reinsurance assumed: The insurer accepts risk from anotherinsurer or reinsurer.

reinsurance captive: A special purpose insurer that operatesonly on a fronted basis, assuming risk from a ceding compa-ny. The reinsurance captive does not issue policies directly toinsureds, and typically operates on a nonadmitted basis.

reinsurance ceded: The insurer transfers its risk to anotherinsurer or reinsurer.

reinsurance commission: 1. Percentage of premium paid to thereinsurance intermediary; a ceding company expense. Compareto ceding commissions, which are an expense to the assuming re-insurer. 2. A profit commission paid to the cedent or the interme-diary by the retrocessionaire; see also contingent commission.

reinsurance confirmation: Evidence of pro rata or excess ofloss reinsurance. A contract of adhesion, issued by the rein-surer confirming acceptance of risk. To be attached to themaster facultative reinsurance certificate (cover note) issuedby the intermediary.

reinsurance intermediary: A broker licensed to place rein-surance.

reinsurance pool: A risk financing mechanism used by insur-ance companies to increase their ability to underwrite specifictypes of risks. The insurer cedes risk to the pool under a trea-ty reinsurance agreement. The insurer may be a part owner ofthe pool and may assume a quota share of the pool risk. Acaptive reinsurance pool may be owned by the original in-sureds. Some pools are operated by states to provide capacityfor hard-to-place risks.

reinsurance recoverable: Amount of an insurer’s incurredlosses that will be paid by reinsurers. May require collateral-ization if cedent is to record the recoverable as an asset forstatutory reporting purposes.

reinsurance treaty: An agreement between an assuming andceding company to cede and assume all risks within a class.See also treaty reinsurance.

reinsurer: The company to whom risk is transferred or ceded.

reinsurer’s margin: The “profit and administration” factor ofthe reinsurer, generally calculated on gross cession.

related risk: The risks of insureds owned by or affiliatedwith the owner(s) of or participant(s) in a captive.

rental captive: A captive insurance company that allows un-related parties (“participants”) to use the captive for a fee,thereby eliminating the need for formation and operation of anew company. The participant may or may not be required tocontribute capital, and may or may not be a preferred share-holder in the rental captive. Provided such use is permitted ina domicile, rental captive participants may be insureds ornoninsureds such as insurance agents. See also segregatedcell captive.

replacement cost: The actual cost of replacing property thathas been damaged or destroyed with new property of likekind and quality without regard to physical depreciation.

reporting lag: The amount of time between the occurrence ofa loss and when it is reported to an insurer.

reporting policy: A policy that states premium based on theactual reported exposures. The insurer must report values tothe insurer periodically.

reservation of rights: An acknowledgment by an insurer to aclaimant that it has received notice of loss and so has the rightto investigate it, but that by accepting the claim, the insurerhas not agreed that the loss is covered by its policies.

reserve: 1. An amount set aside to cover the expected amount ofloss or a fund set up as a contingency to cover future losses. Casereserves are reserves on particular claims, while supplemental

reinsurance—reserve IRMI Captive Insurance Glossary

IRMI Captive Insurance Glossary residual—risk

reserves are for incurred but not reported (IBNR) claims. 2. Theamount of premium collected but not earned, which would haveto be returned if the insurance was canceled. See also unearnedpremium reserve (UPR).

residual market loads (RMLs): A charge to an insurer forits share of losses and expenses incurred by a state’s residu-al market pool (a mechanism for insuring “bad risks”). Al-so known as assigned risk charges. RMLs are assessedbased on the amount of premium the insurer writes in thatstate. Insurers add the expense load to the premium paid by“good risks.”

retention: Retained risk not deducted from policy limits forloss payment purposes but contributing to underlying limitsfor attachment of umbrella coverage. Also known as a self-insured retention (SIR).

retention ability: The amount of aggregate incurred lossesthat an insured can retain in any one financial reporting periodwithout creating an adverse impact on cash flow or earnings.

retroactive date: In claims-made insurance, the policy incep-tion or an earlier specified date. To be covered under the poli-cy, the insurer must be put on notice of the claim after the ret-roactive date.

retroactive insurance: Providing insurance coverage forlosses incurred prior to inception of the insurance period. As-sumption by the insurer of an unknown amount of risk arisingfrom incurred losses, whether known or unknown.

retrocedent: Ceding reinsurance company.

retrocession: Reinsurance of reinsurance.

retrocessionaire: Assuming company under a retrocessionagreement.

retrocessional pools: Treaty reinsurance where the cedent orretrocedents are also retrocessionaires of the same treaty,with the objective of achieving improved risk distribution.The premiums and losses in the pool are retroceded based onthe fraction of the total reinsurance written by each cedent.Usually a surplus share agreement.

retrospective aggregates: Transfer of a portfolio of retroac-tive insurance risk or self-insured balances—insuring the in-curred but not reported (IBNR) and incurred but not enough(IBNE)—all risks ceded for an agreed price.

retrospective rating: Determining the final amount of premi-um to be paid after the close of the policy period, rather thanbefore. A formulaic approach developed for rating workerscompensation based on paid or incurred losses during and af-ter the policy period. See also experience rating and prospec-tive rating.

rider: An attachment to an insurance contract expanding thecoverage provided by the contract. See also endorsement.

right of offset: A provision in a reinsurance agreementwhereby balances due under a reinsurance agreement may benetted out against recoverables under the same agreement.

risk: A specific combination of exposures, perils, and hazards.

risk-based capital (RBC): A recommended amount of capi-tal, based on an assessment of factors such as the amount ofreinsurance purchased and an insurer’s investment policy.May be higher or lower than the amount of capital requiredunder a solvency ratio.

risk capital: See capital at risk.

risk concentration: The underwriting of a number of likerisks, where the same or similar loss events could involvemultiple subjects of insurance insured by the same insurer.

risk distribution: The sharing of loss costs between insuredsin a risk pool.

risk gap: The difference between the net premium plus capitaland surplus and net retained insurance or reinsurance limits.

risk index: Average losses for a homogeneous group of risks,used for risk pricing purposes.

risk management: The process of identifying, analyzing, as-sessing, and controlling loss exposures; using physical andhuman resources to minimize the impact of loss throughmethods of risk reduction, risk financing, or risk avoidance.

risk pool: Multiple subjects of insurance insured or reinsuredby a single insurer, where to avoid risk concentration and im-prove risk distribution, different combinations of exposures,perils, and hazards will be underwritten.

risk purchasing group (RPG): A group of unrelated insuredsjointly purchasing liability insurance pursuant to the terms ofthe federal Risk Retention Act of 1986.

risk reduction: Measures to reduce the frequency or severityof losses, also known as loss control. May include engineering,fire protection, safety inspections, or claims management.

risk retention: A conscious or unconscious decision by an in-dividual or organization not to transfer its risk of loss to an-other party using an insurance or noninsurance risk transfertechnique.

risk retention group (RRG): An insurance company formedpursuant to the federal Risk Retention Act of 1981, whichwas amended in 1986 to allow insurers underwriting all typesof liability risks to avoid cumbersome multistate licensinglaws. An RRG must be owned by its insureds. Most RRGs

21Copyright © 2014 International Risk Management Institute, Inc.

risk—sliding IRMI Captive Insurance Glossary

are formed as captives and must be domiciled onshore, exceptfor those grandfathered under the 1981 Act.

risk securitization: The use of a debt or equity instrument(security) to finance risk, using a risk index to value the secu-rity and/or a specified loss event as a determinant of the inter-est or repayment date. Risk securities are issued by a specialpurpose vehicle (SPV).

risk shifting: Transferring risk to an insurer to distribute thecost of losses between the members of a risk pool.

risk smoothing: Financing risk in such a way that the finan-cial impact of incurred losses is distributed between membersof the risk pool over more than one financial reporting or pol-icy period. Also known as chronological stabilization plans.

risk tolerance: The willingness of an organization to incurrisk to gain future reward. In insurance, risk tolerance may beevidenced by a willingness of the insured to increase deduct-ibles or self-insured retentions (SIRs), but alternative risktransfer is used by insureds with low risk tolerance, i.e., a de-sire to reduce the uncertainty arising from purchase of com-mercial insurance. Compare to retention ability.

rolling policy limits: The amount of insurance stated at in-ception of the policy period is an aggregate limit over a mul-tiyear period, with premium adjusted at each annual anniver-sary to provide a continuous multiyear limit and an extendednotice period for cancellation based not on the annual anni-versary but the end of the multiyear policy period.

S

salvage: An amount recovered by the insurer from sale ordisposal of insured property following a loss.

schedule: A list of coverage or amount concerning things orpeople insured.

security requirements: Obligation to provide acceptable se-curity to cover self-insurance or reinsurance liabilities. Maybe based on the ceding company’s statutory requirement tosecure nonadmitted balances or on the cedent’s or regulatoryauthority’s concern regarding the self-insured or reinsurer’scredit risk. Also known as collateral.

segregated cell captive (SCC): A special purpose insurer(typically operating as a rental captive) that establishes legal-ly segregated cells or underwriting accounts. The objective isto ensure that assets in one underwriting account may not beused to satisfy liabilities in another underwriting account, northe general (noncellular) liabilities of the SCC. Noncellularassets may or may not be available to satisfy cellular liabili-ties. May also be called a segregated portfolio company

(SPC), protected cell company (PCC), or a separate accountcompany (SAC).

self-insurance: 1. Retaining risk through the maintenance ofinternal reserves. See also qualified self-insurer. 2. “Goingbare,” i.e., no purchase of insurance and no recognition of in-curred losses until they are paid.

self-insurance pool: A legal entity regulated by the states thatallows unrelated insureds to retain their own risks and collec-tively purchase claims administration services and excess in-surance to meet statutory coverage requirements.

self-insured retention (SIR): 1. The amount of losses that aninsured must pay before its excess insurance policy attaches.Unlike a deductible, the SIR is not a deduction from the limitpaid by the insurer. The losses paid in satisfaction of the SIRmust be losses that would be covered under the excess policy,in the absence of an SIR. 2. Uninsured losses—see also riskretention.

series business unit (SBU): An SBU is a self-governing andprotected company formed under the umbrella of a series lim-ited liability company (series LLC), currently permitted inDelaware. The SBU is an independent insurance company ca-pable of issuing policies directly or policies fronted by acommercial insurer to the insured company and third parties.Each SBU has a unique business purpose and an independenttax identification number. The SBU’s business purpose, tax-payer election, and coverage offerings are specified. Unlikethe protected cells or segregated accounts of rent-a-captives,SBUs have greater flexibility offered by self-governance. Aseries business unit is protected from the financial obligationsof other SBUs by Delaware statute.

service fulfillment insurance: Insurance to protect againstlosses arising from the requirement to perform services with-in a specified time period. Can be sold separately or as part ofa product warranty.

settlement lag: The time between the first report of a claimand the date the claim is closed (fully paid).

short-rate cancellation: A financial penalty incurred whenthe insured cancels an insurance contract prior to the expira-tion date of the contract. The insurer keeps a percentage ofunearned premium (UEP) to cover costs.

single-owner captive: A captive with a single shareholder.May be referred to as a “single parent” captive. The single-owner captive is not necessarily a “pure” captive since it maybe used primarily to insure or reinsure nonshareholder risks.See also group captive; profit center captives.

sliding scale commission: A ceding commission that variesinversely with the loss ratio under the reinsurance agreement.

22 Copyright © 2014 International Risk Management Institute, Inc.

IRMI Captive Insurance Glossary slip—subject

The scales are not always one to one; for example, as the lossratio decreases by 1 percent, the ceding commission might in-crease only 5 percent.

slip: A binder often including more than one reinsurer. AtLloyd’s of London, the slip is carried from underwriter to un-derwriter for initialing and subscribing to a specific share ofthe risk.

solvency margin: The insurer’s unimpaired surplus as a per-cent of outstanding loss reserve (OLR).

solvency ratio: The ratio of net premium written to surplus,or surplus to reserves.

sophisticated insured: An insured not requiring the samelevel of protection under insurance laws as an average insur-ance consumer. See also industrial insured.

special acceptance: The facultative extension of a reinsur-ance treaty to embrace a risk not automatically included with-in its terms.

special purpose vehicle (SPV): A bankruptcy remote compa-ny used to assume specified assets and liabilities. May beused to issue debt or equity instruments. For securitizing risk,a protected cell captive is used as the SPV, since it can firstassume the risk through an insurance contract and keep assetssecured from other liabilities of the captive.

special risks: Property insurance policy that insures againstall perils unless they are excluded. Formerly called an “allrisks” policy.

specialty risks: Term used by commercial insurers to de-scribe unusual coverage features or types of risks they typi-cally do not underwrite.

specific loss limit: The amount of risk retained by an insuredor an insurer on a per-occurrence basis.

sponsor: The legal entity that contributes statutory capital toform a sponsored or association captive.

sponsored captive: A single-owner or group-owned rentalcaptive, typically formed as a segregated cell company. Thesponsor(s) may or may not have capital at risk. In some do-miciles, the sponsor has to be an insurance or reinsurancecompany.

spread loss: A form of reinsurance under which premiums arepaid during good years to build up a fund from which losses arerecovered in bad years. This reinsurance has the effect of stabi-lizing a cedent’s loss ratio over an extended period of time.

spread of risk: The pooling of risks from more than onesource. Can be achieved by insuring in the same underwritingperiod either a large number of homogeneous risks or multi-ple insured locations or activities with noncorrelated risks.

standard premium: Premium established by using rates be-lieved by underwriters to reflect the standard or average riskfor the class, before application of retrospective rating formu-las. When debits and credits based on the insured’s loss histo-ry or exposure are applied, the standard premium equals thepure premium.

statement blank: See convention statement.

static risk modeling: Using specified assumptions to illus-trate the financial impact of losses. A static risk model is use-ful to project financial results for one type of risk in a stableoperating environment. Integrated risk modeling (noncor-related risks within the same organization) may require a dy-namic approach.

statutory accounting principles (SAP): Rules for insuranceaccounting codified by the National Association of Insur-ance Commissioners (NAIC) or as promulgated by a domi-cile as rules to be used in reporting an insurer’s results toregulators.

statutory capital: The amount of capital and/or surplus re-quired in order for an insurance company to obtain and retaina license to do business. May be stated as a minimum dollaramount or by reference to a solvency ratio or a solvency mar-gin. See also capital.

statutory coverages: Lines of insurance required by law, suchas workers compensation, auto liability, and pollution liability(for underground storage tanks and waste disposal sites).

statutory inspections: In boiler and machinery insurance, therequirement for inspection of pressure vessels as a conditionof insurance. See also inspection fees.

statutory insurance: Insurance that the insured is required tobuy, under a country, state, or federal law.

stock captive: A special purpose limited liability insurer thatraises capital by selling shares to shareholders, and is con-trolled by its shareholders.

stop loss: Protection against an accumulation of losses for allor certain risks written in any one year. Retention expressedas a loss ratio or factor of underwriting income. See also ag-gregate stop loss.

subject of insurance: One or more units of exposure poten-tially involved in a single loss event.

subject policies: Policies issued by the original insurer (the“original policies”) subject to the terms of a treaty reinsur-ance agreement.

subject premium: The amount of original policy premiumto be paid under an excess of loss reinsurance agreement orsubject to pro rata terms under a proportional treaty. Subject

23Copyright © 2014 International Risk Management Institute, Inc.

24 Copyright © 2014 International Risk Management Institute, Inc.

premium is a gross number, used for calculating taxes due.The amount ceded may be net (after deductions for frontfees, commissions, and excise tax, if applicable).

subrogation: The right of an insurer to recover from a thirdparty an amount paid on a loss when the third party is at fault.

supplementary employee retirement plan (SERP): A non-qualified retirement program, i.e., not subject to the EmployeeRetirement Income Security Act (ERISA). Usually for highlycompensated employees, allowing for deferral of income.

surety insurance: The insurer (surety) agrees to pay lossescaused by a bond default. See also bond.

surplus: In a stock insurer, the amount of equity of an insurerin excess of statutory capital, earned or paid in by sharehold-ers. In a mutual, the contributions of members or retainedearnings. May or may not be part of capital at risk.

surplus debenture: A debt instrument accounted for as equi-ty under statutory accounting rules, used when investors loansurplus to an insurer rather than posting a letter of credit. (Al-so referred to as a subordinated debenture.)

surplus lines broker: Licensed on a state-by-state basis tosell surplus lines. Responsible for collecting and paying thepremium tax for nonadmitted business sold by a surplus linesinsurer. Responsible to consumer if the surplus lines insurerdefaults on claims.

surplus lines insurance: Nonadmitted insurance sold by sur-plus lines brokers, who are responsible for determining the fi-nancial condition of the insurer, and collecting and remittingpremium taxes. Surplus lines insurers that have met certain fi-nancial strength criteria can be “white listed” by the NAIC.

surplus relief: Reinsurance or loss portfolio transfer (LPT)undertaken to allow the ceding company to comply with sol-vency ratios limiting the amount of loss reserves retained inproportion to equity.

surplus share: Treaty reinsurance that allows the cedent toreinsure a varying percent of risk. The cedent retains a fixeddollar amount and cedes any risk excess of that amount.

T

tax acceleration: Taking a tax deduction in the period an ex-pense is incurred, rather than when it is paid in a subsequentperiod, resulting in an immediate temporary decrease in taxexpense and a permanent increase in after-tax income, on anet present value basis, by an amount determined by thelength of the acceleration period.

tax harmonization: A euphemistic term for tax increases, pro-moted by governments in high-tax jurisdictions, in an effort to

encourage other jurisdictions to follow their taxing policies, soeliminating “tax havens” for internationally mobile businesses.

Tax Reform Act of 1984: Included two sections that in-creased the tax bill of an offshore captive insurer defined as acontrolled foreign corporation. One section redefined incomerelated to the insurance of U.S.-based risks as U.S.-source in-come instead of foreign-source income. Another sectionmade income from the insurance of related risks in foreigncountries taxable in the current year. The net effect of thesetwo changes was to eliminate most tax advantages for an off-shore single-parent captive.

Tax Reform Act of 1988: The major change imposed by thisAct affected offshore group captives in that the definition of aU.S. shareholder was changed from an ownership interest of10 percent or more to any shareholding interest.

third party: Someone other than the insured and the insurer.In liability insurance, the insurance provides defense againstclaims or suits brought by third parties, hence the term “third-party insurance.”

third-party administrator (TPA): A licensed claims adjusterthat is not an employee of the insurer or the insured. See alsoadjuster.

subrogation—third IRMI Captive Insurance Glossary

IRMI Captive Insurance Glossary third—unrelated

third-party risk: Insurance to protect the named insuredfrom liability to unrelated parties.

time element loss: Loss resulting from inability to use a prop-erty. Examples are business interruption, extra expense, rent-al income, etc.

timing risk: Uncertainty surrounding the timing of a loss oc-currence and its payout profile.

tort: A noncriminal and noncontractual wrong; a negligentaction that is the proximate cause of resulting injury or harmto a third party.

transfer pricing: Payments for goods or services exchangedbetween affiliated companies, where the payment is not“market rate” and the intention is to transfer revenues on apretax basis from one taxation jurisdiction to another, to earnincome in the country with the lowest effective tax rate.

treaty reinsurance: An automatic or “obligatory” contract;all risks are assumed or ceded within a defined underwritingclass. Usually a continuous until canceled contract.

trend analysis: Tracking incurred and paid losses over multi-ple time periods to determine the rate of increase or decreasein average paid claims.

trending factor: The percentage by which average paidclaims increase or decrease over time.

U

ultimate loss: The amount of loss paid over time from asingle occurrence. See also incurred losses. Funding to ul-timate means establishing a reserve in the year the loss isincurred in an amount sufficient to pay the claim in full ina future period.

ultimate net loss: This term usually means the total sumthat the assured, or any company as its insurer, or both, be-come obligated to pay either through adjudication or com-promise, and usually includes hospital, medical, and funer-al charges; all sums paid as salaries, wages, compensation,fees, charges, and law costs; premiums on attachment orappeal bonds; interest; expenses for doctors, lawyers,nurses, and investigators and other persons; and for litiga-tion, settlement, adjustment, and investigation of claimsand suits that are paid as a consequence of the insured loss,excluding only the salaries of the assured’s or of any un-derlying insurer’s permanent employees.

umbrella coverage: Covers losses in excess of amountscovered by other insurance policies and/or self-insured re-tentions; often providing broader coverage than primarypolicies.

unaffiliated business: Also known as unrelated or open mar-ket risk. Insurance of noncontrolled entities, i.e., insureds notin the same corporate organization (less than 50 percent own-ership) or not under common management control.

unallocated loss adjustment expenses (ULAE): All external,internal, and administrative claims handling expenses, in-cluding determination of coverage, that are not included in al-located loss adjustment expenses (ALAE).

unbundling: When an insurer agrees to allow a third party toadjust claims and provide other services usually provided bythe insurer such as engineering or safety inspections.

underwriter: A person with the responsibility of selectingand rating risks to insure.

underwriting: The selection of risks to be insured.

underwriting capacity: The risk retention ability of an insur-er, or of the insurance industry as a whole. Determined by theamount of surplus. See also capital at risk.

underwriting cash flow: Net collected premiums (net of re-insurance premiums) less losses, loss adjustment expenses(LAE), and underwriting expenses paid.

underwriting class: All risks with a specified risk profile,e.g., age, location, and occupation. Risks are classified usingcharacteristics likely to produce the same or similar loss ex-perience for each risk over time.

underwriting cycle: See market cycles.

underwriting expenses: All expenses for the insurer relatedto policy acquisition, maintenance, and general overhead ofthe company.

underwriting profit: Insurer profit before investment incomeand income taxes. See also combined ratio.

underwriting risk: Uncertainty about whether or when a losswill occur and its amount.

unearned premium reserve (UPR): The amount of unex-pired premiums on policies or contracts as of a certain date(the total annual premium less the amount earned).

unimpaired surplus: A stock insurer’s equity that is over andabove statutory minimum capital and is not used for collater-alization of assumed risk or otherwise pledged in support ofthe insurer’s or an affiliate’s business activities. For a mutualinsurer, it is funds not allocated as collateral, loss, or premi-um reserves nor intended for distribution to members.

unrelated business income tax (UBIT): Tax paid on incomeearned in an affiliate. Could be paid by a tax-exempt entity asa result of receiving income earned by a profit-making entity.

25Copyright © 2014 International Risk Management Institute, Inc.

26 Copyright © 2014 International Risk Management Institute, Inc.

unrelated risk: The source of risk is an entity or individualnot under common management and control with the captiveowner or user. See controlled unrelated business and unaffili-ated business.

V

valuation clause: Policy provision that states how losses willbe valued (actual cash value or replacement cost).

valued policy: The policy pays a predefined loss amount notrelated in any way to the actual incurred loss. Used mostly inlife and death insurance.

value of risk (VOR): The contribution to shareholder valueor other stakeholder interests resulting from a risk-taking ac-tivity. Like the “captive value added” concept, VOR looks atcomponents of the cost of risk as an investment required tofurther organizational objectives.

values: The exposure data that must be submitted by an insur-er as part of its underwriting submission, to allow for premi-um calculation.

vanishing premium: Policies where future premiums arepaid by the buildup in cash value or the experience account ofthe insured. Used mostly in life insurance but can be a featureof policies of indemnity written on a finite risk basis.

variable interest entity (VIE): An affiliated or nonaffiliatedentity in which a company is deemed to have a financial in-terest, even if such interest is not evidenced contractually.Typically used to hold or transfer tangible and intangibleassets and liabilities.

vicarious liability: Responsibility for the actions of anotheras a result of a particular relationship, e.g., employer and em-ployee, parent and child, business and independent contrac-tor. Also known as contingent liability.

Voluntary Employees’ Beneficiary Association (VEBA): Es-tablished by employers under the U.S. tax laws as a pretax meth-od of funding certain employee benefits. Like a trust, once moneyis in a VEBA, it cannot be withdrawn, except to pay benefits.

W

waiver: Voluntary surrender of a right or privilege known toexist; for example, waiver of subrogation rights by the insurerin favor of the insured in a back-to-back deductible policy;waiver of the right to sue in a hold harmless clause.

wholesale broker: A broker for independent agents. Can be amanaging general agent (MGA) or surplus lines broker. Allbusiness submitted to a certain insurer or for a certain type ofbusiness goes though this broker, which may have an exclusivearrangement with an insurer or a syndicate of reinsurers.

working layer: The first layer above the cedent’s retentionwherein moderate to heavy loss activity is expected by the ce-dent and reinsurer. Working layer reinsurance agreements ofteninclude adjustable features to reflect actual underwriting results.

wrap-up: Insurance for a number of unrelated insureds in-volved in the same subject of insurance. Used in constructionprojects for independent contractors.

written premium: See gross written premium (GWP).

Y

Yellow Book: The annual reporting form for property and casu-alty insurers in the United States. See also convention statement.Also known as Yellow Peril, for its size and complexity, al-though with the advent of computerized work sheets, electronicfilings, and some of the information in this text, much less of aperil than in the days of typewriters and calculators.

unrelated—Yellow IRMI Captive Insurance Glossary

Risk Financing Provides all the necessary steps to perform a systemati c evaluati on of risk fi nance opti ons, from loss forecasti ng to net present value analysis of the alternati ves. Captive Insurance Company Reports The fi rst (since 1977) and most respected independent resource focused on this alternati ve market. Captives and the Management of Risk Answers the questi ons every risk manager should be able to address (or every broker should be able to explain to a client): “If I have a capti ve, why? If I don’t have a capti ve, why not?” Captive Practices and Procedures Practi cal advice to know if a capti ve is meeti ng your (or your client’s ) business objecti ves.

Fundamentals of Reinsurance and Reinsurance Markets A ti mely, real-world introducti on to the highly specialized fi eld of reinsurance to introduce capti ve owners, board members, or others to the concepts and uses.

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