Glossary of Insurance Terms

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All Lines Aggregate – The combining of more than one line of coverage to establish an annual maximum for the insured for all those lines of coverage. Lines of coverage that might be considered are Trucking Liability, Workers Compensation and Cargo. Each of these lines of coverage would have its own per occurrence (specific) deductible or self-insured retention.

Attachment Point – The value or dollar amount on a specific claim or annual (aggregate) basis where the insurer will assume payment or reimburse the insured.

Basic Premium – Standard Premium x Basic Rate

BI/PD – Bodily Injury/Property Damage

Bottom Up Pricing – Pricing is based on expected losses first. Then expenses & profit are added to determine total cost.

Cash Flow Analysis – A method of determining the best insurance alternative by looking at past historical losses, future loss projections, insurance costs, discount factors for the time value of money, timing of insurance premium and claim payments.

Cell Company – Similar to a group captive except that each member’s insurance risk is maintained to a greater degree in a cell that is separate from the insurance risk of other members. Under public cell laws in many captive domiciles, the cells are not exposed to other cell risk/liabilities.

Core – That portion of a cell captive’s funds that are potentially exposed to mutual liability of all captive members’ insurance risk. Such funds are not retained in the cell but are considered part of the captive’s initial corpus.

Corridor Deductible – Insured agrees to assume additional risk in a layer on both a per occurrence & aggregate basis for a corresponding reduction in premium.

Costs of Risk – All cost to include insurance premiums, claims cost assumed within any deductible or retention, dollars spent on safety and loss prevention, cost for letters of credit, salaries and benefits of safety and risk management personnel, opportunity cost of funds tied up due to collateral requirements and cost of restricted cash on balance sheets.

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Deductibles vs. Self Insured Retention – In a deductible program the insurer still has the primary responsibility for claims in the event the insured goes bankrupt, out of business or for any reason is unable to make payments within the deductible. In a self-insured retention the insured is responsible for claim payments within the retention. The insurance carrier will issue an excess policy, which will reimburse the insured for any claim payments made in excess of the retention. For trucking liability the motor carrier will have to qualify as a self-insurer with the Federal Motor Carrier Safety Administration. Collateral is required for deductible programs and can be quite substantial. For self-insurance a $1,000,000 Trust fund account, LOC or other acceptable security must be in place with FMCSA.

Economic Family Theory – A theory of law, now essentially abandoned by the IRS, to try to prove that a corporate conglomerate could not effectively transfer or shift risk to a captive because the captive was part of the overall financial group as its parent and sister corporations such that an economic loss felt by one was an economic loss felt by all.

Escrow – a cash deposit used to make claims payments from; usually 3 months of average claims payments. Can be smaller depending upon the method the insured chooses to reimburse the insurer (check, electronic funds transfer, etc.).

Excess Insurer – An insurer who provides coverage usually on a reimbursement basis to a qualified self-insurer. The excess insurer has no obligation to “drop down” and pay claims in the event of insolvency on the part of the self-insurer.

Expense Components – Refers to insurance company overhead & profits.

Exposure – A unit of measure to aid in measuring risk (i.e. mileage, revenue, # units, payroll).

Evergreen Letter of Credit – Letter of Credit with no expiration

Facultative Reinsurance – The practice of buying reinsurance for a specific insured by an insurer. Pricing will be determined by loss experience, the state of the reinsurance market and attachment point and limits to be purchased. Risk between the insurer and re-insurer is usually shared on a quota share basis. A ceding commission is usually paid to the insurer.

Frequency – The number of accidents/claims that occur within the policy period.

Frequency of Severity – An increasing number of higher cost accidents than normal. A red flag in the safety and hiring areas as well as a good predictor of higher claims cost. A big area of concern from an underwriter’s standpoint.

Group Captive – Members of a captive insurance company collectively act as an insurer (i.e. the group captive) under the “captive” laws of a domicile’s insurance code to insure the risks of the members such that each member may share other member’s insurance risks within stated limits as defined by the captive’s articles of association and other governing documents.

Incurred Losses – Paid plus reserves (adjuster’s estimates of remaining payments).

Layer – Losses falling in a certain range i.e. losses between $1,000,000 and $2,000,000.

LOC – Issued by a financial institution to secure expected claims cost within a deductible or self-insured retention.

Loss Conversion Factor – Multiplied times standard premium to determine cost of claims handling fees.

Loss Development Factor – Multiplied times losses to estimate ultimate cost
Loss Forecasting-the process of looking at prior losses and predicting future results after allowing for loss development and inflationary factors.

Loss Pick – See Loss Forecasting.

Loss Stratification – The grouping of claims experience by severity. Example total claims cost $500,000, etc.

Loss Triangle – The process of looking at losses valued at annual intervals to determine a company’s own loss development factors as opposed to the use of industry data. This information is used for calculating a loss forecast.

Monetary Authority Defining Type – The government agency in Bermuda and the Caymans that regulates and authorizes captive insurers.

Multiple Year-Single Limit – Share one limit over 3 to 5 years and pay a reduced upfront premium. You can also negotiate guaranteed reinstatement at policy inception including a reinstatement charge. May cancel and rewrite every year with no losses. May finance the premium over the policy term. Offers advantage from budgeting perspective.

Net – A term in the industry where by the insurer assumes the risk without reinsurance.

Net Present Value – Total Cost discounted at a company’s opportunity cost of capital to account for the time value of money.

Opportunity Cost of Capital – Rate of return a company can earn by investing $’s back into its own operations. Rate use to calculate net present value.

Quota Share – Assuming risk on a percentage basis with the insurer in a particular layer of coverage. Example: assuming 25 % of the risk or $1,000,000 in the $4,000,000 excess of $1,000,000 layer for trucking liability for a 25% reduction in premium.

Reinsurance – The practice of transferring risk from either an insurer or a captive insurance company to a re-insurer on either an annual or case by case basis.

RMIS – Risk Management Information System. Carrier/TPA’s online system. Report capabilities, ability to download data, adjuster real-time online notes, etc.

Risk Purchasing Group – Group entity of multiple insureds formed via a Power Of Attorney under the Liability Risk Retention Act in compliance with the insurance code of a single selected state to buy group P&C third party insurance for coverage of all group members that is then not subject to regulation by any other state’s insurance laws.

Risk Retention Group – Similar to the Risk Purchasing Group in that it is a group formed under the federal Liability Risk Retention Act via a power of attorney, however this group does not buy insurance coverage but jointly self insures 3rd party liability insurance.

Reserves – Insurance adjuster’s estimate of remaining payments on a claim.

Security/Collateralization – A financial instrument required by the insurance carrier or regulator to secure expected claims or obligations within the deductible or self-insurance program

Severity – The actual (projected ultimate) cost of the accident/claim.

Short-Term Incentives – Discounted Guaranteed Cost Programs and other cash flow insurance programs that can cause the motor carrier to put less emphasis on the basic principles of hiring, safety and claims management which will lead to higher costs in the long term.

SIR – Self Insured Retention. See “deductible vs. self insured retention.”

Standard Premium – Rate times exposure unit (mileage, #units, payroll, revenue).

Tax Deductibility – The dollar amount that the IRS will allow to be deducted from an income tax return. Paid Losses, Insurance Premiums and Paid Claims Expenses are deductible and claim reserves are not deductible.

Top Down Pricing – Price determined by multiplying rate times exposure, then applying appropriate discounts and experience modification factors.

TPA – Third Party Administrator. Usually Provides Claims Administration, Management and handling to the insured. Is mainly used in self-insurance or large deductible programs where the insurance carrier does not provide services. Some TPA’s may also provide safety and loss prevention services.

Treaty Reinsurance – The purchase of reinsurance by an insurer for the insurer’s current and possibly contemplated book of business. It is typically renewed on an annual basis and terms, pricing and conditions are based on the loss experience of the insurer’s book of business, market conditions, limits purchased and degree of risk assumed by the insurer.

Trust Fund – A financial instrument used to place securities or cash aside to secure obligations of a deductible or self-insurance program.

Courtesy of Wachovia Insurance Services