Glossary of Reinsurance Terms A-M
Printable Version (including Fundamentals of Reinsurance)
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Access to Records Clause
A provision in a reinsurance agreement that allows the Reinsurer access to the Company’s books, records and other documents and information pertaining to the reinsurance agreement. This includes related underwriting and claims information, for purposes of the Reinsurer obtaining information concerning the reinsurance agreement or its subject matter.
Accident Year Experience
Underwriting experience calculated by matching the total value of all losses occurring during a given 12 month period (i.e., the dates of loss fall within the period) with the premiums earned for the same period. See also Calendar Year Experience and Policy Year Experience.
Acquisition Costs
All expenses directly related to acquiring insurance or reinsurance accounts, i.e., commissions paid to agents, brokerage fees paid to brokers, and expenses associated with marketing, underwriting, contract issuance and premium collection.
Admitted Reinsurance (also known as Authorized Reinsurance)
Reinsurance for which credit is given in the ceding company's Annual Statement because the reinsurer is licensed or otherwise authorized to transact business in the jurisdiction in question.
Unauthorized Reinsurance
Reinsurance placed with a reinsurer that does not have authorized or equivalent status in the jurisdiction in question.
Aggregate Excess of Loss Reinsurance (also known as Excess of Loss Ratio Reinsurance, Stop Loss Reinsurance)
A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the ceding company for the amount by which all of the ceding company's losses (either incurred or paid) during a specific period (usually 12 months) exceed either 1) a predetermined dollar amount or 2) a percentage of the company's subject premiums (loss ratio) for the specific period.
Alien (Insurer)
An insurer domiciled outside the United States.
Annual Statement (also known as Convention Blank, Statutory Annual Statement)
The annual report format prescribed by the National Association of Insurance Commissioners and the states.
Arbitration Clause
A provision found in reinsurance contracts whereby the parties agree to submit their disputes to a non-judicial adjudicator(s) tribunal rather than a court of law, generally subject to selection criteria and procedures set out in the clause. The arbitration tribunal produces an award ultimately enforceable by a court of law.
Association (also known as Pool, Syndicate)
An organization of insurers or reinsurers through which pool members underwrite particular types of risks with premiums, losses, and expenses shared in agreed amounts.
Assume
To accept an obligation to indemnify all or part of a ceding company's insurance or reinsurance on a risk or exposure subject to the contract terms and conditions.
Assumption
A procedure under which one insurance (ore reinsurance) company takes over or assumes contractual obligations of another insurer or reinsurer.
Assumption of Liability Endorsement
An endorsement to an insurance policy or reinsurance contract wherein a reinsurer assumes insurance obligations or risks, or both, of existing or in-force policies of insurance. The term is distinguished from a cut-through. See Cut-Through Endorsement.
Authorized Reinsurance
See Admitted Reinsurance.
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Base Premium (also known as Premium Base, Subject Premium, Underlying Premium)
The ceding company’s premiums (written or earned) to which the reinsurance premium rate is applied to produce the reinsurance premium. This term is usually defined in the reinsurance contract.
Gross Net Earned Premium Income (GNEPI)
Generally, the usual rating base for excess of loss reinsurance. It represents the earned premiums of the primary company for the lines of business covered net, meaning after cancellation, refunds and premiums paid for any reinsurance protecting the cover being rated, but gross, meaning before deducting the premium for the cover being rated.
Gross Net Written Premium Income (GNWPI)
Generally, gross written premium less only returned premiums and less premiums paid for reinsurance that inure to the benefit of the cover in question. Its purpose is to create a base to which the reinsurance rate is applied.
Basis of Attachment
A methodology that determines which original policy losses will be covered under a given reinsurance agreement. There are two types of methodologies: policies attaching and losses occurring. The determination may be based on 1) the effective or renewal date of the original policy; or 2) on the date of the loss; or 3) on the date when the reinsured company recorded premium or loss transaction.
Underwriting Year
The effective date of the original policy, rather than the date of loss, determines the basis of attachment. Any losses occurring on policies written or renewed with inception or renewal dates during the term of the given reinsurance agreement will be covered by that reinsurance agreement irrespective when the loss actually occurred. This mechanism is often used with “the policies attaching” methodology.
Accident Year
The date of the loss under the original policy rather than the effective date of the original policy that determines the basis of attachment. Any losses occurring during the reinsurance agreement period on policies in force (if any), written or renewed will be covered by that reinsurance agreement irrespective of the inception or the renewal date of the original policy. This mechanism is often used with “the losses occurring during” the contract period methodology.
Binder
An interim short form contract evidencing coverage, pending replacement by a formal reinsurance contract. See Placement Slip and Cover Note.
Bordereau
A report provided periodically by the reinsured detailing the reinsurance premiums and/or reinsurance losses and other pertinent information with respect to specific risks ceded under the reinsurance agreement.
Broker
An intermediary who negotiates reinsurance contracts between the ceding company and the reinsurer(s). The broker generally represents the ceding company and receives compensation in the form of commission, and/or other fees, for placing the business and performing other necessary services.
Broker Market
The collective reference to those reinsurance companies which accept business mainly from reinsurance brokers. See Direct Writing Reinsurer.
Bulk Reinsurance
A transaction sometimes defined by statute through which, of itself or in combination with other similar agreements, an insurer assumes all or a substantial portion of the liability of the reinsured company.
Burning Cost (also known as Pure Loss Cost)
The ratio of the reinsurance losses incurred to the ceding company's subject premium.
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Calendar Year Experience
The evaluation of underwriting experience whereby the total value of all losses incurred during a given twelve-month period (regardless of the dates of loss or the inception date of the policy) is matched with the premiums earned for the same period. As the name implies, Calendar Year Experience is usually calculated for a twelve-month period beginning January 1st. See also Accident Year Experience and Policy Year Experience.
Capacity
The largest amount of insurance or reinsurance available from a company or the market in general. Also refers to the maximum amount of business (premium volume) that a company or the total market could write based on financial strength.
Catastrophe Reinsurance
A form of excess of loss reinsurance which, subject to a specific limit, indemnifies the ceding company in excess of a specified retention with respect to an accumulation of losses resulting from an occurrence or series of occurrences arising from one or more disasters. Catastrophe contracts can also be written on an annual aggregate deductible basis under which protection is afforded for losses over a certain amount for each loss (the attachment point) in excess of a second amount in the aggregate for all losses (otherwise recoverable but for the aggregate deductible) in all catastrophes occurring during a period of time (usually one year).
Cede
The action of an insurer of reinsuring with another insurer or reinsurer the liability assumed through the issuance of one or more insurance policies by purchasing a contract that indemnifies the insurer within certain parameters for certain described losses under that policy or policies. This action is described as transferring the risk or a part of the risk from the insurer to the reinsurer. The insurer (the buyer) is called the cedent and the assuming company (the seller) is called the reinsurer.
Cedent (also known as Ceding Company, Reassured, Reinsured)
The issuer of an insurance contract that contractually obtains an indemnification for all or a designated portion of the risk from one or more reinsurers.
Ceding Commission
An amount deducted from the reinsurance premium to compensate a ceding company for its acquisition and other overhead costs, including premium taxes. It may also include a profit factor. See Overriding Commission and Sliding Scale Commission.
Ceding Company
See Cedent, Reassured, Reinsured.
Cession
The portion of insurance ceded by the ceding company to the reinsurer.
Claims Made Basis Insurance Agreements
The provision in a policy of insurance that affords coverage only for claims that are made during the term of the policy for losses that occur on or after the retroactive date specified in the policy. A claims made policy is said to “cut-off the tail” on liability business by not covering claims reported after the term of the insurance policy unless extended by special agreement.
Claims Made Basis Reinsurance Agreements
The provision in a reinsurance contract that affords coverage for claims that occur and are made during the contract term, for losses that occur on or after the retroactive date specified in the contract. Claims reported during the term of the reinsurance agreement are therefore covered regardless of when they occurred. A claims made agreement does not cover claims reported after the term of the reinsurance contract unless extended by special agreement.
Clash Cover
A casualty excess of loss reinsurance agreement with a retention level equal to or higher than the maximum limits written under any one reinsured policy or contract reinsured under the reinsurance agreement. Usually applicable to casualty lines of business, the clash cover is intended to protect the ceding company against accumulations of loss arising from multiple insureds and/or multiple lines of business for one insured involved in one loss occurrence.
Combination Plan Reinsurance
Elements of two types of reinsurance, Pro-Rata (Quota Share) and Excess of Loss, are combined in one reinsurance agreement usually in order to assist the ceding company in a transition from pure Pro-Rata reinsurance coverage to Excess of Loss. The excess of loss part of the plan protects the company up to a specified limit on each risk, each occurrence excess of a fixed net retained line. The pro-rata part of the plan protects the company’s net retained lines under the excess part (i.e. after deducting the excess of loss recoveries), on fixed percentage quota share basis.
Common Account Reinsurance
Reinsurance which is purchased by the ceding insurer to protect both the itself and its reinsurer (usually quota share reinsurer) and which applies to net and treaty losses combined. This may also be referred to as Joint Account Excess of Loss Reinsurance.
Commutation Agreement
An agreement between the ceding insurer and the reinsurer that provides for the valuation, payment and complete discharge of some or all current and future obligations between the parties under particular reinsurance contract(s).
Commutation Clause
A clause in a reinsurance agreement that provides for the valuation, payment, and complete discharge of some or all obligations between the ceding company and the reinsurer, including current and future obligations for reinsurance losses incurred.
Contingency Cover
Reinsurance providing protection for an unusual combination of losses. See Clash Cover.
Continuous Contract
A reinsurance contract that does not terminate automatically but continues indefinitely unless one of the parties delivers notice of intent to terminate.
Contributing Excess
A form of excess of loss reinsurance where, in addition to its retention, the ceding company has a share of losses in excess of the retention. This form of reinsurance may also apply to subject polices written in excess of underlying insurance or self insured retentions where the reinsurance applies to a share of losses within the policies, with the ceding company or other reinsurers contributing the remaining share. When more than one reinsurer shares a line of insurance on a risk in excess of a specified retention, each reinsurer contributes towards any excess loss in proportion to its original participation in such risk.
Convention Blank
See Annual Statement, Statutory Annual Statement.
Cover Note
A written statement issued by an intermediary, broker or direct writer indicating that the coverage has been effected and summarizing the terms. See also Binder and Placement Slip.
Credit for Reinsurance
The right of a ceding company under statutory accounting and regulatory provisions permitting a ceding company to treat amounts due from reinsurers as assets or reductions from liability based on the status of the reinsurer.
Credit Carry Forward (CCF)
The transfer of credit or profit from one accounting period, as defined within the reinsurance agreement, to the succeeding accounting period under the existing contract or the replacing contract.
Cut-Off Clause
The termination provision of a reinsurance contract stipulating that the reinsurer shall not be liable for loss as a result of occurrences taking place after the date of termination.
Cut-Through Endorsement
An endorsement to an insurance policy or reinsurance contract which provides that, in the event of the insolvency of the insurance company, the amount of any loss which would have been recovered from the reinsurer by the insurance company (or its statutory receiver) will be paid instead directly to the policyholder, claimant, or other payee, as specified by the endorsement, by the reinsurer. The term is distinguished from an assumption. See Assumption of Liability Endorsement.
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Deficit Carry Forward (DCF)
The transfer of deficit or loss from one accounting period, as defined within the reinsurance agreement, to the succeeding accounting period under the existing contract or the replacing contract.
Deficit and Credit Carry Forward (DCCF)
See Deficit Carry Forward and Credit Carry Forward.
Deposit Premium
The amount of premium (usually for an excess of loss reinsurance contract), which the ceding company pays to the reinsurer on a periodic basis during the term of the contract. This amount is generally determined as a percentage of the estimated amount of premium that the contract will produce based on the rate and estimated subject premium. It is often the same as the minimum premium but may be higher or lower. The deposit premium will be adjusted to the higher of the actual developed premium or the minimum premium after the actual subject premium has been determined.
Direct Writing Reinsurer
A reinsurance company that develops its business by using its own personnel and does not (ordinarily) accept business from a broker or intermediary.
Drop-Down (also known as Second Event Retention)
An approach to establishing the retention level in excess of loss reinsurance (usually catastrophe) under which the amount of the retention is reduced for the second (or subsequent) loss occurrence. The theory is that the ceding company can afford to retain a given retention level on one loss, but for additional loss(es) needs protection over the lower retention.
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Earned Reinsurance Premium
A reinsurance term that refers to either 1) that part of the reinsurance premium applicable to the expired portion of the policies reinsured, or 2) that portion of the reinsurance premium which is deemed earned under the reinsurance contract.
Entire Agreement Clause
A clause in some reinsurance agreements providing that the reinsurance agreement constitutes the entire agreement between the parties with respect to its subject matter, superseding all previous contracts, written or oral; and that any prior statements, negotiations or representations between the parties are merged into the final, written agreement. The clause may also provide that any modifications or changes in the agreement must be in writing, and executed by both parties.
Estoppel (also known as Non-Waiver Clause)
A provision in a reinsurance agreement which reserves to the reinsurer every right under the reinsurance agreement not previously waived, and to the ceding company every right which had not been forfeited.
Evergreen Clause
A term in a Letter of Credit providing for automatic renewal of the credit.
Excess of Loss Ratio Reinsurance
See Aggregate Excess of Loss Reinsurance, Stop Loss Reinsurance.
Excess of Loss Reinsurance (also known as Non-Proportional Reinsurance)
A form of reinsurance, which, subject to a specified limit, indemnifies the ceding company for the amount of loss in excess of a specified retention. It includes various types of reinsurance, such as catastrophe reinsurance, per risk reinsurance, per occurrence reinsurance and aggregate excess of loss reinsurance.
Excess Per Risk Reinsurance
A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the ceding company against the amount of loss in excess of a specified retention for each risk involved in each occurrence.
Experience Rating
See Rating.
Exposure Rating
See Rating.
Extended Reporting Period
An additional period of time affording coverage after termination of a claims-made policy during which a claim first made after such termination for injury or damage that occurs on or after the retroactive date, if any, but before the policy termination date is covered. Also see Retroactive Date.
Extra-Contractual Obligations (ECO)
In reinsurance, monetary awards or settlements against an insurer for its alleged wrongful conduct to its insured. Such payments required of an insurer to its insured are extra-contractual in that they are not covered in the underlying contract.
Ex Gratia Payment
Latin: “by favor”. A voluntary payment made by the reinsurer in response to a loss for which it is not technically liable under the terms of its contract.
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Facultative Certificate of Reinsurance
A contract formalizing a reinsurance cession on a specific risk.
Facultative Reinsurance
Reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the ability to accept or reject each risk offered by the ceding company.
Facultative Treaty
A reinsurance contract under which the ceding company has the option to cede and the reinsurer has the option to accept or decline individual risks. The contract merely reflects how individual facultative reinsurances shall be handled.
Facultative Obligatory Treaty (also known as Facultative Semi-Automatic Treaty, Facultative Semi-Obligatory Treaty)
1) A reinsurance contract under which the ceding company can select and the reinsurer is obligated to accept cessions of risks of a defined class, provided the risks fall within the contract guidelines. 2) A reinsurance contract under which the ceding company must cede exposures of risks of a defined class that the reinsurer may accept, if ceded.
Facultative Semi-Automatic Treaty
Facultative Semi-Obligatory Treaty
See Facultative Obligatory Treaty.
Financial Reinsurance
A form of reinsurance which considers the time value of money and has loss containment provisions. Also see Finite Reinsurance.
Finite Reinsurance (also known as Financial Reinsurance, Limited Risk Reinsurance, Nontraditional Reinsurance, Structured Reinsurance)
A broad spectrum of treaty reinsurance arrangements which provide reinsurance coverage at lower margins than traditional reinsurance, in return for a lower probability of loss to the reinsurer. This reinsurance is often multi-year and often provides a means of sharing positive or negative claims experience with the cedent beyond that usually provided by traditional reinsurance.
Flat Rate
1) A fixed insurance premium rate not subject to any subsequent adjustment. 2) A reinsurance premium rate applicable to the entire premium income derived by the ceding company from the business ceded to the reinsurer as distinguished from a rate applicable to excess limits.
Follow the Fortunes
Follow the fortunes generally provides that a reinsurer must follow the underwriting fortunes of its reinsured and, therefore, is bound by the decisions of its reinsured in the absence of fraud, collusion or bad faith. It requires a reinsurer to accept a reinsured's good faith, business-like reasonable decision that a particular risk is covered by the terms of the underlying policy. The term is often used interchangeably with follow the settlements, and there may be overlap between the affect of follow the fortunes and follow the settlements when the "risk" is what generated the loss. Follow the fortunes is focused on "risk" determination, not necessarily tied to a loss settlement.
Follow the Settlements
Follow the settlements generally provides that a reinsurer must cover settlements made by the reinsured in a business like manner, provided the settlement is arguably within the terms of the reinsured's policy and the reinsurance agreement and the settlement is not affected by fraud, collusion or bad faith. It is an expectation that the reinsurer will abide by the reinsured's good faith determination to settle, rather than litigate, claims under a reinsured policy and not relitigate a reinsured's settlements ceded to the reinsurance agreement. The term is often used interchangeably with follow the fortunes, and there may be overlap between the affect of follow the settlements and follow the fortunes when the "risk" is what generated the loss. Follow the settlements is focused on "loss settlement", not necessarily tied to a "risk determination" arising out of follow the fortunes.
Foreign Insurance Company
A U.S. domiciled insurer which is domiciled in a state other than the jurisdiction in question.
Fronting
Arrangements by which an insurer, for a specified fee or premium, issues its policies to cover certain risks underwritten or otherwise managed by another insurer or reinsurer. The insurer then transfers all, or substantially all, of the liabilities thereunder to such insurers by means of reinsurance.
Funded Cover
A type of excess of loss reinsurance agreement under which the reinsured company pays an agreed upon premium to build a fund (which is held by the insurer or reinsurer pursuant to the terms of the agreement) from which to pay covered losses. Since that fund reduces the reinsurer’s risk that losses will exceed the fund, the Reinsurer agrees to accept a reduced reinsurance margin. Any excess monies in the fund will be returned to the appropriate party pursuant to the terms of the contract.
Funds Withheld
A provision with respect to credit for reinsurance in a reinsurance treaty under which the premium due the reinsurer is withheld and not paid by the ceding company to enable the ceding company to reduce its liability for unauthorized reinsurance in its statutory statement. The reinsurer's asset, in lieu of cash, is "funds held by or deposited with reinsured companies."
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Gross Line
The total limit of liability accepted by an insurer on an individual risk (net line plus all reinsurance ceded).
Ground Up Loss
The total amount of loss sustained by the ceding company before taking into account the credit(s) due from reinsurance recoverable(s).
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Incurred But Not Reported (IBNR)
Refers to losses that have occurred but have not yet been reported to the insurer or reinsurer. IBNR has two components: (1) a provision for loss and loss adjustment expense ("LAE") reserves in excess of the reserves on claims reported during the accounting period (IBNER); (2) a provision for loss and LAE reserves on claims that have occurred but not yet been reported during the accounting period (IBNYR).
Incurred But Not Enough Reported (IBNER) is a provision in claims and losses already reported for claims reserve increases; decreases can occur although infrequently. It is created because reported claims reserves tend to increase from the time a claims occurs until the claim is settled. Changes in insurance company case reserves, during the accounting period and established by judgment and/or formula, often result from a lag in information on liability and damages.
Incurred But Not Yet Reported (IBNYR) is a provision for loss reserves and LAE on losses and claims that have occurred but have not been made known to the insurer.
Incurred Loss (also known as Loss Incurred)
Incurred loss is calculated as outstanding loss at the beginning of a reinsurance period plus paid and/or outstanding loss reported during that period minus the outstanding loss at the end of the period irrespective of when the loss actually occurred or the original policy attached.
Indexing
A procedure sometimes incorporated into an excess of loss reinsurance treaty to adjust the retention and limit according to the value of a specified public economic index (for example: wage, price, or cost-of-living).
Insolvency Clause
A provision now appearing in most reinsurance contracts (because many states require it) stating that in the event the reinsured is insolvent the reinsurance is payable directly to the company or its liquidator without reduction because of its insolvency or because the company or its liquidator has failed to pay all or a portion of any claim.
Interest and Liabilities Agreement
A reinsurance contract between the ceding insurer and one or multiple reinsurers in which the percentage of participation of each reinsurer is specified.
Interlocking Clause
A provision in a reinsurance agreement designed to allocate loss from a single occurrence between two or more reinsurance agreements. The provision is intended to be used when the company purchases its excess of loss reinsurance on an “underwriting year” or “risks attaching” basis. The provision allows the reinsured to prorate its retention between two or more reinsurance agreement periods, i.e., when one loss affects policies assigned to different reinsurance periods, so that the company will have one retention and one recovery for the loss involving the two reinsurance periods.
Intermediary Clause
A contractual provision in which the parties agree to effect all transactions through an intermediary and the credit risk of the intermediary, as distinct from other risks, is imposed on the reinsurer.
IRIS (Insurance Regulatory Information System) Tests
A series of financial tests developed by the National Association of Insurance Commissioners (NAIC) under its Insurance Regulatory Information System (IRIS) to assist states in overseeing the financial soundness of insurance companies.
Inuring Reinsurance
A designation of other reinsurances which are first applied pursuant to the terms of the reinsurance agreement to reduce the loss subject to a particular reinsurance agreement. If the other reinsurances are to be disregarded as respects loss to that particular agreement, they are said to inure only to the benefit of the reinsured. Example: A ceding insurer has a 50% quota share agreement and a per occurrence excess of loss contract (i.e., catastrophe reinsurance) for $80 million excess of $20 million. A catastrophe loss of $100 million occurs. If the quota share contract inures to the benefit of the catastrophe reinsurer, of the gross loss of $100 million, the quota share reinsurer pays $50 million, the ceding insurer bears the $20 million catastrophe retention, and the catastrophe reinsurer indemnifies the ceding insurer to the extent of $30 million.
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Joint Account Reinsurance
See Common Account Reinsurance.
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Letter of Credit (LOC)
A financial instrument obtained from a bank that guarantees the availability of funds to be collected in the future under a reinsurance contract. In the noncommercial setting, these are known as standby credits in the event of non-performance by the obligor. Uniform Custom and Practices for Document Bearing Credits (1993 rev.) ICC, Pub. No. 500. See also Evergreen Clause.
Limited Risk Reinsurance
See Financial Reinsurance, Finite Reinsurance, Nontraditional Reinsurance, Structured Reinsurance.
Line of Business
The general classification of business as utilized in the insurance industry, i.e., fire, allied lines, homeowners, etc.
Line Guide
See Line Sheet.
Line Sheet (also known as Line Guide)
A schedule showing the limits of liability to be written by a ceding company for different classes of risk and (usually) also showing the lines which can be ceded to proportional reinsurance treaties.
Loss Adjustment Expense (LAE)
The expense incurred by the ceding insurer in the defense, cost containment and settlement of claims under its policies. They are normally broken down into two categories: Allocated (ALAE) and Unallocated (ULAE). ALAE are often considered part of the loss to the ceding insurer and may be recovered as part of the reinsurance payments from the reinsurer. By contrast, ULAE are considered part of the ceding insurer’s overhead and cost of doing business, and should not be subject to reinsurance recovery. The elements of loss adjustment expenses that are covered by reinsurance are specified in the terms of the reinsurance agreement.
Loss Conversion Factor (also known as Loss Loading or Multiplier)
A factor applied to the anticipated losses (or loss cost) for an excess of loss reinsurance agreement in order to develop the reinsurance premium (or rate). This factor provides for the reinsurer's loss adjustment expense, overhead expense, and profit margin. See also Rating.
Loss Corridor
A mechanism contained in a proportional or an excess of loss agreement that requires the ceding insurer to be responsible for a certain amount of the ultimate net loss that is above the company’s designated retention and below the designated limit, and which would otherwise be reimbursed under the reinsurance agreement. A loss corridor is usually expressed as a loss ratio percentage of the reinsurer’s earned premium, or a combined ratio if the reinsurance agreement provides for a ceding commission to the company. Loss corridors are employed to mitigate the volatility of reinsurance agreements.
Loss Development
The process of change in amount of losses as a policy or accident year matures, as measured by the difference between paid losses and estimated outstanding losses at some subsequent point in time (usually 12 month periods), and paid losses and estimated outstanding losses at some previous point in time. In common usage it might refer to development on reported cases only, whereas a broader definition also would take into account the IBNR claims.
Loss Excess of Policy Limits
An amount of loss which exceeds the policy limits, but is otherwise under the coverage terms of the policy, for which the insurer is potentially responsible by reason of its action or omissions in defending the insured under the policy.
Loss Incurred
See Incurred Loss.
Loss Loading or Multiplier
See Loss Conversion Factor.
Loss Portfolio
See Loss Portfolio Transfer.
Loss Portfolio Transfer
A financial reinsurance transaction in which loss obligations that are already incurred and which are expected to ultimately be paid are ceded to a reinsurer. In determining the premium paid to the reinsurer, the time value of money is considered, and the premium is therefore less than the ultimate amount expected to be paid. The difference between the premium paid for the transaction and the amount reserved by the cedent is the amount by which the cedent's statutory surplus increases. Other terms used in context with Lloyd’s contracts are loss portfolio-rollover and reinsurance to close.
Losses Occurring
A specific time delineated in a reinsurance agreement when a loss is deemed to have occurred for purposes of determining whether the loss is within the period that reinsurance coverage applies, usually based on the definition of loss occurrence provided for in the agreement.
Loss Rating
See Rating.
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Management Fee Expense (also known as Reinsurance Home Office Expense [RHOE], Reinsurer’s Expense)
A deduction usually expressed as a percentage of ceded premium, in a calculation of profit or contingent commission. The amount is intended to account for the reinsurer's internal expenses.
Maximum Foreseeable Loss / Probable Maximum Loss (PML)
The worst loss that is foreseeable or probable to occur because of a single event.
Maximum Possible Loss
The worst loss that could possibly occur because of a single event.
Mediation
A form of alternative dispute resolution in which the parties agree to submit any dispute to a neutral mediator, whose purpose and goal is to achieve a mutually acceptable settlement and compromise of the dispute, rather than issue a formal ruling and decision on the merits as occurs in arbitration. Depending upon the parties' agreement, the results of mediation can be binding, or non-binding.
Minimum Premium
An amount of premium which will be charged (usually for an excess of loss reinsurance contract), notwithstanding that the actual premium developed by applying the rate to the subject premium could produce a lower figure. See Deposit Premium.
Mortgagee Endorsement
An endorsement to an insurance policy covering the policyholder's mortgaged property to provide that, in the event of the insolvency of the insurance company, the reinsurer shall pay directly to the mortgagee and/or the policyholder the amount of loss that would have been recovered from the reinsurer by the insurance company. The endorsement may provide that the reinsurer will pay the full loss amount in accordance with the insurance protection afforded by the insurance company. Similar in concept to the Cut-Through Endorsement.
