A form of reinsurance under which the reinsurer and primary insurer share losses in the same proportion as they share premiums and policy limits. Quota share reinsurance and surplus share reinsurance are the two types of participating reinsurance. Pro rata reinsurance is another term often used to describe participating reinsurance.
A schedule illustrating the typical rate of dollars paid out in claim settlements over time. For example, on average, less than 30 cents of the total loss dollar for workers compensation claims is paid during the first year of coverage. Even less is paid on average for general liability claims. Depending upon the particular type of risk, an additional five to 10 years can elapse before the full 100 percent of the loss reserve is paid out on a particular claim. During this long pay-out period, the loss reserves (i.e., the not-yet-paid-out funds which are set aside by the insurer to cover the loss claims) can be a source of significant investment income to the insurer, and the payout profile is instrumental in estimating this source of profit for any given category of risk.
The time needed to repair or replace property after loss or damage occurs.
TA legal agreement to replace one insurer with another insurer. The insured, the captive and the new insurer will all execute the novation. If the policy was fronted then the front company would need to agree to the novation. All obligations under the policy transfer to the new insurer as if the new insurer were on risk from inception of the original policy. Novation can also be used to transfer reinsurance protections, perhaps in conjunction with an IBT.
An organisation of insurers or reinsurers through which particular types of risks are underwritten with premiums, losses, and expenses shared in agreed ratios. Pools are also groups of organisations that are not large enough to self-insure individually and thus form a shared risk pool, also referred to as ‘risk pooling’.
A form of reinsurance under which a reinsurer assumes the entire book of the ceding company's business in a certain class or classes.
A set of financial statements (usually an income statement, balance sheet, and statement of cash flows) designed to exhibit ‘as-if’ financial results, often used to project future financial results, based on a set of assumptions. These statements are commonly used to evaluate the feasibility of proposed risk funding programmes such as captives and risk retention groups.
A term describing all forms of ‘proportional’ reinsurance. Under pro rata reinsurance, the reinsurer shares losses in the same proportion as it shares premiums and policy amounts. Quota share and surplus share are the two major types of pro rata reinsurance.
A numerical measure of the chance or likelihood that a particular event will occur. Probabilities are generally assigned on a scale from 0 to 1. A probability near 0 indicates an outcome that is unlikely to occur, while a probability near 1 indicates an outcome that is almost certain to occur.
This is a type of captive reinsurance company that underwrites risks of an affiliated operating business by means of having those risks first directly underwritten by a fronting insurance company which then cedes those risks on through to the captive as reinsurer. The insurance is ‘producer-owned’ in the sense that the producer of the initial insurance contract owns the captive. In some instances, this type of reinsurance company is owned by an insurance agent and broker, in which case, it is not technically-speaking a captive insurer since it is not owned by the owners of the affiliated operating company.
A company whose business is confined solely to reinsurance and peripheral services offered by a reinsurer to its customers. This is in contrast to primary insurers who exchange reinsurance or operate reinsurance departments as adjuncts to their basic business of primary insurance.
A provision found in some reinsurance agreements that provides for profit sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurer's expenses, and the cedant's share of profit after expenses.
A method used in arriving at an insurance or reinsurance rate and premium for a specified period based in whole or in part on the loss experience of the prior period.
Authorised by the Liability Risk Retention Act of 1986, a group formed to obtain liability coverage for its members, all of whom must have similar or related exposures. The Act requires a purchasing group to be domiciled in a specific state. In contrast to risk retention groups, purchasing groups are not risk-bearing entities.
The risk involved in situations that present the opportunity for loss but no opportunity for gain. Pure risks are generally insurable, whereas speculative risks (which also present the opportunity for gain) generally are not. See speculative risk.