An organisation that collects statistical data on losses and exposures of businesses and promulgates rates for use by insurers in calculating premiums. The two most important rating bureaus are the National Council on Compensation Insurance and the Insurance Services Office, Inc. However, a number of states also use their own rating bureaus.
Insurance in which one insurer, the reinsurer, accepts all or part of the exposures insured in a policy issued by another insurer, the ceding insurer. In essence, it is insurance for insurance companies.
That portion of a risk that a reinsurer accepts from an original insurer (also known as a ‘primary’ insurer) in return for a stated premium.
Brokers who act as intermediaries between reinsurers and ceding companies. For the reinsurer, intermediaries operate as an outside sales force. They also act as advisers to ceding companies in assessing and locating markets that meet their reinsurance needs.
An insurer that contracts with a reinsurer to share all or a portion of its losses under reinsurance contracts it has issued in return for a stated premium. Also called ‘ceding company’.
An insurer that accepts all or part of the liabilities of the ceding company in return for a stated premium.
An arrangement in which a captive insurer ‘rents’ its facilities to an outside organisation, thereby providing the benefits that captives offer without the financial commitments that captives require. In return for a fee (usually a percentage of the premium paid by the renter), certain captives agree to provide underwriting, rating, claims management, accounting, reinsurance, and financial expertise to unrelated organisations.
The span of time between the occurrence of a claim and the date it is first reported to the insurer.
An amount of money earmarked for a specific purpose. Insurers establish unearned premium reserves and loss reserves indicated on their balance sheets. Unearned premium reserves show the aggregate amount of premiums that would be returned to policyholders if all policies were cancelled on the date the balance sheet was prepared. Loss reserves are estimates of outstanding losses, loss adjustment expenses, and other related items. Self-insured organisations also maintain loss reserves.
Assumption of risk of loss, generally through the use of noninsurance, self-insurance, or deductibles. This retention can be intentional or, when exposures are not identified, unintentional. In reinsurance, it is the net amount of risk the ceding company keeps for its own account or that of specified others.
A dividend plan normally used in writing workers compensation insurance in which the net cost to the policyholder is equal to a ‘retention factor’ (insurance company profit and expenses) plus actual incurred losses subject to a maximum premium equal to standard premium less premium discount.
A transaction in which a reinsurer transfers risks it has reinsured to another reinsurer.
A method developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of capital required of an insurer to support its operations and write coverage. The insurer's risk profile (i.e., the amount and classes of business it writes) is used to determine its risk-based capital requirement. Four categories of risk are analysed in arriving at an insurer's minimum capital requirement: asset, credit, underwriting, and off-balance sheet.
Achievement of the least-cost coverage of an organisation's loss exposures, while assuring post-loss financial resource availability. The risk financing process consists of five steps: identifying and analysing exposures, analysing alternative risk financing techniques, selecting the best risk financing technique(s), implementing the technique(s), and monitoring the selected technique(s). Risk financing programmes can involve insurance rating plans, such as retrospective rating, self-insurance programmes, or captive insurers.
A group formed in compliance with the Liability Risk Retention Act of 1986 for the purpose of negotiating for and purchasing insurance from a commercial insurer. Unlike a risk retention group which actually bears the group's risk, a risk purchasing group merely serves as a vehicle for obtaining coverage, typically at favourable rates and coverage terms.
Measurement of risk to make risk financing decisions. Loss frequency and loss severity are the dimensions of measurement. The value of loss and the variation in value from one period to the next will quantify the impact of the risk.
Planned acceptance of losses by deductibles, deliberate noninsurance, and loss-sensitive plans where some, but not all, risk is consciously retained rather than transferred.
Federal legislation that facilitates the formation of purchasing groups and group self-insurance for commercial liability exposures.
A group self-insurance plan or group captive operating under the auspices of the Liability Risk Retention Act of 1986. A risk retention group can cover the liability exposures, other than workers compensation, of its owners.
Also known as ‘risk distribution’, risk sharing means that the premiums and losses of each member of a group of policyholders are allocated within the group, based on a predetermined formula. Risk is considered to be shared if there is no policyholder-specific correlation between premiums paid into a captive, for example, and losses paid from the captive's reserve pool.