REINSURANCE GLOSSARY

AB C D EF G H I JK L M N O PQ

RS T U V W X Y Z
"AS IF" FIGURES A term used to restate the treaty statistics for prior years to accord
with the current (or proposed) limits, terms and conditions Sometimes also used to
show results as if exceptional losses had not occurred.

A/C Account. May sometimes refer to a year of account. For example the term "1997
a/c" refers to the 1997 underwriting account.

AAD Annual Aggregate Deductible. See AGGREGATE DEDUCTIBLE

ABI The Association of British Insurers

ABSOLUTE NET RETENTION The amount which the REINSURED retains net for its own
account after deduction of all reinsurance recoveries. Sometimes REINSURERS may
stipulate a minimum RETENTION in order to ensure that a reinsured does not reduce,
by the purchase of additional reinsurance, his retention to a purely nominal figure.
ACCOMMODATION LINE A line written on a less desirable risk or a risk that would
normally be rejected but is accepted because of the overall profitability of the
brokers other business.

ACCOUNTS Statements of the business transactions between the parties. For a

PROPORTIONAL TREATY they are prepared at regular intervals, usually on a quarterly
or half-yearly basis.

ACCUMULATION The number of risks (or sums insured) which are exposed to claims
arising out of a single loss occurrence.
Accumulations can arise in many ways - such as a number of:
Buildings destroyed in the same Fire or Earthquake;
Motor vehicles involved in the same collision;
Passengers in the same plane;
Cargoes on the same ship.

Potential known exposures, (e.g. buildings exposed to earthquake) can be more

easily controlled than unknown accumulations (e.g. personal accident exposure
in respect of passengers on the same plane). See also CATASTROPHE EXCESS OF
LOSS.

ACTS IN FORCE CLAUSE See CHANGE OF LAW.

AEC AGGREGATE EXTENSION CLAUSE

AGGREGATE DEDUCTIBLE (1) That first part of the loss which is retained by the
reinsured but expressed either as an aggregate of a number of potential losses or a
monetary amount. See also STOP LOSS and BUFFER LAYER.
AGGREGATE DEDUCTIBLE (2) An additional deductible for claims that would otherwise
be recoverable under the excess of loss reinsurance contract covering losses arising
from an accident or event and which is retained by the reinsured before claims
become payable by reinsurers. For example, a reinsurance may cover losses up to
Rs.900,000 any one event in excess of Rs.100,000 any one event which in turn in
excess of Rs.2,500,000 in the aggregate (in effect, the reinsured has to bear the
whole of the first 2.5 losses that would otherwise be recoverable under the
reinsurance before it can recover under the reinsurance).

AGGREGATE EXCESS OF LOSS A form of EXCESS OF LOSS reinsurance where both the
deductible and the reinsurers limit of liability are expressed as (usually annual)
aggregate amounts. This form of contract would usually be used to protect an account
that would not normally be exposed to major "event" losses but could be subject to
major attritional loss. e.g. a Medical Expenses account. See also STOP LOSS
AGGREGATE EXPOSURE The total of insured (or reinsured) amounts accepted by the
reinsured on accumulating business.
AGGREGATE EXTENSION CLAUSE A clause that used to be included in per event excess
of loss treaties that cover products liability where the original cover granted to the
insured by the reinsured is on an aggregate basis. For such policies the clause allows
for the deductible and limit of reinsurance to apply also on an aggregate basis. This
clause has been generally replaced by the CLAIMS SERIES CLAUSE
AGGREGATE EXTRACTION CLAUSE A clause found, particularly in LMX contracts, which
allows a Reinsured (who is himself a reinsurer) to extract from an aggregate loss that
proportion of the aggregate loss which relates to any one occurrence so that the one
occurrence loss can be accumulated into the ULTIMATE NET LOSS of the Reinsured for
the specified loss occurrence.

AGGREGATE FRANCHISE DEDUCTIBLE A form of deductible found in some reinsurance

contracts whereby the contract responds to the whole of the loss (up to an agreed
amount) in respect of those losses greater than the stipulated amount. If the loss is
smaller than the stipulated amount
AGGREGATES See AGGREGATE EXPOSURE
ALTERATIONS CLAUSE A clause to be found in treaties which allows for the contracting
parties to change the terms thereof.
ANNIVERSARY A mutually agreed date at which the treaty is renewed. It is used as a
measure of the annual period of the treaty; the date when premium adjustments are
made; the date at which outstanding loss statements are submitted; and when notices
of cancellation take effect.

ANNUAL CONTRACT See FIXED TERM

ANNUAL RESIGNING A procedure used in the Lloyds Market to preserve equity
between Names when a policy has been accepted which has a period for, say, three
years. At the end of the first 12 months (i.e. at the end of the underwriting account) a
premium portfolio transfer of the unexpired 24 months premium is made by way of a reinsurance from
the first years NAMES to the second years Names. At the end of the second year the unexpired 12
months premium is then portfolio transferred by way of a reinsurance from the second years Names
to the third years Names.

ANY ONE EVENT/ CAUSE/ ACCIDENT/ OCCURRENCE The definition of the conditions under which the
reinsurer could become involved in a loss under an excess of loss treaty. Under "event" reinsurance all
and any losses, even if arising under different policies, are aggregated to form one claim if arising from
one insured event or cause or accident or occurrence. Thus, if two motor vehicles owned by different
policyholders of the reinsured are in collision with each other, all the amounts paid under both policies
are totalled so that one claim arises to the excess of loss treaty and the reinsured bears only a single
DEDUCTIBLE. Certain types of loss, such as those arising from weather conditions persisting over a
period (see HOURS CLAUSE) or personal injuries caused by a defective product or LATENT DISEASE
claims arising from exposure to adverse working conditions over a long period, make an adequate
definition of "any one event" or "cause/ accident/occurrence" very difficult to achieve.

AOA Any One Accident.

AOE Any One Event.
AOL Any One Loss.
AOR Any One Risk

AOV Any One Vessel

AP Additional Premium
ARBITRATION AGREEMENT An Agreement to allow for disputes to be settled amicably by reference to
arbitration rather than resorting to action at Law. There are many versions in use. It is usually
recommended that the Arbitration Agreement be a separate agreement to the treaty wording so that
even a dispute as to the validity of the treaty itself can be referred to arbitration.

ARCF Asbestos Related Claim Form. A form used in the London Market for the reporting of Asbestos
related claims. The form gives full details of all original insurances and all reinsurances that have given
rise to the claim being reported thereon. It enables reinsurers to tract asbestos exposures.
ARRANGED TOTAL LOSS See COMPROMISED TOTAL LOSS
AS ORIG As original. To follow the conditions set out in the original policy or policies.

ATTESTATION CLAUSE The final clause of the treaty wording and which provides for the agreement to
be signed in duplicate for and on behalf of each party.

AUTH R/I See AUTHORISED REINSURANCE

AUTHORISED REINSURANCE Authorised reinsurance. A syndicate reinsurance procedure whereby
subscribing syndicates are not required to authorise an entry for processing through Lloyds Policy
Signing Office
AUTOMATIC SCALE OF RATING A form of premium rating based upon the loss experience (BURNING
COST) of the treaty year. A preliminary premium is paid in the form of a DEPOSIT PREMIUM which is
subsequently adjusted according to the actual loss experience. Such adjustments may continue until all
outstanding losses have been finally settled. The reinsurance premium due is expressed as a rate
percent of the reinsureds GPI (or the equivalent used) and which is obtained by applying a LOADING to
the BURNING COST. The premium rate is usually subject to minimum and maximum limits so that if the
loss experience were "Nil" the reinsurer would receive some premium and if the loss experience were
very adverse there would be a limit to the amount of premium the reinsured would be liable to pay.
The premium rating may be based upon the
BURNING COST for the treaty year alone or on an average over a number of years or whatever may be
negotiated. The rating may also be based upon the paid loss experience alone rather than upon paid
plus outstanding (i.e. incurred) losses.

AUTOMATIC TREATY An obligatory treaty

AVERAGE (1) A term used in property insurance whereby in the event of under insurance the amount of
the indemnity which is recoverable by the insured is reduced to proportion that the sum insured bears
to the actual values at risk. Thus for example in a case where a loss amounting to 1,000 occurs on a
policy with a sum insured of 10,000 but where the value at risk was not 10,000 but 20,000 the amount
payable to the insured will not be 1,000 but will be 1,000 x 10,000/20,000 = 500
AVERAGE (2) A term used in the marine market to refer to a partial loss whereby in the event of a loss
to a vessel and its cargo the loss will be apportioned between all parties even though cargoes belonging
to some insureds may not be damaged by that incident

B/C BURNING COST

BACK UP LAYER A layer of excess of loss that provides for further reinstatements of coverage after any
automatic reinstatements provided for under the terms of the original contract have been exhausted.

BIIBA British Insurance & Investment Brokers Association

BINDER A term used to refer to a BINDING AUTHORITY

BINDING AUTHORITY An agreement for insurance or reinsurance whereby an Underwriter delegates

underwriting authority to another party, usually a broker or a managing general agent.
BORDEREAUX (LOSS) A listing of paid and outstanding losses.

BORDEREAUX (PREMIUM) Documents which give brief details of every risk ceded to a treaty or bound
under a Binding authority or Lineslip and which therefore keep insurers/reinsurers informed as to the
types of risks covered under the contracts.
BOTTOM LAYER See FIRST LAYER
BOUQUET OF TREATIES A term used to describe a collection of treaty contracts offered by a reinsured
(e.g. Fire, Accident, Marine, Aviation) as a package. Generally the reinsurer is obliged to accept the
same percentage share of each reinsurance contract which forms part of the bouquet.

BROKER The intermediary who, as agent of the insured or reinsured, negotiates the contract with the
insurer or reinsurer.

BROKERAGE A commission paid to a broker as remuneration for the work undertaken in placing and
servicing a piece of business.

BUFFER LAYER See AGGREGATE DEDUCTIBLE

BUREAUX The organisations through which the London Market transacts business. Currently LLOYDS
POLICY SIGNING OFFICE (LPSO), LLOYDS UNDERWRITERS NON MARINE CLAIMS OFFICE (LUNCO), LLOYDS
UNDERWRITERS CLAIMS AND RECOVERIES OFFICE (LUCRO), for Lloyds and London Insurance and
Reinsurance Market Association LIRMA and the Institute of London Underwriters (ILU) for companies.
BURNING COST (1) The percentage which the total of paid and outstanding losses to the LAYER bears to
the reinsureds GPI (or whichever equivalent is used). Is often used as a base for the calculation of the
premium due to reinsurers.
BURNING COST (2) At one time in was used in Lloyds as a synonym for POSSIBLE MAXIMUM LOSS.
C/N COVER NOTE
CANC CL Cancellation Clause
CARPENTER PLAN A method of SPREAD LOSS rating

CASCADE A description of an EXCESS OF LOSS programme where all layers are capable of dropping to a
lower layer so as to give additional low level reinstatement coverage. See also TOP AND DROP.

CASH LOSS Under proportional treaties claim recoveries are usually made in the accounts. However in
the event that a loss settled by the reinsured exceeds a predetermined amount the reinsured has the
option to request from the reinsurer immediate settlement outside the regular accounts.

CATASTROPHE EXCESS OF LOSS A form of EXCESS OF LOSS reinsurance which indemnifies a REINSURED
against an amount of loss in excess of a specified amount as the result of an accumulation of losses
arising from a catastrophic event or a series of catastrophic events.
CATASTROPHE REINSURANCE See CATASTROPHE EXCESS OF LOSS
CEDANT Since shares of risks are ceded under proportional treaties, the reinsured is often referred to
as the "cedant", the "cedent" or the "ceding company".

CEDENT See CEDANT

CEDING COMMISSION Reinsurers pay a commission to the reinsured to reimburse it for expenses
incurred in obtaining the original business as well as a contribution to the expenses of management of
the reinsured. See also OVERRIDING COMMISSION.

CEDING COMPANY See CEDANT

CESSION The amount ceded under a proportional reinsurance contract.
CHAIN LADDER STATISTICS A method of showing LOSS DEVELOPMENT statistics.
CHANGE OF LAW CLAUSE A clause often included in EXCESS OF LOSS treaties where the amount of the
original loss is in accordance with a scale of benefits laid down in Law such as in certain forms of
Workers Compensation. Thus a change in the scale of benefits could materially increase the
reinsurers liability, sometimes retroactively. A variation of this clause provides that for the purposes
of the reinsurance contract it is deemed that the scale of benefits in force at inception of the treaty
apply regardless of the change in law. Another variation provides for the terms of the treaty to be
renegotiated in the event of such a Change of Law.

CHANGE OF UNDERWRITING POLICY CLAUSE A clause used to ensure that the reinsured does not, after
placing a treaty with reinsurers, change its underwriting practices with regard to the business covered
by the treaty without first obtaining reinsurers agreement.

CLAIMS ADVICE CLAUSE A requirement for the reinsured to advise the reinsurer immediately of any
accident or event which might give rise to a loss under the reinsurance. See also the EXTENDED LOSS
REPORTING CLAUSE.

CLAIMS CO-OPERATION CLAUSE A clause requiring that the reinsured shall advise the reinsurer
immediately the reinsured is aware of a loss that is likely to involve the reinsurance and that the
reinsured must co-operate with the reinsurer at all times in the negotiation and settlement of the loss
CLAIMS MADE A form of cover where only claims notified during the period of insurance or reinsurance
are covered. See also LOSSES OCCURRING and RISKS ATTACHING.
CLAIMS SERIES CLAUSE This clause is designed to define a claims series event by relating all claims from
the same specific common cause involving one original insured arising from a product of the same
design and specification. This clause was introduced to replace the AGGREGATE EXTENSION CLAUSE.
CLEAN CUT The practice of transferring premium and loss portfolios from one year to another. See
PREMIUM PORTFOLIO and LOSS PORTFOLIO.

CLOSING The document used for CLOSING A RISK.

CLOSING A RISK The procedure for submitting accounting details to an underwriter who has written a
risk. May be combined with a policy signing procedure.

CLOSING AN ACCOUNT Making a reinsurance provision to cover outstanding losses, so that reserves and
profit can be released. See also REINSURANCE TO CLOSE.

CN COVER NOTE
CO-INSURANCE Where a number of different insurers subscribe to a single insurance policy.
CO-REINSURANCE A requirement that the reinsured bears, in addition to the deductible, a portion of
the coverage under the treaty un-reinsured and for its own account. Intended to ensure that the
reinsured retains an interest in loss minimisation even after the deductible has been exceeded. A co-
reinsurance provision in LMX business has some effect on reducing the SPIRAL.
COINS CO-INSURANCE
COMMISSION See CEDING COMMISSION
COMPROMISED TOTAL LOSS An agreement made between insurers and insured whereby in the event
that the cost of repairs to a vessel exceed a certain amount the insurers will declare the vessel as
being a total loss. instead of repairing it.

CONDS The conditions of Insurance or reinsurance

CONFIDENTIALITY CLAUSE A clause requiring each party to a contract to treat the contract, and the
information supplied therewith, as confidential and to not use such information to the detriment of the
other party
CONTINGENT COMMISSION See PROFIT COMMISSION

CONTINUOUS TREATIES Most proportional treaties are continuous in the sense that, once they have
incepted, they can be terminated only upon notice of cancellation being given in the proper form.
Where a reinsurer is allowed only to accept Fixed Term treaties it will make its acceptance of a
continuous treaty subject to as "NCAD" which effectively means that the reinsurer has issued notice to
terminate its participation at the end of the one year period. That reinsurer may well renew the treaty
for a further period or periods.

CONTRIBUTORY REINSURANCE An term used, generally in the United States to refer to proportional
reinsurance.
CONVERTIBLE CURRENCY Any currency other than Sterling, US Dollars and Canadian Dollars

COSTS CLAUSE A clause sometimes found as part of the CLAIMS CLAUSE under EXCESS OF LOSS treaties
which provides for claims costs and loss adjustment expresses to be shared separately between
reinsured and reinsurer in the proportions which the deductible and the reinsurance recovery bear to
the indemnity. Normally, within the terms of the ULTIMATE NET LOSS CLAUSE, these costs and
expenses form part of the total claim to the TREATY.
COVERNOTE A document issued by a broker to its client setting out the terms on which it has effected
the insurance or reinsurance.

CURRENCY CLAUSE Where the original business is written in more than one currency some provision
needs to be made for conversion of premiums and losses between the other currencies and the main
currency for the purposes of issuing accounting documentation. Some equitable basis is usually
stipulated, such as the rate of exchange actually used by the reinsured or the rate applying on the
transaction date, etc. See also
CURRENCY FLUCTUATION CLAUSE A clause which is often contained in treaties where the deductible
and limit are expressed in one currency, but where the reinsureds business may be written in other
currencies (and claims may arise in those currencies). In excess of loss reinsurance the whole of any
exchange fluctuation would normally be attributable to the reinsurer. Most versions of the clause which
are in current use aim to share the effects of the devaluation of the currency in which the reinsurance
contract is written (the base currency) by sharing the value of the fluctuation as between that currency
and the currency of the claim in proportion to the deductible and the recovery.

CUT - OFF A provision of a reinsurance contract stating that the REINSURER will not be liable for loss as
a result of loss occurrences which take place after the date of termination of the contract.

CUT-THROUGH CLAUSE A clause occasionally found in treaties (mainly in US) which allows the insured
to recover directly from the reinsurer in the event of a failure by the reinsured to pay a loss due to
specified circumstances. Because there are entirely separate contractual relationships as between
insured and insurer (reinsured) and between reinsured and reinsurer under English law there is no
privity of contract between insured and reinsurer so that such a clause would not be legally
enforceable.

DEDUCTIBLE That first part of the loss which is retained by the REINSURED. The REINSURER is then
liable for the balance of the loss (up to the agreed limit) after deduction of that RETENTION.

DEDUCTIONS An expression used to refer to all deductions from premium such as BROKERAGE,
COMMISSION, taxes etc.
DEFICIT CLAUSE Found in PROFIT COMMISSION clauses to provide that deficits arising in any year will be
carried forward and offset against profit commission due on a subsequent year. Deficits may be carried
forward to extinction or for a limited period, such as 3 or 5 years. In the latter case, any deficit
remaining is then ignored in future calculations.

DEP Deposit (e.g. DEPOSIT PREMIUM)

DEPOSIT PREMIUM A premium paid at inception of the treaty, or in instalments during the treaty year,
which is subject to adjustment at a later date. A deposit premium may also represent the minimum
payable or the minimum premium required might be set at some other figure.

DISCOVERY COVER A reinsurance contract that coves losses that are discovered during the term of the
treaty regardless of when they occurred.
DRAWING A claim recovered from reinsurers through the letter of credit system.

DTI The United Kingdom Department of Trade and Industry which is responsible for regulation of the
insurance industry in the UK.
DUAL MARKET CONTRACTS Contracts written in the Lloyds Market that were deemed to include
elements of more than one type of risk (e.g. both Marine and Non Marine risks or Aviation and Non
Marine Risks). The LEADING UNDERWRITER would indicate on the SLIP the percentage split between the
two classes.

E & EL Each and Every Loss

EARNED PREMIUM That portion of the premium that has been "used up" during the term of the policy.
For example if a one year policy has been in force for 9 months three quarters of the annual premium
has been earned.
Because of the difficulties of calculating the exact earned premium for each policy issued by an insurer
(who may issue many hundreds of thousands of policies per annum) various methods of calculating an
assumed earned premium were developed, the most common being what is termed as the "24ths
system" Under this system it is assumed that all policies are issued at the middle of each month. Thus
all policies issued in January would have an assumed common inception date of 15th January so, at the
31st December, it would be calculated that 23/24ths of the policies had been "used up" or earned. With
the increased utilisation computers it is however now relatively simple to calculate an exact earned
premium.

For accounting purposes the earned premium for the current period is calculated as the WRITTEN
PREMIUM for the current period plus the UNEARNED PREMIUM of the previous period less the UNEARNED
PREMIUM of the current period.

FAC FACULTATIVE REINSURANCE

FAC OBLIG See FACULTATIVE OBLIGATORY

FACULTATIVE OBLIGATORY As the name implies, the facultative obligatory treaty has the
characteristics of both facultative cessions and obligatory treaties. It is an agreement whereby the
REINSURED has the option to cede or not and the reinsurer is bound to accept those risks ceded.

FACULTATIVE REINSURANCE
Reinsurance by offer and acceptance of individual risks whereby the reinsurer has the option to accept
or reject each risk offered.

FDO See FOR DECLARATION ONLY.

FGU From the Ground Up. The whole of the loss including the reinsureds retention.
FIGURES See STATISTICS.
FIRST EXCESS The first LAYER of excess of loss coverage. The term has also been used in the LMX
market to refer to the first excess (i.e. an additional deductible) that the reinsured retains for its own
account before the excess of loss reinsurer becomes liable.
FIRST INTEREST REINSURANCE Same as FLAT LINE REINSURANCE
FIRST LAYER The first LAYER of excess of loss coverage.
FIRST SURPLUS The surplus treaty immediately surplus to the reinsureds retention and to which
cessions must be made in priority over all other surplus treaties.

FIRST TIER REINSURANCE An excess of loss reinsurance of a direct underwriter.

FIXED TERM Contracts which operate for a fixed term only, whereupon they terminate automatically.
The term "annual contracts" is used to describe those contracts that are issued for 12 month periods.
See also CONTINUOUS TREATIES
FLAT LINE REINSURANCE A reinsurance contract for a fixed amount, with the REINSURER paying the
claim up to the agreed amount and the REINSURED bearing the loss above the agreed amount.
FLAT PREMIUMS A fixed non adjustable premium (as opposed to an adjustable premium).
FOM Flag, Ownership or Management. Often reinsurers will restrict a reinsureds hull underwriting to
only those vessels registered, owned or managed by companies or individuals domiciled in the same
country as the reinsured.
FOR DECLARATION ONLY In order to formalise the documentation for policy signing at Lloyds, the ILU
and LIRMA it is usually necessary for there to be a payment of premium. However PROPORTIONAL
TREATIES, BINDING AUTHORITIES AND LINESLIPS also need to be formalised (and usually prior to the
payment of any premium). In order to achieve this an FDO closing is made to the various market
BUREAUX.

FPA FREE OF PARTICULAR AVERAGE

FRANCHISE A relief to insurers (or reinsurers) of each and every loss that does not exceed a specified
amount. A "franchise deductible" will require the reinsured to retain the whole of the loss if the loss
does not exceed an agreed amount but in the event that the agreed amount is exceeded the whole of
the loss will be payable by the reinsured.

FRINGE MARKET Insurance and reinsurance companies writing SUBSCRIPTION MARKET business on the
"fringe" of the Lloyds market. These companies tend to rely on brokers for the production of business
and do not usually have a branch network. These are to be contrasted with the PROFESSIONAL
REINSURERS and/or the UK Composite insurers who write a range of non-life insurances on a world-wide
scale and who are not reliant upon London Market business.

FRONT See FRONTING

FRONTING On occasion an insurer might not be allowed to accept an insurance risk (e.g. it might not be
authorised to accept business in that jurisdiction or it might be authorised only to write reinsurance
rather than direct insurance). In such event it (or the broker involved) might arrange for an authorised
insurer to "front" the business, which is then ceded to the initial company as a reinsurance. The
"fronting" insurer is remunerated by way of a fee (which is generally in the form of an over-riding
commission on the premium). The practice of providing fronting capacity has one major pitfall which is
that the fronting insurer is liable to the insured for the whole of the exposure. This could be a problem
in the event that the reinsuring company cannot or will not pay a claim.

FSL See FULL SIGNED LINE.

FULL REINSURANCE CLAUSE A clause which is usually contained in the reinsurance documentation which
states:
Being a reinsurance of and warranted same gross rates, terms and conditions as and to follow the
settlements of the Insurer.
or words to that effect.

GAMBLING POLICY A policy in respect of which the assured or reassured has no insurable interest, and
no reasonable expectation of acquiring such interest.

GENERAL LAYERS Layers of EXCESS OF LOSS reinsurance that protect the main account of the
REINSURED. For example a marine company may purchase excess of loss reinsurances that cover all his
marine account underwriting such as Hulls, Cargo, War, Energy etc. Such covers would be termed as
"generals" as opposed to SPECIFICS. See also UMBRELLA LAYERS.
GENERALS See GENERAL LAYERS
GNEPI GROSS NET EARNED PREMIUM INCOME.

GNPI GROSS NET PREMIUM INCOME.

GNWPI GROSS NET WRITTEN PREMIUM INCOME.
GPI GROSS PREMIUM INCOME
GROSS NET EARNED PREMIUM INCOME The REINSUREDs gross EARNED PREMIUM income less return
premiums and less premiums n reinsurances which inure to the benefit of the cover in question.
GROSS NET PREMIUM INCOME. The REINSUREDs gross WRITTEN PREMIUM income less return premiums
and less premiums on reinsurances which inure to the benefit of the cover in question.
GROSS NET WRITTEN PREMIUM INCOME The REINSUREDs gross WRITTEN PREMIUM income less return
premiums and less premiums on reinsurances which inure to the benefit of the cover in question.
GROSS PREMIUM INCOME The REINSUREDs gross WRITTEN PREMIUM less return premiums.

H/C Held Covered

HOURS CLAUSE A clause usually contained in CATASTROPHE treaties covering certain types of physical
perils, such as Storm, Bush Fire, Flood, Earthquake, Riot, etc., where it is difficult to identify where
and when the event begins and ends. The clause limits such an event to a specific period of
consecutive hours and/or to a specific area.

IBNR INCURRED BUT NOT REPORTED

ILU INSTITUTE OF LONDON UNDERWRITERS
INCEPTION AND TERMINATION CLAUSE The clause appearing in all treaty wordings which states the
commencement and termination dates of the contract. In the case of CONTINUOUS TREATIES the clause
will also include the details of the cancellation provisions.
INCURRED BUT NOT REPORTED Those losses that have arisen on policies or contracts written by the
insurer or reinsurer but which have not yet been advised to them.

INCURRED CLAIMS The total of paid and outstanding claims.

INCURRED LOSS RATIO INCURRED LOSSES expressed as a percentage of PREMIUMS (which can be related
to EARNED or WRITTEN PREMIUMS, depending upon the basis of the contract).

INCURRED LOSSES INCURRED CLAIMS

INDEX CLAUSE INDEX CLAUSE - A clause usually contained in excess of loss reinsurances covering third
party bodily injury. The intention is for both the REINSURED and the REINSURER to share the effects of
inflation by maintaining the monetary values existing at inception of the treaty. These effects are
shared pro-rata in the ratio that the original deductible and reinsurance coverage bear to the ultimate
indemnity payment. The usual form provides for the deductible and the reinsurers limit to be
increased according to the increase in an Index (generally a wages index) between the date of
inception of the treaty and the date of settlement of the loss. Without such a clause the effects of
inflation on claims would fall solely upon the REINSURER The SEVERE INFLATION CLAUSE is a variation
whereby the indexation applies only if the rate of inflation exceeds, say, 20% or some other negotiated
figure.

INSOLVENCY OF OTHER REINSURERS A clause usually included in a TREATY WORDING whereby it is

stated that the loss to the REINSURER shall not be increased due to the inability of the REINSURED to
collect from another REINSURER.

INSPECTION OF RECORDS CLAUSE A clause usually found in treaty wordings which allows for the
reinsurer or its representative to inspect those records of the reinsured relating to transactions under
the contract. An important requirement is that the right of inspection should be allowed to continue
after termination of the reinsurance and for as long as the reinsurer has any liability arising therefrom.

INSTITUTE OF LONDON UNDERWRITERS (ILU) An organisation of marine and Aviation Insurance

companies based in London. Working closely with Lloyds marine and aviation underwriters, the ILU
provides facilities for discussion between underwriters whereby matters of common interest can be
considered and recommendations made for the benefit of all marine insurers. The ILU also provides
many services for the use of members, including a policy signing service, and publishes the widely used
Institute clauses.
INSURABLE INTEREST A legal or equitable financial interest in property of in the happening of some
event.
INSURED VALUE The value expressed in a policy as being the agreed value of the property insured, and
on which all claims will be based.
INTEREST The relationship of the assured, or reassured, to the subject matter exposed to risk.

INTEREST CLAUSE A term used for the clause in the treaty wording which describes the business and
limits covered.

INTEREST ON DEPOSITS In the event that a REINSURED retains PREMIUM RESERVES or LOSS RESERVES
(which actually belong to the REINSURER) the contract agreement will usually provide for interest at a
certain agreed rate to be paid to the REINSURER.
INTERLOCKING CLAUSE Interlocking Clause - A clause in a contract which is on risks attaching basis
which allows for a loss occurrence to be apportioned between years of account when a loss occurrence
arises on policies that attach to different underwriting years. This is done by proportionately reducing
the deductible and reinsurers liability for each of the two years by the percentage that the loss to
each year of account bears to the total amount of the loss arising from the loss occurrence.
INTERMEDIARY CLAUSE A clause generally used in a treaty wording, where a broker is involved, to
nominate the broker as the official channel through whom communications are to be directed. Certain
versions can impose obligations on the broker as to payment of premiums or recovery of losses.

INTERPRETATION A clause appearing in the treaty wording which specifies the legal system to be
applied to the reinsurance contract. Formerly it was usually assumed that English Law would apply to
treaties but nowadays, because of the international nature of the business, it is becoming increasingly
important to specify the relevant legal system.

JOINT ACCOUNT See COMMON ACCOUNT

JOINT EXCESS OF LOSS COMMITTEE JOINT EXCESS OF LOSS COMMITTEE - A committee set up by the
Lloyds and Institute of London Underwriters Marine market to provide Standard Wordings and Clauses
for Excess of Loss contracts.
JOINT ACCOUNT See COMMON ACCOUNT

JOINT EXCESS OF LOSS COMMITTEE JOINT EXCESS OF LOSS COMMITTEE - A committee set up by the
Lloyds and Institute of London Underwriters Marine market to provide Standard Wordings and Clauses
for Excess of Loss contracts.

L/U LEADING UNDERWRITER

LATENT DISEASE LATENT DISEASE - An illness which may lie dormant for years before manifesting itself
e.g. silicosis, "black lung", asbestosis, noise induced hearing loss, mesothelioma and various
carcinomas.

LATF Lloyds American Trust Fund

LAYERS/LAYERING Where the reinsurance coverage is placed in sections, one above the other, rather
than in a single contract. Thus a coverage for a total of Rs.5,000,000 may be placed as:-

1st Layer Up to Rs.200,000 in excess of Rs.50,000

2nd Layer Up to Rs.750,000 in excess of Rs.250,000
3rd Layer Up to Rs.4,000,000 in excess of Rs.1,000,000

Different reinsurers will probably be involved with each layer and each layer will be rated individually.
The construction of the layering is often dependent upon market conditions.

LBC See LOADED BURNING COST

LCO Lloyds Claims Office
LCTF Lloyds Canadian Trust Fund
LEADING UNDERWRITER The underwriter who usually sets the terms for the reinsurance contract. In
some cases the agreement to certain modifications to a contract is delegated to the leading
underwriter.

LEADING UNDERWRITER CLAUSES These are clauses incorporated into the SLIP whereby insurers and
REINSURERS agree to delegate certain responsibilities to the LEADING UNDERWRITER.
LETTER OF CREDIT A document issued by a Bank which undertakes to pay a stated sum of money to the
addressee subject to certain conditions. These are as guarantees of performance under treaties (e.g.
as a replacement for Reserve Deposits). Such LOCs are often "Clean" (not subject to conditions) and
"Irrevocable" (not cancellable prior to the stated expiry date). See also RESERVE DEPOSITS.
LIBA Lloyds Insurance Brokers Association
LIBC Lloyds Insurance Brokers Committee
LIMIT See LIMIT OF INDEMNITY
LIMIT OF INDEMNITY The maximum amount for which the insurer or reinsurer is liable under a policy of
insurance or reinsurance.

LIMITED GENERALS GENERAL Excess of loss layers that were limited in their scope. The normal
limitation was that they excluded LMX business.
LIMITED TERMS REINSURANCE Reinsurance placement where the reinsurance coverage is less wide than
the original coverage. For example an Insurer may place TOTAL LOSS ONLY reinsurance in respect of a
hull risk that he had accepted on an all risks basis.
LINE (1) The amount accepted by a REINSURER on a reinsurance contract.
LINE (2) The amount which can be ceded under a SURPLUS TREATY is usually expressed in terms of a
number of "lines". A "line" is the amount of the REINSUREDs retention. Thus a "20 line treaty" means
that the treaty will accept a maximum of 20 times the REINSUREDs retention.

LINE SLIP See LINESLIP

LINESLIP An agreement for insurance or reinsurance made between underwriters and a broker whereby
an Underwriter delegates underwriting authority to the LEADING UNDERWRITER of the lineslip.

LIRMA London Insurance and Reinsurance Market Association.

LLOYDS BROKER A broker who is authorised to place insurances at Lloyds of London.

LMX LONDON MARKET EXCESS OF LOSS

LOADED BURNING COST When a contract is rated using the burning cost method the burning cost will
usually be loaded (quite often by a factor of 100/70) in order to provide some margin of surplus for the
REINSURER
LOADING An additional factor which is taken into account in premium rating or loss reserving (e.g. to
include an element for reinsurers profit in the premium quotation or to increase outstanding claims
estimates to cover IBNR losses). See also REVALUATION OF LOSSES, UNUSED EXPOSURE and VARIANCE
LOADING.

LOC See LETTER OF CREDIT

LOD Losses Occurring During
LONDON MARKET EXCESS OF LOSS Excess of Loss Reinsurance contracts of Lloyd's Syndicates and London
Companies (see FRINGE) which accept business in what is referred to as the SUBSCRIPTION MARKET.
Reinsurances of Lloyd's Motor and Employers Liability Syndicates (which are not part of the
"subscription" market) are not considered to be LMX. The concept of what is or is not LMX used to
embrace whether or not the account reinsured contained REINSURANCE ASSUMED or business emanating
from the USA. See also SPIRAL.
LONG TAIL Those types of insurance (e.g. products liability and many classes of third party liability)
where it is known from experience that notification, manifestation and settlement of losses may take
many years.
LONG TERM Long term insurances are those insurance such as life assurances where the policy period
can be for a number of years.
LOSS PORTFOLIO The amount of the outstanding losses at a particular date. Occasionally a treaty might
provide for the loss portfolio to be withdrawn at termination of the treaty. In such event the reinsurer
will pay the reinsured a negotiated percentage (generally in the range from 90% to 110%) of the
outstanding losses to the treaty at the termination date in return for a release from any and all future
liability. Treaties can also be structured to require the reinsured to assume a loss portfolio. The
reinsurer will be credited with the loss portfolio from the previous year and will thus assume liability
for all losses paid in the current year but which may have occurred in previous years.

Technically speaking the Loss portfolio is a premium paid by the reinsurers of one year to obtain a
release from future liability. This is generally not recognised as such by insurance regulators; probably
because of the adverse effect that these transfers could have on an insurers solvency margins which
are calculated upon premium income figures.

LOSS RATIO The ratio of losses to premiums, usually expressed as a percentage.

LOSS RESERVE See LOSS RESERVE DEPOSIT
LOSS RESERVE DEPOSIT A deposit retained from the REINSURER by the REINSURED which is usually equal
to the REINSURERS proportion of the estimated outstanding losses at the end of that accounting
period.
LOSS RETENTION CLAUSE A clause requiring the CEDING COMPANY to retain a proportion of the loss to
REINSURERS once an agreed LOSS RATIO has been exceeded
LOSSES CARRIED FORWARD See DEFICIT CLAUSE

LOSSES OCCURRING LOSSES OCCURRING - The form of excess of loss reinsurance contract whereby only
those losses which occur during the period of the treaty are covered thereby. Such losses would be
covered even though the original policy of insurance to which they relate may have incepted outside
the period of the reinsurance. See also RISKS ATTACHING. LATENT DISEASE losses, particularly in the
US., have shown how difficult it is to define this term. Thus the date of the loss occurrence may range
from when an insured was exposed to a peril (see EXPOSURE BASIS) or when the disease manifested
itself (see MANIFESTATION) or may include the whole of the latent interval in between.
LPO Lloyds Policy Office
LPSO Lloyds Policy Signing Office
LUA Lloyds Underwriters Association
LUAGM Leading Underwriter Agreement General Marine
LUAMC Leading Underwriter Agreement for Marine Cargo

LUAMH Leading Underwriter Agreement for Marine Hull

LUC London Underwriting Centre
LUCRO Lloyds Underwriters Claims and Recoveries office

M&D Minimum and Deposit Premium

M&DP Minimum and Deposit Premium
M/E The reinsurers Management Expenses in a Profit Commission formula. See PROFIT COMMISSION
MANIFESTATION An approach toward identifying the date of the loss event for occupational disease
claims under an excess of loss reinsurance. On this approach the date of the event is accepted as being
the date when the disease manifests itself. See TRIPLE TRIGGER

MARITIME PERILS Marine perils, that is perils consequent upon, or incidental to, the navigation of the
seas.

MATERIAL CIRCUMSTANCE Any circumstance that would influence a prudent underwriter in its decision
to accept or reject a risk or in the amount it would accept or the premium it would charge for cover or
the conditions which it would impose.

MAXIMUM FORESEEABLE LOSS A term, originally used in the United States but sometimes also in the
London Market. In the event of a loss affecting a risk it is unlikely that 100% of the amount at risk
would be destroyed. Maximum Foreseeable Loss (MFL) is an estimate of the amount of damage that
would be expected to occur to a risk in the event that all loss protections failed. (e.g. the amount of
fire damage that would occur in the event that the sprinklers failed and the fire brigade did not arrive
to put the fire out). See also ESTIMATED MAXIMUM LOSS, Probable Maximum Loss, Possible Maximum
Loss, Maximum Probable Loss, Maximum Possible Loss
MFL MAXIMUM FORESEEABLE LOSS
MIN/DEP MINIMUM AND DEPOSIT PREMIUM - see DEPOSIT PREMIUM
MINIMUM AND DEPOSIT PREMIUM See DEPOSIT PREMIUM
MISREPRESENTATION A statement made by an insured, reinsured or broker which misleads an
underwriter in the assessment of a risk he is being offered. A breach of utmost good faith.

MPL Maximum Probable Loss or Maximum Possible Loss. See ESTIMATED MAXIMUM LOSS
NA Net absolute.
NAME An underwriting member of Lloyds
NCAD See NOTICE OF CANCELLATION AT ANNIVERSARY DATE
NEREC See NUCLEAR ENERGY RISKS EXCLUSION CLAUSE
NET PREMIUM INCOME The gross WRITTEN PREMIUM income of the reinsured (less return premiums)
after deduction of original commissions or reinsurances or both of these.

NET RETAINED LINES CLAUSE A clause which allows the reinsured to effect other REINSURANCES IN
PRIORITY so that the treaty protects the net account only, e.g. where the treaty operates after
proportional treaty or facultative cessions. The INSOLVENCY OF OTHER REINSURERS Clause usually
forms a paragraph hereof. The Net Retained Lines Clause will normally be omitted where the treaty
covers the reinsureds gross account or where the cover operates for COMMON ACCOUNT.

NMA Lloyds Underwriters Non Marine Association

NON DISCLOSURE Failure by the insured, reinsured or broker to tell the underwriter about a material
circumstance affecting the risk he is being asked to write. A breach of utmost good faith.

NON PROPORTIONAL A term used to refer to the EXCESS OF LOSS and STOP LOSS forms of reinsurance
(where premiums and claims are not proportionate to those of the original risks) as distinct from the
PROPORTIONAL forms.

NOTICE OF CANCELLATION Usually proportional treaties are for an unlimited period, i.e. they continue
for as long as both parties agree to maintain the contracts in force. However, either party may decide
to cancel the treaty and this must be done at a specified date (for example, the anniversary date of
31st December for treaties incepting at 1st January) by giving notice to the other party of its intention
to cancel, usually 3 months in advance.
NOTICE OF CANCELLATION AT ANNIVERSARY DATE A term which is added to the reinsurers acceptance
on a SLIP that offers a reinsurance on a continuous basis (see CONTINUOUS TREATIES) to provide the
reinsurer with an agreed automatic expiry at anniversary. This helps the reinsurer to avoid any problem
which might arise should it forget to give notice of termination according to the terms of the
reinsurance. This cannot be used on a treaty or facultative risk issued for a fixed period that is greater
than one year.
NOTIONAL RATE A provisional rate of exchange for converting currency.
NPI NET PREMIUM INCOME
O/R Overriding commission.
O/S Outstanding
OBLIGE (OBLIGED) LINE See ACCOMMODATION LINE
OCA See OUTSTANDING CLAIMS ADVANCE

OCA CLAUSE Outstanding claims advance clause - a provision in a reinsurance contract wording which is
similar to a Loss Reserve Deposit Clause (see LOSS RESERVE DEPOSIT). OCAs can be provided in cash or
agreed securities or a LETTER OF CREDIT

OFFSET CLAUSE See SET-OFF CLAUSE

OGP ORIGINAL GROSS PREMIUM.
OGPI ORIGINAL GROSS PREMIUM INCOME.
OGR ORIGINAL GROSS RATE

ONP ORIGINAL NET PREMIUM

ONPI ORIGINAL NET PREMIUM INCOME
ONR ORIGINAL NET RATE

OPERATIVE CLAUSE The clause found in all treaties which describes the business covered, the risks
excluded and the monetary limits of the reinsurers liability.
ORDER Instruction given to a broker by his client setting out the details of the insurance or reinsurance
to be placed.
ORIGINAL GROSS PREMIUM INCOME The total of the ORIGINAL GROSS PREMIUMS received by the
REINSURED
ORIGINAL GROSS PREMIUM. The original premium paid by the insured

ORIGINAL GROSS RATE The actual rate applied by the insurer to the Sum Insured to obtain the
premium.
ORIGINAL NET PREMIUM The original premium paid by the insured less brokerage or original commission
paid to brokers or agents.
ORIGINAL NET PREMIUM INCOME The total of the ORIGINAL NET PREMIUMS received by the REINSURED

ORIGINAL NET RATE The rate after deduction from the ORIGINAL GROSS RATE of brokerage or original
commission paid to brokers or agents.
ORIGINAL RATE Normally used as being equivalent to ORIGINAL GROSS RATE
ORIGINAL SLIP The slip used by the broker in negotiating an insurance or reinsurance contract. Off slips
or signing (closing) slips may be issued off the original slip for processing purposes, but the contract is
concluded on the original slip.

OUTSTANDING LOSS STATEMENT Often in treaties there is a requirement in the CLAIMS CLAUSE for the
reinsured to provide the reinsurer annually with a statement giving details of all losses which might
involve the treaty and which are not yet settled. Apart from the need to update information, there is
also the reinsurers own accounting needs. Thus in addition to the statement being rendered as at
anniversary date of the treaty, usually 31st December, there may also be a requirement for the
statement to be submitted at the end of the reinsurers financial year.
PARTICIPATING REINSURANCE Another term for PROPORTIONAL reinsurance

PAY AS MAY BE PAID To follow claims paid on the original policy or policies, but only insofar as the
reinsured is liable in law.
PAY BACK Reinsurance is considered to be a long term arrangement (even as a partnership between
reinsured and reinsurers). In the event of reinsurers suffering a major loss the renewal premium may
be increased to include an element of compensation for this loss. A contract in this situation is
considered to be in "pay back"
PENCIL LINE See PENCILLED LINE
PENCILLED LINE The practice of an underwriter binding on the basis of a pencilled initial on a copy of
the slip. When time allows the pencilled line will be cancelled and replaced on the main slip. This
practice is intended to expedite completion of the risk prior to inception date.

PLACING INFORMATION The information given to the reinsurers at the time of placing the risk that can
be used by them to consider the risk. This can include written and verbal information and may include
standard market questionnaires

PLACING SLIP See SLIP

PML POSSIBLE MAXIMUM LOSS. See ESTIMATED MAXIMUM LOSS

PML PROBABLE MAXIMUM LOSS. See ESTIMATED MAXIMUM LOSS
PNOC Provisional Notice Of Cancellation

POOL An arrangement whereby a group of insurers or reinsurers agree to accept a fixed proportion of
each risk placed with the group

PORTFOLIO (1) The "book" of business covered by the treaty assumption and withdrawal of Unearned
Premium Reserves and/ or Outstanding Loss Reserves (see further CLEAN CUT).

PORTFOLIO (2) The assumption and withdrawal of Unearned Premium Reserves and/ or Outstanding
Loss Reserves (see further CLEAN CUT).

PORTFOLIO ASSUMPTION AND WITHDRAWAL See CLEAN CUT.

POSSIBLE MAXIMUM LOSS See ESTIMATED MAXIMUM LOSS

PR (1) Pro rata

PR (2) Premium Reserve

PREAMBLE The introduction to a treaty wording, establishing the parties to the contract and the basis
for operating the contract.

PREM Premium

PREMIUM IN FULL See FLAT PREMIUM

PREMIUM PORTFOLIO A method of transferring unexpired liability from one year to another. Thus, if
one reinsurer is to be relieved of its liability under a treaty at the end of the treaty year, it will be
debited with an amount representing the UNEARNED PREMIUM in the last account of the year. The new
reinsurer who takes over the business for the subsequent year is credited with the premium which has
thus been withdrawn from the previous reinsurer. The effect of this transaction is to release the
previous reinsurer from any liability in respect of the unexpired portion of the risks which were
accepted in the preceding year and the new reinsurer accepts this liability. Thus the new reinsurer
assumes liability for all claims which might arise in the current year on the running off of the old risks.

PREMIUM RATE The reinsurance premium expressed as a percentage.

PREMIUM RESERVE
See PREMIUM RESERVE DEPOSIT. See also UNEARNED PREMIUM RESERVE

PREMIUM RESERVE DEPOSIT

A proportion of the premium due to the reinsurer but which is retained by the ceding company as a
guarantee for the fulfilment of the obligations of the reinsurer.

PREMIUM WARRANTY A condition in a reinsurance contract which requires the reinsured to pay the
premium, usually by a specified date.

PRIORITY See DEDUCTIBLE

PRO RATA Proportionate part

PRO RATA PREMIUM The proportion of the original premium or additional premium that the cession
bears to the original line written by the reinsured.
PRO RATA REINSURANCE PROPORTIONAL REINSURANCE
PROBABLE MAXIMUM LOSS See ESTIMATED MAXIMUM LOSS

PROFESSIONAL REINSURER A company that specialises in writing reinsurance business, particularly

treaty reinsurance, generally using its own in house sales force. Generally, companies of this nature
will deal directly with a reinsured client without using the intermediary of a reinsurance broker.

PROFIT COMMISSION A contingent commission which is allowed to the reinsured in addition to the
ceding commission and is based upon the underwriting results of a treaty. There are many methods of
calculating Profit Commissions - see further DEFICIT CLAUSE and THREE-YEAR AVERAGE.

PROGRAMME A series of PROPORTIONAL TREATIES and/or layers of EXCESS OF LOSS reinsurance

designed to protect the reinsureds account.

PROPORTIONAL REINSURANCE A term used to describe all forms of reinsurance (facultatively or treaty)
where the reinsurer accepts a pro rata share of the premiums and losses in respect of risks which are
ceded by the reinsured. See FACULTATIVE; FACULTATIVE OBLIGATORY; QUOTA SHARE TREATY;
SURPLUS TREATY.

PROPORTIONAL TREATY See PROPORTIONAL REINSURANCE

PROXIMATE CAUSE The cause of a loss. It can be defined as "The active, efficient cause that sets in
motion a train of events which brings about a result without the intervention of any force started and
working actively from a new and independent source."

PSAC
Policy Signing and Accounting Centre. A London market organisation which was merged in 1991 with
the Reinsurance Offices Association (ROA) to form LIRMA.
PURE BURNING COST The actual BURNING COST
Q/S QUOTA SHARE

QS QUOTA SHARE

QUOTA SHARE TREATY

A reinsurance treaty whereby the REINSURED is bound to cede and the REINSURER is bound to accept a
fixed share of all risks falling within the scope of the treaty.

R/I REINSURANCE

RATE ON LINE The premium rate expressed as a percentage of the LIMIT OF INDEMNITY.

REASSURED See REINSURED

RECIPROCAL CANCELLATION A part of the notice of cancellation provisions whereby, if one party has
given notice then it is assumed that notice is mutually given. It prevents one party giving notice and
then withdrawing such after the time limit for notice, thereby pre-empting the other party. The term
can also be used to apply to a part of the notice of cancellation provisions whereby, if the parties have
a number of reinsurances in force, then if notice has been given on one contract then it is assumed
that notice is mutually given on all the other contracts. This allows the parties to maintain a flexibility
in their negotiations.

RECIPROCAL EXCHANGE The practice whereby underwriters agree to exchange business with each
other.

RECIPROCITY The business that is exchanged in a reciprocal exchange.

RECITAL CLAUSE The first clause in the treaty wording which names the parties to the contract.

RECORDS CLAUSE A clause sometimes found in treaties where the PREMIUM RATE is based upon prior
years loss experience. This Clause allows that, if subsequently it is found that the rate is inadequate
because the loss data was inaccurate or incomplete, the premium rate will be renegotiated or
increased proportionately. Also known as the Special Records Clause.

REINSTATEMENT The restoration of the full policy limit after loss.

REINSTATEMENT PREMIUM PROTECTIONS A coverage effected to protect the reinsured against the
contingency of having to pay REINSTATEMENT PREMIUMS. The usual intention is that the purchase of
such a cover establishes a fixed total reinsurance cost to the reinsured at inception. Without such
cover a reinsured would not know the cost of his reinsurances until such time as they had expired. In
terms of English law this is considered to be a form of insurance rather than one of reinsurance.

REINSTATEMENT PREMIUMS Reinsurance premiums paid to reinstate the treaty limits to the full amount.
Reinstatement premiums are usually payable at the time of settlement of the claim, and may be
calculated pro rata as to amount only or pro rata as to both amount and time. The terms for
Reinstatement Premiums are usually negotiated. Thus "1 Free" means one full reinstatement is allowed
without any additional premium becoming payable and "1 @ 75%" means that the Reinstatement
Premium is to be a pro rata share of 75% of the original reinsurance premium.

REINSURANCE An insurance of an insurance. Insurers seek to limit their exposure to claims which might
arise on policies of insurance (or life assurance) which they have issued. This exposure could be a single
large loss or to an accumulation of smaller losses. The reinsurance protection can be purchased for a
single risk (FACULTATIVE reinsurance) or for the whole or part of a portfolio (TREATY reinsurance). See
also EXCESS OF LOSS and PROPORTIONAL. A reinsurance protection of a reinsurance account is called
RETROCESSION.

REINSURANCE FOR COMMON ACCOUNT

See COMMON ACCOUNT.

REINSURANCE ORDER See ORDER

REINSURANCE TO CLOSE The practice adopted by Lloyds syndicates of transferring the liabilities from
one year to the next open year and thus between one syndicate and another syndicate by way of a
transfer of funds thus "closing" the earlier year.

REINSURANCES IN PRIORITY Where a reinsurance programme consists of a number of treaties, these

protections usually operate in an order of precedence. Thus a reinsured may have a Quota Share treaty
protecting the gross account with an excess of loss protecting its retention after the cession to the
Quota Share. The Quota Share treaty is then the Reinsurance in Priority.

REINSURED REINSURED - The insurer who purchases reinsurances from another insurer (referred to as
the REINSURER). The term CEDING COMPANY is also sometimes used although this term is not really
appropriate for EXCESS OF LOSS reinsurances

REINSURER The insurer who accepts by way of reinsurance the whole or part of risks or exposures
assumed by another insurer.

RENEWAL SEASON That part of the year when most reinsurance contracts come up for renewal (usually
September to January). This is determined by the London and New York practice of renewing
reinsurances for periods commencing 1st January. For countries such as Australia, where most
reinsurances are renewed at July 1, the renewal season arises at a different part of the year.

RESERVE ACCOUNT A record showing the amount of PREMIUM RESERVE DEPOSIT currently being held by
the REINSURED.

RESERVE DEPOSITS See PREMIUM RESERVE DEPOSIT and LOSS RESERVE DEPOSIT

RESERVES (1) RESERVES - Often used as a synonym for RESERVE DEPOSITS. However can also be used as
"loss reserve" meaning the total of the estimated outstanding losses and "premium reserve" meaning the
total of the unearned premiums..

RESERVES (2) The combined Capital and retained Profits of an insurance or reinsurance company, i.e.
its financial strength.

RETAINED LINE The proportion of a risk that the reinsured retains for its own account.

RETRO See RETROCESSION

RETROCEDANT The REINSURED who cedes to a RETROCESSIONAIRE under a RETROCESSIONAL

REINSURANCE contract.

RETROCEDE To cede to a RETROCESSIONAIRE.

RETROCESSION A cession under a retrocessional reinsurance contract.

RETROCESSIONAIRE A REINSURER of a RETROCESSIONAL REINSURANCE.

RETROCESSIONAL REINSURANCE A REINSURANCE of a contract or policy which is itself a reinsurance
contract or policy

RETURN PREMIUM A premium refund made to the policyholder as a result of cancellation or amendment
under the policy.

REVALUATION OF LOSSES The process of restating the losses under a contract to represent the quantum
of those losses at current values. This assists in generating a valid current loss experience for the
purposes of premium rating

REVOLVING FUND A system whereby a LETTER OF CREDIT is kept open to provide security for the
REINSURED under a TREATY.

RISK (1) The uncertainty of whether a loss will arise or not, the risk of loss.

RISK (2) The property being insured or reinsured.

RISK (3) The peril being covered (e.g. fire department risks).

RISK EXCESS OF LOSS A form of reinsurance that protects the reinsured for losses arising on individual
risks rather than from claims arising from ANY ONE EVENT. It is a form of excess of loss reinsurance
often used as a substitute for proportional reinsurance. It can also be used as a supplement to a
proportional treaty and thereby protect the reinsured against the effect of an incorrect ESTIMATED
MAXIMUM LOSS.

RISK PROFILE An analysis of business which tabulates risks into bands of similar value showing, inter
alia, the number of risks in each category, average values, aggregate values and aggregate premiums.

RISKS ATTACHING This form of REINSURANCE covers those losses arising on policies issued or renewed
during the contract period. Unless otherwise agreed the reinsurers liability continues until the expiry
of such policies. This is an alternative to LOSSES OCCURRING forms of excess of loss reinsurance.

RITC See REINSURANCE TO CLOSE

ROA The Reinsurance Offices Association which was set up in 1969 to provide a forum for exchange of
information between reinsurers. It has now been absorbed by LIRMA.

RP Return of Premium

RUN OFF (2) A termination provision in a reinsurance contract which stipulates that the reinsurer shall
remain liable for loss under each reinsured policy in force until its expiration date.

RUN OFF (3) A term used to describe the business of handling cancelled accounts which may well be
active for many years after the business has been cancelled or indeed after the company has ceased
active underwriting.

SCHEDULE OF UNDERLYINGS The listing of layers of underlying layers in a reinsurance programme that
would respond to losses before the subject contract.

SECOND SURPLUS The surplus treaty surplus to the FIRST SURPLUS treaty. Cessions may only be made to
the second surplus after the capacity of the first surplus has been satisfied.
SECOND TIER REINSURANCE A reinsurance of an Excess of Loss reinsurer of direct insurers. See also
FIRST TIER REINSURANCE and THIRD TIER REINSURANCE.
SECURITY The insurer(s) or reinsurer(s) with whom a risk has been placed.

SET OFF CLAUSE A clause that allows for amounts due between REINSURER and REINSURED to be set off
against each other and the balance settled net. Can be extended to cover balances due under all
contracts between the parties. Does not cover brokers balances.

SEVERE INFLATION CLAUSE see INDEX CLAUSE.

SHORT TAIL Those types of insurance (such as fire, personal accident, etc.) where it is expected that
losses will be notified and settled quickly, either within the period of cover or shortly thereafter. See
LONG TAIL.

SIDEWAYS COVERAGE The amount of REINSTATEMENT coverage provided by a reinsurance programme.

Signed Line The underwriters participation in a risk after the lines have been reduced, as necessary, to
total 100% of the actual amount at risk. See Written Line

SIGNING The percentage that the SIGNED LINE bears to the WRITTEN LINE. The broker would be aware
of the possibilities of overplacing a risk and would be able to mention an estimate of the signing when
placing the contract. The reinsurer could then take this into consideration when judging the line to be
written.

SIGNING SLIP The slip used by the broker in the procedure for signing and accounting through the
BUREAUX. This may be the original slip or it may be a copy taken from the original slip that has been
approved by the LEADING UNDERWRITER.

SINK A piece of business that has consistently shown poor results (and is considered to have little
potential for future profit)

SKEY FORMS Pro forma questionnaires, which were first used by Charles Skey, a leading non-marine
underwriter at Lloyds, to give a good overview of the reinsureds account. These were gradually
adopted by Lloyds and LMX market leaders to be the minimum amount of information needed to
consider a reinsurance submission.

SLEEP EASY COVERS CATASTROPHE reinsurances either for a high layer beyond the known levels of
exposure or in excess of an accumulation beyond predicted amounts, but intended to give an extra
degree of security against an untoward experience.

SLIDING SCALE OF COMMISSION A scale of commission payable under a treaty where the amount of
commission varies inversely with the treaty LOSS RATIO subject to a maximum and minimum.

SLIP The document used by the broker for negotiating a placing in a SUBSCRIPTION MARKET. The
underwriter signifies his acceptance on the brokers slip.

SLIP POLICY A SIGNING SLIP that has been adapted to serve as a policy in place of a formal policy
document.

SPECIAL ACCEPTANCE A specific agreement by a treaty reinsurer to accept a risk that would not be
normally included within the scope of a reinsurance contract.

SPECIAL RECORDS CLAUSE See RECORDS CLAUSE.

SPECIFIC PROTECTIONS Layers of EXCESS OF LOSS coverage that respond to losses arising on specific
sections of the account (property, marine, aviation etc.). See also GENERAL LAYERS.
SPECIFICS See SPECIFIC PROTECTIONS

STABILITY CLAUSE See INDEX CLAUSE

STAMP CAPACITY The total amount of premium that a SYNDICATE is authorised to underwrite in a
particular year.

STATISTICS The statistical record showing the premiums and claims relating to an insurance or a
reinsurance contract.

STOP LOSS A form of excess of loss reinsurance. Operates on the basis of aggregate losses. Thus a
typical cover will pay the reinsureds aggregate losses in excess of a specified LOSS RATIO. The cover
provided may be subject to a measure of CO-REINSURANCE. Often used for certain types of business
not amenable to usual methods of reinsurance, such as Hail, and as an ultimate protection to the
reinsureds net retained account in many other classes. Formerly also known as Excess of Loss Ratio
reinsurance. Under AGGREGATE EXCESS OF LOSS reinsurance the deductible and the reinsurers limit of
liability are expressed in terms of monetary amounts rather than Loss Ratios.

SUBSCRIBING Writing a line on an insurance or a reinsurance contract.

SUBSCRIPTION The amount an underwriter accepts as its liability under an insurance or a reinsurance
contract.

SUBSCRIPTION MARKET A market, such as Lloyds, where Underwriters accept shares of an insurance (or
reinsurance) coverage on a co-insurance (or co-reinsurance) basis in contrast to markets where a single
insurance carrier will accept the whole of the offer. Whilst subscription markets maximise capacity
they tend to suffer a costs disadvantage in that it is often necessary to approach many insurers (or
reinsurers) to complete the placing of a coverage.

SUDDEN DEATH CLAUSE A provision allowing the treaty to be cancelled immediately, without notice, in
the event of the happening of certain events, such as war between the countries of the parties or the
insolvency of one of them.

SURPLUS TREATY A form of PROPORTIONAL reinsurance treaty whereby the REINSURED CEDES and the
REINSURER accepts that share of the risk which exceeds the reinsureds retention (see LINE (2)). The
agreed treaty limit will usually be expressed as a multiple of that retention. A reinsured may place
several surplus treaties (First Surplus, Second Surplus etc.)
SYND R/I See SYNDICATE REINSURANCE

SYNDICATE A group of Lloyds underwriting members who jointly offer their security for risks accepted
on their behalf by an active underwriter appointed to represent them at Lloyds by an underwriting
agency. Each name in the syndicate has an individual liability and is not responsible for the liabilities of
his/her fellow members.

SYNDICATE REINSURANCE A reinsurance effected on behalf of a Lloyds syndicate.

TABLE OF LIMITS A table shown in a treaty wording setting out the retention and limit for each
category of risk.

TBA To be agreed or to be advised.

TBE To be entered

TERM OF TREATY The period covered by a treaty reinsurance contract.

TERMS OF CREDIT The period of time allowed to a broker for the payment of premium to the
underwriter.

TERRITORIAL SCOPE The territorial area of the business covered by the reinsurance. It is usual to place
reinsurances covering the US separately because of the specific characteristics of insurance in that
markets, so that treaties which are World-wide in scope invariably exclude US business. There is a
great difference between a treaty covering business "written in X country" and a treaty covering risks
"located in X country".

THIRD SURPLUS The surplus treaty surplus to the FIRST SURPLUS and SECOND SURPLUS treaties.
Cessions may only be made to the third surplus after the capacities of the first and second surplus
treaties have been satisfied.
Third Tier reinsurance An EXCESS OF LOSS reinsurance of a SECOND TIER reinsurer. i.e. an excess of
loss reinsurance protecting an excess of loss reinsurer of a direct underwriter.

THREE YEAR ACCOUNTING An accounting system, originally adopted at Lloyds whereby an underwriting
year is not closed until the end of the third year following the inception of the underwriting year and
all premiums and claims relating to that year are accounted to that year. This was developed in order
to give a more accurate position when determining the profit or loss relating to an underwriting year

THREE-YEAR AVERAGE A method of calculating PROFIT COMMISSIONS which is intended to equalise

fluctuations as between one year and another. In Year 1 the profit commission is paid on the whole of
the result of that year, in Year 2 the profit commission is paid on the average of the results of Years 1
and 2 and in Year 3 the profit commission is paid on the average result of the three years. Thereafter
the oldest Year is dropped from the calculation as the new Year is added.

TLO Total Loss Only

TOP AND DROP LAYER A layer of excess of loss protection that provides coverage at more than one
level. The primary purpose is to provide TOP LAYER coverage, however in the event that
REINSTATEMENT coverage at lower levels is exhausted the top and drop layer will, if required, "drop"
down to give such coverage.

TOP AND STEP A form of TOP AND DROP coverage whereby the contract only drops to give
reinstatement coverage to the layer immediately below.

TOP LAYER The highest LAYER of EXCESS OF LOSS COVERAGE purchased by a REINSURED.

TREATY A reinsurance agreement made between a REINSURED and one or more REINSURERS whereby
the latter accept without option reinsurances within the terms of the contract. Certain types of treaty
also require the reinsured to CEDE all risks falling within the scope of the treaty. See also QUOTA
SHARE TREATY, SURPLUS TREATY, FACULTATIVE OBLIGATORY TREATY, EXCESS OF LOSS TREATY, STOP
LOSS TREATY.

TREATY WORDING The formal document, usually produced in duplicate and signed by both parties,
which sets out the terms and conditions of the TREATY agreement between REINSURED and REINSURER.

TRIANGULATION A method of presenting the treaty statistics showing the data for each year at
(usually) twelve monthly intervals from inception. As the oldest year shows the longest stretch of data
with each year thereafter being shorter by twelve months the appearance of the table is triangular.
The purpose of this method of presentation is to show loss development (and, to a lesser extent, the
premium development) by year.

U/W UNDERWRITER

ULTIMATE NET LOSS The definition of the amount of the REINSUREDs loss which is eligible for recovery
under the terms of an EXCESS OF LOSS TREATY. The amount is usually defined as all the payments
made in respect of the claim (including loss adjustment expenses but excluding the reinsureds office
expenses) less recoveries by way of salvage, etc. A specific provision allows claims to be settled to the
reinsured before all recoveries have been made and the Ultimate Net Loss is finally determined. See
also NET RETAINED LINES clause.

UMBRELLA COVERS EXCESS OF LOSS treaties which protect the reinsured against an accumulation,
arising out of one event, of retained losses under different classes of business, such as a storm that
may cause property, marine, aviation and motor losses.

UMBRELLA LAYERS See UMBRELLA COVERS

UNDERLYING CONTRACTS Layers of EXCESS OF LOSS coverage that are at a lower level and which would
therefore respond to losses before the contract in question.

UNDERWRITER (1) An Insurer. Either an individual or a company who subscribes to a policy or contract
of insurance or reinsurance. Although a NAME at Lloyds is an Underwriter, the Name will invariably
delegate underwriting authority to a Lloyds Managing Agency to conduct business on their behalf.

UNDERWRITER (2) An official of an insurance or reinsurance company or of a Lloyds Syndicate who is

empowered to accept risks on behalf of such organisations.

UNDERWRITING AGENCY A Lloyds underwriting agency manages the affairs of a Lloyds syndicate. See
Also NAMES AGENT.
A company underwriting agency accepts business on behalf of its principal, within the limits set down
in the agency agreement.

UNDERWRITING YEAR The year of the inception of a risk.

UNDERWRITING YEAR BASIS A method of accounting to a proportional treaty whereby all premiums and
losses relating to an UNDERWRITING YEAR are accounted to that year regardless as to when such losses
arise or when such premiums and losses are paid.

UNEARNED PREMIUM That part of the premium applicable to the unexpired portion of the policy.

UNEARNED PREMIUM RESERVE (1) See PREMIUM RESERVE DEPOSIT

UNEARNED PREMIUM RESERVE (2) An amount set aside in the accounts of an insurer or reinsurer that
represents the amount of premium applicable to the unexpired portion of the policy.

UNEXPIRED RISK RESERVE See UNEARNED PREMIUM RESERVE

UNL ULTIMATE NET LOSS

US INSOLVENCY CLAUSE See INSOLVENCY

VARIABLE QUOTA SHARE A reinsurance treaty whereby the REINSURED is bound to cede and the
REINSURER is bound to accept a share of all risks falling within the scope of the treaty. The actual
share ceded by the reinsured is subject to a minimum and a maximum. In essence it is a hybrid
between a quota share treaty.

VARIANCE LOADING A LOADING applied to the premium calculated from the statistically predicted
claims experience to allow for possible adverse fluctuations from the statistically predicted level.

WATERBORNE AGREEMENT
An agreement made in 1937 in London whereby it was agreed that cargo insurers would undertake not
to provide cover against war risks for cargo whilst it is on land, except for a limited period in a dock
area while it awaits loading onto an on-carrying vessel or during transhipment. This led to a general
exclusion of war risks on land from the scope of insurances and reinsurances.

WEF With Effect From

WHOLE ACCOUNT COVER A term used to describe an excess of loss contract that protects the whole of
the business written by the reinsured. It may also refer to an excess of loss contract that protects the
whole of a certain category of business written by the reinsured. (e.g. instead of placing different
protections for Motor, Public Liability and Employers Liability etc. a reinsured may place a reinsurance
protecting his Liability Whole Account).

WORDING See TREATY WORDING

WORDING AS EXPIRING.
A term used in slips for renewals of reinsurance coverages to indicate that the general terms and
conditions of the treaty to be incorporated in the TREATY WORDING for the coming year will be the
same as those for the expiring year.

WORDING AS UNDERLYING A term used in SLIPS for upper LAYERS of EXCESS OF LOSS coverage to
indicate that the general terms and conditions of the TREATY WORDING for that layer will be the same
as those applying to the lower layer.

WORDING TBA L/U ONLY TREATY WORDING to be agreed by THE LEADING UNDERWRITER only.

WORKING EXCESS OF LOSS A layer of EXCESS OF LOSS reinsurance where it is expected that a number of
losses will arise in each year. Premiums are generally based on prior years loss experience and are
often calculated on an AUTOMATIC SCALE OF RATING.

WPI Written Premium Income

WRITTEN LINE The amount of a risk that an Insurer or Reinsurer has agreed to accept. See also SIGNED
LINE.

WRITTEN PREMIUM The total of the premiums on insurances and/or reinsurances which have been
written during the period. Can be significantly different to apparently similar formulations such as
"premium accounted" (which can relate only to premiums which have been processed) or "premiums
received" (which can refer to cash receipts only). Premium calculations on reinsurances will normally
be based either on WRITTEN PREMIUMS or on EARNED PREMIUMS.

WTBA WORDING to be agreed

WTD Warranted

WTIES Warranties

WTY Warranty
XL EXCESS OF LOSS

XL ON XL EXCESS OF LOSS reinsurance of excess of loss business

XOL EXCESS OF LOSS

XS LOSS EXCESS OF LOSS

YEAR OF ACCOUNT The year in which the transaction is made.

YEAR OF ACCOUNT BASIS A method of accounting to a proportional treaty whereby all premiums and
losses accounted during the year in question are accounted to that year regardless of the year of origin
of the cession or of the date of loss. Contracts accounted on this basis are usually closed at the end of
each year by a PORTFOLIO transfer into the following year.
Admitted Reinsurance - A company is admitted when it has been licensed and accepted by
appropriate insurance governmental authorities of a state or country. In determining its financial
condition a ceding insurer is allowed to take credit for the unearned premiums and unpaid claims on the
risks reinsured if the reinsurance is placed in an admitted reinsurance company.

Arbitration Clause - Language providing a means of resolving differences between the reinsurer and
the reinsured without litigation. Usually, each party appoints an arbiter. The two thus appointed select a
third arbiter, or umpire, and a majority decision of the three becomes binding on the parties to the
arbitration proceedings.

Bordereau (plural Bordereaux) - A form providing premium or loss data with respect to identified
specific risks which is furnished the reinsurer by the reinsured.

Burning Cost - A term most frequently used in spread loss property reinsurance to express pure loss
cost or more specifically the ratio of incurred losses within a specified amount in excess of the ceding
companys retention to its gross premiums over a stipulated number of years.

Cancellation - (a) Run-off basis means that the liability of the reinsurer under policies, which became
effective under the treaty prior to the cancellation date of such treaty, shall continue until the expiration
date of each policy; (b) Cut-off basis means that the liability of the reinsurer under policies, which
became effective under the treaty prior to the cancellation date of such treaty, shall cease with respect
to losses resulting from accidents taking place on and after said cancellation date. Usually the reinsurer
will return to the company the unearned premium portfolio, unless the treaty is written on an earned
premium basis.

Capacity - The percentage of surplus or the dollar amount of exposure that an insurer or reinsurer is
willing to place at risk. Capacity may apply to a single risk, a program, a line of business, or an entire
book of business.

Catastrophe Reinsurance - A form of reinsurance that indemnifies the ceding company for the
accumulation of losses in excess of a stipulated sum arising from a catastrophic event such as
conflagration, earthquake or windstorm. Catastrophe loss generally refers to the total loss of an
insurance company arising out of a single catastrophic event.

Cede - When a company reinsures its liability with another, it cedes business.

Ceding Commission - The cedants acquisition costs and overhead expenses, taxes, licenses and
fees, plus a fee representing a share of expected profits - sometimes expressed as a percentage of the
gross reinsurance premium.

Ceding Company - The original or primary insurer; the insurance company which purchases
reinsurance.

Claims-Made Basis - A form of reinsurance under which the date of the claim report is deemed to be
the date of the loss event. Claims reported during the term of the reinsurance agreement are therefore
covered, regardless of when they occurred. A claims made agreement is said to cut off the tail on
liability business by not covering claims reported after the term of the reinsurance agreement - unless
extended by special agreement. See Occurrence Basis.

Commission - In reinsurance, the primary insurance company usually pays the reinsurer its proportion
of the gross premium it receives on a risk. The reinsurer then allows the company a ceding or direct
commission allowance on such gross premium received, large enough to reimburse the company for
the commission paid to its agents, plus taxes and its overhead. The amount of such allowance
frequently determines profit or loss to the reinsurer.

Commutation Clause - A clause in a reinsurance agreement, which provides for estimation, payment
and complete discharge of all future obligations for reinsurance losses incurred regardless of the
continuing nature of certain losses such as unlimited medical and lifetime benefits for Workers
Compensation.

Contingent Commissions (or Profit Commission) - An allowance payable to the ceding company in
addition to the normal ceding commission allowance. It is a pre-determined percentage of the
reinsurers net profits after a charge for the reinsurers overhead, derived from the subject treaty.

Contributing Excess - Where there is more than one reinsurer sharing a line of insurance on a risk in
excess of a specified retention, each such reinsurer shall contribute towards any excess loss in
proportion to his original participation in such risk. Example: Retention $100,000, Reinsurer A accepts
one-half contributing share part of $1,000,000 in excess of said $100,000. Reinsurer B accepts
remaining one-half contribution share part of $1,000,000.

Earned Premium - (1) That part of the premium applicable to the expired part of the policy period,
including the short-rate premium on cancellation, the entire premium on the amount of loss paid under
some contracts, and the entire premium on the contract on the expiration of the policy. (2) That portion
of the reinsurance premium calculated on a monthly, quarterly or annual basis which is to be retained by
the reinsurer should there cession be canceled. (3) When a premium is paid in advance for a certain
time, the company is said to earn the premium as the time advances. For example, a policy written for
three years and paid for in advance would be one-third earned at the end of the first year.

Errors and Omissions Clause - A provision in reinsurance agreements which is intended to neutralize
any change in liability or benefits as a result of an inadvertent error by either party.

Excess of Loss - A form of reinsurance under which recoveries are available when a given loss
exceeds the cedants retention defined in the agreement.

Ex Gratia Payment - A payment made for which the company is not liable under the terms of its policy.
Usually made in lieu of incurring greater legal expenses in defending a claim. Rarely encountered in
reinsurance as the reinsurer by custom and for practical reasons follows the fortunes of the ceding
company.

Expense Ratio - The percentage of premium used to pay all the costs of acquiring, writing and
servicing insurance and reinsurance.

Experience - (1) The loss record of an insured or of a class of coverage. (2) Classified statistics of
events connected with insurance, of outgo, or of income, actual or estimated. (3) What figures show to
have happened in the past.

Experience may be compiled on different bases to provide various means of appraisal, viz. Accident
Year, Calendar Year, or Policy Year, but, for underwriting purposes, should always compare earned
premium with incurred losses after the latter have been modified by an allowance for loss development
and incurred but not reported losses (I.B.N.R.).

Extra Contractual Obligations (ECO) - A generic term that, when used in reinsurance agreements,
refers to damages awarded by a court against an insurer which are outside the provisions of the
insurance policy, due to the insurers bad faith, fraud, or gross negligence in the handling of a claim.
Examples are punitive damages and losses in excess of policy limits.

Facultative - Facultative reinsurance means reinsurance of individual risks by offer and acceptance
wherein the reinsurer retains the faculty to accept or reject each risk offered.

Financial Reinsurance - A form of reinsurance which considers the time value of money and has loss
containment provisions. One of its objectives is the enhancement of the cedants financial statements or
operating ratios, e.g., the combined ratio; loss portfolio transfers; and financial quota shares are
examples.

Flat Rate - In reinsurance, a percentage rate applied to a ceding companys premium writings for the
classes of business reinsured to determine the reinsurance premiums to be paid the reinsurer.

Following the Fortunes - The clause stipulating that once a risk has been ceded by the reinsured, the
reinsurer is bound by the same fate thereon as experienced by the ceding company.

Incurred Loss Ratio - The percentage of losses incurred to premiums earned. (See Experience.)

Inflation Factor - A loading to provide for increased medical costs and loss payments in the future due
to inflation.

Intermediary - A third party in the design, negotiation, and administration of a reinsurance agreement.
Intermediaries recommend to cedants the type and amount of reinsurance to be purchased and
negotiate the placement of coverage with reinsurers.

Intermediary Clause - A provision in reinsurance agreements which identifies the intermediary

negotiating the agreement. Most intermediary clauses shift all credit risk to reinsurers by providing that:

1. the cedants payments to the intermediary are deemed payments to the reinsurer; and
2. the reinsurers payments to the intermediary are not payments to the cedant until actually
received by the cedant.

This clause is mandatory in some states.

Layer - A horizontal segment of the liability insured, e.g., the second $100,000 of a $500,000 liability is
the first layer if the cedant retains $100,000 but a higher layer if it retains a lesser amount.

Lead Reinsurer - The reinsurer who negotiates the terms, conditions, and premium rates and first signs
on to the slip; reinsurers who subsequently sign on to the slip under those terms and conditions are
considered following reinsurers.

Letter of Credit - A financial guaranty issued by a bank that permits the party to which it is issued to
draw funds from the bank in the event of a valid unpaid claim against the other party; in reinsurance,
typically used to permit reserve credit to be taken with respect to non-admitted reinsurance; and
alternative to funds withheld and modified coinsurance.

Loss Adjustment Expense - All expenditures of an insurer associated with its adjustment, recording,
and settlement of claims, other than the claim payment itself. The term encompasses both allocated
loss adjustment expenses (ALAE) which are loss adjustment expenses identified by a claim file in the
insurers records, such as attorneys fees; and unallocated loss adjustment expenses (ULAE), which are
operating expenses not identified by claim file, but functionally associated with settling losses, such as
salaries of claims department.

Loss Development - The difference between the original loss as originally reported to the reinsurer and
its subsequent evaluation at a later date or at the time of its final disposal. A serious problem to
reinsurers who, being involved in the more serious cases, must frequently wait many years for the final
disposition of a loss.

Loss Event - The total losses to the ceding company or to the reinsurer resulting from a single cause
such as a windstorm.

Loss Ratio - Proportionate relationship of incurred losses to earned premiums expressed as a

percentage.

Non-Admitted Reinsurance - A Company is non-admitted when it has not been licensed and thereby
recognized by appropriate insurance governmental authority of a state or country. Reinsurance is non-
admitted when placed in a non-admitted company and therefore may not be treated as an asset
against reinsured losses or unearned premium reserves for insurance company accounting and
statement purposes.

Occurrence - An adverse contingent accident or event neither expected nor intended from the point of
view of the insured. With regard to limits on occurrences, property catastrophe reinsurance agreements
frequently define adverse events having a common cause and sometimes within a specified time frame,
for example 72 hours, as being one occurrence. This definition prevents multiple retentions and
reinsurance limits from being exposed in a single catastrophe loss.

Offset Clause - A provision in reinsurance agreements which permits each party to net amounts due
against those payable before making payment; especially important in the event of insolvency of one
party which ceases to remit amounts due to the other.

Participating or Pro Rata Reinsurance - Includes Quota Share, First Surplus, Second Surplus, and all
other sharing forms of reinsurance whereunder the reinsurer participates pro rata in all losses and in all
premiums.

Peril - This term refers to the causes of possible loss in the property field - for instance: Fire,
Windstorm, Collision, Hail, etc. In the casualty field the term Hazard is more frequently used.

Per Risk Excess Reinsurance - Retention and amount of reinsurance apply per risk rather than on a
per accident or event or aggregate basis.

Policy Year - The year commencing with the effective date of the policy or with an anniversary of that
date.

Pool - An organization of insurers or reinsurers through which particular types of risks are underwritten
with premiums, losses, and expenses shared in agreed ratios.

Portfolio Reinsurance - In transactions of reinsurance, it refers to all the risks of the reinsurance
transaction. For example, if one company reinsures all of anothers outstanding Automobile business,
the reinsuring company is said to assume the portfolio of Automobile business and it is paid the total of
the unearned premium on all the risks so reinsured (less some agreed commission).

Portfolio Run-off - The opposite of Return of Portfolio - permitting premiums and losses in respect of
in-force business to run to their normal expiration upon termination of a reinsurance treaty.

Premium, Deposit - When the terms of a policy provide that the final earned premium be determined at
some time after the policy itself has been written, companies may require tentative or deposit
premiums at the beginning which are readjusted when the actual earned charge has been later
determined.

Premium, Pure - The portion of the premium calculated to enable the insurer to pay losses and, in
some cases, allocated claim expenses or the premium arrived at by dividing losses by exposure and in
which no loading has been added for commission, taxes, and expenses.

Premium (Written/Unearned/Earned) - Written premium is premium registered on the books of an

insurer or reinsurer at the time a policy is issued and paid for. Premium for a future exposure period is
said to be unearned premium for an individual policy, written premium minus unearned premium equals
earned premium. Earned premium is income for the accounting period, while unearned premium will be
income in a future accounting period.

Professional Reinsurer - A term used to designate a company whose business is confined solely to
reinsurance and the peripheral services offered by a reinsurer to its customers as opposed to primary
insurers who exchange reinsurance or operate reinsurance departments as adjuncts to their basic
business of primary insurance. The majority of professional reinsurers provide complete reinsurance
and service at one source directly to the ceding company.

Profit Commission - A provision found in some reinsurance agreements which provides for profit
sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurers expenses, and
the cedants share of such profit after expenses.

Quota Share - The basic form of participating treaty whereby the reinsurer accepts a stated percentage
of each and every risk within a defined category of business on a pro rata basis. Participation in each
risk is fixed and certain.

Reinstatement Clause - When the amount of reinsurance coverage provided under a treaty is reduced
by the payment of a reinsurance loss as the result of one catastrophe, the reinsurance cover is
automatically reinstated usually by the payment of a reinstatement premium.

Reinstatement Premium - A pro rata reinsurance premium is charged for the reinstatement of the
amount of reinsurance coverage that was reduced as the result of a reinsurance loss payment under a
catastrophe cover.

Reinsurance - The practice whereby one party called the Reinsurer in consideration of a premium paid
to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by
the latter party under a policy or policies of insurance which it has issued. The reinsured may be
referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.

Reinsurer - An insurer or reinsurer assuming the risk of another under contract.

Retention - The net amount of risk which the ceding company or the reinsurer keeps for its own
account or that of specified others.

Retrocession - A reinsurance of reinsurance. Example: Company B has accepted reinsurance from

Company A, and then obtains for itself, on such business assumed, reinsurance from Company C.
This secondary reinsurance is called a Retrocession. The transaction whereby a reinsurer cedes to
another reinsurer all or part of the reinsurance it has previously assumed.

Retrospective Rating - A plan or method which permits adjustment of the final reinsurance ceding
commission or premium on the basis of the actual loss experience under the subject reinsurance treaty
- subject to minimum and maximum limits.

Risks - A term used to denote the physical units of property at risk or the object of insurance protection
and not Perils or Hazard. Reinsurance by tradition permits each insurance company to frame its own
rules for defining units of Risks. The word is also defined as chance of loss or uncertainty of loss.

Salvage and Subrogation - Those rights of the insured which, under the terms of the policy,
automatically transfer to the insurer upon settlement of a loss. Salvage applies to any proceeds from the
repaired, recovered, or scrapped property. Subrogation refers to the proceeds of negotiations or legal
actions against negligent third parties and may apply to either property or casualty coverages.

Self-Insurance - Setting aside of funds by an individual or organization to meet his or its losses, and to
absorb fluctuations in the amount of loss, the losses being charged against the funds so set aside or
accumulated.

Sliding Scale Commission - A ceding commission which varies inversely with the loss ratio under the
reinsurance agreement. the scales are not always one to one: for example, as the loss ratio decreases
by 1%, the ceding commission might increase only 5%.

Slip - A binder often including more than one reinsurer. At Lloyds of London, the slip is carried from
underwriter to underwriter for initialing and subscribing to a specific share of the risk.

Special Acceptance - The facultative extension of a reinsurance treaty to embrace a risk not
automatically included within its terms.

Spread Loss - A form of reinsurance under which premiums are paid during good years to build up a
fund from which losses are recovered in bad years. This reinsurance has the effect of stabilizing a
cedants loss ratio over an extended period of time.

Stop Loss - A form of reinsurance under which the reinsurer pays some or all of a cedants aggregate
retained losses in excess of a predetermined dollar amount or in excess of a percentage of premium.

Subject Premium - A cedants premiums (written or earned) to which the reinsurance premium rate is
applied to calculate the reinsurance premium. Often, subject premium is gross/net written premium
income (GNWPI) or gross/net earned premium income (GNEPI), where the term gross/net means
gross before deducting reinsurance premiums for the reinsurance agreement under consideration, ;but
net after all other adjustments, e.g., cancellations, refunds, or other reinsurance. Normally, subject
premium refers to premium on subject business. Also known as base premium.

Surplus - The excess of assets over liabilities. Statutory surplus is an insurers or reinsurers capital as
determined under statutory accounting rules. Surplus determines an insurers or reinsurers capacity to
write business.

Surplus Share - A form of proportional reinsurance where the reinsurer assumes pro rata responsibility
for only that portion of any risk which exceeds the companys established retentions.

Treaty - A general reinsurance agreement which is obligatory between the ceding company and the
reinsurer containing the contractual terms applying to the reinsurance of some class or classes of
business, in contrast to a reinsurance agreement covering an individual risk.

Ultimate Net Loss - This term usually means the total sum which the assured, or any company as his
insurer, or both, become obligated to pay either through adjudication or compromise, and usually
includes hospital, medical and funeral charges and all sums paid as salaries, wages, compensation,
fees, charges and law costs, premiums on attachment or appeal bonds, interest, expenses for doctors,
lawyers, nurses, and investigators and other persons, and for litigation, settlement, adjustment and
investigation of claims and suits which are paid as a consequence of the insured loss, excluding only
the salaries of the assureds or of any underlying insurers permanent employees.

Unearned Premium - That portion of the original premium that applies to the unexpired portion of risk.
A fire or casualty insurer or reinsurer must carry a reserve against all unearned premiums as a liability in
its financial statement, for if the policy should be canceled, the company would have to pay back the
unearned part of the original premium.

Working Layer - The first layer above the cedants retention wherein moderate to heavy loss activity is
expected by the cedant and reinsurer. Working layer reinsurance agreements often include adjustable
features to reflect actual underwriting results.