What is Reinsurance?
Reinsurance is insurance for insurance companies. Many insurers around the world purchase reinsurance to reduce their exposure to the risks they have underwritten in order to provide better protection to their clients. While the concept may be simple, like most industries, reinsurance has a terminology that can be difficult to interpret for those who do not use it on a daily basis.
At PartnerRe, we thought a glossary of reinsurance terms might help de-mystify the business and its language.
Acquisition Costs
Expenses incurred by the insurer or the reinsurer in assessing business, including producer commissions and brokerage.
Expenses incurred by the insurer or the reinsurer in assessing business, including producer commissions and brokerage.
Adjustable Rate
A percentage rate applied to a cedent’s sums insured or premium income which is used to determine the final premium payable.
A percentage rate applied to a cedent’s sums insured or premium income which is used to determine the final premium payable.
Aggregate Deductible
A loss limit which is retained by the cedent and is gradually eroded by frequency of loss activity.
A loss limit which is retained by the cedent and is gradually eroded by frequency of loss activity.
Aggregate Limit
The maximum sum of recoveries payable under a reinsurance agreement.
The maximum sum of recoveries payable under a reinsurance agreement.
Alternative Risk Transfer (ART)
Non-traditional methods of insurance or reinsurance, for example, securitization.
Non-traditional methods of insurance or reinsurance, for example, securitization.
Assume
The term used for accepting a risk; the opposite of cede.
The term used for accepting a risk; the opposite of cede.
Attachment Basis
A provision that determines whether, and in what manner, a reinsurance agreement covers a specific loss.
A provision that determines whether, and in what manner, a reinsurance agreement covers a specific loss.
Attachment Point
In excess of loss reinsurance, the loss level at which reinsurers begin to pay.
In excess of loss reinsurance, the loss level at which reinsurers begin to pay.
Balance
A reference point used to measure premium volume against the maximum exposure for a reinsurance agreement.
A reference point used to measure premium volume against the maximum exposure for a reinsurance agreement.
Bank
The sum of the total premiums paid to reinsurers over a multi-year period, less any losses paid by reinsurers on a layer. For example, payments of $10,000 premiums over five loss-free years would be called a $50,000 bank.
The sum of the total premiums paid to reinsurers over a multi-year period, less any losses paid by reinsurers on a layer. For example, payments of $10,000 premiums over five loss-free years would be called a $50,000 bank.
Broker Market
When business is written through reinsurance intermediaries (brokers), it is referred to as business obtained in the Broker Market.
When business is written through reinsurance intermediaries (brokers), it is referred to as business obtained in the Broker Market.
Broker of Record
The appointed broker for a contractual reinsurance agreement.
The appointed broker for a contractual reinsurance agreement.
Burning Cost Ratio
A tool used in determining rates for excess of loss reinsurance. Also called the ‘pure loss cost’, it is the ratio of historical incurred losses (usually excluding IBNR and indexed to portfolio growth) of a reinsurance agreement to the subject premium.
A tool used in determining rates for excess of loss reinsurance. Also called the ‘pure loss cost’, it is the ratio of historical incurred losses (usually excluding IBNR and indexed to portfolio growth) of a reinsurance agreement to the subject premium.
Capacity
The maximum dollar amount of exposure that an insurer or reinsurer can underwrite. Capacity may be used when referring to a single risk, a program, a line of business or an entire book of business.
The maximum dollar amount of exposure that an insurer or reinsurer can underwrite. Capacity may be used when referring to a single risk, a program, a line of business or an entire book of business.
Captive
An insurance or reinsurance company, formed by a large, often multi-national corporation, which insures or reinsures the risks of its parent corporation. Most captives are located in tax-advantaged locations. Bermuda is the leading domicile for captives followed by Cayman, Vermont and Guernsey.
An insurance or reinsurance company, formed by a large, often multi-national corporation, which insures or reinsures the risks of its parent corporation. Most captives are located in tax-advantaged locations. Bermuda is the leading domicile for captives followed by Cayman, Vermont and Guernsey.
Casualty Reinsurance
Liability or third party business.
Liability or third party business.
Catastrophe
High severity events such as hurricanes, earthquakes and other disasters, involving multiple insureds and/or locations. Catastrophe reinsurance indemnifies the insurer for portions of such losses.
High severity events such as hurricanes, earthquakes and other disasters, involving multiple insureds and/or locations. Catastrophe reinsurance indemnifies the insurer for portions of such losses.
Cedent
An insurance company which contractually transfers (cedes) a portion of risk to a reinsurer. The term can also refer to a reinsurer which transfers (cedes) a portion of its portfolio to a retrocessionnaire.
An insurance company which contractually transfers (cedes) a portion of risk to a reinsurer. The term can also refer to a reinsurer which transfers (cedes) a portion of its portfolio to a retrocessionnaire.
Ceding Commission
The costs incurred by the cedent in negotiating a reinsurance contract including 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.deductible
The costs incurred by the cedent in negotiating a reinsurance contract including 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.deductible
Clash Cover
A form of reinsurance protecting a cedent’s exposure to multiple retentions and a larger sin
A form of reinsurance protecting a cedent’s exposure to multiple retentions and a larger sin
gle loss than intended due to losses incurred by two or more insureds for the same event, or clash.
Coinsurance
The part of the reinsurance cover that the insurance company retains and does not reinsure.
The part of the reinsurance cover that the insurance company retains and does not reinsure.
Combined Ratio
The sum of the loss ratio and the expense ratio. The combined ratio is used in both reinsurance and insurance to indicate whether the company is making a profit on its underwriting operations. A combined ratio below 100% is representative of a profitable underwriting portfolio.
The sum of the loss ratio and the expense ratio. The combined ratio is used in both reinsurance and insurance to indicate whether the company is making a profit on its underwriting operations. A combined ratio below 100% is representative of a profitable underwriting portfolio.
Commutation
The conclusion of all obligations between the parties to a reinsurance agreement, often completed with a lump sum cash settlement.
The conclusion of all obligations between the parties to a reinsurance agreement, often completed with a lump sum cash settlement.
Cover Note
The document or receipt issued by the intermediary to the cedent confirming terms and conditions and the percentage share placed with each reinsurer.
The document or receipt issued by the intermediary to the cedent confirming terms and conditions and the percentage share placed with each reinsurer.
Direct Market
When reinsurance business is written directly by a reinsurer, rather than through a third party or broker, it is referred to as business obtained in the Direct Market.
When reinsurance business is written directly by a reinsurer, rather than through a third party or broker, it is referred to as business obtained in the Direct Market.
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