Glossary of terms
Accident year
The calendar or accounting year in which a loss occurs.
Actuarial best estimate
The result projected from a statistical model in which the intention is to be neither prudent nor optimistic. Actuarial best estimate reserves should be enough to pay the expected average future liabilities but include no margin for the emergence of worse than expected experience.
AIR
Service providing up-to-date information and loss estimates for major natural catastrophes worldwide.
Asset backed security
A financial security backed by a loan, lease or receivables against assets other than property and mortgage-backed securities.
Attritional losses
Losses other than major losses.
Binders/Binding authority
An authority granted by an active underwriter to an intermediary whereby that intermediary is entitled to accept, within certain limits, insurance business on behalf of members.
Box at Lloyd’s
Accommodation in the underwriting room at Lloyd’s from which business may be transacted with Lloyd’s brokers.
B Shares
The second tier of classified stock which usually has fewer voting rights than Class A stock. The specific features of each class are set out in the charter and bylaws.
Bureau Central de Repartition
The French official insurance structure which looks after the claims and premium payments for leaders and coinsurers.
Capacity
The maximum amount of business which may be accepted by a Lloyd’s syndicate.
Capital builder scheme
Employee incentive scheme for underwriters which rewards long term commitment by affording the opportunity to build personal capital over a sustained period.
Capital markets
The markets in which equities and debt are traded.
Capital model
Model used to calculate capital requirements.
Catastrophe bonds
Risk-based securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catastrophe. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk. Other financial instruments used to transfer catastrophe risk to capital markets include catastrophe swaps and industry loss warrants.
CDOs
Collateralised debt obligations. Entities owning cash generating assets, which sells the rights to the cash flows from those assets along with associated risks.
Cede
To transfer risk from a direct insurer to his reinsurers.
Claims ratio
Net claims plus claims expenses divided by net earned premium.
Claims made basis
Coverage for losses notified in the policy period.
Class IV reinsurance company
Company licensed in Bermuda to write property catastrophe reinsurance or excess liability insurance.
Combined ratio
Claims ratio plus expense ratio.
Commercial combined
Also known as “Package”. Policies where several different types of insurance cover are combined into one policy.
Contingent capital
Contingent capital arrangements provide the option to raise capital during a defined commitment period based upon the occurrence of a qualifying event, such as a defined insurance loss.
Contract certainty
The complete and final agreement of all terms between the insured and the insurer before inception of the risk.
Counter party risk
The risk that the other party in an agreement will default.
Cover holder
Company or partnership authorised by a managing agent to enter into a contract or contracts of insurance to be underwritten by the members of a syndicate managed by it, in accordance with the terms of a binding authority.
Credit crunch
The sudden reduction in the availability of loans and other types of credit from banks and capital markets at given interest rates. The reduced availability of credit can result from many factors, including an increased perception of risk on the part of lenders, an imposition of credit controls, or a sharp restriction of the money supply.
Cross cycle
Throughout the insurance pricing cycle.
Deleverage
A company’s attempt to decrease its financial leverage. The best way for a company to delever is to immediately pay off any existing debt on its balance sheet
DFA
Dynamic Financial Analysis uses a detailed modelling assessment of the key risks facing an insurer to help assess its financial position. Key areas of use include the assessment of capital requirements and understanding the possible impact of future plans and strategies.
Direct and facultative
Direct property insurance and facultative reinsurance of property.
Drawdown
The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.
Earned premium
Proportion of insurance premium recognised in the income statement based on the estimated risk period falling in the financial year.
ECF
Electronic claims file.
Endorsement
Any addition to a policy, or addition to the printed wording, which changes or varies terms of, or parties to, the contract.
Enterprise risk management system
An entity wide process implemented by management to manage and control risk. This includes risks associated with accidental losses, as well as financial, strategic, operational, and other risks.
Excess of loss reinsurance (XL)
A reinsurance that covers that part of a loss paid by the reinsured which is in excess of an agreed amount and then pays up to the limit of the policy.
Expense ratio
Underwriting expenses divided by net earned premium.
Facultative
Where the insurer accepts risks on an individual basis.
Financial strength ratings
See IFSR. “Gross” and “net” underwriting When referring to premium written or earned, losses or underwriting results, these terms denote before (gross)
and after (net) the application of reinsurance. IBNR
An estimate of claims or losses which have been incurred but not yet reported to the insurer.
ICA
Individual capital assessment required to be submitted to Lloyd’s. It sets out the level of capital required in the business to contain the risk of insolvency to no greater than a probability of 0.5%.
IFRS
International Financial Reporting Standards.
Incurred loss
Paid claims plus claims advised by a policyholder but not paid. Does not include IBNR.
Incurred loss ratio
Incurred losses divided by earned premium.
Insurance financial strength rating (IFSR)
Current opinion provided by ratings agencies of the financial security characteristics of an insurance organisation with respect to its ability to pay under its insurance policies and contracts in accordance with their terms.
Insurance pricing cycle
Recurring pattern of increases and decreases in insurance prices and profits.
Lead/non-lead
“Lead” denotes an underwriter in the subscription market who sets the terms and price of a policy. Following underwriters accept the policy on the same terms.
Letter of credit (LOC)
Written undertaking by a financial institution to provide funding if required.
Lloyd’s of London
A specialist insurance market comprised of a society of members, both corporate and individual, who underwrite in syndicates on whose behalf professional underwriters accept risk. Supporting capital is provided by investment institutions, specialist investors, international insurance companies and individuals.
Line size
The monetary limit of a policy for a first claim accepted by an underwriter.
Line slip
A facility operated by a Lloyd’s broker whereby risks can be bound to a panel of insurers through the agreement of a leading underwriter plus one or two following markets (as specified on the slip at placement).
Loss event
Circumstance that produces a loss.
Losses occurring basis
Coverage for events occurring during the policy period even if they are not notified until after expiry.
Loss ratio
See “incurred loss ratio” and “ultimate loss ratio”.
Mark to market
Valuation at market value.
Mortgage backed security
A type of asset backed security that is secured by a mortgage or collection of mortgages.
148 Amlin plc Annual Report 2008
NFIP
The National Flood Insurance Program is a US federal insurance program providing property insurance as protection against flood losses in exchange for floodplain management regulations that reduce future flood damages.
Non-life
General insurance companies which sell policies other than life insurance, annuities or pension products.
Non-monetary assets and liabilities
Assets and liabilities that are accounting entries and are not expected to be exchanged for cash - such as unearned premium reserves.
Outstanding claims
Losses which have been reported to the insurer but not yet paid.
Package
See “commercial combined”.
Personal lines
Property/casualty insurance products that are designed for and bought by individuals, including homeowners and automobile policies.
Policyholders funds
Premiums received and held to pay future claims.
Proportional reinsurance
A type of reinsurance where the ceding insurer cedes to its reinsurer a predetermined proportion of the premium and liability of those policies subject to the reinsurance agreement.
Quota share
A form of proportional reinsurance where the reinsurer receives a percentage of every risk, as defined by the reinsurance contracts, written by the ceding company.
Rating agency
Credit agencies which determine insurers’ financial strength and company debt ratings.
Realistic disaster scenario (RDS)
Modelling of the probable loss which may arise from
a defined catastrophic event.
Reinsurance
Insurance bought by insurers. A reinsurer assumes part of the risk and part of the premium originally taken by the insurer, known as the primary company.
Reinsurance to close
Premium paid by a closing year of account to a later year to cover its outstanding liabilities. A reinsurance to close is usually made three years after the commencement of a year of account.
Renewal rights
The right to seek renewal of certain existing insurance business.
Reserves
Funds that have been set aside to meet outstanding claims and IBNR.
Retention ratio
The percentage of the previous year’s premium that is renewed.
Retrocession
The reinsurance of liability accepted by way of reinsurance.
Return on capital (ROCE)
After tax profit divided by opening shareholders’ equity plus debt, adjusted for any capital raisings or returns.
Return on equity (ROE)
After tax profit divided by opening shareholders’ equity, adjusted for any capital raisings or returns.
Risk-based capital
Risk-based capital is a method used to measure the minimum amount of capital that an insurance company needs to support its overall business operations taking into account the size and type of risk taken by the insurer.
RMS
Risk Management Solutions. Provider of catastrophic
modelling software.
Run-off
Increase or decrease to claims on old years of account.
Service company
A company set up to operate a binding authority on behalf of the Syndicate to write business from non-Lloyd’s brokers or policyholders directly.
Share buy-back
Where a company buys back its own shares. One of the principal reasons for a company wanting to purchase its own shares is to return surplus cash to shareholders, for example, after a large disposal.
Shareholder equity
The portion of a company’s assets that the shareholders own, as opposed to what they’ve borrowed: equal to total assets minus liabilities.
Share incentive plan
A Share Incentive Plan is a tax efficient way for employees to invest in shares in their company.
Sharpe ratio
A ratio which measures risk-adjusted performance.
It denotes whether a portfolio’s returns are due to smart investment decisions or a result of excess risk. Sidecars
Specialty reinsurance companies designed to provide additional capital to a specific reinsurance company. Investors, such as hedge funds, invest in a reinsurance company, the sidecar, to reinsure specific risks for a specific reinsurance company.
SME
Small and medium enterprises.
Special dividend
A nonrecurring dividend that is exceptional in terms of either size or date issued.
Solvency II
Capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards to be implemented in 2013 that will replace the current Solvency 1 requirements.
Special purpose vehicle
Corporate entity designed to isolate financial risk, often to allow other investors to participate in that risk.
Specie
The insurance of high value items including deposits, bullion and fine art.
Special purpose syndicate (SPS)
An annual joint venture Lloyd’s syndicate that is formed to write reinsurance of another existing Lloyd’s syndicate.
Strategic asset allocation
A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation.
Subordinated debt
Subordinated debt is debt that takes a lower priority than other debt. If an issuer is liquidated then subordinated debt holders will only be paid after senior creditors have been fully paid.
Sub-prime
Mortgages provided to home buyers with lower credit
scores. Nearly all sub-prime loans in the US are packaged into mortgage backed securities for sale to investors.
Subscription market
Insurance market, such as Lloyd’s, whereby underwriters subscribe to proportions of risks.
Surplus
The amount by which the gross sum insured accepted by the insurance company exceeds its own retention.
Surplus lines
A reinsurance where the surplus of the reinsured’s retention is ceded up to an agreed amount. Once accepted, both parties pay their proportion of losses arising.
Tactical asset allocation
An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.
Tier 1 capital
The core measure of financial strength from the viewpoint of the FSA. It consists of the most reliable and liquid assets.
Total shareholder returns (TSR)
Returns combining share price performance and dividend payments.
Treaty
A reinsurance contract covering entire portfolios of risks.
Ultimate loss ratio (ULR)
Total forecast claims divided by total forecast premium expected to arise from a policy or class of business. Losses include those paid, those notified and IBNR.
Underwriting year
The year to which a policy is allocated and to which all premiums and claims in respect of that policy are attributed. Allocation is determined by the inception date of the policy.
Unearned premium
Proportion of insurance premium covering periods after the end of the financial year. Held in the unearned premium reserve.
US admitted market
The market provided by insurers who are licensed to do business in US States.
Value at risk
A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities.
XL
See “excess of loss”.
Year of account (yoa)
The year for Lloyd’s syndicates to which a policy is allocated and to which all premiums and claims in respect of that policy are attributed. Allocation is determined by the inception date of the policy.
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