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.

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.

Capacity

The maximum amount of business which may be accepted by a Lloyd’s syndicate.

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 sell 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.

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.

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.

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.

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.

“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.

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.

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.

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 ratio

See “incurred loss ratio” and “ultimate loss ratio”.

Non-life

General insurance companies which sell policies other than life insurance, annuities or pension products.

Non-monetary assets & 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.

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.

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.

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.

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.

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.

Total shareholder returns

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.

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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