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Glossary

Administrator

Is a licensed insurance manager that works with the reinsurance company owners and direct writers. Making all paperwork required to obtain and maintain the reinsurance company. Additionally, works with the domicile to make sure the reinsurance company is in compliance with the business plan.

Business Risk

A risk of loss so closely tied to an insured’s way of doing business that it is considered not to be an appropriate subject of insurance coverage; such risks are typically addressed as overhead (i.e., the cost of the loss is included in the price of the business’s products or services) or as a subject for loss control. The cost of replacing a defective product or redoing defective work is a classic “business risk”.

Ceded Premiums

Premiums paid or payable by the direct writer to another insurer for reinsurance protection.

Direct Writer

Is an insurance company that initially underwrites the risk, and then, may transfer the insurance it has written to another insurance company or reinsurance company.

Domicile

The location or venue in which a reinsurance company is licensed to do business. There are a number of factors that must be considered in selecting the best domicile, including capitalization and surplus requirements, investment restrictions, income and local taxes, formation costs, acceptance by fronting insurers, availability of banking and other services, and proximity considerations.

Facultative Clause

Reinsurance transacted on an individual risk basis. The direct writer has the option to offer an individual risk to the reinsurer and the reinsurer retains the right to accept or reject the risk. When the reinsurer accepts the risk, the reinsurer is responsible for the first dollar claim of up to 50% of the total coverage.

Feasibility Study

Is a study undertaken to determine whether a contemplated risk financing program is feasible for an organization or group of organizations. An actuarial analysis is often done in conjunction with a feasibility study. It is often used in reference to studies that attempt to ascertain whether the formation of an insurance company is a viable risk financing alternative under a given set of circumstances.

Fortuitous Event

An event happening by chance or accident. It is an occurrence or failure to occur which is, or is assumed by the parties to be adversely affected by the happening of such event.

Promissory Note

Is a legal instrument (more particularly, a financial instrument), in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms, including the interest rate to paid.

Reinsurance Agreement

Is an Agreement by which one insurance company transfers risk to another (buys reinsurance). Unlike an insurance policy, both parties sign a reinsurance agreement.

Reinsurance Ceded

That portion of a risk that a direct writer transfers to a reinsurer in return for a stated premium.

Reinsurance Investment Agreement

Is an agreement between a direct writer and a reinsurance company how the reserves of the reinsurance company will be invested.

Risk Distribution

Incorporates the statistical phenomenon known as the law of large numbers. Distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums and set aside for the payment of such a claim.

Risk Shifting

Occurs when a person/operating company facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer, such that a loss by the insured does not affect the insured because the loss is offset by a payment from the insurer.

Treaty Reinsurance

Transaction covering a block of the direct writer’s book of business. Reinsurer must accept all business included within the term of the reinsurance agreement. Reinsurer shares in all losses exceeding 50% of total coverage on a pro-rata share basis.

Underwriting Profit

Consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investments income earned on the held premiums.

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