Glossary Terms

Assumption Reinsurance: The form of reinsurance under which the reinsurer steps into the shoes of the ceding company, the original insurer, and directly assumes all the service and financial obligations of the original insurer on the block of business being assumed. Unlike indemnity reinsurance, assumption reinsurance makes the assuming company (reinsurer) directly liable to the policyholders. After the assumption, the reinsured business no longer appears on the books of the original insurer. In some instances, the original insurer may continue to administer and service the business but, if it does so, it does it as the agent of the reinsurer.

It is often used when the original insurer wishes to exit a line of business or market. It is sometimes used at the direction of insurance regulatory authorities, to safeguard the interest of policyholders when an original insurer becomes financially impaired or otherwise unable to perform.
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Automatic Reinsurance: Reinsurance that is ceded in accordance with an automatic reinsurance agreement or treaty under which the original insurer agrees to cede and the reinsurer agrees to accept a predetermined class of business, such as insurance issued on a particular plan. The reinsurance is ceded on the underwriting judgement of the ceding company without a case by case concurrence of the reinsurer, up to a specified amount, the automatic limit. The ceding company normally is required to keep its full stipulated retention for the class of business involved on any case ceded automatically. Often certain defined types of cases are not eligible for automatic treatment. Cases in excess of the automatic limits or otherwise ineligible for automatic cover can usually be submitted for facultative consideration.
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Bordereau Reinsurance: A form of reinsurance administration, without the use of individual policy documents, in which the ceding company provides the reinsurer with details of each life reinsured in list format, either on paper or by electronic medium. Summary information, possibly including reserves, may be included.
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Bulk Reinsurance: A form of reinsurance administration under which the ceding company provides only summary information, without any individual data, to the reinsurer.
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Catastrophe Reinsurance: It is a form of non-proportional reinsurance offering the ceding company protection against excess losses from multiple claims arising out of a single event. Typically reinsurance benefits will be paid if at least a specified minimum number of claims exceeding a minimum threshold amount of benefits arises out of a single event. When these conditions are met, the ceding company is reimbursed for a percentage (often 100%) of the claims over the threshold attachment point up to the maximum reinsurance benefit specified in the treaty. It is a form of reinsurance commonly used in the Group Insurance field and other areas where there might be a known or unknown concentration of risks.
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Ceding Company: An insurance company that secures reinsurance protection from another insurer, a reinsurer, against some or all of the risks it has assumed under a policy or policies it has issued or reinsured.
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Entire Agreement Provision: A concept introduced into the NAIC Model Regulation adopted October 1992, governing Life and Health Reinsurance Agreements. The Model Regulation requires that all coinsurance and modified coinsurance treaties contain provisions that provide:

(1) The agreement shall constitute the entire agreement between the parties with respect to the business being reinsured thereunder and that there are no understandings between the parties other than as expressed in the agreement; and

(2) Any change or modification to the agreement shall be null and void unless made by amendment to the agreement and signed by both parties.
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Facultative Reinsurance: The word "Facultative" means optional. When it is used to describe reinsurance, it refers to reinsurance that is optional for both parties. The ceding company has no obligation to cede the business to the reinsurer and the reinsurer has no obligation to accept it. Thus it is reinsurance that the ceding company chooses to submit to a reinsurer for its consideration and which may be ceded to the reinsurer only if the reinsurer makes an offer to reinsure. The reinsurer determines the underwriting classification assigned to the risk. Facultative reinsurance may be ceded under the facultative terms of an automatic treaty for risks that the ceding company cannot or does not wish to cede automatically, or it may be ceded under a purely facultative treaty.

When a case is submitted to one or more reinsurers for facultative consideration, any automatic coverage the case may have been eligible for normally is considered terminated. If a facultative application is submitted to more than one reinsurer, the facultative reinsurance coverage does not commence until the ceding company has accepted an offer made by one of the reinsurers.
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Facultative/Obligatory Reinsurance: A form of reinsurance that shares aspects of both facultative and automatic reinsurance. As with facultative reinsurance, the ceding company has no obligation to offer specific cases to the reinsurer. However, once a case is offered to the facultative/obligatory reinsurer, the case is treated largely as if it were automatic. The reinsurer receives no underwriting information and is offered the case at the ceding company's rating with the option to accept or reject the case. While not always stated in the treaty, it is usually understood that, the case will be rejected by the reinsurer only if the reinsurer does not have available capacity (i.e. its own retention and automatic retrocession facilities).

This form of reinsurance is more commonly used among reinsurers in placing a retrocession on large cases.
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Indemnity Reinsurance: The form of reinsurance under which the ceding company secures reinsurance as a partial or total offset on the risks assumed on policies it has issued or reinsured. Under indemnity reinsurance the reinsurer has no relationship with the original policyholders; the ceding company continues to administer and service the insurance on which it has secured reinsurance and remains fully responsible for all the interests of the policyholders. If the reinsurer cannot or does not honor its obligations to the ceding company, the ceding company would still be fully liable to its policyholders.

Indemnity reinsurance may be employed, not only between a direct writing company and a reinsurer, but also between two reinsurers when retrocession of risks is being implemented. In such instances, the same principles apply. The retrocessionaire has no relationship with the original issuing company, the direct writer. The original issuing company has no recourse to the retrocessionaire, but only to the reinsurer to whom the original issuing company had ceded its reinsurance.

Also see Assumption Reinsurance.
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Jumbo Limit: A limitation on the ceding company's authority to cede specific cases on an automatic basis. If the amount of insurance currently being applied for with the ceding company and all other companies, together with the amount of insurance in force with all companies, exceeds the jumbo limit specified in the automatic treaty, the case may not be ceded automatically. Generally, whether explicitly stated in the treaty or not, amounts of inforce insurance to be replaced are included in the jumbo limit determination.

Reinsurers employ a jumbo limit for two reasons. First they recognize that their own automatic capacity on a case may already be filled from other clients on a life with a large amount of inforce insurance. Secondly, they often feel the underwriting demands of cases with large lines of inforce and applied for insurance are subtle and difficult. Having considerable experience in the large amount market, reinsurers often wish to share in the underwriting evaluation of these cases.

The ceding company's underwriters sometimes overlook jumbo limits. Where this occurs, the validity of the reinsurance is in jeopardy at claim time.
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Loss Carryforward: Under reinsurance arrangements subject to experience refunds, negative results in one year may be carried forward as a negative element in the refund calculation of subsequent years. Sometimes the losses may be carried forward indefinitely until amortized by subsequent positive results; often there are restrictions on the period for which losses are carried forward.
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Mode of Reinsurance: This refers to the structure of the reinsurance arrangements, that is, whether it be Risk Premium (Yearly Renewable Term, Monthly Renewable Term), Coinsurance or Modified Coinsurance reinsurance. It may also be referred to as method or type of reinsurance.
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Yearly Renewable Term (YRT): Also referred to as Risk Premium Reinsurance, it is a form of reinsurance where only the mortality risk is transferred to the reinsurer. The amount of reinsurance, which may change annually, is the reinsured portion of the risk amount, normally the death benefit less the accumulated policy value (usually the cash value or terminal reserve). Under level term policies with no cash values, the terminal reserves are usually ignored, producing a level reinsured risk amount. The reinsurance premium is a one year term rate taken from a table of rates included in the treaty. The rates are normally developed by the reinsurer and are independent of, but usually compatible with, the premium the ceding company charges its insured.

With the advent of monthly cycle unbundled policies, such as Universal Life, a monthly version of YRT has come into use. The reinsured risk amount is normally calculated monthly and the reinsurance premium is usually the mortality charge, the monthly Cost of Insurance, the ceding company charges its own insured, less a discount or expense allowance. These monthly premiums are sometimes paid quarterly.

For administrative convenience the reinsured risk amount may remain fixed for a period of time, or vary according to a predefined formula, rather than directly reflecting the precise change in risk amount.
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Coinsurance: This is the broadest form of reinsurance under which all risks, on the reinsured portion of the policy, are transferred to the reinsurer. The reinsurer is liable not only for the death benefit but also all the nonforfeiture values. The reinsurer receives its proportionate share of the ceding company's gross premium less a coinsurance allowance for commissions and other expenses. The reinsurer holds the reserve on its portion of the policy and retains any excess investment earnings.
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Modified Coinsurance: This differs from coinsurance only in that the ceding company retains the policy reserves rather than having the reinsurer accumulate them. Periodically an adjustment is made to the mean reserve on deposit with the ceding company. This is usually done at year-end but may be done more frequently. If the reserve increases, the increase in mean reserve less a year's interest on the mean reserve held at the end of the previous year is paid by the reinsurer to the ceding company. If the mean reserve decreases, the decrease and interest are paid by the ceding company to the reinsurer. The appropriate interest rate is defined in the treaty.
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Nonproportional Reinsurance: Reinsurance that is not secured on individual lives for specific individual amounts, but rather reinsurance that protects the ceding company's overall mortality experience on its entire portfolio of business, or at least a broad segment of it. The most common forms of nonproportional reinsurance are stop-loss reinsurance and catastrophe reinsurance.

Nonproportional reinsurance is a form of casualty insurance. Usually neither the premium nor continuance of coverage is guaranteed beyond a specified term (cf. Proportional Reinsurance).
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Oversights: It is typical for reinsurance treaties to provide that any unintentional errors discovered in any reinsurance transaction, or omission of a transaction, will be corrected and both parties will be restored to the position they would have been in had the error or omission not occurred. Often the errors or omissions to be routinely rectified are limited to "Clerical" ones. Errors of judgement are not accorded this protection.

The provision goes to the heart of the confidence and trust the two parties place in one another under a reinsurance agreement. It is, however, not intended to be a completely absolute protection to the parties. Repeated errors or those suggesting lack of diligence or goodwill would still invite challenge. Any delay in correcting an error immediately upon discovery could also compromise the protection this provision accords the erring party.
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Policy Fee: In developing YRT reinsurance premium scales, reinsurers often added a policy fee (sometimes called a cession fee) payable to the reinsurer to reflect part or all of their expense loading, thereby making the rates more attractive to companies ceding larger units of reinsurance. With most reinsurance being ceded today on a self-administered basis, the practice has diminished in frequency and importance.

YRT policy fees are usually fully earned when due. No portion of the policy fee is refunded to the ceding company, if the reinsurance is terminated before the end of the policy year.

Under coinsurance and modified coinsurance, policy fees charged the insured by the ceding company are normally fully retained by the ceding company to offset ceding company expenses.
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Proportional Reinsurance: Reinsurance on a particular life for a specified amount is generally, though not necessarily, secured at the time the policy is issued to the insured. The continuation of coverage guarantees for the reinsurance generally parallel those in the life insurance coverage reinsured. Most life reinsurance conducted in the United States is done so on a proportional basis (cf. Nonproportional Reinsurance).
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Quota Share:> An approach to allocating liability on reinsured policies between the ceding company and the reinsurer, where both the ceding company and the reinsurer have fixed percentage shares from the first dollar of liability on a policy. This differs from an excess of retention approach to allocating liabilities, where the ceding company first retains for its liability a specified dollar amount, its retention, and only reinsures any excess over this retention amount. Thus, under a 50/50-quota share arrangement, the ceding company would retain 50% of each issue and reinsure 50%. If the issue amounts could be high enough for the ceding company's 50% share to exceed its normal maximum retention, provision is usually made for the ceding company's actual dollar retention to be limited to its normal published maximum retention.

Quota share reinsurance is a method of involving the reinsurer in every policy issued. The usual motivation is conservation of surplus. It might also be desirable for the ceding company when issuing an experimental product or might be required by the reinsurer to get a better spread of risk in special programs. It is sometimes used when the reinsurer developed the product or otherwise contributed something extraordinary to marketing or sustaining the product.

The quota share concept is often coupled with an excess of retention approach for allocating reinsurance shares to multiple reinsurers. Under a quota share excess of retention arrangement the ceding company would first keep its retention and then allocate quota shares of the excess to several reinsurers. This approach treats the automatic reinsurance account as a pool, with each automatic reinsurer getting its quota share of the automatic pool.

This method gives the ceding company better control over the actual allocation of reinsurance to various reinsurers than an alphabetic split of the account might do. For the reinsurers, it gives a better spread of risk.
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Recapture: Reinsurance treaties often provide that if a ceding company increases its retention, the ceding company can, under previously agreed to terms, take back(recapture) amounts of insurance previously ceded to fill up its new retention.

The basic conditions under which a company may recapture usually are: 1) ceding company must have kept its then maximum (non-zero) permissible retention when it ceded the reinsurance; 2) the reinsurance has been inforce for a sufficient period for the reinsurer to recover its investment in the cession and perhaps even realize some profit (the minimum recapture period will be stated in the treaty); and 3) all eligible policies are being recaptured. Other conditions may also be set.
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Reinsurer:> An insurance company to which another insurance company can transfer, through the mechanism of reinsurance, part or all of its risks under a policy or policies it has issued or reinsured. If the transfer of risk is secured through indemnity reinsurance, the reinsurer becomes liable to the ceding company for the reinsured benefits while the original insurer, the ceding company, remains fully liable to its insured policyholders. If the transfer of risk is secured through assumption reinsurance, the original insurer steps out of the picture and transfers all of its liabilities and responsibilities to the reinsurer who then is henceforth directly responsible to the original policyholders.
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Types of Reinsurers: A prime consideration for a ceding company is the recognition that will be accorded to a reinsurance arrangement by state insurance authorities; that is, whether the ceding company will be permitted to take an offsetting credit for the reinsurance against the ceding company's financial statement liabilities. With respect to this question, reinsurers may be classified as follows. It should be noted that the same reinsurer might be classified differently by the different states in which the ceding company operates.

Note: It should be noted that the terms authorized, accredited, licensed, admitted and accepted reinsurer are sometimes used interchangeably without much distinction.
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Authorized Reinsurer: A reinsurer that is licensed in the ceding company's state of operation in question. When a company reinsures with an authorized reinsurer, full credit is routinely granted by insurance authorities on the ceding company's financial statements for reserves held by the reinsurer on the business ceded and amounts recoverable under the reinsurance treaty.
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Accredited Reinsurer: A reinsurer that is not licensed in the ceding company's state of operation in question may be, or become, accredited in that state. Accreditation procedures and standards vary by state but usually require the reinsurer to show four things: 1) its financial condition meets the standards applied by the ceding company's state to like insurers; 2) it is licensed in at least one state of the United States to transact insurance or reinsurance; 3) it has submitted to that state's jurisdiction and allows its books and records to be examined; and 4) that its directors and management personnel are of acceptable character and experience. Once a reinsurer is accredited by the ceding company's state of operation, that state will normally give full credit to the ceding company for reserves held by the reinsurer on the business ceded and amounts the ceding company shows as recoverable under the reinsurance agreement.

In addition, the NAIC Model Law on Credit for Reinsurance allows credit for reinsurance ceded to a reinsurer which is domiciled and licensed in a state which employs standards regarding credit for reinsurance substantially similar to those applicable under the ceding company's state of operation in question provided the reinsurer maintains at least $20 million of surplus and submits to the authority of the ceding company's state of operation in question to examine its books and records.
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Unauthorized and Unaccredited Reinsurer: If a ceding company's reinsurer is neither authorized nor accredited, the ceding company still may be able to take credit in its financial statements for the reinsurance ceded, if the reinsurer provides sufficient security for amounts due under the reinsurance treaty. This can usually be accomplished by permitting the ceding company to withhold funds due the reinsurer (funds withheld approach) or by the reinsurer providing the ceding company with a letter of credit, in a form acceptable to the state in question, or by the reinsurer establishing a trust agreement for the benefit of the ceding company.
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Retention: The portion of a policy that the ceding company retains for its own liability. It is normally expressed in terms of face amount of insurance, especially if more than the mortality risk is reinsured. It is sometimes expressed in terms of risk amount, particularly with single premium products.

A company's retention is often graded by age and or underwriting classification. Less frequently special reduced retentions apply to specified risks, such as those engaged in aviation activities or with histories of coronary artery disease.
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Retrocession: A form of reinsurance under which a reinsurer cedes to another insurer part or all of the reinsurance it has assumed from another company. The original ceding company has no relationship or recourse to the retrocessionaire and the original reinsurer remains fully liable to its client, the original ceding company.

It provides a reinsurer with a method of accommodating its clients with respect to larger risks while still managing its own risk exposure.
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Risk Amount: Also called the net amount at risk. This is the policy death benefit less the policy value accumulation, usually the terminal reserve or the policy cash value. It is the amount that must come from surplus in the event of a death claim.

Under YRT reinsurance, the reinsured risk amount is the death benefit on the portion of the policy reinsured less accumulated policy values (terminal reserve or cash value, as defined in the treaty). If only the accumulated policy values on the reinsured portion of the policy are used as a decrement to the reinsured risk amount, the approach is described as a proportionate risk retention since in the future both the ceding company's and the reinsurer's share of the risk will fluctuate (usually decline) proportionately. If the accumulated policy values on the entire policy are used as a decrement against the reinsured risk amount, the approach is called level risk retention since the ceding company's portion of the risk amount will remain static and all fluctuations in the risk amount will be reflected in the reinsurer's portion.
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Stop Loss Reinsurance: A form of nonproportional reinsurance under which the ceding company receives protection against the risk of its cumulative claims, rather than on any individual policies, exceeding an acceptable level. Typically, such reinsurance coverage might provide that if the ceding company's actual claims exceed its expected mortality, as defined in the treaty, by more than a stated percentage, such as 10%, the reinsurer would reimburse the ceding company for a stated percentage, say 90%, of the excess over this attachment point up to a stated maximum reinsurance benefit. Usually the reinsurance coverage may be terminated or the reinsurance premium increased after the expiry of a limited term, typically one year. Sometimes the ceding company has the option of converting the arrangement to a conventional proportional reinsurance treaty for a portion of the ceding company's retention following a stop loss reinsurance rate increase or termination by the reinsurer.

When stop loss protection is used, it is usually combined with conventional proportional reinsurance. By combining the reinsurance coverage, the ceding company will usually feel comfortable with a higher retention than it would using proportional reinsurance alone.
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Excerpt from the "Discussion of Reinsurance Provisions in a Life Reinsurance Agreement," issued by the Treaty Committee of the SOA Reinsurance Section in August 1994. Reprinted with permission from the Society of Actuaries.
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