Glossary
Glossary
Severity
The amount of damage that is (or that may be) inflicted by a loss or catastrophe. Severity is sometimes quantified as a severity rate, which is a ratio relating the amount of loss to values exposed to loss during a specified period of time.
Soft Market
One side of the market cycle characterized by low rates, high limits, flexible contracts, and high availability of coverage. Contrast with hard market.
Speculative Risk
Uncertainty about an event under consideration that could produce either a profit or a loss, such as a business venture or gambling transaction. A pure risk is generally insurable, while a speculative risk is usually not.
Spread of Risk
Consideration of the number of independent exposures to loss in a given time period. As the number of units exposed independently to loss increases, the spread of risk expands and the likelihood that all units will suffer loss diminishes. Predictive ability increases as the spread of risk increases. This is often called the "law of large numbers."
Stop Loss Reinsurance
A form of reinsurance also known as "aggregate excess of loss reinsurance" under which a reinsurer is liable for all losses, regardless of size, that occur after a specified loss ratio or total dollar amount of losses has been reached.
Structured Settlement
A settlement under which the plaintiff agrees to accept a stream of payments in lieu of a lump sum. Structured settlements can be tailored to the individual's inflation-adjusted living costs, anticipated future medical expenses, education costs for children, and other lifetime needs. Annuities are usually used as funding mechanisms.
Surplus Reinsurance
Reinsurance amounts that exceed a ceding company's retention. In surplus reinsurance, the reinsurer contributes to the payment of losses in proportion to its share of the total limit of coverage.
Surplus Share Reinsurance
Proportional reinsurance in which the reinsurer assumes pro rata responsibility for only that portion of the risk that exceeds the ceding company's established retention.
Third-Party Administrator (TPA)
A firm that handles various types of administrative responsibilities on a fee-for-services basis for organizations involved in cash flow programs. These responsibilities typically include claims administration, loss control, risk management information systems, and risk management consulting.
Treaty
An agreement between an insurer and a reinsurer stating the types or classes of businesses that the reinsurer will accept from the ceding insurer.
Treaty Reinsurance
A form of reinsurance in which the ceding company makes an agreement to cede certain classes of business to a reinsurer. The reinsurer in turn agrees to accept all business qualifying under the agreement, known as the "treaty." Under a reinsurance treaty, the ceding company is assured that all of its risks falling within the terms of the treaty will be reinsured in accordance with treaty terms.
Unallocated Loss Adjustment Expense
Salaries, overhead, and other related adjustment costs not specifically allocated to the expense incurred for a particular claim.
Unbundling
The practice of separating risk handling and risk funding services either from a multiline insurer or from themselves. Captives that require a "front" may also be required to purchase all or some of the services from the same insurer. This is a "bundled" program. Unbundling indicates the ability to purchase services from any vendor, not just those associated with the fronting insurer.
Valuation Date
The cutoff date for adjustments made to paid claims and reserve estimates in a loss report. For example, a workers compensation loss report for the 1996 policy year that has a 1998 valuation date includes all claim payments and changes in loss reserves made prior to the 1998 valuation date.
Weighted Average Loss Forecasting
A method of forecasting losses that assigns greater weight, typically to more recent years, when developing a forecast of future losses. Recent years receive a greater weight because they tend to more closelyapproximate current conditions (e.g., benefit levels, nature of company operations, medical expenses).
Working Layer
A dollar range in which an insured or, in the case of an insurance portfolio, a group of insureds, is expected to experience a fairly high level of loss frequency. For many organizations, this loss frequency is adequate to provide some degree of statistical credibility to actuarial forecasts of the total expected losses during a specific period of time, e.g., 1 year. This is the layer typically subject to deductibles, self-insured retentions, retrospective rating, and similar programs.
Wrap-Around Risk Financing Program
A risk financing program in which two or more different risk financing approaches are combined into one overall program. Typically, a wrap-around is used for workers compensation insurance so that the most cost-effective program in each state can be used to an insured's advantage. For instance, in state A, an insured may have an exposure large enough to qualify as a self-insurer, whereas the requirements in state B may be such that another type of risk financing program is preferable.
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Alternative Risk Planning for the Middle Market
