Glossary OF ALTERNATIVE RISK TERMS

Actuary  An individual, often holding a professional designation, who computes statistics relating to insurance. Actuaries are most frequently used to estimate loss reserves (for both insurers and self-insureds) and to determine premiums for various coverage lines. Professional designations are awarded by the Casualty Actuarial Society and the Society of Actuaries.

Admitted insurer  An insurance company licensed to do business in a specified jurisdiction to underwrite insurance in that jurisdiction.

Aggregate limit of liability  An insurance contract provision limiting the maximum liability of an insurer for a series of losses in a given time period, e.g., a year or for the entire period of the contract. Aggregate limits may be equal to or greater than the per occurrence or per accident policy limit. An insurance policy may have one or more aggregate limits. For example, the standard commercial general liability policy has two: the general aggregate that applies to all claims except those that fall in the products-completed operations hazard and a separate products-completed operations aggregate.

Aggregate excess of loss reinsurance -A form of reinsurance that requires participation by the reinsurer when aggregate excess losses for the primary insurer exceed a certain stated retention level.

Alien insurer- An insurer domiciled outside the United States.

Alternative market- A term commonly used in risk financing to refer to one of a number of risk funding techniques (e.g., self-insurance, captive) or facilities (e.g., ACE, XL) that provide coverages or services outside the realm of those provided by most traditional property and casualty insurers. The alternative market may be utilized by large corporations, for example, to provide high limits of coverage over a large self-insured retention. It may also be utilized by groups of smaller entities, for example, participating in a risk retention group or group captive program. Note that the distinction between traditional and alternative markets tends to blur over time as many traditional insurers have expanded their offering of products to encompass alternative-type funding techniques, and vice versa. Finally, retrospective funding plans, especially paid loss plans, are sometimes identified with the alternative market.

Association captive  A captive insurance company formed and owned by a trade or professional association.

Attachment point  The point at which excess insurance or reinsurance limits apply. For example, a captive's retention may be $250,000. This is the attachment point at which excess reinsurance limits would apply.

Automatic treaty  A reinsurance treaty under which the ceding company must transfer exposures of a defined class that the reinsurer must accept in accordance with the terms of the treaty.

Best's rating  The rating system developed and published annually by A.M. Best Company that indicates the financial condition of insurance companies.

Bordereau  A report providing premium or loss data with respect to identified specific risks. This report is periodically furnished to a reinsurer by the ceding insurers or reinsurers.

Bornhuetter-Ferguson technique  An actuarial technique for developing losses to estimate their ultimate amount. An amount for expected unreported losses (derived using the reciprocal of the loss development factor) is added to the actual reported losses to obtain the estimated ultimate loss for a given accident year. The technique is most useful when actual reported losses for an accident year are a poor indicator of future IBNR for the same accident year, as is often the case where there is low frequency of loss but a very high potential severity.

Break point  The loss level at which losses below the level are considered "primary" losses and losses above are "excess" losses. The appropriate break point in any risk financing program is a matter of judgment and is dependent upon that program's individual characteristics.

Brokerage market  Reinsurers that write business through reinsurance intermediaries. Reinsurers that do not generally accept such business are referred to as the direct market.

Buffer layer  Any layer of insurance (or risk retention) that resides between the primary (burning) layer and the excess layers. For example, if the insured's primary CGL limit is $500,000 and its umbrella attachment point is $1 million, the layer of $500,000 excess of $500,000 coverage between the two is the buffer layer.

Captive insurer  A captive insurer is an insurance company that insures the risks of an associated business. For example, a parent corporation may own both an operating company and a captive insurance company as brother-sister subsidiaries where the captive insures risks of the operating company; such as for illustration: ABC Parent Corporation owns both ABC Manufacturing Company and ABC Captive Insurance Company and ABC Captive Insurance Company insures certain of the risks of ABC Manufacturing Company. This arrangement is often called a single-owner captive. There are many other forms of captive. As an example of an alternative arrangement, a captive may be owned by a number of unrelated companies in the same industry and insure a set of risks unique or common to that group of companies. This form of captive is often referred to as an association captive (meaning that it insures a specific industry or trade group). There are many more ways of classifying captives by type, e.g., pure captives (those that write no outside business) and so on.

Catastrophe reinsurance- A form of reinsurance that indemnifies the ceding company for the accumulation of losses in excess of a stated sum arising from a single catastrophic event or series of events.

Catastrophic loss  Loss in excess of the working layer, usually of such magnitude as to be difficult to predict and therefore rarely self-insured or retained.

Cedant  A ceding insurer or reinsurer. A ceding insurer is an insurer that underwrites and issues an original, primary policy to an insured and contractually transfers (cedes) a portion of the risk to a reinsurer. A ceding reinsurer is a reinsurer that in turn transfers (cedes) a portion of its reinsurance layer to a retrocessionnaire.

Ceding commission  A percentage of the reinsurance premium retained by a ceding company to cover its acquisition costs, and sometimes, to provide a profit.

Claims reserve  An amount of money set aside to meet future payments associated with claims incurred but not yet settled at the time of a given date.

Combined ratio  The sum of two ratios, loss and expense, calculated by dividing incurred losses and all other expenses by earned premiums. Used in both insurance and reinsurance, a combined ratio below 100 percent indicates an underwriting profit.

Contingent commission  In reinsurance, an allowance payable to the ceding company in addition to the normal ceding commission allowance. It is a predetermined percentage of the reinsurer's net profits after a charge for the reinsurer's overhead, derived from the subject treaty.

Credibility  An actuarial term describing the degree of accuracy in forecasting future events based on statistical reporting of past events. Credibility tends to increase with the number of exposure bases in the observed data and to decrease with higher levels of variability in the observed data.

Deductible  An amount agreed to between the insured and insurer whereby the insured reimburses the insurer for losses it pays within the specified deductible amount.

Dividend  The return of premium to an insured by the insurance company. Policies on which dividends may be paid are often called participating insurance. It is important to note that it is illegal for insurers to guarantee that dividends will be paid.

Domicile  The location or venue in which a captive insurer is licensed to do business. Some factors to be considered in selecting the best domicile for a given captive include capitalization and surplus requirements, investment restrictions, income and local taxes, formation costs, acceptance by fronting insurers and reinsurers, availability of banking and other services, and proximity considerations.

Earned premium  An insurer "earns" a portion of a policy's premium as time elapses during the policy period.

Earned surplus  Funds earned by an insurance company (including captives and risk retention groups) after all losses and expenses have been paid. Once earned surplus is recognized, it can be allocated to capital and/or dividends.

Enterprise risk management  A risk management approach that totally integrates both financial (i.e., speculative) and event (i.e., pure) risk into one broad program of multiple retentions and high-excess aggregate insurance limits. To date, however, few firms have implemented such a comprehensive program. Nevertheless, companies are increasingly buying multiyear, multiline insurance programs that cover disparate forms of risk (e.g., property and directors and officers liability), which are designed to maximize the benefits of portfolio diversification.

Excess insurance  A policy or bond covering the insured against certain hazards, and applying only to loss or damage in excess of a stated amount, a specified primary limit, or a self-insurance limit. It is also that portion of the amount insured that exceeds the amount retained by an entity for its own account. See net line.

Excess of loss reinsurance  A form of reinsurance that indemnifies the ceding company against the amount of loss excess of only the specified retention.

Expected loss  Estimated loss frequency multiplied by estimated loss severity, summed for all exposures. This measure of loss generally refers to the total losses of an organization of a particular type, e.g., workers compensation or general liability.

Expense ratio  The percentage of premium used to pay all the costs of acquiring, writing, and servicing insurance and reinsurance.

Experience rating  Describes any plan that uses the past loss experience and exposure levels, e.g., payrolls, of the individual risk as a basis of determining premiums.

Exposure  The state of being subject to loss because of some hazard or contingency. Also used as a measure of the rating units or the premium base of a risk.

Facultative reinsurance  Reinsurance of individual risks on an individual "offer" and "acceptance" basis wherein the reinsurer has the option to accept or reject each risk offered.

Facultative obligatory treaty  The hybrid of the facultative versus treaty reinsurance approach. It is a treaty under which the primary insurer has the option to cede or not cede individual risks. However, the reinsurer must accept any risks that are ceded.

Feasibility study  A study undertaken to determine whether a contemplated risk financing program is practicable for an organization or group of organizations. An actuarial analysis is often performed in conjunction with a feasibility study. The term is often used in reference to studies that attempt to ascertain whether or not the formation of a captive insurance company is a viable risk financing option under a given set of circumstances.

Foreign insurer  An insurer domiciled in the United States but outside the state in which the insurance is to be written.

Frequency  The likelihood that a loss will occur. Expressed as low frequency (meaning that the loss event is possible but the event has not happened in the past and is not likely to occur in the future), moderate frequency (meaning the loss event has happened once in a while and can be expected to occur sometime in the future), or high frequency (meaning the loss event happens regularly and can be expected to occur regularly in the future). Workers compensation losses normally have a high frequency as do automobile collision losses. General liability losses are usually of a moderate frequency, and property losses often have a low frequency.

Fronting  The process whereby an insurance company issues an insurance policy to the insured and then reinsures all or most of the risk with the insured's captive insurance company or elsewhere as directed by the insured. This approach allows the insured to issue certificates of insurance acceptable to regulators and lenders and avoids the burden of licensing the insured's captive in all states or of becoming a qualified self-insurer in all states.

Hard market  One side of the market cycle that is characterized by high rates, low limits, and restricted coverage. Contrasts with a soft market.

Incurred but not reported (IBNR)  Recognition that events have taken place in such a manner as to eventually produce claims but that these events have not yet been reported. In other words, IBNR is a loss that has happened but is not known about. Since it is impossible to know the value of a case not yet reported or investigated, a subjective estimate is often used by insurance companies to recognize losses incurred but not reported.

Incurred losses  All open and closed claims occurring within a fixed period, usually a year. Incurred losses include reserves for open claims but do not usually include IBNR losses.

Insurance department  A regulatory department charged with the administration of insurance laws and other responsibilities associated with insurance. The commissioner of insurance is the head of this department in most states.

Investment income  The income of an insurance company derived from itsinvestments, as opposed to its underwriting operations. The term has special significance in the insurance industry as various factions consider whether such income should be considered in ratemaking.

Judgment rates  Rates that are established by judgment of an underwriter rather than by a rating authority. Judgment rates are used most often for those lines of insurance in which there are not enough similar exposure units to develop statistically credible rates.

Large deductible plan  An Insurance program that allows the insured to retain a portion of each loss through a substantial deductible and to transfer to an insurer losses in excess of that deductible. The insurer typically handles losses falling below the deductible and bills these costs back to the insured.

Law of large numbers  A tool used in probability and statistics. The larger the number of units independently exposed to loss, the more accurate the ability to predict loss results arising from those exposure units.

Letter of credit  A legal commitment issued by a bank or other entity stating that, upon receipt of certain documents, the bank will pay against drafts meeting the terms of the letter of credit. Letters of credit are frequently used for risk financing purposes to collateralize monies owed by an insured under various cash flow programs such as incurred but not paid losses in a paid loss retrospective rating program. "LOCs" also provide a means of meeting capitalization requirements of captives, and are used to satisfy the security requirements in "fronted" deductible or retention programs.

Loss adjustment expense  The cost of investigating and adjusting losses. Such expenses may be termed "allocated loss adjustment expenses (ALAE)" or unallocated loss adjustment expenses.

Loss development  The difference between the original loss as first reported to an insurer and its subsequent evaluation at a later date or at the time of its final disposal.

Loss forecasting  Predicting future losses through an analysis of past losses.

Loss portfolio transfer  A financial reinsurance transaction in which loss obligations that are already incurred and will ultimately be paid are ceded to a reinsurer.

Loss ratio  Proportionate relationship of incurred losses to earned premiums expressed as a percentage. If, for example, a firm pays a $100,000 annual premium for worker's compensation insurance, and its insurer pays and reserves $50,000 in claims, its loss ratio is 50 percent ($50,000/$100,000).

Loss reserve  An estimate of the value of a claim or group of claims not yet paid. A case reserve is an estimate of the amount for which a particular claim will ultimately be settled or adjudicated. An insurer will also set reserves for its entire books of business to estimate its future liabilities.

Loss trending  One step in the process of predicting future losses, through an analysis of past losses.

Market cycles  Market-wide fluctuations in the prevailing level of insurance and reinsurance premiums. A soft market, i.e., a period of increased competition, depressed premiums, and excess capacity, is followed by a hard market a period of rising premiums and decreased capacity.

Minimum premium  The least amount of premium to be charged for providing a particular insurance coverage. The minimum premium may apply in any number of ways such as per location, per type of coverage, or per policy.

Obligatory treaty  A reinsurance treaty between an insurer and a reinsurer (usually involving pro rata reinsurance), in which the insurer agrees to automatically cede all business that falls within the terms of the treaty. The reinsurer, in turn, is obligated to accept such business. "Automatic treaty" is another term for obligatory treaty.

Outstanding losses  Losses that have been reported to the insurer but are still in the process of settlement. Paid losses plus outstanding losses equal incurred losses.

Participating reinsurance  A form of reinsurance under which the reinsurer and primary insurer share losses in the same proportion as they share premiums and policy limits. Quota share reinsurance and surplus share reinsurance are the two types of participating reinsurance. Pro rata reinsurance is another term often used to describe participating reinsurance.

Payout profile  A schedule illustrating the typical rate of dollars paid out in claim settlements over time. For example, on average, less than 30 cents of the total loss dollar for workers compensation claims is paid during the first year of coverage. Even less is paid on average for general liability claims. Depending upon the particular type of risk, an additional 5 to 10 years can elapse before the full 100 percent of the loss reserve is paid out on a particular claim. During this long pay-out period, the loss reserves (i.e., the not-yet-paid-out funds which are set aside by the insurer to cover the loss claims) can be a source of significant investment income to the insurer, and the payout profile is instrumental in estimating this source of profit for any given category of risk.

Pool  An organization of insurers or reinsurers through which particular types of risks are underwritten with premiums, losses, and expenses shared in agreed ratios. Pools are also groups of organizations that are not large enough to self-insure individually and thus form a shared risk pool, also referred to as "risk pooling".

Portfolio reinsurance  A form of reinsurance under which a reinsurer assumes the entire book of the ceding company's business in a certain class or classes.

Probability  A numerical measure of the chance or likelihood that a particular event will occur. Probabilities are generally assigned on a scale from 0 to 1. A probability near 0 indicates an outcome that is unlikely to occur, while a probability near 1 indicates an outcome that is almost certain to occur.

Producer-owned reinsurance captive (PORC)  This is a type of captive reinsurance company that underwrites risks of an affiliated operating business by means of having those risks first directly underwritten by a fronting insurance company which then cedes those risks on through to the captive as reinsurer. The insurance is "producer-owned" in the sense that the producer of the initial insurance contract owns the captive. In some instances, this type of reinsurance company is owned by an insurance agent and broker, in which case, it is not technically-speaking a captive insurer since it is not owned by the owners of the affiliated operating company.

Professional reinsurer  A company whose business is confined solely to reinsurance and peripheral services offered by a reinsurer to its customers. This is in contrast to primary insurers who exchange reinsurance or operate reinsurance departments as adjuncts to their basic business of primary insurance.

Profit commission  A provision found in some reinsurance agreements that provides for profit sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurer's expenses, and the cedant's share of profit after expenses.

Pro forma financial statements  A set of financial statements (usually an income statement, balance sheet, and statement of cash flows) designed to exhibit "as-if" financial results, often used to project future financial results, based on a set of assumptions. These statements are commonly used to evaluate the feasibility of proposed risk funding programs such as captives and risk retention groups.

Pro rata reinsurance  A term describing all forms of "proportional" reinsurance. Under pro rata reinsurance, the reinsurer shares losses in the same proportion as it shares premiums and policy amounts. Quota share and surplus share are the two major types of pro rata reinsurance.

Prospective rating  A method used in arriving at an insurance or reinsurance rate and premium for a specified period based in whole or in part on the loss experience of the prior period.

Purchasing group  Authorized by the Liability Risk Retention Act of 1986, a group formed to obtain liability coverage for its members, all of whom must have similar or related exposures. The Act requires a purchasing group to be domiciled in a specific state. In contrast to risk retention groups, purchasing groups are not risk-bearing entities.

Pure risk  The risk involved in situations that present the opportunity for loss but no opportunity for gain. Pure risks are generally insurable, whereas speculative risks (which also present the opportunity for gain) generally are not. See speculative risk.

Quota share reinsurance  A form of reinsurance whereby the reinsurer accepts a stated percentage of each exposure written by the ceding company on a defined class of business.

Rating bureau  An organization that collects statistical data on losses and exposures of businesses and promulgates rates for use by insurers in calculating premiums. The two most important rating bureaus are the National Council on Compensation Insurance and the Insurance Services Office, Inc. However, a number of states also use their own rating bureaus.

Reinsurance  Insurance in which one insurer, the reinsurer, accepts all or part of the exposures insured in a policy issued by another insurer, the ceding insurer. In essence, it is insurance for insurance companies.

Reinsurance assumed  That portion of a risk that a reinsurer accepts from an original insurer (also known as a "primary" insurer) in return for a stated premium.

Reinsurance ceded  That portion of a risk that an original insurer (also known as a "primary" insurer) transfers to a reinsurer in return for a stated premium.

Reinsurance intermediaries  Brokers who act as intermediaries between reinsurers and ceding companies. For the reinsurer, intermediaries operate as an outside sales force. They also act as advisers to ceding companies in assessing and locating markets that meet their reinsurance needs.

Reinsured  An insurer that contracts with a reinsurer to share all or a portion of its losses under reinsurance contracts it has issued in return for a stated premium. Also called "ceding company."

Reinsurer  An insurer that accepts all or part of the liabilities of the ceding company in return for a stated premium.

Rent-a-captive  An arrangement in which a captive insurer "rents" its facilities to an outside organization, thereby providing the benefits that captives offer without the financial commitments that captives require. In return for a fee (usually a percentage of the premium paid by the renter), certain captives agree to provide underwriting, rating, claims management, accounting, reinsurance, and financial expertise to unrelated organizations.

Reporting lag  The span of time between the occurrence of a claim and the date it is first reported to the insurer.

Reserve  An amount of money earmarked for a specific purpose. Insurers establish unearned premium reserves and loss reserves indicated on their balance sheets. Unearned premium reserves show the aggregate amount of premiums that would be returned to policyholders if all policies were canceled on the date the balance sheet was prepared. Loss reserves are estimates of outstanding losses, loss adjustment expenses, and other related items. Self-insured organizations also maintain loss reserves.

Retention  Assumption of risk of loss, generally through the use of noninsurance, self-insurance, or deductibles. This retention can be intentional or, when exposures are not identified, unintentional. In reinsurance, it is the net amount of risk the ceding company keeps for its own account or that of specified others.

Retention plan  A dividend plan normally used in writing workers compensation insurance in which the net cost to the policyholder is equal to a "retention factor" (insurance company profit and expenses) plus actual incurred losses subject to a maximum premium equal to standard premium less premium discount.

Retrocession  A transaction in which a reinsurer transfers risks it has reinsured to another reinsurer.

Risk-based capital (RBC) requirements  A method developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of capital required of an insurer to support its operations and write coverage. The insurer's risk profile (i.e., the amount and classes of business it writes) is used to determine its risk-based capital requirement. Four categories of risk are analyzed in arriving at an insurer's minimum capital requirement: asset, credit, underwriting, and off-balance sheet.

Risk financing  Achievement of the least-cost coverage of an organization's loss exposures, while assuring post-loss financial resource availability. The risk financing process consists of five steps: identifying and analyzing exposures, analyzing alternative risk financing techniques, selecting the best risk financing technique(s), implementing the technique(s), and monitoring the selected technique(s). Risk financing programs can involve insurance rating plans, such as retrospective rating, self-insurance programs, or captive insurers.

Risk purchasing group  A group formed in compliance with the Liability Risk Retention Act of 1986 for the purpose of negotiating for and purchasing insurance from a commercial insurer. Unlike a risk retention group which actually bears the group's risk, a risk purchasing group merely serves as a vehicle for obtaining coverage, typically at favorable rates and coverage terms.

Risk quantification  Measurement of risk to make risk financing decisions. Loss frequency and loss severity are the dimensions of measurement. The value of loss and the variation in value from one period to the next will quantify the impact of the risk.

Risk retention  Planned acceptance of losses by deductibles, deliberate noninsurance, and loss-sensitive plans where some, but not all, risk is consciously retained rather than transferred.

Risk Retention Act  Federal legislation that facilitates the formation of purchasing groups and group self-insurance for commercial liability exposures.

Risk retention group  A group self-insurance plan or group captive operating under the auspices of the Liability Risk Retention Act of 1986. A risk retention group can cover the liability exposures, other than workers compensation, of its owners.

Risk sharing  Also known as "risk distribution," risk sharing means that the premiums and losses of each member of a group of policyholders are allocated within the group, based on a predetermined formula. Risk is considered to be shared if there is no policyholder-specific correlation between premiums paid into a captive, for example, and losses paid from the captive's reserve pool.

Self-insurance  A formal system whereby a firm pays out of operating earnings or a special fund any losses that occur that could ordinarily be covered under an insurance program. The moneys that would normally be used for premium payments may be added to this special fund for payment of losses incurred.

Self-insured retention  The amount of each loss for which the insured agrees to be responsible before a commercial insurer begins to participate in a loss. This is in contrast to a deductible in that the commercial insurer is responsible for losses even within the deductible limit. Although the deductible insurer looks to the insured for reimbursement of such losses, the insurer's responsibilities are unaffected by the insured's failure to reimburse.

Settlement lag  The span of time between the first report of a claim and the date on which it is ultimately settled.

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 closely approximate 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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