Actuary
An actuary analyzes, evaluates and manages statistical information to determine rates.
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Admitted Insurance Company
A company is admitted when it has been licensed and accepted by the appropriate governmental regulator of a state.
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Alternative Risk Transfer
Alternative risk transfer (ART) is an alternative to traditional insurance. A company’s risks are funded by means other than the purchase of insurance through an agent broker from an admitted insurer. ART forms include surplus lines placement, self-insured trusts, risk retention groups and captives. The alternative market seeks to avoid costs associated with insurance brokerage and allow a business to finance its own risk.
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Association
Any legal organization of sole proprietorships, corporations, partnerships, limited liability companies or associations that has been in continuous existence for at least one year and has the power to vote all of the outstanding voting securities for its captive.
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Capacity
Capacity is determined by the amount of surplus an insurer is willing to put at risk for the payment of losses experienced by their insureds. An insurer has a fixed amount of premium they are willing to write associated with their capacity.
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Cede
To cede is to transfer part or all of a risk to another company (reinsurer). A fee is charged for the service of accepting that risk.
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Domicile
“Domicile” means the state or area where the captive resides. So, the captive is domiciled (or governed by the laws and formed) in that state.
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Expense Ratio
The percentage of premium not directed to the coverage of losses but rather to the payment of expenses associated with writing and servicing the risk.
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Facultative
Facultative coverage is a form of reinsurance where the reinsurer accepts or rejects individual risks. If a member of a group captive has an individual need for additional coverages not shared by the group, these coverages can be placed facultatively with the captive’s reinsurance treaty.
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Federal Risk Retention Act
Revised and enacted in 1981, this law makes allowances for captive and risk retention groups to form and operate. The legislation preempts restrictive and prohibitive state laws that would preclude insurers from giving preferential rates, terms and conditions to groups seeking liability insurance coverage. The act provides definitions to aid in gaining an understanding of RRGs.
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Fronting/Issuing Company
A fronting company is a commercial insurance company licensed and admitted in the state(s) where a risk to be insured is located. The captive contracts with the front to issue its policy to the insured(s). The front then transfers all that risk to the captive and/or reinsurers through a reinsurance agreement known as a fronting agreement. Fronting companies provide various levels of involvement from simply providing the paper for the policies to complete underwriting and issuance. Of course, their fees vary to match the depth of their services. The result is insurance policies issued on admitted paper, but with the risk associated with the coverage retained by the captive.
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Indemnify
Indemnify means “to make whole,” or return one to the state that occurred before the loss incident. Insurers generally indemnify two parties: persons damaged by a liability loss, and the insured damaged by a property loss.
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Industrial Insured
An insured which procures the insurance of any risk or risks by use of the services of a full-time employee acting as an insurance manager or buyer. An industrial insured must have aggregate annual premiums for insurance on all risks totaling at least $25,000 and have at least 25 full-time employees.
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Loss Adjustment Expense
LAE means all expenditures of an insurer associated with the adjustment, recording and settlement of claims other than the indemnity itself. There are two types of LAE. Allocated Loss Adjustment Expense (ALAE) is identified by the claim file in the insurers record, such as attorney’s fees. (ULAE) Unallocated Loss Adjustment Expense is the fixed cost an insurer bears to be able to process claims irregardless of the individual claims.
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Loss Ratio
The loss ratio is the incurred losses of a captive compared to the earned premiums expressed as a percentage.
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Member Organization
A member organization is a sole proprietorship, corporation, partnership, or association as a mutual insurer.
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Parent
A parent is a corporation, partnership, or individual that directly or indirectly owns, controls or holds with power to vote more than 50% of the outstanding voting securities of a pure captive insurance company.
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Pure Premium
The portion of the premium that covers losses and related expenses
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Quota Share
A form of insurance wherein all insurance parties (primary and reinsurers) share a portion of all losses on an individual basis. Quota share is credited with being the original form of insurance. The story goes that a group of ship owners and financiers were sitting around in a little coffee shop in London called Lloyd’s
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Reinsurance
Reinsurance is the concept of one insurance company being insured by another. There exists a primary insurer and then a secondary insurer to guarantee that a business can cover its claims in case of a crisis.
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Reinsurance Treaty
An agreement between a reinsurer and a ceding insurer setting forth details of the reinsurance agreement.
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Risk Retention Group
A form of captive insurance specifically designed for those insureds who share the same risks. An example of those forming RRGs would be doctors.
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Self Insurance
The amassing of funds by an individual or organization to meet his or its insurance needs and to absorb fluctuations in the amount of loss, the losses being charged against the funds accumulated.
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Surplus
Surplus is an insurance company’s assets in excess of its liabilities. Captives are subject to statutorily required minimum surplus levels as well as practical requirements for premium to surplus ratios.
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Third Party Administrator (TPA)
A TPA is an independent company which provides services to the insurance company (captive) for a fee. Typical services provided include claims reporting, administration, and management; and/or underwriting and policy issuance. Typical TPA firms include claims adjusting firms and managing general underwriters (MGU) and managing general agents (MGA).
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Underwriting
Underwriting refers to the issuing and signing of an insurance policy by a party to assume liability in case of specified losses.
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