Glossary of insurance terms

Accident year experience

The matching of all claims occurring (regardless of when reported or paid) during a given 12 month period with all premium earned over the same period.

Acquisition cost

The total of net commission and operating expenses incurred in the generation of net earned premium and often expressed as a percentage of net earned premium. The operating expenses are after the transfer of direct costs for claims settlement expenses which are included in net incurred claims expense.

Attritional claims ratio

Total of all claims with a net cost of less than US$2.5 million as a percentage of net earned premium.

Admitted insurance

Insurance written by an insurer that is admitted (or licensed) to do business in the (US) state in which the policy was sold. 


One who negotiates contracts of insurance or reinsurance as an insurance company's representative i.e. the agent's primary responsibility is with the insurance carrier and not the insurance buyer.


One who negotiates contracts of insurance or reinsurance on behalf of an insured party, receiving a commission from the insurer or reinsurer for placement and other services rendered. In contrast with an agent, the broker's primary alliance is with the insurance buyer not the insurance carrier.


In relation to a Lloyd’s member, the maximum amount of insurance premiums (gross of reinsurance but net of brokerage) which a member can accept. In relation to a syndicate, the aggregate of each member’s capacity allocated to that syndicate.

Casualty insurance

Insurance that is primarily concerned with the losses resulting from injuries to third persons or their property (i.e. not the policyholder) and the resulting legal liability imposed on the insured. It includes, but is not limited to, general liability, employers’ liability, workers’ compensation, professional liability, public liability and motor liability insurance.

Catastrophe reinsurance

A reinsurance contract (often in the form of excess of loss reinsurance) that, subject to specified limits and retention, compensates the ceding insurer for losses in  related to an accumulation of claims resulting from a catastrophe event or series of events.


The amount payable under a contract of insurance or reinsurance arising from a loss relating to an insured event.

Claims incurred

The aggregate of all claims paid during an accounting period adjusted by the change in the claims provision for that accounting period.

Claims provision

The estimate of the most likely cost of settling present and future claims and associated claims adjustment expenses plus a risk margin to cover possible fluctuation of the liability.

Claims ratio

Net claims incurred as a percentage of net earned premium.

Combined operating ratio

The sum of the claims ratio, commission ratio and expense ratio. A combined operating ratio below 100% indicates profitable underwriting results. A combined operating ratio over 100% indicates unprofitable underwriting results.

Commercial lines

Refers to insurance for businesses, professionals and commercial establishments.


Fee paid to an agent or broker as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods.

Commission ratio

Net commission expense as a percentage of net earned premium.

Credit spread

The difference in yield between a corporate bond and a reference yield (e.g. LIBOR, BBSW or a fixed sovereign bond yield). 

Credit spread duration

The weighted average term of cash flows for a corporate bond. It is used to measure the price sensitivity of a bond to changes in credit spreads.  


The amount or proportion of some or all losses arising under an insurance contract that the insured must bare.

Deferred acquisition costs

Acquisition costs relating to the unexpired period of risk of contracts in force at the balance sheet date which are carried forward from one accounting period to subsequent accounting periods.  

Excess of loss reinsurance

A form of reinsurance in which, in return for a premium, the reinsurer accepts liability for claims settled by the original insurer in excess of an agreed amount, generally subject to an upper limit.

Expense ratio

Underwriting and administrative expenses as a percentage of net earned premium.

Facultative reinsurance

The reinsurance of individual risks through a transaction between the reinsurer and the cedant (usually the primary insurer) involving a specified risk.

General insurance

Generally used to describe non-life insurance business including property and casualty insurance.

Gross claims incurred

The amount of claims incurred during an accounting period before deducting reinsurance recoveries.

Gross earned premium (GEP)

The total premium on insurance earned by an insurer or reinsurer during a specified period on premiums underwritten in the current and previous underwriting years.

Gross written premium (GWP)

The total premium on insurance underwritten by an insurer or reinsurer during a specified period, before deduction of reinsurance premium.

Incurred but not reported (IBNR)

Claims arising out of events that have occurred before the end of an accounting period but have not been reported to the insurer by that date.

Insurance profit

The sum of the underwriting profit (loss) and investment income on assets backing policyholders’ funds.

Insurance profit margin

The ratio of insurance profit to net earned premium.

Inward reinsurance

The reinsurance or assumption of risks written by another insurer.

Large individual risk and catastrophe claims ratio

The aggregate of claims each with a net cost of US$2.5 million or more as a percentage of net earned premium.

Lenders’ mortgage insurance (LMI)

A policy that protects the lender (e.g. a bank) against non-payment or default on a residential property loan.

Lead/non-lead underwriter

A lead underwriter operates in the subscription market and sets the terms and price of a policy. The follower or non-lead is an underwriter of a syndicate or an insurance company that agrees to accept a proportion of a given risk on terms set by the lead underwriter.

Lender placed insurance (LPI)

Coverage obtained by the lender when the customer's voluntary home building insurance has lapsed, been cancelled or proof of the customer's insurance has not been received. Coverage is required by the mortgage contract to protect the lender's interest in the property if damage was to occur and the customer had not maintained adequate coverage.

Letters of credit (LoC)

Written undertaking by a financial institution to provide funding if required.


Insurance and reinsurance market in London. It is not a company but is a society of individuals and corporate underwriting members.

Lloyd's managing agent

An underwriting agent which has permission from Lloyd's to manage one or more syndicates and carry on underwriting and other functions for a member.


Classes of insurance business involving coverage for risks where notice of a claim may not be received for many years and claims may be outstanding for more than one year before they are finally quantifiable and settled by the insurer.

Managing General Agent (MGA)

A wholesale insurance agent with the authority to accept placements from (and often to appoint) retail agents on behalf of an insurer. MGAs generally provide underwriting and administrative services such as policy issuance on behalf of the insurers they represent. Some may handle claims.

Maximum event retention (MER)

An estimate of the largest loss to which an insurer will be exposed (taking into account the probability of that loss at a return period of one in 250 years) due to a concentration of risk exposures, after netting off any potential reinsurance recoveries and inward and outward reinstatement premiums.

Multi peril crop scheme

US federally regulated crop insurance protecting against crop yield losses by allowing participating insurers to insure a certain percentage of historical crop production.

Net claims incurred

The amount of claims incurred during an accounting period after deducting reinsurance recoveries.

Net claims ratio

Net claims incurred as a percentage of net earned premium.

Net earned premium (NEP)

Net written premium adjusted by the change in net unearned premium for a year.

Net investment income

Gross investment income net of foreign exchange gains and losses and investment expenses.

Net written premium (NWP)

The total premium on insurance underwritten by an insurer during a specified period after the deduction of premium applicable to reinsurance.

Outstanding claims provision

The amount of provision established for claims and related claims expenses that have occurred but have not been paid.

Personal lines

Insurance for individuals and families, such as private motor vehicle and homeowners insurance.

Policyholders’ funds

Those financial assets held to fund the insurance provisions of the Group.


Amount payable by the insured or reinsured in order to obtain insurance or reinsurance protection.

Prescribed capital amount (PCA)

This comprises the sum of the capital charges for asset risk, asset concentration risk, insurance concentration risk and operational risk as required by APRA. The PCA must be disclosed at least annually.

Probability of adequacy

A statistical measure of the level of confidence that the outstanding claims provision will be sufficient to pay claims as and when they fall due.

Proportional reinsurance

A type of reinsurance in which the original insurer and the reinsurer share claims in the same proportion as they share premiums.

Prudential capital requirement (PCR)

The sum of the Prescribed Capital Account (PCA) plus any supervisory adjustment determined by APRA. The PCR may not be disclosed.


The amount of claims recovered from reinsurance, third parties or salvage.


An agreement to indemnify a primary insurer by a reinsurer in consideration of a premium with respect to agreed risks insured by the primary insurer. The enterprise accepting the risk is the reinsurer and is said to accept inward reinsurance. The enterprise ceding the risks is the cedant or ceding company and is said to place outward reinsurance.

Reinsurance to close

A reinsurance agreement under which members of a syndicate, for a year of account to be closed, are reinsured by members who comprise that or another syndicate for a later year of account against all liabilities arising out of insurance business written by the reinsured syndicate.


The insurer that assumes all or part of the insurance or reinsurance liability written by another insurer. The term includes retrocessionaires, being insurers that assume reinsurance from a reinsurer.


That amount of liability for which an insurance company will remain responsible after it has completed its reinsurance arrangements.


Reinsurance of a reinsurer by another reinsurance carrier.


Classes of insurance business involving coverage for risks where claims are usually known and settled within 12 months.

Solvency Ratio

Ratio of net tangible assets to net earned premium. This is an important industry indicator in assessing the ability of general insurers to settle their existing liabilities.

Stop loss reinsurance

A form of excess of loss reinsurance which provides that the reinsurer will pay some or all of the reassured’s losses in excess of a stated percentage of the reassured’s premium income, subject (usually) to an overall limit of liability.

Surplus (or excess) lines insurers

In contrast to "admitted insurers", every (US) state also allows non-admitted (or "surplus" or "excess lines") carriers to transact business where there is a special need that cannot or will not be met by admitted carriers. The rates and forms of non-admitted carriers generally are not regulated in that state, nor are the policies back-stopped by the state insolvency fund covering admitted insurance. Brokers must inform insurers if their insurance has been placed with a non-admitted insurer.

Survival ratio

A measure of how many years it would take for dust disease claims to exhaust the current level of claims provision. It is calculated on the average level of claims payments in the last three years.


A member or group of members, underwriting insurance business at Lloyd’s through the agency of a managing agent.

Treaty reinsurance

Reinsurance of risks in which the reinsurer is obliged by agreement with the cedant to accept, within agreed limits, all risks to be underwritten by the cedant within specified classes of business in a given period of time.


The process of reviewing applications submitted for insurance or reinsurance coverage, deciding whether to provide all or part of the coverage requested and determining the applicable premium.

Underwriting expenses

The aggregate of policy acquisition costs, excluding commissions, and the portion of administrative, general and other expenses attributable to underwriting operations.

Underwriting result

The amount of profit or loss from insurance activities exclusive of net investment income and capital gains or losses.

Underwriting year

The year in which the contract of insurance commenced or was underwritten.

Unearned premium

The portion of a premium representing the unexpired portion of the contract term as of a certain date.

Written premium

Premiums written, whether or not earned, during a given period.