Accreditation
Results when a state meets all accreditation standards set by the National Association of Insurance Commissioners (NAIC) – its model acts and periodic examination of an insurance department’s policies. Commercial insurers domiciled in an accredited state will be acceptable “security” in other states.

Admitted Insurer
An insurer legally authorized by proper insurance governmental authorities to conduct business in the state or country where the insured exposure is located.

Admitted Reinsurer
A reinsurer legally authorized by proper insurance governmental authorities to conduct business in the state or country where the insurer is located.

Agency Captive
A company formed by an insurance agency or brokerage firm to reinsure a portion of third party risks, i.e., insured clients, through that company. Loosely tagged as a “captive” but more appropriately referred to as an “agency-owned reinsurance company.”

Aggregate Deductible
Also called “annual aggregate deductible,” it is the maximum dollar amount the insured can pay as deductibles usually over one year or a specified length of time. The insured is thereby protected against a high frequency of losses.

Aggregate Limit
Also called “annual aggregate limit,” it is the maximum dollar amount the insurer can pay in relation to its liability for incurred losses usually over one year or a specified length of time.

Aggregate Stop Loss Reinsurance
Depending on the coverage limit, this protective type of reinsurance caps the insurer’s annual aggregate loss . Losses incurred after the aggregate deductible or attachment point are paid by the reinsurer.

AICPA
The American Institute of CPAs (AICPA) disseminates to its members rules on how to interpret captive financial information. All auditors are required to be AICPA members. Off-the-record, many consider the AICPA as the unofficial rival of the Financial Accounting Standards Board or FASB. See also EITF.

Alien Insurer
Insurer formed under the legal jurisdiction of a foreign country.

Allocated Loss Adjustment Expense (ALAE)
Insurer’s loss adjustment expenses in connection with specific claims. Examples of ALAE are fees paid to attorneys, investigators and expert professionals. See also loss adjustment expense.

Alternative Minimum Tax (AMT) (simplified explanation)
Supplementary U.S. Federal income tax paid by the insurer when its GAAP, or statutory total income, is substantially greater than its taxable income.

Amerco
Ruled in January 1991, it is one of three cases (see also Harper and Sears) that considered premiums, paid to wholly owned insurance companies, as deductible expenses.

Association Captive
A general term that refers to all types of group-owned captives or insurers that belong to two or more owners. Owners are usually members of an industry trade association. An association, in some instances, may also be the captive’s owner.

Attachment Point
The critical point at which excess insurance or reinsurance limits take in effect on the basis of a specific or aggregate stop loss.

Authorized Non-Admitted Reinsurer
An unlicensed reinsurer, with an established security trust fund, given authority by the state or country to enter into reinsurance transactions.

Branch Profits Tax (simplified explanation)
Tax imposed at a rate of 30% on the dividend equivalent amount, payable by foreign captives, which is derived from profits of business operations in the U.S.

Brother-Sister Relationship
Term coined during the Humana Tax Case, which refers to the separation of subsidiaries owned by the same parent, i.e., a captive insurance company and an operating subsidiary

Burning Cost
Refers to the ratio of incurred reinsured losses to the theoretical amount of premium for the same period. Used to project future conditions or study former reinsurance experiences.

Capacity
The extent of an insurer’s financial strength to issue contracts. It is oftentimes determined by the highest amount of issuable insurance for a given risk or, in specific situations, by the maximum volume of insurance (or reinsurance) business it is ready and available to accept.

Capital
Capital in a captive differs from other forms of insurance capital. The former is treated by owners as risk capital that is available to be utilized by the business’ adverse results. Defined as one of three different things: 1. Initial amount necessary to set up a captive, 2. Total amount of paid-in along with other forms such as letters of credit, and 3. Sum of two capital forms plus accumulated surplus.

Captive Insurance Company
An insurance company, closely held, supplied by and controlled by its owners. The principal beneficiaries are the original insureds who have direct involvement and influence over the company’s major operations, including but not limited to, underwriting, investment, and claims management policy.

Captive Insurance Company Association (CICA)
A trade association consisting of captive insurers that offer networking, educational opportunities and support to its members as well as interested parties regarding captives, regardless of purpose.

Captive Insurance Company Reports (CICR)
The monthly newsletter published by the International Risk Management Institute in cooperation with the Tillinghast business of Towers Perrin. The CICR covers global developments in the captive industry.

Captive Management Company
See management company.

Cedant (Ceding Insurer)
A cedant is an insurer that underwrites and issues an original, primary policy to an insured and contractually transfers or cedes a portion of the risk to a reinsurer.

Ceding Commission
Amount paid for incurred expenses such as underwriting and business acquisition, given to the ceding insurer or reinsurer by the assuming reinsurer (other entity possibly a captive).

Cession
Written by the ceding or primary insurer, cession refers to the transfer of all or a portion of the insurance/reinsurance to a reinsurer. A retrocession, on the other hand, is the cession of reinsurance by reinsurers.

Claims-Made Policy
Insurance/Reinsurance contract provision that coverage is triggered by the date the insured first learned about the possibility of a claim and informed the insurer of such possibility. The policy period for a claims-made policy will extend to a “retroactive date,” meaning years prior to the purchase of the policy. Hence, the policy will provide coverage for claims made today as a result from actions or events all the way back to that retroactive date. In a claims-made policy, the claim is required to be made within the policy period or an extended reporting period (“ERP”).

Claims-Made Reinsurance
Provides for reinsurance of claims-made policies on a claims-made basis.

Claims-Made Tail
Refers to liability losses not yet reported to the insurer. See also IBNR.

Commercial Insurer/Reinsurer
An insurer that sells insurance to all interested parties. Profits benefit shareholders.

Commission
A certain percentage of premium retained as remuneration by insurance intermediaries or companies. Other types of commission also exist, usually based on profits and volume of business placed. Also known as acquisition cost.

Commutation
Pertains to a reinsurance contract’s dissolution or termination; profits or losses in the contract are to be allocated.

Confidence Intervals (Levels)
A concept in statistics that refers to the measure of the degree of confidence, which, as an example, predicts whether total losses will be at or below a specific amount in a given time period, usually one year. Interpreted as the long-run probability, it seeks to ensure that the estimates will not exceed simulated periods.

Controlled Foreign Corporation (CFC) (simplified explanation)
A foreign captive whose U.S. shareholders own more than 25% (50% for companies in Europe) of voting control.

Convention Blank
Made and developed by the National Association of Insurance Commissioners (NAIC), a convention blank is a report form that presents annual captive financial results. It is a requirement of some states and mostly utilized by group-owned captives.

Converted Losses
The product of rateable losses and a loss conversion factor.

Credit Life Captive
Usually formed by a bank holding company, auto dealership, or a mortgage company, a credit life captive underwrites credit life insurance.

Credit Life Insurance
A life insurance policy that covers payment of a debt should the debtor or borrower dies. It is meant to protect the deceased borrower’s dependents. The policy’s face value decreases relatively with an outstanding loan amount as the loan is paid off and both reach zero value.

Deductibility
In connection with tax purposes, deductibility concerns whether or not the “premiums” paid to a group-owned captive are for deduction as an operating expense in the same year payment is made. There are tax cases won that give light to some deductibility arguments. See Amerco, Harper, Humana and Sears.

Deductible
Either on a per occurrence (specific) or annual aggregate basis, a deductible is the amount of first-dollar loss that the insured retains prior to the primary layer of insurance coverage response.

Deductible Buyback
Most commonly used for single-owner captives, a deductible buyback refers to using a captive to fund some or all of an entity’s deductible.

Discounted Loss Reserves
Implemented in 1987, loss reserves are required to be discounted when calculating U.S. Federal income tax for insurance companies. Discounted loss reserves reflect anticipated future investment income. It is an estimate of the amount of ultimate loss reserves. Discounting is mixed for GAAP purposes. See Tax Reform Act.

Dividends
In the captive industry, there are two kinds of dividends: 1. Policyholder dividends, which through the insurance premium process, are paid back to the insureds. Considered as before-tax expenses for the captive. 2. Shareholder dividends, on the other hand, are paid to the shareholders of the captive after tax and then again taxed to the shareholder.

Domestic Insurer
Refers to an insurer formed under the legal jurisdiction of the state or country where the insured exposure is located.

Domicile
Refers to the state or country where the insurer is legally authorized to operate. Typically, captive insurance companies manage their business in their state or country.

Earned Premium
The portion of an insurance written premium considered to be “earned” by the insurer, on the basis of the part of the policy period that the insurance has taken effect, and within the time by which the insurer has been exposed to loss.

EITF
Abbreviation for Emerging Issues Task Force of the AICPA. The EITF is responsible to warn in advance any new interpretations of accounting practices and announces discussion and commentary.

Election (simplified explanation)
Refers to the opportunity presented to a foreign captive to directly settle U.S. income taxes rather than allow its shareholders to shoulder the obligation.

Engaged in Trade or Business (ETB) (simplified explanation)
A foreign captive that operates onshore is said to officially be ETB, which entails that it is fully obliged to pay taxes in the U.S.

Event
Refers to an incident or occurrence that may result or may not result to officially becoming a claim. Events reporting are allowed for some claims-made coverages.

Excess Insurance
Provided coverage over the limit of the primary policy or the self-insured retention (SIR) of the insured; usually the same with coverage provided in the primary layer.

Excess of Loss Reinsurance
Provided coverage to the ceding insurer or captive for exceeding losses, on a stated per claim retained limit or attachment point.

Excess/Surplus Lines Insurance
In adherence to the excess or surplus lines provisions stated in the state insurance law, businesses may be positioned in non-admitted markets by licensed brokers on an unregulated basis. There are captives that qualify as E&S companies. Brokers pay for local premium taxes.

Expense Ratio
The quotient between the total expenses and net written premiums. Contained within the total expenses are acquisition, writing and policy servicing costs. Losses or reinsurance are not included.

Experience Rating
Refers to one of the cost-plus methods in rating insurance. “Experience” pertains to the losses incurred by the insured. The final cost, being largely a function of the “experience,” and its balance an attribute of the insurer’s expenses.

Exposure (Exposure Base)
Expressed as units, exposure refers to the measure of risk in terms of loss, i.e., assets, revenues, payroll, etc. Also called an “exposure base,” it is used in conjunction with lost cost to come up with a pure premium.

Facultative Reinsurance
Refers to reinsurance of individual risks based on a case-by-case analysis.

FAS 113
Abbreviation for Financial Accounting Statement 113. Contained within the statement are reinsurance accounting standards that require risk transfer in reinsurance transactions. FAS 113 makes sure that reinsurance receivables and prepaid reinsurance premiums are reported as assets.

FAS 115
Abbreviation for Financial Accounting Statement 115. Contained within the statement are standards for asset evaluation. FAS 115 sees to it that a captive’s equity investments and/or debt securities are classified and accounted for under three categories, which are held-to maturity, trading securities or available-for-sale securities.

FASB
Abbreviation for Financial Accounting Standards Board. The FASB sets standards of financial accounting and reporting to educate and guide the general public, including issuers, auditors, and other financial information users.

Feasibility Study (for captives)
A comprehensive analysis that makes use of financial modelling, business plans and comparison to other alternatives. It aims to look into the potential or continued viability of a captive insurance company.

Federal Excise Tax
Imposed tax on premium payments to foreign insurers/reinsurers, which is 4% on direct premiums and 1% on reinsurance premiums. A federal excise tax can be removed on either of these two conditions: 1. If the captive makes an election to be taxed as a U.S. company, or 2. If the transaction is arguably a transfer of self-insurance reserves and not actually an insurance that does not claim premium deductibility.

Fees
Refer to fixed cost charges in comparison with percentage charges known as commissions. Captives prefer fee-based charges yet express the total as a premium percentage.

Financial Modelling
Formed under a variety of scenarios pertaining to finance and financial loss, financial modelling generate pro forma financial statements over a multi-year period.

Financial Reinsurance
A contract of reinsurance that reflects investment income in the pricing; also reflected on the risk transferred is an aggregate limit. Usually valid for multiple years, the price on the contract is based on the current value of anticipated future losses at an aggregate limit. In recent times, however, additional risk elements have been included on these contracts.

Fronting (Front)
Strategy used when insurance evidence is needed by captive insureds. For a predetermined price, the insurer agrees to serve as the front, and will issue a written policy to cover a risk or a small percentage of it. The insurer, or front, may also reinsure the majority or all of the risk to a captive and usually offers insurance services on behalf of the captive.

Funded Self-Insurance
Compared with “unfunded” or “pay as you go” self-insurance, a funded self-insurance is a more formalized approach. It involves the creation of an earmarked asset account to match loss reserves.

Generally Accepted Accounting Principles (GAAP)
A consensus among those in the accounting profession led in the development of GAAP, which is an accounting method that contains standard procedures and concepts to help in the preparation of various financial statements and recognize income as it is earned. Compare to statutory accounting principles.

Gross Written Premium
Refers to a premium paid by the original insured. Also called “original gross premium.”

Group-Owned Captive
Refers to a captive insurance company having more than one owner. See also association captive.

Guaranteed Cost Premium
Self-explanatory term for a premium determined prospectively. Cost is locked for the policy period and the only way to change the premium is upon underlying exposure audit.

Harper
Ruled in January 1991, it is one of three cases (see also Amerco and Sears) that considered premiums, paid to wholly owned insurance companies, as deductible expenses.

Humana
Refers to a tax case won in 1989 where the concept of deductibility was firmly established. Premiums paid by or for brother-sister subsidiaries to a captive insurance subsidiary were deemed deductible. Parent premiums, on the other hand, were not.

Incurred But Not Reported (IBNR) Losses
Incurred losses not yet reported to the insurer as of a specific date. Also referred to as “pure IBNR,” which is parallel to a claims-made tail. IBNR further deals with future development on case reserves and loss incurred on reopened claims, hence, the reference to RBNE (reserved but not enough). IBNR is usually measured by an estimated casualty actuary.

Incurred Losses
Refers to losses, adjusted or paid, which occur within a specified time period. IBNR not included in reported losses but are a part of ultimate incurred losses.

Industrial Insured
An industrial insured refers to an insurance buyer with large premiums and calls for the employment of a risk or insurance manager. An excellent analogy would be, industrial insured is to an insurance commissioner as a “sophisticated investor” is to the Securities and Exchange Commission.

Letter of Credit (LOC)
A bank-issued financial guarantee that makes sure that funds will be ready upon request. LOCs are utilized by captives for a couple of possible purposes: 1. to be used as capital in lieu of or in addition to cash or other securities, and/or 2. to securitize the reinsurance receivable created by a non-admitted reinsurer, say for example, the captive, for the fronting insurer.

Liability Risk Retention Act
Authority given by the U.S. Federal legislation to allow the formation of risk retention groups and purchasing groups. Required to be operating onshore, these groups can be tasked to perform liability coverage writing not including workers compensation and personal risk liability. Moreover, only the ownership interest of their insureds can be included.

Limited Losses
Pertains to the quantity or amount of losses of a claim in a particular occurrence that is limited only to a specific or given value. See also retention.

Loss Adjustment Expenses (LAE)
Additional charges and fees incurred upon settlement of claims. Fees involving legal, professional and research aspects are all LAE, including allocated and unallocated loss adjustment expenses.

Loss Conversion Factor
Percentage application to rateable losses in terms of retrospective rating in order to compensate for unallocated loss adjustment expenses.

Loss Development
Trends and/or discrepancies reflected by the increase in losses, between initially reported amounts of losses at succeeding dates of evaluation and at ultimate disposition.

Loss Ratio (Ultimate)
The ratio of ultimate losses paid out in claims plus adjustment expenses divided by the total earned premiums.

Loss Reserve
Liability estimate for all claims due but not yet paid by an insurer. This estimate includes loss adjustment expenses (LAE) and incurred but not reported losses (IBNR).

Malone & Hyde
Pertains to the tax case in which taxpayers failed to win even after numerous appeals. The court ruled the rejection of deductibility of premiums paid to a single-owner captive, giving the reason of parental guarantees, among other arguments.

Maximum Foreseeable Loss (MFL)
Also called “probable maximum loss” or PML, the MFL is the worst anticipated loss most likely to happen due to a single event.

Maximum Possible Loss (MPL)
The worst anticipated loss most probable to occur due to a single event.

Membership Accounting
Presentation of financial models for each participant of the captive. It features account history and status as well as the value each participant will receive upon liquidation of the captive. The financial model is likewise utilized to show future scenarios and strategies in terms of losses, profits and dividends.

Mutual Insurance Company (Mutual)
An insurer or insurance company referred to as a “mutual” and owned by its policyholders. There is no so-called capital in a mutual, however, an “initial contributed surplus” is present, which basically is just the same concept.

NAIC
Abbreviation for National Association of Insurance Commissioners. Captive owners may be wary of the NAIC because its model acts suggest anti-captive and anti-fronting measures. Furthermore, it is the requirement of the NAIC to accredit states, which can also be worrisome for captive owners.

Net Written Premium
Refers to the written premium a captive receives. It is computed minus the deductions for commissions and ceded reinsurance.

Non-Admitted Insurer
Refers to an insurer that is not licensed and authorized to conduct business in the state or country where the insured exposure is located.

Odeco
Refers to a tax case fought and won by taxpayers on the ground of unrelated business that eventually led to the captive’s fall.

Original Gross Premium
The original gross premium is the total premium paid before taxes, commissions and other expenses have been deducted.

Paid Losses
Paid losses pertain to a portion of incurred losses shouldered by the insurer in actuality.

Payout Pattern
Varying by line of insurance, a payout pattern pertains to the assumed timing of payments for losses.

Per-Loss Deductible
Determines the amount of first-dollar loss settled by the insured per loss.

Pool
A gathering of insurance underwriters that follows prespecified guidelines. Insurers/reinsurers equally share among themselves the premiums, expenses and losses.

Portfolio Transfer
A financial reinsurance form; a portfolio transfer sends some or all of the liabilities and enough assets a captive incurred to a reinsurer or related captive that expressed willingness to accept.

Primary Insurance (Layer)
Refers to the first layer of coverage, which provides for the first-dollar loss, not including deductibles, up to the primary policy’s limit.

Proportional/Pro Rata Reinsurance
A term that encompasses all types of quota share and surplus reinsurance. In a proportional/pro rate reinsurance, losses and premiums are proportionally shared by the reinsurer and the ceding insurer.

Prospective Aggregate Covers
Coverage of reinsurance for a given maximum amount of loss (capping risk of the reinsurer) for a future period. The current value of the aggregate limit of losses and assumed loss payout pattern are reflected on the premium charged by the reinsurer. See financial reinsurance.

Purchasing Group
Comprising of two or more individuals, a purchasing group aims to purchase liability insurance and gain benefits or discounts available only to groups. Every group member owns a unique policy and therefore, does not share the risk with others. The Liability Risk Retention Act made the formation of purchasing groups possible. A purchasing group may only be insured by licensed insurers onshore.

Pure Captive
A captive insurance company is considered “pure” when it is owned by only one corporate owner. Also referred to as a “single parent captive.” The sole owner principally insures only the risks of the parent organization or its subsidiaries.

Pure Premium
Refers to the portion of the total premium required to shoulder anticipated losses and allocated loss adjustment expense (ALAE).

Quota Share Reinsurance
Using the percentage agreed upon as basis, quota share reinsurance involves the reinsurer and ceding insurer in sharing the pro rata premium (minus an expense allowance) and losses.

Rateable Losses
Subject to a maximum per-loss amount or loss limitation, rateable losses are loss dollars incurred by the insured, including paid and outstanding losses.

Reciprocal Insurance
Through a mutual exchange of insurance contracts, individual or entities make use of reciprocal insurance as a means of protecting each other against losses of specified kinds.

Reciprocal Insurer
A reciprocal insurer facilitates an exchange of insurance contracts under the management of an attorney-in-fact. It is an unincorporated association similar to an insurance company in a stock or mutual format.

Related Person Insurance Income (RPII) (simplified explanation)
Pronounced as “rippy,” RPII is, to some extent, a complicated subject. Basically, it is the premium income given to a foreign captive or insurance company brought about by policies issued to shareholders. If a captive’s income is considered to be less than 20% RPII, it is said that a more favorable U.S. federal income tax treatment can be expected.

Reported Losses
The sum of paid losses and case reserves, not including IBNR.

Retention
1. System of loss financing within an organization, utilizing self-insurance, deductibles or non-insurance agreements. Can be considered active/intentional or passive/unintentional. 2. The amount per loss retained by an insurer/reinsurer. 3. Typically expressed as a percentage, it is the amount retained by the servicing insurer in some companies belonging to the life and benefits industry.

Retroactive Date
In a claims-made coverage, it is the date after which losses may occur and be brought as claims against a claims-made basis liability policy.

Retrocedent
In a retrocession, the retrocedent pertains to the ceding reinsurer.

Retrocessionaire
A reinsurer of a reinsurer.

Retrospective Rating
A loss-sensitive rating plan that adjusts the premium, based on paid or incurred losses, to reflect the insured’s current loss experience. The premium’s ultimate amount is totalled after the evaluation of all losses. Evaluations and adjustments are periodically performed upon expiration of the policy. Retrospective rating is a combination of actual losses and graded expenses to come up with a premium that more or less reflect the actual current experience of the insured.

Risk-Based Capital
Necessary capital requirements based on NAIC’s complex formula to ensure that regulatory thresholds are met. Underwriting risk, credit risk and investment risk are reflected in the calculation. This, however, does not apply to foreign captives but can be utilized as a benchmark.

Risk Distribution
A term encountered in tax-deductibility discussions. Risk distribution happens when the captive has enough individual exposures insured. Risk distribution interpretations vary amongst taxpayers and the IRS.

Risk Factor
As per Tillinghast Recognized and Accepted Captive Standards, risk factor is the captive’s retained maximum per loss risk ratio over capital and surplus. It is the yardstick that measures the potential effect of a single event’s maximum loss.

Risk Retention Group (RRG)
An insurer licensed to operate under the legal jurisdiction of a state; its primary role is to assume and spread all liability coverages, not including personal risk liability (i.e., private passenger auto) and workers’ compensation. An RRG is required to be owned by its policyholders that are likewise insured by the group.

Risk Shifting
A term encountered in tax-deductibility discussions. Risk shifting happens when an insured transfers the risk of loss to a separate party.

Self-Insured Retention (SIR)
A term usually encountered in liability or casualty insurance, SIR pertains to the each loss amount paid by the insured, prior to the participation of the insurer in a loss. See also retention.

Self-Procurement Taxes
Premium taxes imposed by the state, which are up to 4% on premiums received by most captives. Self-procurement taxes are avoided by owners and advisors as much as possible.

Single-Parent Captive
Also called “pure captive,” a single-parent captive has only one shareholder. There are more single-parent captives existing than their group-owned counterparts.

Solvency Ratio
A statutory ratio test, which is commonly the quotient of net written premiums and capital as well as surplus.

Stock Insurer
Unlike a mutual company that is owned by policyholders, a stock insurer is an insurance company owned by stockholders.

Subpart F Income (simplified explanation)
Defined in the U.S. Tax Code as an investment and underwriting income earned by a foreign insurer/reinsurer that primarily writes U.S. risks. The term, however, has been adapted by most foreign insurers/reinsurers even those that are not exclusively writing U.S. risks.

Subscriber
A subscriber is considered both an insured and an insurer. The term refers to a party committing to reciprocal agreements of indemnity.

Subscribers’ Advisory Committee
Similar to a board of directors, the Subscribers’ Advisory Committee pertains to the governing body of a reciprocal insurer.

Surety Bond
Possible to be utilized as a form of security in replacement of cash or letters of credit, a surety bond is a third-party agreement, which has a principal, an obligor and a surety. The principal is responsible for performing contractual obligations. The obligor and surety make sure that all compensations are met in case the principal fails to perform.

Surplus
A significant denominator in numerous statutory ratios, surplus refers to the amount yielded when assets exceed liabilities. Surplus can include or exclude capital.

Surplus Lines
See excess/surplus lines.

Surplus Notes
Proof of evidence that a loan has been made to a captive, the purpose of which is to get additional capital. The loan is not considered a “debt” but has to be repaid.

Surplus Reinsurance
Refers to the reinsurance of amounts after the retained limit of the cedant has been reached. In a surplus reinsurance, premiums and losses are proportionally shared by the insurer and the reinsurer.

Tail
Refers to the actuarial estimation of unreported losses. See also claims-made tail and IBNR.

Tax Reform Act (simplified explanation)
Legislation enacted in 1986, the Tax Reform Act required all insurers, captives included, to revise computation of their taxable income. One of which was the discounted computation of reserves.

Technical and Miscellaneous Revenue Act of 1988 (TAMRA) (simplified explanation)
Captive owners find the 1988 TAMRA significant because of its sections on tax treaties with Barbados and Bermuda as well as the elections for foreign captives to be taxed as domestic corporations in the U.S.

Tillinghast Recognized and Accepted Captive Standards (TRACS)
Developed by the Tillinghast Business of Towers Perrin ( in a monograph by the same name), TRACS present a set of financial guidelines intended to be used by captives.

Treaty Reinsurance
An arrangement predetermined to allow the ceding insurer to automatically cede particular specified types of insured exposure to the assuming reinsurer as long as it is in adherence to the reinsurance contract terms or treaty and without the evaluation of each exposure, on a case-by-case basis, by the assuming reinsurer.

Trust Fund
A captive trust fund, in a manner of speaking, refers to an onshore guarantee fund that makes use of the captive’s assets. It is utilized to seek admission onto the NAIC approved list or to replace a letter of credit in arrangements pertaining to fronting reinsurance. A trust fund may also be defined as a formalized self-insurance vehicle that operates in pursuant of its governing trust document. More narrowly defined business purposes and risk funding more often than not use a trust fund as an alternative to a captive.

Ultimate Loss
Ultimate loss is the amount paid by the insured, insurer and/or reinsurer for losses considered to be fully-developed. An example of which are paid losses, including outstanding reported losses and IBNR. The exact value of ultimate losses may not be known until after the policy period has expired. Actuaries are tasked to come up with projections for financial modelling and determination purposes.

Umbrella Policy
An extra liability insurance coverage designed to provide an additional layer of security to parties at risk for being legally held liable. Providing broader coverage than the underlying policies, an umbrella insurance policy is most helpful to asset rich entities.

Unallocated Loss Adjustment Expense (ULAE)
Refers to expense items incurred by the insurer, i.e., overhead costs, salaries, that are not assigned or part of a particular claim’s expense. See also loss adjustment expense.

Unbundled Costs
Split of insurance services, such as claims administration, and charges usually lumped together in a typical insurance purchase. These services are usually rendered by separate groups or at times, as part of a program’s overall savings.

Underwriting
Involves the critical process of decision making as to whether or not a risk is acceptable, and determining the rate and amount of insurance on the risk. Insurance companies, individuals and corporations may act as underwriters for their own or others’ account.

Unfunded Self-Insurance
Refers to a “paper” reserve figure a company creates. This system does not particularly segregate funds and match them with the reserves set. The money is intended to be used for other purposes.

Unrelated Business
Risk insurance not in relation to the captive owner’s business.

Warehousing
The fronting insurer provides warehousing service usually upon a captive’s start-up when the latter is not yet prepared to receive premiums. A part of this service allows the front to start receiving premiums reinsured to a captive.

Working Layer
The additional insurance layer that is expectant of loss frequency. Often used to price a working layer is retrospective rating.

Written Premium
Unlike earned premium, written premium is immediately registered on the insurer’s (reinsurer’s) books at the time of the issuance and payment of the policy.