ART Glossary

The ART Glossary is an alphabeticised listing of terms and phrases used by professionals in our market. For those of you engaged in the weather trading market please visit our Weather Trading Glossary.

	Act of God Bond	A bond where redemption value is related to the occurence of catastrophes. Can relate to an index of losses or the losses of an individual carrier
	Aggregate Retention	Retention of risk by the policyholder calculated by reference to the total of claims to be retained
	Annual Aggregate Limit	Retention of risk by the policyholder, calculated on the basis of retention of claims in total over a year
	ART (Alternative Risk Transfer)	Generic phrase used to denote various non-traditional forms of re/insurance and techniques where risk is trasferred to the capital markets. On a broader note it refers to the convergence of re/insurance, banking and capital markets.
	Asset-backed securities	Debt securities which depend on a pool of underlying receivables. In ART these refer to insurance-linked securities.
	Average Basis	A way of quantifying basis risk. Used to describe average difference between losses from portfolios and gains from hedges. The value is asserted on the amount of portfolios used
	Basis Risk	A method of measuring performance of hedges: the lower the basis risk the better the hedges performance
	Blended Cover	Mixture of insurance/reinsurance and other risk management techniques on a single policy
	Bond	Capital instrument issued by government or private corporation. Redemption may be linked to an event (eg. CAT bond)
	Bourse	An exchange where financial instruments are traded
	Call Option	Gives buyer the right to buy, seller is obliged to sell
	Capacity	Amount of reinsurance that can be underwritten by an entity or market
	Captive	Establishment of trading company in a 'no-tax' haven
	CAT	Common term for a catastrophe
	Catastrophe Equity Put (CatEPut)	An options contract that gives the purchaser the opportunity but does not oblige them to exercise the option. Allows the purchaser to raise additional capital by exercising the option in the event of a catastrophe
	Cedant	An insurance company buying reinsurance cover
	Commercial Risk	Risk from a companies commercial activities as distinct from insurable risk
	Commutation	Agreement to swap future insurer claims liabilities into a cash payment to the buyer
	Contingent Credit	Credit made available related to specific events and limits
	Contingent Surplus Note	Contract to supply equity at fixed interest
	Contract of Difference	Contract where future liability is based on difference (eg. an index price above a fixed minimum)
	Convergence	The combining of traditional re/insurance and the capital markets
	Convertible Share	Share that can be converted to another class (eg. debenture (fixed interest) to an ordinary share)
	Cost of Risk Formula	Formula to measure the insurable risk of a company
	Cumulative Degree Days	Sum of the daily Heating or Cooling degree days over a specified period
	Dedicated Vehicle	Company or entity set up for a specific purpose (eg. reinsuring catastrophe risk)
	Deductible	First part of loss borne by policyholder
	Defeasance	Used in connection with a bond issue, describes the amount of risk faced by holders of the bonds. A fully defeased issue means that principal and interest are at complete risk of loss
	Degree Day	Term created to better forecast demand for energy. Number of degree days is calculated from the difference between actual temperature and a previously set level (usually 65 degrees). Expressed in Cooling Degree Days or Heating Degree Days
	Derivative	A financial contract the value of which is derived from another (underlying) asset, such as an equity, bond or commodity
	Disintermediation	The process of eliminating the middle-man. Such as an insured going to the capital markets for insurance-like products without the use of a re/insurer
	Domicile	Tax haven
	Event Risk	The insurable risk from an occurence such as a catastrophe (eg. earthquake, hurricane)
	Excess of Loss Reinsurance	Reinsurance which pays on the basis of the excess of claims over and above a pre-determined retention limit
	Exotics	Derivatives that are either complex or are available in emerging economies (plain-vanilla) - typical exchange traded
	Experience Account	Reserve fund set up to hold the premiums for finite reinsurance from a single insured. Earns interest over the fixed term, and returns to the insured whatever principle and interest is not paid out as losses
	Financial Risk Management	A method of mitigating risk in various financial travsactions
	Finite Risk	Re/Insurance policy with an ultimate limit of indemnity oftem with direct link between premium and claim amounts
	Fixed Rate Note	Borrowing at fixed rate
	Floating Rate Note	Borrowing at a pre-determined variable rate
	Forward	Commits user to buying or selling and asset at a specific price on a specific date in the future
	Frictional Cost	Expenses of providing a service
	Future	Forward contract that is traded on an exchange
	Holistic Risk Management	Describes a risk management scheme which integrates financial and event risk within one program which is designed to anticipate all of a firms exposure to loss
	Index Based Contracts	Options contracts based on an index. The value of the derivative is derived from the index. Variation between actual losses and those derived from the index creates basis risk
	Insurance Guarantee Funds	Funds set up to meet in full or part the cost of claims from insolvent insurance companies
	Insuratisation	Using an insurance contract to hedge against financial risks (eg. currency/portfolio risks)
	Interest Rate Swap	An exchange of financial instruments to give each party their preferred position
	Leverage	Amount of money put at risk by a derivative is much bigger than the down payment that was made when it was traded
	Long Tail Liability	Insurance of liability risks where notification and payment of claims are intrinsically delayed
	Loss Portfolio Transfer	Transfer of an insurance portfolio where amount transferred reflects the total expected cost of unpaid losses
	Mutual insurance Company	Members or policy holders share risks, premiums go into pool from which claims and expenses are met
	Option	A contract which gives the buyer the right, but not the obligation to buy or sell a particular asset at a particular price
	Outstanding Loss	Loss whose cost has not been fully determined and paid
	Over The Counter (OTC)	A derivative that is not traded on an exchange but purchased from an investment bank
	Payment Account	Opposite to an experience account. Money is moved from the experience account to the payment account to be specifically paid out in losses
	Per Loss Retention	Retention of risk of fixed amounts for each individual loss
	Perfect Hedge	A hedge which correlates perfectly with the risk. Insurance contracts enable perfect hedges because the contract either pays or doesn't depending on a fixed trigger
	Primary Insurer	Insurer who takes the first element of the risk
	Principal	Amount representing capital base
	Principle Amount Note	A promise to repay the principal on defined terms
	Private Placement	An investment opportunity which requires no registration with the SEC
	Proportional Treaty	Reinsurance contract which takes a defined pro rata share of all risks within treaty limits
	Put Option	Gives buyer the right to sell - buyer has to buy
	Quota Share	Reinsurance on a percentage basis of a fixed share of all risks
	Redeemable Preference Shares	Give priority in payment of interest in shares of capital, redeemable shares can be bought back by the insurer
	Reinsurance Pool	Pooling of reinsurance risks within fixed limits of a group of reinsurers
	Retrospective Funding	Insurance where the premium is adjustable after the claims to reflect the cost of loss
	Risk Based Capital	System of calculating insurance capital needed with reference to different elements of risk
	Risk Differentiation	Evaluation of risk by comparison
	Risk Exposure	An exposure to loss (property, liability etc.)
	Risk Financing	Methods of funding the cost of risk (eg. insurance, credit and financial reserves)
	Risk Management	Identification, evaluation and contril of risk
	Risk Purchasing Groups (RPG)	Collective insurance buying
	Risk Retention Groups (RRG)	Collective insurance companies i.e. underwriter of risk
	Run-Off	The process of settling claims for an account that has stopped accepting new risks
	Securitisation	Securing the cash flows associated with insurance risk. Securitised insurance risk enables entities which may not be insurance companies to participate in these cash flows
	Self insurance	Funded from organisations own financial resources
	Small Cap	PCS Option contracts which limit the aggregate amount of losses that can be included in the contract to $20 billion
	Speculator	Someone who wants to accept a risk because of the likelihood of substantial profit
	Spread Loss	Contract which uses a formula to spread the cost of losses over a number of years
	Spread Option	Option on difference between two contracts
	Stop Loss Reinsurance	Reinsurance which covers the total cost of claims within fixed limits
	Strike Price	Price where future or option contract operates
	Surplus Note	Additonal funding to augment policyholder surplus in times of need
	Swap	Two companies exchange cash flow linked to a liability or asset
	Timing Risk	Risk that claims may become payable earlier than expected
	Tranche	Term to describe a specific class of bonds within an offering, usually each tranche offers varying degrees of risk to the investor
	Transfer of Risk	The transfer of the financial consequences of a risk to another by legal contract and/or insurance
	Trust Fund	Fund established to safeguard resources
	Unbundling	The seperation of different elements such as loss control from the actual risk financing
	Weather Hedge	Product which allows buyer to partially or fully offset climate related risks
	Zero-Beta Asset	An investment which doesn't correlate with an index or market results
	Zero-Coupon Security	Security where no interest is paid