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
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 Place of incorporation
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