AAii 302 Insurance Operations & Finance key terms

The amount a policyholder pays an insurer, usually in installments, in exchange for coverage during a defined period. It funds expected claims, operating costs, and profit margin.

The total premium attached to policies issued during an accounting period, regardless of how much coverage time has actually elapsed. It measures new business volume rather than coverage consumed.

The portion of written premium that corresponds to coverage already provided. It is recognized over the policy term and is the revenue figure used when calculating loss ratios.

A liability representing premium received for coverage not yet provided. It is released as the policy period runs off, and its size signals how much future coverage the insurer still owes.

Incurred losses and loss adjustment expenses divided by earned premium. It shows how much of each premium dollar goes to claims before other costs are considered.

Underwriting expenses divided by written premium. It captures acquisition, administrative, and general costs, showing how efficiently the insurer converts premium into coverage.

The sum of the loss ratio and expense ratio. A result below 100 percent indicates an underwriting profit; above 100 percent indicates an underwriting loss covered by investment income or capital.

The profit or loss from insurance operations alone, equal to earned premium minus incurred losses and underwriting expenses. It excludes investment returns, isolating core insurance performance.

Returns earned on the insurer's invested assets, including interest, dividends, and realized gains. It supports pricing and can offset underwriting losses in a soft market.

Premium collected before claims are paid, which the insurer invests in the interim. It is a low-cost or negative-cost source of funds that rewards disciplined underwriting.

Liabilities recorded for obligations the insurer expects to pay, chiefly outstanding claims and unearned premium. Their adequacy directly affects solvency and reported profit.

Incurred but not reported: an estimate for claims that have occurred but are not yet known to the insurer. It is a key part of claims reserves and a common source of estimation error.

An amount set aside for a specific reported claim based on its known facts and expected development. It is reviewed and adjusted as the claim progresses toward settlement.

The aggregate of an insurer's liabilities for obligations to policyholders, including claims reserves and unearned premium. Regulators scrutinize them as a core measure of financial strength.

The excess of admissible assets over required liabilities, expressed against a regulatory minimum. It measures the buffer available to absorb unexpected losses and protect policyholders.

Whether an insurer holds enough capital to meet regulatory requirements and withstand plausible shocks. It links risk exposure, reserving, and investment policy to the ability to pay claims.

Coordinating investment choices with the timing and amount of expected claim payments. It aims to keep cash available when needed and to limit exposure to interest-rate and market movements.

The ability to meet cash obligations, such as claims and expenses, as they fall due without forced asset sales. Insurers hold liquid assets because claim timing is uncertain.

Insurance bought by an insurer to transfer part of its risk to another insurer. It reduces volatility, frees capital, and supports writing larger or unfamiliar risks.

The portion of risk or premium an insurer transfers to a reinsurer under a reinsurance agreement. Ceded premium and ceded losses are tracked separately from retained business.

The amount of risk an insurer keeps for its own account after reinsurance, or a deductible the policyholder bears. It defines the exposure that directly affects results.

Premium remaining after ceded reinsurance premium is deducted from gross premium. It reflects the revenue the insurer actually keeps for the risk it retains.

The process of evaluating a risk, deciding whether to accept it, and setting terms and price. It balances growth against the need to charge enough for expected losses.

Choosing which applicants or risks to accept, decline, or modify. Sound selection keeps the insured pool from being dominated by risks priced too low for their expected losses.

A tendency for higher-risk applicants to seek or keep coverage more than lower-risk ones, especially when price does not reflect risk. It erodes profitability unless underwriting and pricing respond.

Behavior change that increases the chance or size of a loss because the person is insured. It is managed through deductibles, exclusions, and claims investigation.

The amount a policyholder must bear before the insurer pays a claim. It reduces small claims, shares risk, and can lower premium.

The end-to-end process of reporting, investigating, evaluating, and settling a claim. Efficient handling controls costs, supports reserving accuracy, and shapes customer experience.

Costs incurred to investigate, defend, and settle claims, separate from the claim payment itself. It is included in the loss ratio and must be budgeted and controlled.

An actuarial technique that arranges historical loss data by accident year and development period to project ultimate losses and estimate reserves such as IBNR.

Expenses of obtaining business, such as commissions, broker fees, and marketing. It is a major part of the expense ratio and affects how quickly new business becomes profitable.

Pricing or accepting business with less regard to underwriting profit because investment income on float is expected to compensate. It can weaken results if investment returns fall.

A review of exposure data, such as payroll or sales, used to set the final premium for policies priced on an adjustable basis. It corrects estimates made at inception.

A detailed schedule listing individual risks, premiums, or claims, often used in reinsurance and delegated authority arrangements. It supports reconciliation, reporting, and reserve monitoring.

An arrangement in which an insurer grants a broker or managing general agent power to underwrite, price, or settle claims on its behalf. It requires strong oversight and reporting controls.

The core software that records policies, endorsements, premiums, and customer data. Its accuracy underpins billing, reserving, reporting, and regulatory compliance.

A written change to an existing policy that alters coverage, limits, or terms, such as adding a location or amending an exclusion. It is dated and forms part of the contract.

The change over time in estimated ultimate losses for prior accident years as new information emerges. Adverse development signals weak reserving and can hit capital and earnings.