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Reinsurance terms
The market behind the market.
Rate on lineThe premium for a layer of reinsurance or excess coverage divided by that layer's limit, showing the price paid for each dollar of protection.ReinsuranceInsurance an insurer buys from a reinsurer to transfer part of its risk, add capacity and protect its capital from large or accumulated losses.Catastrophe modelSoftware that simulates thousands of hurricanes, earthquakes and other disasters against a portfolio of locations to estimate insured losses and odds.Probable maximum loss (PML)An estimate of the largest loss a location, portfolio or event is likely to produce, used to set limits, size reinsurance and satisfy lender requirements.Terrorism Risk Insurance Act (TRIA)The 2002 federal law, run by Treasury, that backstops insurers' losses from certified terrorist attacks and requires them to offer terrorism coverage.CedentThe insurer that passes part of its risk and premium to a reinsurer, and stays liable to its own policyholders for the whole.Facultative reinsuranceReinsurance negotiated for one specific risk or policy rather than a whole book of business, usually because the risk is large or unusual.FrontingAn arrangement where a licensed insurer issues the policy but passes most or all of the risk to a captive or reinsurer, for a fee.RetrocessionReinsurance bought by a reinsurer to pass part of the risk it has assumed to other reinsurers or investors, usually to manage peak catastrophe exposure.Treaty reinsuranceA reinsurance contract that automatically covers a defined portfolio of an insurer's policies, instead of reinsuring one risk at a time.Catastrophe bondA security sold to investors that pays interest but loses principal if a defined catastrophe occurs, giving an insurer or reinsurer multiyear protection.SidecarA special-purpose vehicle funded by outside investors that takes a share of an insurer's or reinsurer's business for a set term, usually collateralized.