The NAIC’s Solvency Modernization Initiative, which began in 2008, is “a critical self-examination of the United States’ insurance solvency regulation framework and includes a review of international developments regarding insurance supervision, banking supervision, and international accounting standards and their potential use in U.S. insurance regulation.” The SMI is focused on five key solvency areas: capital requirements, international accounting, insurance valuation, reinsurance, and group regulatory issues.

A clause that may be included in a non-proportional reinsurance treaty, providing for the indexation of monetary limits (i.e., excess point and/or the upper limit) in line with a specified index of inflation.

An initiative of the E.U. to undertake a “fundamental review of the capital adequacy regime for the European insurance industry.” It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. The Solvency II Directive is intended to become effective on January 1, 2016.
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UK: Ongoing review of solvency regulation that appears likely to lead to the implementation of a risk-based capital model for solvency purposes in the EC in the next few years.

A clause found in reinsurance contracts providing that, upon the happening of some specified condition or event, such as the insolvency, merger, loss in credit rating or decline in policyholder surplus of one party, the other party may fully terminate the contract earlier than would otherwise be required, had such condition or event not happened. The clause should state which party may initiate the termination, the notice requirements, the triggering conditions or events necessary, the effective date of termination, and the method of terminating existing business (i.e., whether on a cut-off or run-off basis). Termination by the reinsurer of a contract may be detrimental to the liquidation of a ceding company and may be rejected by regulators.

REINSURANCE: (01) The working cover subject to a prospective rating plan. (02) A form of excess reinsurance wherein each year’s premium rate is determined by the amount of the ceding insurer’s excess losses for a specified number of preceding years. A form of experience rating.
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A form of reinsurance under which premiums are paid during good years to build up a fund from which losses are recovered in bad years. This reinsurance has the effect of stabilizing a cedant’s loss ratio over an extended period of time.
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UK: Aggregate excess of loss financial reinsurance under which premiums, under a multi-year contract, are paid during the good years to build up a fund from which losses are recovered in poor years. Premiums accumulate in an investment fund as well as additional premiums paid if losses exceed the fund balance. Cover is fixed on a per year basis, often stop loss. The key is to stabilise the cedant’s losses over time.

An aggregate excess of loss reinsurance that provides protection based on the total claims, from all perils, arising in a class or classes over a period. The Excess Point and the Upper Limit are sometimes expressed as a percentage of cedant’s premium income rather than in monetary terms, e.g. cover might for a claim ratio in excess of 110% up to a limit of 140%. Where this form of reinsurance exists in practice, it is usual for the cedant to be required to retain a proportion of the risk in the reinsured layer called the coinsurance proportion, to avoid any moral hazard. Also, refer “Reinsurance, Aggregate Excess of Loss.”

The settlement of a casualty or workers’ compensation claim involving periodic annuity payments over an extended period of time, rather than in one up-front, lump sum cash payment. There may be certain advantages to a claimant under a structured settlement, including tax treatment of interest under the Internal Revenue Code, that are not present under a lump sum cash settlement. Structured settlements are designed to guard against the early dissipation of settlement proceeds by recipients, who are often minors or those in need of life-time care as a result of their injuries.

REINSURACNE: A cedant’s premium (written or earned) to which the reinsurance premium rate is applied to calculate the reinsurance premium. Often, subject premium is gross/net written premium income (GNWPI) or gross/net earned premium income (GNEPI), where the term “gross/net” means gross before deducting reinsurance premiums for the reinsurance agreement under consideration; but net after all other adjustments, e.g., cancellations, refunds, or other reinsurance. Normally, subject premium refers to premium on subject business. Also, known as base premium.
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A cedant’s premiums (written or earned) to which the reinsurance premium rate is applied to calculate the reinsurance premium. Often, subject premium is gross/net written premium income (GNWPI) or gross/net earned premium income (GNEPI), where the term “gross/net” means gross before deducting reinsurance premiums for the reinsurance agreement under consideration, but net after all other adjustments, e.g., cancellations, refunds, or other reinsurance. Normally, subject premium refers to premium on subject business. Also know as base premium.
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REINSURACNE: See: Base Premium, Premium Base, Underlying Premium.
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UK: See: Base Premium.