A method of risk financing involving the agreement of a bank to provide finance to fund losses as they occur. Contingency funds arranged in this way may reduce a firm’s borrowing capacity and restrict its investment potential but may be advantageous for firms with a good credit rating. The lender charges for guaranteeing the standby line of credit. If not used there will be no additional charge. See CONTINGENT CAPITAL.

A condition whereby a broker secures an underwriter’s commitment on the monetary amount of his acceptance, even though on closing, this line may represent an increased percentage of a reduced limit. This will happen if the placement is not completed and allows the broker to place 100 per cent of a smaller amount not exceeding the monetary amount with the underwriter. This happens when the broker has doubts about the availability of the capacity for full placement.

another term for chain ladder.

Long-term business assets by reference to which linked benefits are determined. These assets are separated from the other long-term business assets of the company.

The value of the rights conferred under a life policy or collective investment scheme by reference to the value of specific assets or fluctuations in an index of the value of such assets, e.g. unit trust holdings.

Linking together of a member’s pension benefit and period service in one scheme with the benefits the member earns in a new scheme. The previous benefits are transferred. The qualifying service in the two schemes is linked.

Investment schemes offered by life insurers in which premiums paid by the policyholders as investors are used partly to purchase life insurance and partly to purchase units in a unit trust or unitised fund. The proceeds or benefits payable will be the greater of the guaranteed sum insured or the value of the units accrued. See UNIT-LINKED LIFE INSURANCE.

Damages specified in a contract representing a genuine pre-estimate of compensation due for an anticipated breach of contract, (e.g. delay in completion). They are usually expressed in agreed sums per week. Liquidated damages are only levied when reasons for delay do not entitle the party concerned to an extension of time. Liability insurers specifically exclude any liability to pay liquidated damages or penalties.

The risk that an individual or business will be unable to meet its financial obligations from its cashflow. This may lead to an entity having to quickly convert assets into cash at considerable loss or becoming insolvent.