Glossary

Insurance Terms

Attachment Point: The loss level at which an insurance layer begins to pay. For example, a layer with a $1M attachment point starts paying after the first $1M of loss.
Burning Cost: Historical average losses as a percentage of limit. Used as a baseline for pricing.
Captive Insurance Company: A subsidiary company created to provide insurance to its parent company. Allows for risk retention with potential tax benefits.
Catastrophe (Cat) Coverage: Insurance for low-frequency, high-severity events like natural disasters or major accidents.
Ceded Premium: The portion of premium passed to reinsurers when risk is transferred.
Deductible: See Retention.
Excess Insurance: Coverage that applies above a primary layer. Only pays after underlying limits are exhausted.
Experience Rating: Premium adjustment based on your company’s actual loss history.
Frequency: The expected number of loss events per year. Typically modeled with Poisson distribution.
IBNR (Incurred But Not Reported): Losses that have occurred but haven’t been reported yet. Important for reserving.
Layer: A horizontal slice of insurance coverage between two dollar amounts.
Limit: The maximum amount an insurer will pay under a policy.
Loading Factor: The multiple applied to expected losses to determine premium. Includes insurer profit and expenses.
Parametric Insurance: Insurance that pays based on objective triggers (e.g., earthquake magnitude) rather than actual losses.
Premium: The amount paid for insurance coverage, typically annual.
Primary Insurance: The first layer of insurance coverage, sits above the retention.
Retention (or Deductible): The amount of loss you retain before insurance responds. Also called self-insured retention (SIR).
Severity: The size of a loss when it occurs. Often modeled with lognormal distribution.
Tower: The complete stack of insurance layers from retention to maximum limit.
Umbrella Coverage: Broad coverage that sits above multiple underlying policies.

Mathematical Terms

Coefficient of Variation (CV): Standard deviation divided by mean. Measures relative variability.
Conditional Value at Risk (CVaR): Expected loss given that loss exceeds VaR threshold. Also called Expected Shortfall.
Correlation: Statistical relationship between two variables. Range from -1 to +1.
Ensemble Average: Average across many parallel scenarios at a single point in time.
Ergodic: A system where time averages equal ensemble averages. Most economic systems are non-ergodic.
Expected Value: Probability-weighted average of all possible outcomes.
Geometric Brownian Motion (GBM): Stochastic process used to model asset prices with continuous random changes.
I.I.D. (Independent and Identically Distributed): Assumption that random variables are independent and drawn from the same distribution.
Kelly Criterion: Formula for optimal bet sizing that maximizes long-term growth rate.
Lognormal Distribution: Probability distribution where the logarithm is normally distributed. Common for modeling losses.
Maximum Drawdown: Largest peak-to-trough decline in wealth over a period.
Monte Carlo Simulation: Method using random sampling to model probability distributions.
Poisson Process: Statistical model for counting random events over time. Used for loss frequency.
Power Law Distribution: Heavy-tailed distribution where extreme events are more likely than in normal distribution.
Ruin Probability: Probability that wealth reaches zero at any point.
Sharpe Ratio: Risk-adjusted return measure: (return - risk-free rate) / standard deviation.
Sortino Ratio: Like Sharpe ratio but only considers downside volatility.
Stochastic Process: Random process that evolves over time.
Time Average: Average of a single trajectory over time. What an individual entity actually experiences.
Value at Risk (VaR): Loss level that won’t be exceeded with specified confidence (e.g., 95% VaR).
Volatility: Standard deviation of returns, measures uncertainty.

Business Terms

Assets: Total resources owned by the company. Basis for many insurance calculations.
Base Revenue: Starting annual revenue before growth or shocks.
Burn Rate: Rate at which a company spends cash, especially relevant for startups.
CapEx (Capital Expenditure): Investments in long-term assets like equipment or facilities.
Cash Flow: Actual cash generated or consumed by operations.
Debt Capacity: Maximum borrowing ability, often expressed as percentage of assets.
Dividend Rate: Percentage of profits distributed to shareholders.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization.
Growth Rate: Annual percentage increase in revenue or assets.
Margin: Profit as percentage of revenue. Operating margin excludes financing costs.
Operating Leverage: Degree to which costs are fixed vs. variable. High leverage means profits vary more with revenue.
Return on Assets (ROA): Net income divided by total assets.
Return on Equity (ROE): Net income divided by shareholder equity.
Terminal Value: Value at the end of the analysis period.
Working Capital: Current assets minus current liabilities. Cash tied up in operations.

Ergodic Framework Terms

Ergodic Gap: Difference between ensemble average and time average growth rates.
Ergodic Insurance Premium: Maximum premium where insurance still improves time-average growth.
Ergodic Optimization: Maximizing time-average growth rate rather than expected value.
Ergodic Value: Long-term wealth achieved through time-average optimization.
Growth-Optimal Strategy: Strategy that maximizes long-term time-average growth rate.
Multiplicative Dynamics: Processes where outcomes multiply rather than add (e.g., wealth growth).
Non-Ergodic System: System where time and ensemble averages differ. Includes most economic systems.
Survival Constraint: Requirement to avoid ruin before optimizing for growth.
Time Horizon: Period over which analysis is performed. Longer horizons reveal ergodic effects.
Wealth Multiple: Final wealth divided by starting wealth.

Simulation Parameters

Confidence Interval: Range containing true value with specified probability.
Convergence: When simulation results stabilize with additional iterations.
Random Seed: Starting value for random number generator. Fixed seed ensures reproducibility.
Scenario: One possible path through time in a simulation.
Sensitivity Analysis: Testing how results change with parameter variations.
Time Step: Granularity of simulation (annual, monthly, daily).

Industry-Specific Terms

All-Risk Policy: Coverage for all perils except those specifically excluded.
Business Interruption (BI): Coverage for lost income during disruptions.
Cyber Insurance: Coverage for data breaches, system failures, and cyber attacks.
D&O (Directors & Officers): Liability insurance for company management.
E&O (Errors & Omissions): Professional liability coverage.
General Liability (GL): Coverage for third-party bodily injury and property damage.
Key Person Insurance: Coverage for death/disability of critical employees.
Product Liability: Coverage for damages from defective products.
Property Insurance: Coverage for physical assets.
Stop Loss: Aggregate coverage that caps total annual losses.
Workers Compensation: Coverage for employee injuries.

Acronyms

ALM: Asset Liability Management
AOP: Annual Operating Plan
APH: Aggregate Policy Holder
BCAR: Best’s Capital Adequacy Ratio
CML: Commercial Multiple Line
ERM: Enterprise Risk Management
GWP: Gross Written Premium
ILS: Insurance-Linked Securities
LAE: Loss Adjustment Expenses
LGD: Loss Given Default
LOB: Line of Business
MGA: Managing General Agent
MPL: Maximum Probable Loss
NPV: Net Present Value
PML: Probable Maximum Loss
ROL: Rate on Line (premium/limit)
SIR: Self-Insured Retention
TIV: Total Insured Value
TPL: Third Party Liability
UW: Underwriting

Need More Definitions?

If you encounter terms not in this glossary:

Check the Frequently Asked Questions for context
Review the technical documentation
Consult industry resources
Ask your broker or risk advisor

Understanding terminology is crucial for making informed insurance decisions. Don’t hesitate to seek clarification on unfamiliar terms.