AAL (Average Annual Loss)
The expected long‑term average loss per year from a specific risk, often produced by catastrophe or risk models.
ACV (Actual Cash Value)
The replacement cost of property minus depreciation.
Aggregate Limit
The maximum amount an insurer will pay for all covered losses during a policy period.
Attachment Point
The loss amount at which an excess or reinsurance policy begins to pay.
BI (Business Interruption)
Coverage for lost income and continuing expenses resulting from a covered property loss.
Broker (Insurance Broker)
A licensed intermediary who represents the buyer rather than the insurance company. They assess specific risk needs and shop the insurance market to find, negotiate, and secure the best property and liability coverage policies for their customers.
Cat Model (Catastrophe Model)
A model used to estimate potential losses from natural disasters such as hurricanes or earthquakes.
Ceding Company
An insurer that transfers (cedes) risk to a reinsurer.
Claim
A request by the insured for payment under an insurance policy following a loss.
Claim Frequency (loss Frequency, report frequency)
Claim frequency in property insurance refers to how often claims are filed by policyholders within a specific timeframe. It measures the probability of a loss occurring. Insurers calculate claims frequency to evaluate risk and set premium rates.
It is typically calculated using the following formula: Claims Frequency = Number of Claims Reported / Earned Exposures. It answers the question “How often do claims happen per unit of risk?” and isolates risk occurrence, independently of claim size or premium. At an actuarial level, frequency is often calculated by coverage.
Claims‑Made Policy
A policy that covers claims reported during the policy period, regardless of when the loss occurred.
COI (Certificate of Insurance / Cause of Loss)
Either a document proving insurance coverage or the portion of a policy defining covered perils, depending on context.
Combined Ratio (Underwriting Ratio)
The expense ratio is added to the loss ratio to determine the company’s overall profitability, known as the combined ratio. If the combined ratio is under 100%, the insurer is operating at an underwriting profit.
For example, a combined ratio of 90% means the insurer is keeping 10 cents of profit for every dollar collected in premiums. This ratio measures the money an insurer pays out in claims and operating expenses relative to the premiums it collects.
Coverage
The specific risks or losses protected by an insurance policy.
Deductible
The amount the insured must pay before insurance coverage responds.
D&O (Directors & Officers Insurance)
Liability coverage protecting company leadership against claims alleging wrongful acts.
E&O (Errors & Omissions)
Professional liability insurance covering financial losses caused by mistakes or failures in professional services.
Earned Exposure
The specific portion of the policy’s total exposure period (the timeframe the insurer is vulnerable to risk) that has already elapsed. It measures how much of the risk the insurance company has actively carried over a given timeframe. Exposures are usually measured in units of time (such as policy-years).
For example, one insured property with a 12-month policy equals 1.0 exposure. After one month, 1/12 (0.083) of an exposure is earned; after six months, 0.5 is earned. Each exposure corresponds to a defined unit of risk (e.g. one vehicle or one property), earned over time. Actuaries often track exposures by coverage for analysis of frequency calculations by coverage.
Earned Premium
The portion of the total premium that corresponds to the elapsed portion of the policy period. Because insurance is paid in advance, this represents the actual revenue the insurance company has “earned” for assuming risk over the elapsed period. Earned premiums are the primary way insurers calculate their profitability. Insurers track this to measure their financial health.
Earned Premium is the portion of the written premium that the insurer has actually “earned” as revenue because the policyholder has received the corresponding coverage (e.g. if you buy a $1,200 annual policy, the written premium is $1,200, but the insurer only earns $100 for each month that passes).
Excess Insurance
Coverage that applies after an underlying policy’s limit has been exhausted.
Expense Ratio (General Expense Ratio)
Measures the percentage of premium used to cover the costs of acquiring, writing and servicing policies. It indicates an insurer’s operational efficiency. The lower the ratio, the more effectively the company manages its overhead expenses.
The commonly accepted formula is Expense Ratio = (Total Operating Expenses) / Net Written Premium. However, some companies will divided by net earned premium for consistency with the loss ratio calculation. Note expense ratio does NOT include claims costs as those belong to the loss ratio calculation.
Exposure
The extent to which a person, property, or organization is subject to potential loss.
Facultative Reinsurance
Reinsurance purchased for a specific, individual risk.
GL (General Liability)
Coverage for bodily injury or property damage claims made by third parties.
Gross Written Premium
The total premium amount an insurer collects before deducting any expenses, such as the costs paid to reinsurers to share the risk.
Incurred Losses
The total amount paid out for approved claims plus loss reserves set aside for pending claims.
Insured / Policyholder
The individual or entity covered by an insurance policy.
Insurer / Carrier
The company that underwrites and issues insurance policies.
Lloyd’s of London
An association of independent underwriters based in the United Kingdom. It is not an insurance company, but rather a marketplace for large and/or unusual insurance exposures where brokers representing insurance applicants are able to contract with underwriters offering coverage.
Limit (Limit of Liability)
The maximum amount an insurer will pay for a covered loss.
Loss
Physical damage to property or bodily injury, including loss of use or loss of income.
Loss Adjustment Expense (LAE)
Expected payments for costs to be incurred in connection with the adjustment and recording of losses. Can be classified into two broad categories: Defense and Cost Containment (DCC) and Adjusting and Other (AO). Can also be separated into Allocated Loss Adjustment Expense and Unallocated Loss Adjustment Expense for ratemaking purposes.
Loss Cost (Pure Premium)
The portion of the premium specifically allocated to cover expected claims and the administrative expenses of settling those claims. It does not include insurer overhead, operating costs, or profit margins. Loss Cost = Incurred Losses / Earned Exposures.
Loss Development
The process by which the estimated cost of an insurance claim changes over time from its initial reporting until it is fully settled. Because damage can be more extensive than first realized and some claims involve reporting lags or inflation, insurers must continuously adjust the claim’s financial reserves to reach the eventual “ultimate” cost.
To accurately price policies and ensure they have enough money set aside (reserves) to pay all future claims, actuaries use historical data to predict how much current claims will grow. Ultimately, understanding loss development is vital for an insurance company to maintain financial solvency and ensure it has enough capital on hand to cover all eventual claim payouts.
Loss Development Factors (LDF)
Numerical multipliers derived from loss development triangles. Actuaries multiply current, known losses by an LDF to calculate the projected ultimate loss amount.
Loss Development Triangles
Mathematical tables used by actuaries to organize claim data by accident year and track how the total value of these claims changes over specific time intervals (e.g. 12 months, 24 months, 36 months).
Loss History
A record of all previous insurance claims filed by a policyholder or on a specific property, typically covering the past five to seven years. Insurance companies use this history to assess risk, determine policy eligibility, and calculate premiums.
Loss Payment
A loss payment in property insurance is the financial payout an insurer makes to a policyholder (or a third-party claimant) to cover the costs of a covered loss or damage to property. The amount is calculated according to the terms of the policy, usually based on actual cash value or replacement cost.
Loss Ratio
Measures the percentage of earned premiums an insurer pays out to cover claims and related adjustment expenses. It indicates how much money is being used to pay for policyholders’ damages relative to the total premium revenue collected.
Formula wise this is calculated as Loss Ratio = (Incurred Losses + Loss Adjustment Expenses) / Earned Premiums
Loss Reserve
The amount that insurers set aside to cover claims incurred but not yet paid. On a balance sheet, loss reserves are technically recorded as liabilities because they represent outstanding obligations to policyholders. There are three common types of loss reserves: Statutory (Stat) Reserves – legally mandated funds that state regulators require insurance companies to maintain. Case Reserves – Funds allocated for claims that have been reported to the insurance company and are currently in the adjusting process. An adjuster estimates this amount on a case-by-case basis using available evidence. Incurred but not Reported (IBNR) – Bulk reserves estimated by actuaries to cover claims that have already occurred but have not yet been reported to the insurer (for example, damage from a recent severe storm that policyholders have not yet filed claims for).
Managing General Agent (MGA)
A type of insurance agent/broker that, unlike traditional agents/brokers, is vested with underwriting authority from an insurer. An MGA is authorized by an insurer to transact insurance business and may have authority to bind the insurer, issue policies, appoint producers, arrange for reinsurance, and provide other administrative support, depending on the specifics of the MGA agreement.
Managing General Underwriter (MGU)
An organization granted authority by one or more insurers to underwrite and administer insurance programs for the insurer(s). MGUs can perform many tasks that are normally performed by insurers, such as appointing retail agents, underwriting insurance, binding and issuing policies, collecting premiums, and claims management. MGUs are typically used for specialty lines of insurance, such as professional liability and cyber insurance, and operate in the surplus lines marketplace
Multi-Peril Insurance
Personal and business property coverage combining several types of property insurance in one policy.
Net Written Premium
The gross written premium minus any reinsurance costs. This represents the actual amount of premium the primary insurer keeps for the risk they continue to hold.
Occurrence‑Based Policy
A policy that covers losses occurring during the policy period, regardless of when the claim is reported.
PD (Property Damage)
Physical damage to insured property.
PEL (Policy Exposed Limit)
The portion of a policy’s limit that is actually exposed to loss, after accounting for deductibles, sub‑limits, and coverage terms.
Peril
The cause of property damage or personal injury, origin of desire for insurance. “Cause of Loss”
PML (Probable Maximum Loss)
An estimate of the largest loss likely to result from a single event.
Policy Limit
The maximum payable amount under an insurance policy.
Policy Term
Length of coverage (typically 6 or 12 months).
Portfolio
A collection of insurance policies or risks grouped together, typically managed or analyzed by an insurer or underwriter as a single book of business.
Premium
The amount paid to an insurer to maintain coverage.
Rate Level
The set price an insurance company charges per unit of exposure (coverage) to cover anticipated losses, expenses, and profit, often calculated as a dollar amount per $100 or $1,000 of the property’s replacement value. It acts as the foundational multiplier used to determine the final insurance premium, representing the overall cost of risk before individualized adjustments.
Rate / Rating
The method used to calculate insurance premiums based on risk factors.
Rating Tiers
Insurers often place properties into tiers (e.g. preferred, standard, or substandard) based on risk factors, with each tier having a different rate level.
Reinsurance
Insurance purchased by insurers to transfer portions of their risk to another insurer.
Replacement Cost (RC)
The cost to replace damaged property with new property of similar kind and quality, without depreciation.
Retention (Self‑Insured Retention, SIR)
The amount of loss the insured retains before insurance coverage applies.
Rider (Floater)
An optional, add-on provision to a standard property insurance policy. It is designed to amend, expand, or customize the base coverage by either insuring specific high-value items, increasing coverage limits, or adding protection for additional risks.
Risk Appetite
The level and type of risk an insurer is willing to accept.
Severity (Loss Severity)
The magnitude of financial loss or the size of a claim. It measures how much a covered incident costs to repair or replace, rather than how often such events occur. It is often calculated by taking the total incurred losses and dividing them by the total number of claims. In risk management, severity is always evaluated alongside frequency, which dictates how often a claim happens.
High Frequency, Low Severity: Frequent, small claims (e.g. constantly losing shingles) often indicate systemic issues and can sometimes worry insurers more than occasional large events. Low Frequency, High Severity: Rare but catastrophic events (e.g. a massive earthquake) are exactly what property insurance is primarily designed to protect against.
Schedule
A detailed listing of insured locations, properties, or assets. In SpatialKey, a schedule typically refers to a list of new risks that an underwriter is reviewing for potential coverage.
Sub‑Limit
A lower limit applying to a specific type of coverage within a policy.
Syndicate
A group of companies or underwriters who join together to insure very high-valued property or high-hazard liability exposure by assuming portions of the financial or specific risks. Insurance exchanges, like Lloyd’s of London, use syndicates to write insurance.
Treaty Reinsurance
Reinsurance that covers a defined portfolio or class of business.
TIV (Total Insured Value)
The total value of insured assets, typically including buildings, contents, and business interruption.
Underwriting
The process of evaluating risk and determining policy terms and pricing.
Unearned Premium
The money paid in advance for the remaining time left on the policy.
Written Premium
Written premium in property insurance is the total premium recorded in an insurer’s books for policies issued during a specific accounting period, regardless of when the coverage begins. It represents the total sales volume and contractual obligations of policyholders, but it is not immediately recognized as earned company revenue.
Was this helpful?