Article

Insurance is a field where a few misunderstood words can derail an otherwise straightforward conversation. The vocabulary of insurance can often be confusing, terms like attachment, cession, and IBNR get used as though everyone in the room already shares the same definition. Often they don't. This glossary collects the terms that most often trip people up — grouped by what they describe — and defines each in plain English.

Retention & Risk Financing

These terms describe how much risk an organization keeps for itself, and where in a loss the various parties come into play.

• Retention. The amount of risk an organization keeps for its own account rather than transferring to an insurer. A captive is, at its core, a formal structure for retaining risk — the retained layer is the portion of loss the captive itself pays before any transfer kicks in.
• Deductible. The amount the insured pays on a covered claim before the insurer begins to pay. The insurer handles the claim and is reimbursed for the deductible portion; the coverage limit sits on top of the full loss.
• Self-Insured Retention (SIR). Often confused with a deductible. Like a deductible, it is an amount the insured absorbs before coverage responds — but with an SIR, the insured typically pays and administers losses within the retention directly, and the insurer's limit sits above it. The distinction matters for who handles the claim and how limits stack.
• Attachment Point. The dollar level at which a particular layer of coverage begins to respond. A policy that attaches at $15 million does not pay until losses exceed $15 million — everything below that is someone else's responsibility (a primary layer, a retention, or another insurer). "Attachment" is simply where your layer starts.
• Layer. A defined band of risk between two dollar amounts — for example, "$5 million excess of $15 million" means a layer covering losses from $15 million up to $20 million. Risk programs are built by stacking layers, each potentially held by a different party.
• Working Layer. The lower, more frequently hit layer of a program, where losses are comparatively predictable and routine. Captives are generally best suited to retaining the working layer, where their own loss experience is credible.
• Excess Layer. A higher layer that attaches above the working layer and is hit only by larger, less frequent losses. Excess layers are lower-frequency but higher-severity — the territory of nuclear verdicts and catastrophic claims — and are often better transferred than retained.

Reinsurance & Transfer

These terms describe how risk moves from one party to another — the mechanics of transferring away what an organization chooses not to keep.

• Cession / Ceding. To "cede" risk is to transfer it to another party. The insurer or captive that passes risk along is the ceding company; the risk it transfers is the cession. When a captive cedes its catastrophic layer to a reinsurer, it is handing off that slice of risk in exchange for a premium.
• Reinsurance. Insurance for insurers — coverage a carrier or captive buys to transfer some of the risk it has assumed. Reinsurance is what lets a captive write more than its own surplus could otherwise support, by ceding the layers it would rather not hold.
• Retrocedent. A reinsurer that cedes — passes on — risk it has already assumed to yet another reinsurer. It is the same ceding relationship as before, but one level up the chain: the reinsurer now acts as the one transferring risk away. The transfer itself is called retrocession, or reinsurance of reinsurance.
• Retrocessionaire. The counterpart to the retrocedent. The reinsurer that assumes risk from another reinsurer — a reinsurer's reinsurer. Retrocession lets reinsurers spread their own accumulations, and it is how risk ultimately disperses across the global market rather than piling up in any one balance sheet.
• Quota Share. A proportional form of reinsurance in which the ceding company and the reinsurer split premiums and losses by a fixed percentage. In a 50% quota share, the reinsurer takes half the premium and pays half of every loss. It lets a captive participate in a layer's economics without assuming 100% of the risk.
• Excess-of-Loss (XoL). Non-proportional reinsurance that responds only when a loss exceeds a set attachment point. Rather than splitting every claim, the reinsurer pays only the portion of a loss above the attachment — protection calibrated to the catastrophic tail rather than routine losses.
• Facultative Reinsurance. Reinsurance negotiated one risk at a time. The reinsurer evaluates and prices each individual risk on its own, and can accept or decline it — "facultative" means optional. It is used for unusual, large, or risks that fall outside a standing arrangement.
• Treaty Reinsurance. The counterpart to facultative. A standing agreement under which the reinsurer automatically assumes a defined class or book of risks, without evaluating each one individually. A treaty covers everything within its terms, giving the ceding company certainty of cover across a whole category rather than risk-by-risk approval.
• Specific (Per-Occurrence) Reinsurance. Protection that responds to a single loss — it attaches when any one claim or occurrence exceeds a set amount. "Specific" protection guards against the individual large loss, capping what the captive pays on any one event.
• Aggregate Reinsurance. Often paired with specific protection. Protection that responds to accumulated losses over a period rather than any single claim — it attaches when the total of losses across the year exceeds a set amount. An aggregate (or "stop-loss") cover limits the captive's total annual loss, guarding against a year of many moderate losses rather than one catastrophic one. Together, specific and aggregate protections cap both the single-event and the full-year exposure.
• Fronting. An arrangement in which a rated carrier issues the policy — supplying the AM Best-rated paper that lenders and contracts require — while the captive retains the economics of the risk behind it through reinsurance or a quota share. Fronting lets an unrated captive satisfy rating requirements without surrendering its economics.
• Ceding Commission. An amount the reinsurer pays the ceding company to offset the cost of acquiring and administering the business it is assuming. It is part of how the economics of a quota share are actually divided between the parties.
• Reinstatement. A provision that restores a reinsurance layer's limit after it has been used by a loss, allowing it to respond again — sometimes for an additional premium. It governs how many times a layer can refill within a policy period.
• Collateral. Security — often a letter of credit, trust, or funded assets — that a captive posts to guarantee its obligations to a fronting carrier or reinsurer. It is the mechanism that lets an unrated captive hold risk behind rated paper, and its cost and availability can constrain how much a captive can prudently retain.

Reserving & Losses

These terms describe how insurers account for losses — including the ones that haven't fully revealed themselves yet.

• Reserves. Money an insurer sets aside to pay claims it expects to owe. Setting reserves accurately is central to solvency — under-reserving flatters today's results at the expense of tomorrow's.
• IBNR (Incurred But Not Reported). One of the most misunderstood terms in insurance. Reserves held for losses that have already happened but have not yet been reported to the insurer — plus future development on claims already known. On long-tail lines, a loss can occur today and not surface as a claim for months or years, so IBNR is the cushion for what is coming but not yet visible. Conservative IBNR is a hallmark of disciplined reserving.
• Loss Development. The way a claim's estimated cost changes over time as more becomes known — typically growing as investigation, litigation, and medical treatment play out. Loss development factors are the multipliers actuaries apply to current losses to estimate their ultimate cost.
• Long-Tail / Short-Tail. A short-tail line settles quickly (property damage is reported and paid in short order); a long-tail line takes years to resolve (liability claims that wind through litigation). Long-tail lines demand more conservative reserving because their ultimate cost stays uncertain far longer.
• Ultimate Loss. The total amount a claim or book of claims is expected to cost once everything is finally settled — paid losses plus outstanding reserves plus IBNR. It is the number that actually matters, even though it isn't fully known until years after the fact.

Performance & Results

These terms describe whether an insurer — or a captive — is actually making money.

• Combined Ratio. The single most important measure of underwriting performance. The sum of losses and expenses divided by premium, expressed as a percentage. Below 100% means the insurer made an underwriting profit — it took in more premium than it paid out in losses and expenses. Above 100% means an underwriting loss. A combined ratio of 105%, for instance, means the insurer paid out $1.05 for every $1.00 of premium it collected, before any investment income.
• Loss Ratio. Losses divided by premium — the share of each premium dollar that goes to paying claims. It is one of the two components of the combined ratio.
• Expense Ratio. Underwriting expenses divided by premium — the share of each premium dollar that goes to the cost of acquiring and running the business. Loss ratio plus expense ratio equals the combined ratio.
• Underwriting Profit. What remains when premiums exceed losses and expenses — profit from the insurance business itself, separate from investment income. A captive that retains a favorable layer captures this profit instead of ceding it to a commercial carrier.
• Gross Written Premium (GWP). The total premium written before deductions for reinsurance ceded. It measures the full size of the premium a program generates — distinct from the portion a captive ultimately retains net of what it cedes away.
• Frequency & Severity. The two variables behind every pricing and retention decision. Frequency is how often losses occur; severity is how large they are when they do. A working layer is high-frequency, low-severity; a catastrophic excess layer is the reverse.

How the Terms Fit Together

These definitions are more useful together than apart, because risk transfer is really one connected idea. An organization decides how much risk to retain and where its coverage attaches; it cedes the layers it would rather not hold through quota share or excess-of-loss reinsurance; it holds reserves — including IBNR — against the losses it keeps; and it measures whether the whole arrangement works through its combined ratio. A captive is simply a structure that lets an organization make those choices deliberately and capture the results of making them well.