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AAD

Annual Aggregate Deductible. See AGGREGATE DEDUCTIBLE

ABI

The Association of British Insurers

ABS

See Asset Backed Securities.

Absolute Net Retention

The amount which the REINSURED retains net for its own account after deduction of all reinsurance recoveries. Sometimes REINSURERS may stipulate a minimum RETENTION in order to ensure that a reinsured does not reduce, by the purchase of additional reinsurance, his retention to a purely nominal figure.

A/C

Account. May sometimes refer to a year of underwriting account.

Acceleration

Generally refers to the underlying covenant in revolving assets securitization and future flows securitization that the repayment of principal (amortization) to the investors in a program will be accelerated upon the happening of certain events, normally events such as a fall in the degree of over-collateralization, under-performance events, etc.

Accommodation line

A line written on a less desirable risk or a risk that would normally be rejected but is accepted because of the overall profitability of the broker’s other business.

An insurer that is otherwise unauthorized to do business in the same state as the ceding insurer but which is granted approval to assume reinsurance by meeting requirements of the insurance department. These requirements usually are to file a formal acknowledgment of the jurisdiction of the state; to submit to financial examinations by the state; to provide evidence that the reinsurer is licensed as an insurer or reinsurer in at least one other state or, in the case of an alien insurer, it is lawfully entered through another state; to meet specified surplus requirements; and to file annual financial statements.

Accreting Swap

A swap with a notional principal amount which decreases over time.

Accrual Bonds

See Z bonds

Accounts

Statements of the business transactions between the parties. For a PROPORTIONAL TREATY they are prepared at regular intervals, usually on a quarterly or half-yearly basis.

Accumulation

The number of risks (or sums insured) which are exposed to claims arising out of a single loss occurrence.
Accumulations can arise in many ways - such as a number of:

• Buildings destroyed in the same Fire or Earthquake;

• Motor vehicles involved in the same collision;

• Passengers in the same plane;

• Cargoes on the same ship.

Potential known exposures, (e.g. buildings exposed to earthquake) can be more easily controlled than unknown accumulations (e.g. personal accident exposure in respect of passengers on the same plane).

See also CATASTROPHE EXCESS OF LOSS.

Actionable Claims

Legal word for receivables, right to claim.

Act of God Bond

A bond where redemption value is related to the occurrence of catastrophes. Can relate to an index of losses or the losses of an individual carrier

Acts In Force Clause

See CHANGE OF LAW.

Actuals

Debt securities, currencies, physical commodities and equity securities (versus derivatives)

Actuarial Method

Method for finding out the amortization of the principal invested in any periodic repayment. The method uses the implicit rate of return to find out the income earned during the period, and treats the balance as amortization.

Actuarial Risk

Traditionally, actuarial risk included any of the risks for which insurance companies underwrote insurance coverage. These included: human mortality, human morbidity, loss of property and liability risks. Actuaries were insurance professionals who designed and priced policies for these risks.

Today, as the distinctions between segments of the financial services industry blur, actuarial risk is becoming a more general notion. Actuaries are being employed to analyze such risks as:

• Mortgage prepayment rates
• Credit card default rates 
• Rates at which employees elect early retirement

Such risks share certain elements. They all represent exposure to multiple, statistically similar events which are, at least partially, non-financial in nature. For example, mortgage prepayment rates result from many different homeowners independently deciding to prepay or not prepay their mortgages. While the decisions of those homeowners may be partially motivated by financial issues such as the desirability of refinancing a mortgage based upon current interest rates, they are also effected by non financial considerations. For example, unsophisticated homeowners may fail to refinance a home when it is economically in their best interest to do so. Also, homeowners may prepay their mortgages because they are relocating to a new home. Such non-financial sources of uncertainty represent an actuarial component to prepayment rates.

Actuarial risks are increasingly becoming securitized. Examples include mortgage backed securities and securitized credit card receivables. Also, insurance derivatives are becoming popular. These provide insurance companies with an alternative to reinsurance and speculators with a new source of risk. [see footnote]

 As with many risks, actuarial risks typically entail a specific and a systematic component. For example, human mortality risk has the systematic component described by the general mortality rates experienced by a population. These rates evolve over time and can change suddenly because of war, disease or natural disasters. Human mortality risk also has a specific component. Any particular human may die earlier or later than might be expected.

Traditionally, insurance companies managed the specific component of actuarial risk through diversification. They would sell life insurance policies to many individuals. They would sell homeowners insurance to many homeowners. They would then capitalize the systematic component of the actuarial risks.

Non-insurance companies manage actuarial risks in much the same way. For example, if a bank purchases securitized credit card receivables, that security will already represent a diversified interest in receivables from many credit card holders. The bank will then allocate capital for the instrument. Specifically, that capital supports the systematic risk that average default rates may change—along with other risks such as interest rate risk, etc.

Actuary

An actuary is a professional business person skilled in the application of mathematics to financial problems.

An actuary applies specialized knowledge of the mathematics of finance, statistics and risk theory to problems faced by:

• insurance companies
• pension plans
• government regulators
• social programs
• individuals

Traditionally, actuaries have specialized in:

• life insurance
• annuities
• property and casualty insurance
• pension plans
• other employee benefit plans
• evidence in the courts about loss of future earnings

An actuary has a practical business sense, the creativity to apply training and experience to new problems and provide innovative solutions, and the communication skills required to convince both colleagues and clients. Actuaries help people plan better for the future by controlling or reducing financial risks associated with:

• sickness
• disability
• dying too soon
• living too long
• unemployment
• property loss and damage
• investment policy

Some actuaries spend part of their time ensuring that companies and pension plans comply with the consumer protection and tax legislation, which govern their operations. In legislation, an actuary is defined as a Fellow of the Canadian Institute of Actuaries. Actuaries, as a profession, have rules of professional conduct and standards of practice.

Adjustable Rate Mortgages

A mortgage loan which has a coupon or interest rate that is subject to change on predetermined reset dates, on the basis of variations in a reference rate. These loans use interest rate indices as the reference rate. Adjustable rate loans may have cap and floor features, meaning the maximum rate and the minimum rates after giving effect to variations. There may also be lifetime cap and floor features. Adjustable Rate Mortgages may be strictly amortizing though some have negative amortization features.

AEC

See - AGGREGATE EXTENSION CLAUSE

Agency

Refers to US government agencies for promoting mortgage secondary markets. In market language, it may also refer to a a security issued by these organizations. These organizations include: the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), the Federal National Mortgage Association (FNMA or Fannie Mae), the Government National Mortgage Association (GNMA or Ginnie Mae).

Agency Securities

In US parlance, refers to the mortgage -backed securities issued by agencies. Compare with private label securities.

Aggregate Deductible (1)

That first part of the loss which is retained by the reinsured but expressed either as an aggregate of a number of potential losses or a monetary amount. See also STOP LOSS and BUFFER LAYER.

Aggregate Deductible (2)

An additional deductible for claims that would otherwise be recoverable under the excess of loss reinsurance contract covering losses arising from an accident or event and which is retained by the reinsured before claims become payable by reinsurers. For example, a reinsurance may cover losses up to $900,000 any one event in excess of $100,000 any one event which in turn in excess of $2,500,000 in the aggregate (in effect, the reinsured has to bear the whole of the first 2.5 losses that would otherwise be recoverable under the reinsurance before it can recover under the reinsurance).

Aggregate Excess Of Loss

A form of EXCESS OF LOSS reinsurance where both the deductible and the reinsurer’s limit of liability are expressed as (usually annual) aggregate amounts. This form of contract would usually be used to protect an account that would not normally be exposed to major "event" losses but could be subject to major attritional loss. e.g. a Medical Expenses account. See also STOP LOSS

Aggregate Exposure

The total of insured (or reinsured) amounts accepted by the reinsured on accumulating business.

Aggregate Extension Clause

A clause that used to be included in per event excess of loss treaties that cover products liability where the original cover granted to the insured by the reinsured is on an aggregate basis. For such policies the clause allows for the deductible and limit of reinsurance to apply also on an aggregate basis. This clause has been generally replaced by the CLAIMS SERIES CLAUSE

Aggregate Extraction Clause

A clause found, particularly in LMX contracts, which allows a Reinsured (who is himself a reinsurer) to extract from an aggregate loss that proportion of the aggregate loss which relates to any one occurrence so that the one occurrence loss can be accumulated into the ULTIMATE NET LOSS of the Reinsured for the specified loss occurrence.

Aggregate Franchise Deductible

A form of deductible found in some reinsurance contracts whereby the contract responds to the whole of the loss (up to an agreed amount) in respect of those losses greater than the stipulated amount. If the loss is smaller than the stipulated amount, the reinsured recovers nothing.

Aggregate Retention

Retention of risk by the policyholder calculated by reference to the total of claims to be retained.

Aggregates

See AGGREGATE EXPOSURE

Aging

The concept which assumes that newly issued mortgages tend to prepay slower than mortgages which are older or seasoned. This aging refers to the underlying collateral and not the securities created upon that collateral.

All or Nothings

The option payout is a predetermined amount, which is paid out only if a trigger point is reached.

Alterations Clause

A clause to be found in treaties which allows for the contracting parties to change the terms thereof.

Alternative Risk Transfer

Refer to ART.

Refers to devices for managing insurable risk other than by seeking an insurance cover. For example, when a corporate wanting protection against natural calamities either sets up a captive insurance company or uses securitization of risk to cover itself, it is using an alternative to traditional insurance, and hence the device is called alternative risk transfer (ART).

American Style Option

An option that can be exercised any time during its life up to and including the last trading day.

Amortization

The paying off of debt in regular instalments over a period of time.
The deduction of capital expenses over a specific period of time. Similar to depreciation, it is a method of measuring the "consumption" of the value of long-term assets like equipment or buildings.

Anniversary

A mutually agreed date at which the treaty is renewed. It is used as a measure of the annual period of the treaty; the date when premium adjustments are made; the date at which outstanding loss statements are submitted; and when notices of cancellation take effect.

Annual Aggregate Limit

Retention of risk by the policyholder, calculated on the basis of retention of claims in total over a year

Annual Contract

The term "annual contracts" is used to describe those contracts that are issued for 12 month periods.

Annual Resigning

A procedure used in the Lloyd’s Market to preserve equity between Names when a policy has been accepted which has a period for, say, three years. At the end of the first 12 months (i.e. at the end of the underwriting account) a premium portfolio transfer of the unexpired 24 months’ premium is made by way of a reinsurance from the first year’s NAMES to the second year’s Names. At the end of the second year the unexpired 12 months’ premium is then portfolio transferred by way of a reinsurance from the second year’s Names to the third year’s Names.

Any One Event/ Cause/ Accident/ Occurrence

The definition of the conditions under which the reinsurer could become involved in a loss under an excess of loss treaty. Under "event" reinsurance all and any losses, even if arising under different policies, are aggregated to form one claim if arising from one insured event or cause or accident or occurrence. Thus, if two motor vehicles owned by different policyholders of the reinsured are in collision with each other, all the amounts paid under both policies are totalled so that one claim arises to the excess of loss treaty and the reinsured bears only a single DEDUCTIBLE. Certain types of loss, such as those arising from weather conditions persisting over a period (see HOURS CLAUSE) or personal injuries caused by a defective product or LATENT DISEASE claims arising from exposure to adverse working conditions over a long period, make an adequate definition of "any one event" or "cause/ accident/occurrence" very difficult to achieve.

AOA

Any One Accident.

AOE

Any One Event.

AOL

Any One Loss.

AOR

Any One Risk

AOV

Any One Vessel

AP

Additional Premium

APR

The Annual Percentage Rate of Interest.  Refers to the intrinsic rate of return (IRR) in a mortgage or loan carrying specified payments over time.

APY

The Annual Percentage Yield of Interest. This refers to the APR compounded on a yearly basis.

Arbitrage

An arbitrage is a financial transaction that makes an immediate profit without involving any risk. For example, suppose a futures contract is traded on two different exchanges. If, at one point in time, the contract was trading at $45¼ on one exchange and $45 on the other, an investor could purchase the contract at $45 on one exchange and sell it at $45¼ on the other, thereby making a risk-free profit of a quarter dollar.

Arbitrage opportunities arise because of minor pricing discrepancies between markets or related instruments. Per-transaction profits tend to be small, and they can be consumed entirely by transaction costs. Accordingly, most arbitrage is performed by financial institutions which have very low transaction costs and can make up for small profit margins by doing a large volume of transactions.

An arbitrageur is an individual or institution who engages in arbitrage. Arbitrageurs play an important role in financial markets by helping to eliminate price discrepancies between markets or related financial instruments.

A pure arbitrage involves trading effectively the same instruments for different prices at the same time.

The term is now used widely in connection with concurrent purchases and sales of securities of proposed acquiring and acquired companies in pending tender offers and other acquisitions.

Arbitration Agreement

An Agreement to allow for disputes to be settled amicably by reference to arbitration rather than resorting to action at Law. There are many versions in use. It is usually recommended that the Arbitration Agreement be a separate agreement to the treaty wording so that even a dispute as to the validity of the treaty itself can be referred to arbitration.

ARCF

Asbestos Related Claim Form. A form used in the London Market for the reporting of Asbestos related claims. The form gives full details of all original insurances and all reinsurances that have given rise to the claim being reported thereon. It enables reinsurers to tract asbestos exposures.

ARM

See Adjustable Rate Mortgages.

Arranged Total Loss

Same as COMPROMISED TOTAL LOSS

An agreement made between insurers and insured whereby in the event that the cost of repairs to a vessel exceed a certain amount the insurers will declare the vessel as being a total loss, instead of repairing it.

ART - (Alternative Risk Transfer)

Generic phrase used to denote various non-traditional forms of re/insurance and techniques where risk is transferred to the capital markets or other vehicles including self-insurance.  On a broader note it refers to the convergence of re/insurance, banking and capital markets.

Some of the alternatives are as follows:

• Fund from Cash-Flow (Self Insure / Large Deductible or Self Insured Retention / Internal Fund / Sinking Fund)

• Lending Agreement

• Retrospective Rating Program

• Chronological Loss Stabilization Program (blended finite risk insurance)

• Multi-Line Integrated Program / Multi Year / Finite Risk

• Wholly Owned Captive

• Rent-a-Captive

• Protected Cell Company / Captive

• Association Captive

• Agent Owned Captive

• Risk Retention Group

• Purchasing Group

• Reciprocal Insurance Exchange (Canada - except Quebec)

• Catastrophe Bond / Securitization

• Non-Catastrophic Securitization / Future Flow Transactions

• Derivatives / Futures / Options / Swaps

• Insuritization

• Loss Portfolio Transfer

• Traditional Insurance / Guaranteed Cost

Asian Option (Average-Style)

The payoff of Average-Style options is based on the average price of the underlying interest over a period relative to the strike price. This contrasts with American and European style options which pay off based on a prices as at a single date relative to the strike price.

"As if" figures

A term used to restate the treaty statistics for prior years to accord with the current (or proposed) limits, terms and conditions Sometimes also used to show results as if exceptional losses had not occurred.

As Orig

As original. To follow the conditions set out in the original policy or policies.

Asset-Backed Commercial Paper

An application of the concept of securitization to funding of trade receivables. Several originators wanting liquidity against their trade receivables sell these receivables to a conduit which then issues commercial paper, that is, short term paper of typically 90 days to 180 days maturity corresponding to the present value of such receivables. On maturity, the originator is supposed to collect the receivables and pass them over to the holders of the paper through the conduit. At times, the conduit is sponsored by a major bank which also provides liquidity support to the conduit to ensure timely redemption of the paper.

Asset-Backed Financing

Refers generically to all forms of financing where the financier has a claim over specific assets of the borrower, whether with or without a general claim against the borrower.

Asset-Backed Securities

Asset-backed securities represent securitized interests in a pool of assets. Issues have been backed by credit card receivables, auto loans and other forms of consumer installment loans.

Investors receive monthly payments of principal and interest. Securities backed by installment loans operate much like a mortgage pass-through. All principal and interest payments flow directly to investors.

Securities backed by revolving credit lines, such as credit cards, may delay distributing principal during a lockout period. During that period, principal cash flows are reinvested in additional receivables. Once the lockout period is over, principal flows to the investors.

The rate at which asset-backed securities pay down principal, as well as their ultimate maturity date, is uncertain. This is because principal cash flows depend upon the rate at which individual consumers decide to prepay their indebtedness. However, because deals are large, and diversified across many loans, this uncertainty is minimal. Unlike mortgage-backed securities, whose prepayment rates are affected by changes in interest rates, asset-backed security prepayments show little sensitivity to interest rates.

Asset-Liability Management

Matching the amounts of assets and liabilities by term and interest rate type. Financial institutions carry out asset-liability management when they match the maturity of their deposits with the length of their loan commitments to keep from being adversely affected by rapid changes in interest rates.

Assignable Mortgage/ Assumable Mortgage

A mortgage loan which can be assumed by a new buyer. Generally, the new owner must pass a credit approval process.

Assignment

In relation to receivables, it means the legal action of transfer of receivables from one person to another. In relation to a mortgage, it would mean the transfer of a mortgage by the mortgagee (borrower and occupier) to another person.

The amount of insurance assumed by a reinsurer from a ceding insurer in an ordinary facultative or treaty reinsurance arrangement.

Attestation Clause

The final clause of the treaty wording and which provides for the agreement to be signed in duplicate for and on behalf of each party.

At-the-Market

An order to buy or sell a financial instrument (eg. futures, options, etc.) at whatever price the contract is trading when the order is executed.

At-the-Money

An option whose exercise price is equal to the market price of the underlying stock, index or other security.

Auth R/I

See AUTHORISED REINSURANCE

Authorised Reinsurance (1)

Authorised reinsurance. A syndicate reinsurance procedure whereby subscribing syndicates are not required to authorise an entry for processing through Lloyd’s Policy Signing Office

Authorized reinsurance / admitted (2)

Automatic Scale of Rating

A form of premium rating based upon the loss experience (BURNING COST) of the treaty year. A preliminary premium is paid in the form of a DEPOSIT PREMIUM which is subsequently adjusted according to the actual loss experience. Such adjustments may continue until all outstanding losses have been finally settled. The reinsurance premium due is expressed as a rate percent of the reinsured’s GPI (or the equivalent used) and which is obtained by applying a LOADING to the BURNING COST. The premium rate is usually subject to minimum and maximum limits so that if the loss experience were "Nil" the reinsurer would receive some premium and if the loss experience were very adverse there would be a limit to the amount of premium the reinsured would be liable to pay. The premium rating may be based upon the BURNING COST for the treaty year alone or on an average over a number of years or whatever may be negotiated. The rating may also be based upon the paid loss experience alone rather than upon paid plus outstanding (i.e. incurred) losses.

Automatic Treaty

An obligatory treaty. - See Automatic reinsurance

Average (1)

A term used in property insurance whereby in the event of under insurance the amount of the indemnity which is recoverable by the insured is reduced to proportion that the sum insured bears to the actual values at risk. Thus for example in a case where a loss amounting to 1,000 occurs on a policy with a sum insured of 10,000 but where the value at risk was not 10,000 but 20,000 the amount payable to the insured will not be 1,000 but will be 1,000 x 10,000/20,000 = 500

Same as Coinsurance clause in North America.

Average (2)

A term used in the marine market to refer to a partial loss whereby in the event of a loss to a vessel and its cargo the loss will be apportioned between all parties even though cargoes belonging to some insured’s may not be damaged by that incident.

Average Maturity

The weighted average of the remaining terms to maturity (expressed in months) of the mortgage loans underlying the MBS.

Average Temperature

The average temperature is usually measured as the average of the daily high and low temperatures.
or Tmax + Tmin / 2
e.g. 14C + 5C / 2 = 9.5 C (Average Temperature)
In some areas, the average of hourly readings is used.

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Baby Bonds

Are bonds which have denominations less than $1,000 per bond.

Back-End Load

Refers to charges which are imposed upon the redemption or liquidation of an investment or borrowing option. Sometimes, these charges are viewed as early withdrawal penalties. They are called back-end because they occur at the end of the investment process.

Back Up Layer

A layer of excess of loss that provides for further reinstatements of coverage after any automatic reinstatements provided for under the terms of the original contract have been exhausted.

Back-Up Servicer

In securitization transactions, it is customary for the originator to continue to service the transaction, that is, collect receivables, follow them up, etc. However, the SPV is given the right, in certain predefined events or at the discretion of the SPV, to remove the servicer and have the transaction serviced by the back up servicer, that is, an entity other than the servicer.

Backwardation

A market situation where the spot price trades at a premium to the forward price. Opposite of contango.

Balloon Payment

If a contract contains a clause that reads something like, " The entire purchase price and interest shall be paid in full within five (5) years from the date hereof, anything herein to the contrary not withstanding..." that is a balloon clause in the contract.

A balloon payment is the term used for a large, final payment on the contract. A balloon clause usually calls for the final payment to be make in five to ten years from the original sale date.

If the buyer fails to make the balloon payment, this constitutes a default on the contract.

BAN or Bond Anticipation Note

Is a short term security issued by a municipality. The security will be paid or redeemed by funds from a new issue. It is a cash management tool.

Bankers Acceptances

A time or sight draft drawn on a commercial bank by a borrower, usually in connection with a commercial transaction. The borrower is liable for payment, as is the bank, which is the primary obligor, to pay the draft at its face amount on the maturity date.

Bank for International Settlements (BIS)

An international banking forum which sets standards for bank capital and risk management. The BIS has, inter alia, set model capital adequacy norms based on which bank regulators in individual countries fix the minimum capital requirements for banks and financial intermediaries. These proposals also include provisions relating to securitization transactions.

Bankruptcy

Refers to a situation where an entity is unable to pay its debts. Normally the assets of a bankrupt entity are taken over by a Court-appointed administrator, and the entity is taken to winding up.

Bankruptcy Code

The law relating to bankruptcy of entities.

Bankruptcy Estate

The properties of a bankrupt entity which are usually taken over by a Court-appointed administrator.

Bankruptcy Remote

A key concern in securitization transactions to ensure that the transfer of assets of the originator to the investors' representative or SPV is not affected by bankruptcy or distress of the originator. This necessitates certain legal precautions in structuring the assignment of receivables, as also so constituting the SPV that it can neither be taken to liquidation by the shareholders of the originator, nor by those of the SPV itself. Further, the structure should also ensure that the SPV would not be treated as the subset of the originator by substantive consolidation. Such a structure is called bankruptcy remote structure.

Bankruptcy Risk

The risk that a counterparty, which owes your institution money, goes bankrupt.

Bare Trust

Similar to grantor trust where the only role of the trust is to hold title to the asset and the trustee has no interest in the asset. See also grantor trust, tax transparency.

Barrier Options

These options operate in the same way as standard options, except that payout or receipt only occurs if certain thresholds in the related reference rate or index are or are not exceeded during the exercise period. Barrier options include Knock-in options and Knock-out options.

Base Currency

Base currency is the currency in which an institution quantifies its risks. The choice is important in risk estimation because it can alter the results. For example, a Treasury bill may entail little risk for an investor who calculates risk in US dollars. Because of exchange rate risk, however, it would be quite risky for an investor who used the French franc as a base currency. Most institutions estimate risk in the currency that they use for accounting.

Basis

The difference between a futures contract price for an item and the current spot price of the same item.

Basis Risk (weather derivatives)

The risk that a hedge will not perfectly mirror gains or losses on the underlying exposure.

Location basis risk -  refers to the fact that the weather at one location will generally differ from the weather at another location. (e.g., location of the risk and the nearest weather station).

Basis Point

One one-hundredth of one percentage point. Such a small measurement is especially helpful in expressing the often small but significant variations in bond yields. For example, the difference between a 12.83% yield and a 12.88% yield is 5 basis points. 

B/C

BURNING COST

Bear and Bull

For generations, bulls and bears on Wall Street have referred to two decidedly different types of investors - the bulls being those who expect stock prices to rise, the bears being those who believe prices are about to decline.

Bearer Bond

A bond that does not have the owner's name registered on the books of the issuer. Interest and principal, when due, are payable to the owner.

Benchmark

The standard to measure, monitor, price or evaluate a security or derivative. It could also refer to a rate used as the basis for adjustable rate loans or mortgages. For example, the treasury market is the benchmark for the corporate, mortgage backed, international and emerging credit markets.

Benchmarking

Comparing information of one entity to like information of another entity or composite group for the purpose of determining areas for potential improvement and to identify the best practices.

Beneficial Interest

The interest of the investors on whose behalf the trustee or the SPV holds securities/ receivables. In a securitization deal, the receivables/ cash flows are legally held by the SPV or trust, for the benefit of the investors; hence the investors are beneficiaries and their interest is beneficial interest.

Beneficial Interest Certificates

Certificates indicating the beneficial interest of investors in the SPV/ trust. These are different from bonds which are debt securities issued by the SPV. See also cash flow bonds.

BIIBA

British Insurance & Investment Brokers Association

Binder (1)

A term used to refer to a BINDING AUTHORITY

Binding Authority

An agreement for insurance or reinsurance whereby an Underwriter delegates underwriting authority to another party, usually a broker or a managing general agent.

BIS

See Bank for International Settlements.

Black Box

A securitization issue where no or scanty details are known about the collateral, that is, underlying assets. Normally this is the case where the SPV issues securities backed by receivables of multiple originators.

Black-Scholes Formula

An option valuation formula based on the principle that an option can be priced by combining it with its underlying asset into a riskless hedge portfolio.

Blended Cover

Mixture of insurance/reinsurance and other risk management techniques on a single policy.

Blue Chip

A company known nationally for the quality of its products or services, its reliability, and its ability to operate profitably in good and bad economic times.

Bond

Bonds are promissory notes or IOUs issued by a corporation or government to its lenders. They are usually issued in multiples of $1,000 or $5,000, although $100 and $500 denominations are available.

A bond is evidence of a debt on which the issuing company usually promises to pay the bondholder a specified amount of interest at intervals over a specified length of time, and to repay the original loan on the expiration date. A bond represents debt, therefore its holder is a creditor of the corporation and not a part owner, as the stockholder is.

The NYSE operates both a bond trading floor and an Automated Bond System (ABS) where listed bonds may be traded.

Redemption may be linked to an event (e.g. CAT bond)

Bond Equivalent Yield

The computation of a yield on the basis of a 365-day year.

Book Value

An accounting term.  The book value of a stock is determined by adding up all of a company's assets and then deducting all of its debt and liabilities, including the liquidation price of any preferred issues. This sum is then divided by the number of common shares outstanding and the result is book value per common share.

Book value of a company's assets or of a security may have little relationship to the market value.

Bordereaux (Loss)

A listing of paid and outstanding losses.

Bordereaux (Premium)

Documents which give brief details of every risk ceded to a treaty or bound under a Binding authority or Lineslip and which therefore keep insurers/reinsurers informed as to the types of risks covered under the contracts.

Bottom Layer

Same as FIRST LAYER

The first LAYER of excess of loss coverage.

Bouquet of Treaties

A term used to describe a collection of treaty contracts offered by a reinsured (e.g. Fire, Accident, Marine, Aviation) as a package. Generally the reinsurer is obliged to accept the same percentage share of each reinsurance contract which forms part of the bouquet.

Bowie Bonds

An instrument created by securitizing the receivables from music tapes of a famous singer by that name. Perhaps the first instance of securitization of intellectual property rights.

Brady Bonds

Bonds created by converting sovereign debts of Argentina, Mexico and Venezuela into tradable securities under a plan initiated by the US Government in 1989. Named after its author, Brady.

Bridge Bank

An organization which is created to serve as a vehicle to transport damaged loans or securities from an ailing financial institution. Often these nonperforming securities are package into securities or portfolios, which may be, acquired by turn-around specialists or vulture funds at significantly discounted prices. This activity can help improve the creditworthiness of the impaired financial institution because loans or securities in default are no longer held by that institution. This frees up regulatory capital for other purposes and removes impediments for complying with various regulatory bodies and banking laws. It should be noted that from a banking, brokerage or insurance perspective, illiquid or defaulted loans and securities have substantially higher regulatory capital haircuts relative to most other liquid securities. See Special Purpose Vehicle.

Broker

The intermediary who, as agent of the insured or reinsured, negotiates the contract with the insurer or reinsurer.

Brokerage

A commission paid to a broker as remuneration for the work undertaken in placing and servicing a piece of business.

Buckets

Categories for securities or derivatives. Some buckets refer to maturity classifications, such as, 3, 6, 12 month buckets. There are many other designations as well. The term can also refer to duration adjusted groups, option adjusted groups, and other predefined categories which represent a dominant, common feature.

Buffer Layer

Same as AGGREGATE DEDUCTIBLE

That first part of the loss which is retained by the reinsured but expressed either as an aggregate of a number of potential losses or a monetary amount. See also STOP LOSS.

Bullet

A type of credit security which repays the entire principal on the maturity date. Prior to the maturity or prepayment of the bond, interest payments are to be made in accordance with the payment schedule. Normally, corporate bonds pay off in lump sum principal, that is, are bullet paying bonds, whereas many mortgages, leases etc. pay off on an amortization basis. See also amortization.

Bulk reinsurance

The transfer of over 50% (or some other substantial portion defined by law or regulation) of a ceding insurer's liabilities to an assuming insurer. Such a transfer often requires the approval of the state insurance commissioner.

Bureaux

The organizations through which the London Market transacts business. Currently Lloyd’s Policy Signing Office (LPSO), Lloyd’s Underwriters Non Marine Claims Office (LUNCO), Lloyd’s Underwriters Claims and Recoveries office (LUCRO), for Lloyd’s and London Insurance and Reinsurance Market Association (LIRMA) and the Institute of London Underwriters (ILU) for companies.

Burning Cost (1)

The percentage which the total of paid and outstanding losses to the LAYER bears to the reinsured’s GPI (or whichever equivalent is used). Is often used as a base for the calculation of the premium due to reinsurers.

Burning Cost (2)

At one time in was used in Lloyd’s as a synonym for POSSIBLE MAXIMUM LOSS.

Burnout

Mortgage market phenomenon representing the tendency of mortgage pools to become less sensitive to interest rate as they tend to maturity. The older the pool, the more burnt out is the sensitivity to interest rate changes.

Business Risk

The uncertainty associated with operating cash flows of a business. There are different dimensions of business risk, namely sales risk and operating risk.