SALVAGE AND SUBROGATION – Those rights of the insured that, under the terms of the policy, automatically transfer to the insurer upon settlement of a loss. Salvage applies to any proceeds from the repaired, recovered, or scrapped property. Subrogation refers to the proceeds of negotiations or legal actions against negligent third parties and may apply to either property or casualty coverages.
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SECTION 831(b) – An “831(b)” captive is an insurance company whose premiums do not exceed $1,200,000 per year and which elects to have those premiums exempted from taxation. If the captive has proper risk distribution, then the insured company can deduct the premium being paid to the captive, while the captive pays no income taxes on that premium. After the payment of losses and expenses, any profits in that captive can be distributed at a favorable dividend rate or can be distributed in a full liquidation of the captive, and the shareholders will receive those accumulated profits at capital gains rates. And if the captive is owned by trusts or adult children, the entrepreneur can also enhance the benefits in his or her estate plan by side stepping the estate tax.
SELF INSURANCE -The process of retaining risk through the maintenance of internal reserves.
SELF-INSURED RETENTION (SIR) – Amount of losses incurred under self-insurance before the excess insurance attachment point.
SINGLE-PARENT CAPTIVE – A captive with one shareholder, also known as “pure captive.” There are more known single parent captives than are group-owned captives.
SLIDING SCALE COMMISSION – A ceding commission which varies inversely with the loss ratio under the reinsurance agreement. the scales are not always one to one: for example, as the loss ratio decreases by 1%, the ceding commission might increase only 5%.
SLIP – A binder often including more than one reinsurer. At some reinsurers, the slip is carried from underwriter to underwriter for initialing and subscribing to a specific share of the risk.
SPECIAL ACCEPTANT – The facultative extension of a reinsurance treaty to embrace a risk not automatically included within its terms.
SPONSORED CAPTIVE – A captive insurance company in which the minimum capital and surplus required by applicable law is provided by one or more sponsors, insures the risks of separate participants through the contract, and segregates each participant’s liability through one or more protected cells.
SPREAD LOSS – A form of reinsurance under which premiums are paid during good years to build up a fund from which losses are recovered in bad years. This reinsurance has the effect of stabilizing a cedant’s loss ratio over an extended period of time.
STOP LOSS – A form of reinsurance under which the reinsurer pays some or all of a cedant’s aggregate retained losses in excess of a predetermined dollar amount or in excess of a percentage of premium.
SUBJECT PREMIUM – A cedant’s premiums (written or earned) to which the reinsurance premium rate is applied to calculate the reinsurance premium. Often, subject premium is gross/net written premium income (GNWPI) or gross/net earned premium income (GNEPI), where the term “gross/net” means gross before deducting reinsurance premiums for the reinsurance agreement under consideration, but net after all other adjustments, e.g., cancellations, refunds, or other reinsurance. Normally, subject premium refers to premium on subject business. Also known as base premium.
SURPLUS – The excess of assets over liabilities. Surplus determines an insurer’s or reinsurer’s ability to write business. Captives are subject to statutorily required minimum surplus levels as well as practical requirements for premium to surplus ratios.
SURPLUS SHARE – A form of proportional reinsurance where the reinsurer assumes pro rata responsibility for only that portion of any risk which exceeds the company’s established retentions.
