Insurance & Finance Glossary for 4 Target Roles

Comprehensive vocabulary flashcards covering the core terminology across insurance fundamentals, reinsurance, catastrophe modeling, banking and credit risk, climate physical and transition risk, management consulting, solutions engineering, and product management.

Carrier / insurer

The insurance company that writes the policy and pays claims (e.g. Chubb, Travelers).

Policyholder / insured

The person or business buying the insurance coverage.

Premium

What the insured pays for coverage, usually on a yearly basis.

Policy

The contract detailing what is covered, for how much, and the exclusions.

Underwriting

Deciding whether to insure something and determining at what price to do so.

Claim

A request for payment submitted after a loss occurs (e.g. when a house floods).

Deductible

The amount the insured must pay first out-of-pocket before insurance coverage kicks in.

Limit

The maximum dollar amount an insurer will pay out on a policy.

Exclusion

Something a policy specifically does not cover (for example, many home policies exclude flood damage).

Line of business

A category of insurance, such as property, auto, liability, or life. Climate work is mostly in property.

P&C

Property and casualty insurance: coverage for physical things and liability, as opposed to life or health insurance.

Personal vs commercial lines

Insurance designed for individuals (such as homes and personal cars) versus coverage for businesses (such as offices and factories).

Loss ratio

Claims paid divided by premiums earned (e.g. $70\%$ means $70$ in claims paid per $100$ of premium earned).

Combined ratio

Loss ratio plus expenses. A combined ratio under $100\%$ indicates that the insurer made money on underwriting.

Rate / pricing adequacy

Whether premium rates are high enough to cover expected losses plus operational costs.

Rate filing

The regulatory requirement in the US where insurers must submit and receive approval from state regulators for price changes.

Non-renewal / market withdrawal

An insurer dropping existing customers or completely leaving a geographic region, as seen with several insurers exiting California due to wildfire risk.

Insurer of last resort

A state-backed insurance plan for individuals or businesses unable to obtain private market coverage (e.g. California FAIR Plan, Florida Citizens).

NFIP

National Flood Insurance Program: the federal US government program that writes the majority of flood insurance policies in the country.

Protection gap

The difference between total economic losses from disasters and the portion that was actually covered by insurance.

MGA

Managing general agent: a specialized firm authorized to underwrite risks on an insurer's behalf. Many insurtech startups operate as MGAs.

Actuary

A math-heavy professional who prices insurance policies and sets financial reserves, requiring a series of professional certification exams.

Reserves

Funds that an insurer sets aside specifically to cover future claims it expects to pay.

Solvency

The financial status of whether an insurer holds sufficient capital to satisfy all of its claims, even in the aftermath of a major disaster.

Reinsurer

A company that takes on a portion of a primary insurer's risk to prevent catastrophic losses (e.g. Swiss Re, Munich Re, Everest, TransRe).

Cedent / ceding company

The primary insurer purchasing reinsurance; "ceding" refers to the act of passing risk along to a reinsurer.

Reinsurance broker

An intermediary (e.g. Aon, Guy Carpenter, Gallagher Re, Howden Re) that advises the cedent, models its risk, structures the deal, shops it to reinsurers, and earns commission.

Treaty reinsurance

An agreement covering an entire portfolio of policies under a single contract, typically written on an annual basis.

Facultative ("fac")

Reinsurance purchased for a single, specific large risk, such as an individual skyscraper.

Proportional / quota share

A reinsurance arrangement where the reinsurer receives a fixed percentage of every policy's premium and assumes that exact same percentage of losses (e.g. $30\%$ of everything).

Non-proportional / excess of loss (XoL)

Reinsurance where the reinsurer pays only after primary losses exceed a predefined dollar threshold. Most catastrophe reinsurance is structured as XoL.

Retention

The dollar amount of loss that the primary insurer retains and absorbs before reinsurance coverage begins paying.

Attachment point

The exact loss threshold at which a specific layer of reinsurance begins paying out; equivalent to the retention for that particular layer.

Layer / tower

The tiered structure in which reinsurance coverage is arranged (e.g. "$50\text{M}$ xs $100\text{M}$" covers the next $50\text{M}$ above $100\text{M}$ in losses). The full stack of layers is called the tower.

Exhaustion point

The maximum loss level where a specific reinsurance layer's coverage is completely depleted.

Rate on line (ROL)

The reinsurance premium divided by the layer's coverage limit, used as a fast metric to evaluate and compare pricing across different layers.

Reinstatement

The mechanism of restoring a layer's coverage limit after it has paid out a claim, usually requiring the payment of an additional premium.

Renewal / 1/1

The calendar date when reinsurance contracts are renegotiated and renewed. Major industry renewal dates include January 1, April 1 (Japan), June 1 (Florida), and July 1.

Placement

The process of securing commitments from reinsurers to accept and underwrite risk for a proposed reinsurance program.

Submission

The structured data package sent by a broker to reinsurers, containing exposure data, catastrophe model results, and historical loss records.

Lead reinsurer

The primary reinsurer that negotiates and sets the price and contract terms for a deal, which following reinsurers then accept.

Hard vs soft market

A hard market features scarce underwriting capacity and high prices; a soft market features abundant capacity and low prices.

Capacity

The total volume or limit of insurance and reinsurance risk that the market is willing and able to underwrite.

Retrocession ("retro")

A secondary layer of reinsurance bought by reinsurers to manage and pass along portions of their own risk.

ILS

Insurance-linked securities: financial investment instruments whose yields and returns depend on insurance loss outcomes, allowing capital market investors to assume catastrophe risk.

Cat bond

Catastrophe bond: a form of ILS where investors receive coupon interest but forfeit their principal investment if a contractually specified disaster occurs.

Trigger

The defined event or benchmark that prompts a cat bond or insurance contract to pay out, such as actual indemnity losses, an industry loss index, or parametric physical measurements.

Parametric insurance

A policy that disburses a pre-agreed fixed payment immediately when a predefined measurable physical metric is met (e.g. wind speeds exceeding $120\,\text{mph}$ at a station), bypassing the traditional claims adjusting process.

Cat model

Catastrophe model: analytical software simulating thousands of potential disaster scenarios to estimate financial losses. Major vendors include Moody's RMS and Verisk (formerly AIR), alongside smaller firms like KCC and CoreLogic.

Hazard module

The component of a catastrophe model that simulates physical perils and their intensity (e.g. tracking a hurricane's path or modeling flood inundation depth).

Vulnerability module

The component of a catastrophe model calculating expected physical damage sustained by a structure at a given hazard intensity, taking into account structure type, construction year, roof material, etc.

Financial module

The component of a catastrophe model that overlays insurance terms (such as limits, deductibles, and reinsurance structures) onto physical damage estimates to determine dollar loss values.

Exposure

The total inventory of insured assets and structures at risk along with their replacement values.

Exposure data / schedule (SOV)

The detailed property spreadsheet used in catastrophe modeling; SOV stands for statement of values.

Primary characteristics / COPE

Essential building data points that drive structural vulnerability: Construction, Occupancy (use of the building), Protection, and Exposure.

Geocoding

The computational process of converting street addresses into spatial geographic coordinates (latitude and longitude) for risk modeling.

Event set / stochastic catalog

A large-scale database of thousands of synthetically generated disaster events (e.g. $10{,}000$ simulated years of potential hurricanes) evaluated by a cat model.

Peril

A specific hazard or disaster type, including hurricanes, earthquakes, floods, wildfires, and severe convective storms (hail and tornadoes).

Primary vs secondary perils

Primary perils are large, traditionally well-modeled catastrophic events (hurricanes, earthquakes); secondary perils are smaller, higher-frequency events (wildfire, hail, localized flood) that currently generate a substantial share of industry losses.

AAL

Average annual loss: the expected loss per year averaged across the full stochastic catalog of simulated years, representing the baseline actuarial cost of risk.

EP curve

Exceedance probability curve: a graphical curve displaying the annual probability of financial losses exceeding various dollar thresholds.

Return period

An expression of probability representing the inverse of annual exceedance; for example, a $1\text{-in-}100\text{-year}$ loss carries a $1\%$ chance of being exceeded in any given year.

PML

Probable maximum loss: the modeled loss anticipated at a designated return period (e.g. the $1\text{-in-}250\text{-year}$ PML).

OEP vs AEP

Occurrence Exceedance Probability (OEP) measures the probability that the single largest event in a year exceeds a dollar amount; Aggregate Exceedance Probability (AEP) measures the probability that the cumulative sum of all events in a year exceeds it.

TVaR

Tail value at risk: the mathematical expected average of all loss outcomes that fall beyond a specific return period threshold.

Ground-up / gross / net loss

Ground-up loss represents total raw physical damage; gross loss represents losses remaining after primary policy deductibles and limits; net loss represents residual losses after reinsurance payouts.

Demand surge

A sudden escalation in reconstruction costs and replacement labor following widespread regional disasters due to severe shortages in building materials and contractors.

Secondary uncertainty

The variance and modeling uncertainty surrounding how much structural damage an event will inflict, independent of the uncertainty of the hazard event taking place.

Model blending / own view of risk

The practice of synthesizing multiple commercial vendor models or tuning vendor parameters to reflect a firm's proprietary technical perspective on catastrophe risk.

Loss cost

The expected dollar loss per unit of exposure value (e.g. expected loss per $1{,}000$ of insured value), used as a baseline input in pricing.

Accumulation / aggregation

The total concentrated exposure and value situated within a specific geographic area, evaluated to avoid dangerous concentrations of risk.

Real-time event response

The capability to model and forecast potential portfolio loss estimates during an ongoing disaster event using live meteorological forecasts.

Validation / back-testing

Evaluating and verifying a catastrophe model's performance and accuracy by comparing its simulated predictions against observed historical loss events.

Loan book / portfolio

The total collective body of loans held and managed by a commercial bank or lending institution.

Mortgage

A secured credit loan provided by a lender to finance real property, using the underlying building or home as security.

CRE

Commercial real estate: income-producing properties such as office complexes, logistics warehouses, multi-family apartment communities, and retail properties.

Collateral

The specific physical or financial asset pledged to secure a loan, which a lender can seize and liquidate if the borrower defaults.

LTV

Loan-to-value ratio: outstanding loan principal divided by the appraised value of the property. When flood or disaster damages lower asset value, LTV rises and credit risk escalates.

Credit risk

The financial risk that a borrowing counterparty will fail to fulfill their obligations by defaulting on scheduled loan payments.

Default

The failure of a borrower to meet scheduled debt interest or principal payment obligations.

PD / LGD / EAD

The foundational components of expected credit loss: Probability of Default (PD), Loss Given Default (LGD, the percentage lost if default occurs), and Exposure at Default (EAD, total balance owed at default).

Expected loss (Banking)

The statistical expectation of credit loss calculated as $\text{Expected Loss} = \text{PD} \times \text{LGD} \times \text{EAD}$. Climate assessments frequently adjust PD or LGD to account for flood or wildfire hazards.

Market risk

Risk of financial losses resulting from fluctuations in market pricing instruments, including equities, debt bonds, and prevailing interest rates.

Operational risk

Risk of loss resulting from internal failures, operational breakdowns, people, or external events (such as an enterprise data center flooding).

Capital / capital requirements

The required minimum cushion of equity capital reserves that banks must hold to absorb severe losses as mandated by financial regulators.

Basel III

The comprehensive international regulatory accord that establishes global standards for bank capital adequacy, stress testing, and market liquidity risk.

Stress test

A regulatory or internal simulation exposing a financial institution's balance sheet to extreme adverse economic or environmental scenarios to evaluate solvency.

Scenario analysis

Evaluating plausible alternative forward-looking conditions (such as $2^\circ\text{C}$ vs $4^\circ\text{C}$ warming trajectories) to assess resilience rather than forecasting a single deterministic outcome.

Regulators (Banking)

Governing bodies overseeing bank safety and stability: Federal Reserve (Fed), OCC, and FDIC in the United States; European Central Bank (ECB) and Bank of England (BoE) in Europe, with European authorities leading in climate mandates.

Three lines of defense

An institutional risk governance model: Line 1 constitutes operational business units taking risk, Line 2 constitutes risk management overseeing and challenging, and Line 3 constitutes internal audit providing independent assurance.

Model risk management (MRM)

The specialized oversight team in a financial firm responsible for reviewing, challenging, and approving mathematical and vendor models (including third-party climate tools).

SR 11-7

The Federal Reserve's supervisory guidance document governing model risk management, which establishes rigorous validation expectations for third-party methodologies.

Risk appetite

The formally defined amount and type of risk an organization is intentionally willing to accept in pursuit of its business goals.

Concentration risk

The risk stemming from outsized exposure to a single geographic area, borrower, or business segment (e.g. clustering high loan volumes in one coastal county).

Stranded assets

Investments or physical facilities (such as coal-fired generating plants) that suffer premature asset write-downs or devaluations driven by climate policy shifts or technological change.

Asset manager

An investment firm that directs and allocates client capital (e.g. BlackRock), increasingly utilizing climate hazard analytics to assess investment portfolios.

ESG

Environmental, social, and governance: an umbrella framework encompassing non-financial considerations and enterprise sustainability, with climate representing the "E."

Basis point (bp)

A standard financial measurement unit equal to $0.01\%$ ($50\,\text{bps} = 0.5\%$), commonly used for quoting interest rate variations and credit spreads.

Physical risk

Direct financial impacts and physical damage caused by climatic events, encompassing floods, severe heatwaves, wildfires, and windstorms.

Acute vs chronic risk

Acute risk refers to sudden, intense shock events (e.g. a hurricane landfall); chronic risk describes progressive, long-term environmental shifts (e.g. sea level rise, sustained heat increases).