Frequently Asked Questions

Insurance Company Terminology:

Actuary – A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics. (Americanism: In most other countries the individual is known as "mathematician.")

Acquisition Costs – The net costs associated with the annual premium on a policy. Includes premium taxes, outside broker commission and reinsurance commission. Booked in full for the annual policy at inception of the policy.

Admitted Assets – Assets permitted by state law to be included in an insurance company's annual statement. These assets are an important factor when regulators measure insurance company solvency. They include investments, cash, stocks, bonds, and receivables less than 90 days old.

Aggregate Limit – Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate incidents or claims might occur.

Ceded Premium – Premium paid to reinsurers under reinsurance treaties to transfer a portion of CHI’s risk. CHI’s current net retention is $1,000,000 per claim inclusive of the individual SIR. See also Reinsurance.

Changes in Loss Expense Reserves (direct, assumed, ceded, development) – Sometimes referred to as LAE. Represents the calendar year change to loss expense reserves on the balance sheet. See also explanation for change in loss reserves.

Changes in Loss Reserves (direct, ceded, development) – Represents the calendar year change to the loss reserves on the balance sheet. After accounting for net changes to direct reserves and paid claims, additions or deletions to development reserves are calculated by applying a percentage (the loss ratio) to net written premium.

Codification – NAIC statutory accounting principles, effective January 1, 2001. The purpose of codification was to produce a comprehensive guide to accounting principles for use by insurance departments, insurers and auditors. It has resulted in more consistent treatment for all insurance companies, irregardless of state of domicile.

Combined Ratio – The sum of the loss, lae and operating expenses divided by net written premium. This ratio does not take into account investment income. The combined ratio measures the company's overall underwriting profitability, and a combined ratio of less than 100 indicates an underwriting profit.

Commissions on Reinsurance – Represents commissions received for ceded premium under the reinsurance treaties. The current commission rate for CHI on ceded premium is 25%. Commission on reinsurance is subtracted from ceded premium to calculate net reinsurance cost.

Contributed Surplus – Amounts paid by CHI shareholders’ above the $1 par value when joining the program and purchasing shares of CHI common stock.

Coverage – The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed.

Deferred Tax Asset – An asset (prepaid) arising from the payment of federal income taxes before the taxes are “due” for book purposes (for example, certain deductions (loss reserves discounting) are allowed for book purposes in the current year, but not for tax purposes until subsequent years, increasing taxable income in the current year and resulting in additional taxes paid currently. Eventually, the deferred tax asset “turns” and the disallowed deduction is allowed for income tax purposes, but has already been reflected on the books, decreasing the deferred tax asset). Deferred tax assets, before codification, were non-admitted assets and thus, decreased GAAP equity to arrive at statutory equity. With the implementation of codification in 2001, deferred tax assets are partially admitted assets, subject to an admissibility test.

Direct Premiums Written – The aggregate gross amount of recorded originated premiums, other than reinsurance, written during the year, whether collected or not, at the close of the year premiums.

Direct Loss Reserve – The estimated liability, as it would appear in an insurer's financial statement, for unpaid insurance claims or losses that have occurred as of a given evaluation date. Includes losses due but not yet paid and amounts not yet due. For individual claims, the loss reserve is the estimate of what will ultimately be paid out on that claim.

Frequency – Measurement of the number of claims. Generally CHI measures the number of claims per OBE.

Earned Premium – The amount of the premium that as been paid for in advance that has been "earned" by virtue of the fact that time has passed. A three-year policy that has been paid in advance and is one year old would have only partly earned the premium (one year).

Earned Surplus – prior years – Inception through prior year end net income.

Earned Surplus – current year – Current year to date net income.

Employers Liability Insurance – Coverage against common law liability of an employer for accidents to employees, as distinguished from liability imposed by a workers' compensation law.

General Liability Insurance – Insurance designed to protect business owners and operators from a wide variety of liability exposures. Exposures could include liability arising from accidents resulting from the insured's premises or operations, products sold by the insured, operations completed by the insured, and contractual liability.

Ground Up/First Dollar – Refers to claim costs (loss and loss adjustment expense) from the first dollar paid or incurred which includes the clients self insurance retention (SIR).

Hard Market Conditions – The limited availability of insurance carriers.

Income Taxes – Incurred income taxes (including income taxes on capital gains) reported in each annual statement for that year.

Incurred Losses/LAE–Total losses or lae (includes amounts paid (for both losses and loss adjustment expenses and changes to reserves (direct and development).

Investment Income – The return received by insurers from their investment portfolios including interest, dividends and realized capital gains on stocks. It doesn't include the value of any stocks or bonds that the company currently owns.

Loss Adjustment Expenses (LAE) – Expenses incurred to investigate and settle claims.

Losses Incurred (Pure Losses) – Net paid losses during the current year plus the change in loss reserves since the prior year end.

Losses Paid – direct – Net losses (settlements) paid by CHI on claims. Represents gross paid by CHI, reduced by any reinsurance recoverable from reinsurers.

Loss Ratio – The ratio of incurred losses and loss adjustment expenses to net premiums earned. This ratio measures the company's underlying profitability, or loss experience, on its total book of business.

National Association of Insurance Commissioners (NAIC) – Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and develop model laws for passage by state legislatures.

Net Investment Income – Represents investment income earned during the year less investment expenses. Investment expenses are the expenses related to generating investment income and capital gains but exclude income taxes.

Net Written Premium – The amount of direct written premium minus ceded reinsurance. Also, the premium necessary to cover future anticipated losses, before loading to cover other expenses.

Net Premiums Earned – The adjustment of net premiums written for the increase or decrease of the company's liability for unearned premiums during the year. When an insurance company's business increases from year to year, the earned premiums will usually be less than the written premiums. With the increased volume, the premiums are considered fully paid at the inception of the policy so that, at the end of a calendar period, the company must set up premiums representing the unexpired terms of the policies. On a decreasing volume, the reverse is true.

Net Premiums Written to Policyholder Surplus (IRIS Ratio) or Capacity Ratio – This ratio measures a company's net retained premiums written after reinsurance ceded, in relation to its surplus. This ratio is designed to measure the ability of the insurer to absorb above-average losses and the insurer's financial strength. The ratio is computed by dividing net premiums written by surplus. An insurance company's surplus is the amount by which assets exceed liabilities. The ratio is computed by dividing net premiums written by surplus. For example, a company with $2 in net premiums written for every $1 of surplus has a 2-to-1 premium to surplus ratio. The lower the ratio, the greater the company's financial strength. State regulators have established a direct premium-to-surplus ratio of no higher than 3-to-1 as a guideline.

Net Underwriting Income – Net premiums earned less incurred losses, incurred loss adjustment expenses and underwriting expenses incurred.

Non-Admitted Assets – Assets that are not included on the balance sheet of an insurance company (they are a reduction to surplus), including furniture and fixtures, past-due accounts receivable (greater than 90 days past due), and certain computer equipment and software.

Notes Receivable – stock – The portion of the purchase price of common stock financed by CHI shareholders. A non-admitted asset (reduction to surplus) under statutory accounting rules.

Occupied Bed Equivalents (OBE’s) – OBE measures exposure units by classifying them into a common denominator. For instance an acute care bed translates to .624 OBE’s while a delivery translated to 1.203 OBE’s.

One Year Loss Development – The one year development is the increase (decrease) in the estimate of the ultimate net losses and loss adjustment expense incurred for a loss year from the prior year evaluation to the current year evaluation.

Operating Expense Ratio – The ratio of underwriting expenses (including commissions) to net premiums written. This ratio measures the company's operational efficiency in underwriting its book of business.

Operating Ratio (IRIS Ratio) – Combined ratio less the net investment income ratio (net investment income to net premiums earned). The operating ratio measures a company's overall operational profitability from underwriting and investment activities. This ratio doesn't reflect other operating income/expenses, capital gains or income taxes. An operating ratio of more than 100 indicates a company is unable to generate profits from its underwriting and investment activities.

Paid in Capital – Since CHI’s common stock is $1 par, this dollar amount represents the par value of common stock outstanding and the number of shares outstanding.

Policy – The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clause, riders, endorsements, and papers attached thereto and made a part thereof.

Policyholder Surplus – The sum of paid in capital, paid in and contributed surplus, and net earned surplus. It also is the difference between total admitted assets and total liabilities.

Premium – The price of insurance protection for a specified risk for a specified period of time.

Premium Tax Payable– The liability due the state of California or Nevada for premium taxes on direct written premium in the particular state. The current tax rate is 2.35% of direct written premium in California and 2% in Nevada.

Reinsurance – In effect, insurance that an insurance company buys for its own protection. The risk of loss is spread so a disproportionately large loss under a single policy doesn’t fall on one company. Reinsurance enables an insurance company to expand its capacity; stabilize its underwriting results; finance its expanding volume; secure catastrophe protection against shock losses; withdraw from a line of business or a geographical area within a specified time period.

Reinsurance Payable– The liability due the reinsurers for ceded risk.

Reinsurance Recoverable on Paid Losses – Amounts receivable from reinsurers for losses or loss adjustment expenses paid by CHI, but reimbursable under the reinsurance treaties.

Renewal – The automatic re-establishment of in-force status effected by the payment of another premium.

Reserve – An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.

Reserve for Losses – direct – Known case loss reserves. These are the reserves that are reported on individual loss runs on a monthly basis.

Reserve for Losses – ceded – Amounts recoverable from reinsurers for reserves for losses – direct.

Reserve for Loss Development – Reserves for costs/expenses for known claims. Development on report claims. Sometimes referred to as reserve “cushion”. These reserves are extra reserves over and above the direct case reserves that are detailed on individual loss runs.

Reserves for Loss Expense (direct, ceded, development) – The definitions described above are consistent for loss expense reserves, the difference is simply the type of expense (loss adjustment expense – attorney’s fees, expert witnesses, depositions, etc.)

Risk Based Capital (RBC) – RBC is a regulatory attempt to measure the amount of statutory surplus an insurer needs, giving consideration to the various risks associated with its operations. The RBC requirement is compared with the insurer’s statutory surplus as reflected in its Annual Statement.

Risk Management – Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through practices such as avoiding the risk, retaining the risk, reducing the risk, or transferring the risk, usually by insurance.

Risk Retention Groups – Liability insurance companies owned by their policyholders. Membership is limited to people in the same business or activity, which exposes them to similar liability risks. The purpose is to assume and spread liability exposure to group members and to provide an alternative risk financing mechanism for liability. These entities are formed under the Liability Risk Retention Act of 1986. Under law, risk retention groups are precluded from writing certain coverages, most notably property lines and workers' compensation. They predominately write medical malpractice, general liability, professional liability, products liability and excess liability coverages. They can be formed as a mutual or stock company, or a reciprocal. CHI is a risk retention group in the form of a stock company.

Self Insurance Retention (SIR) – The amount of risk retained by the insured. This includes both loss and loss adjustment expense. The insurance company is not liable to pay any claim until the SIR is satisfied.

Severity – Measures the average cost per claim by dividing the total incurred (loss and loss adjustment expenses) by the number of claims and suits.

Soft Market Conditions – Too many insurance carriers pursuing too few potential customers.

Solvency – Having sufficient assets--capital, surplus, reserves--and being able to satisfy financial requirements--investments, annual reports, examinations--to be eligible to transact insurance business and meet liabilities.

State of Domicile – The state in which the company is incorporated or chartered. The company also is licensed (admitted) under the state's insurance statutes for those lines of business for which it qualifies. CHI’s state of domicile is Hawaii.

Stop Loss – Any provision in a policy designed to cut off an insurer's losses at a given point.

Subrogation – The right of an insurer who has taken over another's loss also to take over the other person's right to pursue remedies against a third party.

Surplus Notes – A vehicle used by insurers to raise capital. Classified as equity in policyholders’ surplus under statutory accounting but as debt under generally accepted accounting principles (GAAP). Sometime referred to as surplus debentures.

Total Liabilities – The sum of all legally enforceable obligation The total liabilities of the corporate is shown of the balance sheet.

Two Year Loss Development – The two year development is the increase (decrease) in the estimate of the ultimate net losses and loss adjustment expense incurred for a loss year from the second prior year evaluation to the current year evaluation.

Unallocated Loss Expense – The cost of managing the claims (salaries, benefits, travel, etc.)

Unallocated Loss Reserve– The estimated (actuarially determined) overhead cost of “running off the claim book.” This liability is an estimate of the overhead cost (salaries for claim examiners, etc.) to complete known claims.

Unearned Premiums – That part of the premium applicable to the unexpired part of the policy period.

Unrealized Gain/Loss in Subsidiary – Optima– The net change in the investment in CHI’s 100% owned subsidiary, Optima Healthcare Insurance Services. The total change represents the net income or loss on Optima’s books, adjusted for changes in non-admitted assets, inception to date.

Unrealized Gain/Loss in Mutual Funds – The net unrealized gain or loss in mutual funds. The gains or losses are not recognized (booked through the income statement) until the funds are “cashed out”.

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