THG 2018 Annual Report

Exposure – As it relates to underwriting, a measure of the rating units or premium basis of a risk; for example, an exposure of a number of automobiles. As it relates to loss events, the maximum value of claims made on an insurer from an event or events that would result in the total exhaustion of the cover or indemnity offered by an insurance policy. Exposure management actions ± Actions that focus on improving underwriting profitability and/or lessening earnings volatility by reducing our exposures and property concentrations in certain geographies and lines that are believed to be more prone to catastrophe and non-catastrophe losses. These actions include, but are not limited to, non-renewal, rate increases, stricter underwriting standards and higher deductible utilization, agency management actions, and more selective portfolio management by modifying our business mix. Frequency ± The number of claims occurring during a given coverage period. Inland Marine Insurance ± In Commercial Lines, this is a type of coverage developed for insuring businesses against physical losses to SURSHUW\ VXFK DV FRQWUDFWRU¶V HTXLSPHQW EXLOGHU¶V ULVN DQG JRRGV LQ WUDQVLW WKDW GR QRW LQYROYH RFHDQ WUDQVSRUW ,W FRYHUV D rticles in transit by all forms of land and air transportation as well as bridges, tunnels and other means of transportation and communication. In the context of Personal Lines, this term relates to floater policies that cover expensive personal items such as fine art and jewelry. Loss adjustment expenses (“LAE”) ± Expenses incurred in the adjusting, recording, and settlement of claims. These expenses include both internal company expenses and outside services. $OORFDWHG /$( ³$/$(´ UHIHUV WR GHIHQVH DQG FRVW FRQWDLQPHQW H[SHQVHV including legal fees, court costs, and investigation fees. 8QDOORFDWHG /$( ³8/$(´ UHIHUV WR H[SHQVHV that generally cannot be associated with a specific claim. ULAE includes internal costs such as salaries, fringe benefits and other overhead costs associated with the claim settlement process and external adjustment and appraisal fees. Loss costs ± An amount of money paid for an insurance claim. Loss reserves ± Liabilities established by insurers to reflect the estimated cost of claims payments and the related expenses that the insurer will ultimately be required to pay in respect of insurance it has written. Reserves are established for losses and for LAE. Morbidity ± Morbidity relates to the occurrence of illness, disability or other physical or psychological impairment, whether temporary or permanent, for insured risks. Morbidity is a key assumption for long-term care insurance and other forms of individual and group health benefits. Peril ± A cause of loss. Price(ing) increase or decrease (Commercial Lines) ± Represents the average change in premium on renewed policies caused by the estimated net effect of base rate changes, discretionary pricing, inflation or changes in policy level exposure or insured risk. Price(ing) increase or decrease (Personal Lines) ± The estimated cumulative premium effect of approved rate actions applied to policies available for renewal, regardless of whether or not policies are actually renewed. Pricing changes do not represent actual increases or decreases realized by the Company. Property insurance ± Insurance that provides coverage for tangible property in the event of loss, damage or loss of use. Rate ± 7KH HVWLPDWHG SXUH SULFLQJ IDFWRU XSRQ ZKLFK WKH SROLF\KROGHU¶V SUHPLXP LV EDVHG H[FOXGLQJ FKDQJHV LQ H[SRVXUH RU ULVN Ratios: (1) Catastrophe loss ratio ± The ratio of catastrophe losses incurred to premiums earned. Combined ratio ± This ratio is the GAAP equivalent of the statutory ratio that is widely used as a benchmark for determining an LQVXUHU¶V XQGHUZULWLQJ SHUIRUP ance. A ratio below 100% generally indicates profitable underwriting prior to the consideration of investment income. A combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income. The combined ratio is the sum of the loss and loss adjustment expense ratio and the expense ratio. Expense Ratio ± The ratio of underwriting expenses (including the amortization of deferred acquisition costs), less premium installment fee income and premium charge offs, to premiums earned for a given period. Loss and Loss adjustment expense (“LAE”) ratio ± The ratio of loss and loss adjustment expenses to premiums earned for a given period. The LAE ratio includes catastrophe losses and prior year reserve development. Loss ratio ± The ratio of losses (including catastrophe losses) to premiums earned for a given period. Reinstatement premium ± A pro-rata reinsurance premium that may be charged to us by our reinsurers. A reinstatement premium may be contractually required to be charged for restoring an amount of reinsurance coverage reduced as the result of a reinsurance loss payment that depletes or exhausts a reinsurance treaty or treaty layer. For example, in 2005, this premium was required to ensure that our property catastrophe occurrence treaty, which was exhausted by hurricane Katrina, was available again in the event of another large catastrophe loss in 2005. Reinsurance reinstatement premiums accrued by us are accounted for as a reduction in net premiums earned rathe U WKDQ DV DQ ³H[SHQVH´ )RU FHUWDLQ UHLQVXUDQFH WUHDWLHV D FHGLQJ FRPPLVVLRQ DGMXVWPHQW LV UHFRUGHG FRPPHQVXUDWH ZLWK D reinstatement premium accrual. A ceding commission is a fee paid by a reinsurance company to a direct writer to cover the costs of issuing the policy and is recorded as a contra-expense. 73 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP