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Insurance Terminology
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ACCELERATED DEATH BENEFITS
A life insurance policy option that provides policy proceeds to insured individuals over their lifetimes, in the event of a terminal illness. This is in lieu of a traditional policy that pays beneficiaries after the insured’s death. Such benefits kick in if the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries.
ACCIDENT AND HEALTH INSURANCE
Coverage for accidental injury, accidental death, and related health expenses. Benefits will pay for preventative services, medical expenses, and catastrophic care, with limits.
ACTUAL CASH VALUE
An amount equivalent to the fair market value of the stolen or damaged property immediately preceding the loss. For real
property, this amount can be based on a determination of the fair market value of the
property before and after the loss. For vehicles, this amount can be determined by local
area private party sales and dealer quotations for comparable vehicles.
ACTUARY
An insurance professional skilled in the analysis, evaluation, and management of statistical information. Evaluates insurance firms’ reserves, determines rates and rating methods, and determines other business and financial risks.
ADDITIONAL LIVING EXPENSES
Extra charges covered by homeowners policies over and above the policyholder's customary living expenses. They kick in when the insured requires temporary shelter due to damage by a covered peril that makes the home temporarily uninhabitable.
ADJUSTER
An individual employed by a property/casualty insurer to evaluate losses and settle policyholder claims. These adjusters differ from public adjusters, who negotiate with insurers on behalf of policyholders, and receive a portion of a claims settlement. Independent adjusters are independent contractors who adjust claims for different insurance companies.
ADMITTED ASSETS
Assets recognized and accepted by state insurance laws in determining the solvency of insurers and reinsurers.
ADMITTED COMPANY
An insurance company licensed and authorized to do business in a particular state.
ADVERSE SELECTION
The tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk. Insurers react either by charging higher premiums or not insuring at all, as in the case of floods. (Flood insurance is provided by the federal government but sold mostly through the private market.)
AFFINITY SALES
Selling insurance through groups such as professional and business associations.
AFTERMARKET PARTS
Generic auto parts
AGENCY COMPANIES
Companies that market and sell products via independent agents.
AGENT
A licensed person or organization authorized to sell insurance by or on behalf of an
insurance company.
ALIEN INSURANCE COMPANY
An insurance company incorporated under the laws of a foreign country, as opposed to a foreign insurance company that does business in states outside its own.
ALLIED LINES
Property insurance that is usually bought in conjunction with fire insurance; it includes wind, water damage, and vandalism coverage.
ALTERNATIVE DISPUTE RESOLUTION / ADR
Alternative to going to court to settle disputes. Methods include arbitration, where disputing parties agree to be bound to the decision of an independent third party, and mediation, where a third party tries to arrange a settlement between the two sides.
ALTERNATIVE MARKETS
Mechanisms used to fund self-insurance. This includes captives, which are insurers owned by one or more non-insurers to provide owners with coverage. Risk-retention groups, formed by members of similar professions or businesses to obtain liability insurance, are also a form of self-insurance.
ANNUAL STATEMENT
Summary of an insurer’s or reinsurer’s financial operations for a particular year, including a balance sheet. It is filed with the state insurance department of each jurisdiction in which the company is licensed to conduct business.
ANNUITY
A life insurance company contract that pays periodic income benefits for a specific period of time or over the course of the annuitant’s lifetime. These payments can be made annually, quarterly, or monthly and are related to life insurance. Annuity investments are tax-deferred; taxes are not due until income payments begin. Annuities are often used as a form of retirement savings and some allow tax-free loans. They can be bought on a periodic schedule or through a one-time payment. The insurer’s profit or loss depends on the accuracy of assumptions of life expectancy. There are fixed-income annuities, which invest in a general insurer’s account, and variable annuities, where individuals can choose their own investments.
ANTITRUST LAWS
Laws that prohibit companies from working as a group to set prices, restrict supplies or stop competition in the marketplace. The insurance industry is subject to state antitrust laws but has a limited exemption from federal antitrust laws. This exemption, set out in the McCarran-Ferguson Act, permits insurers to jointly develop common insurance forms and share loss data to help them price policies.
APPORTIONMENT
The dividing of a loss proportionately among two or more insurers that cover the same loss.
APPRAISAL
A survey to determine a property’s insurable value, or the amount of a loss.
ARBITRATION
Procedure in which an insurance company and the insured or a vendor agree to settle a claim dispute by accepting a binding or non-binding decision made by a third party.
ARRESTEE
A person in custody whose release may be secured by posting bail.
ARSON
The deliberate setting of a fire.
ASSETS
The property owned, in this case by an insurance company, including stocks, bonds, and real estate investments. State laws require a conservative valuation of assets so they do not allow insurance companies to list some assets whose values are uncertain, such as furniture, fixtures, debit balances, and accounts receivable that are more than 90 days past due.
ASSIGNED RISK PLANS
Facilities through which drivers can obtain auto insurance if they are unable to buy it in the regular or voluntary market. These are the most well-known type of residual auto insurance market, which exist in every state. In an assigned risk plan, all insurers selling auto insurance in the state are assigned these drivers to insure, based on the amount of insurance they sell in the regular market. Residual market.
AUTOMOBILE INSURANCE
Coverage on the risks associated with driving or owning an automobile. It can include
collision, liability, comprehensive, medical, and uninsured motorist coverages.
AVIATION INSURANCE
Commercial airlines hold property insurance on airplanes and liability insurance for negligent acts that result in injury or property damage to passengers or others. Damage is covered on the ground and in the air. The policy limits the geographical area and individual pilots covered.
BAILEE
A person or concern having possession of property committed in trust from the owner.
BALANCE SHEET
Provides a snapshot of a company’s financial condition at one point in time. It shows assets, including investments and reinsurance, and liabilities, such as loss reserves to pay claims in the future, as of a certain date. It also states a company’s equity, known as policyholder surplus. Changes in that surplus are one indicator of an insurer’s financial standing.
BEACH AND WINDSTORM PLANS
State-sponsored insurance pools that sell property coverage for the peril of windstorm to people unable to buy it in the voluntary market because of their high exposure to risk. Seven states (AL, FL, LA, MS, NC, SC, TX) offer these plans to cover residential and commercial properties against hurricanes and other windstorms. Insurance companies that sell property insurance in the state are required to participate in these plans. Insurers share in profits and losses. Residual market.
BID BOND
A guarantee that the contractor will enter into a contract, if it is awarded to him, and
furnish such contract bond (sometimes called "performance bond") as is required
by terms thereof.
BLANKET COVERAGE
Insurance coverage for more than one item of property at a single location, or two or more items of property in different locations.
BODILY INJURY LIABILITY COVERAGE
Portion of an auto insurance policy that covers injuries the policyholder causes to someone else.
BOILER AND MACHINERY INSURANCE
Often called Equipment Breakdown, or Systems Breakdown insurance. Commercial insurance that covers damage caused by the malfunction or breakdown of boilers, and a vast array of other equipment including air conditioners, heating, electrical, telephone, and computer systems.
BOOK OF BUSINESS
Total amount of insurance on an insurer's books at a particular point in time.
BINDER
A temporary or preliminary agreement which provides coverage until a policy can be
written or delivered.
BROKER
A licensed person or organization paid by you to look for insurance on your behalf.
BURGLARY AND THEFT INSURANCE
Insurance for the loss of property due to burglary, robbery or larceny. It is provided in a standard homeowners policy and in a business multiple peril policy.
BUSINESS INTERRUPTION INSURANCE
Commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time that a business must stay closed because of a covered peril, such as a fire.
BUSINESSOWNERS POLICY / BOP
A policy that combines property, liability, and business interruption coverages for small to medium-sized businesses.
CANCELLATION
The termination of insurance coverage during the policy period. Flat cancellation is the
cancellation of a policy as of its effective date, without any premium charge.
CAPACITY
The supply of insurance available to meet demand. Capacity depends on the industry’s financial ability to accept risk. Reduced capacity leads to higher premiums, but higher premiums eventually attract more capacity to the market.
CAPITAL
Shareholder’s equity (for publicly-traded insurance companies) and retained earnings (for mutual insurance companies). Each state has its own requirements. There is no general measure of capital adequacy for property/casualty insurers.
CAPITAL MARKETS
The markets in which equities and debt are traded.
CAPTIVE AGENT
A person who represents only one insurance company and is restricted by agreement from submitting business to any other company, unless it is first rejected by the agent’s captive company.
CAPTIVES
Insurers that are created and wholly-owned by one or more non-insurers, to provide owners with coverage. A form of self-insurance.
CAR YEAR
Equal to 365 days of insured coverage for a single vehicle It is the standard measurement for automobile insurance.
CASE MANAGEMENT
A system of coordinating medical services to treat a patient, improve care, and reduce cost. A case manager coordinates health care delivery for patients.
CATASTROPHE
Term used for statistical recording purposes to refer to a single incident or a series of closely related incidents causing severe insured property losses totaling more than a given amount, currently $25 million.
CATASTROPHE BONDS
Risk securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catastrophe such as those caused by a major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk.
CATASTROPHE DEDUCTIBLE
A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in when a major natural disaster occurs. These large deductibles limit an insurer’s potential losses in such cases, allowing it to insure more property. A property insurer may not be able to buy reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a certain level.
CATASTROPHE FACTOR
Probability of catastrophic loss, based on the total number of catastrophes in a state over a 40-year period.
CATASTROPHE MODEL
Using computers, a method to mesh long-term disaster information with current demographic and building data to determine potential losses for a given geographic area.
CELL PHONE INSURANCE
Separate insurance provided to cover cell phones for damage or theft. Policies are often sold with the cell phones themselves.
CHARTERED FINANCIAL CONSULTANT / ChFC
A professional designation given by The American College to financial services professionals who complete courses in financial planning.
CHARTERED LIFE UNDERWRITER / CLU
A professional designation by The American College for those who pass business examinations on insurance, investments, and taxation, and have life insurance planning experience.
CHARTERED PROPERTY/CASUALTY UNDERWRITER / CPCU
A professional designation given by the American Institute for Property and Liability Underwriters. National examinations and three years of work experience are required.
CLAIM
Notice to an insurer that under the terms of a policy, a loss maybe covered.
CLAIMANT
The first or third party. That is any person who asserts right of recovery.
CLAIMS-MADE POLICY
A form of insurance that pays claims presented to the insurer during the term of the policy or within a specific term after its expiration. It limits liability insurers’ exposure to unknown future liabilities. Occurrence policy.
COBRA
Short for Consolidated Omnibus Budget Reconciliation Act. A federal law under which group health plans sponsored by employers with 20 or more employees must offer continuation of coverage to employees who leave their jobs and their dependents. The employee must pay the entire premium. Coverage can be extended up to 18 months. Surviving dependents can receive longer coverage.
COINSURANCE
In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20 percent health insurance coinsurance clause, the policyholder pays for the deductible plus 20 percent of his covered losses. After paying 80 percent of losses up to a specified ceiling, the insurer starts paying 100 percent of losses.
COLLATERAL SOURCE RULE
Bars the introduction of information that indicates a person has been compensated or reimbursed by a source other than the defendant in civil actions related to negligence or other liability.
COLLISION COVERAGE
Portion of an auto insurance policy that covers the damage to the policyholder’s car from a collision.
COMBINED RATIO
Percentage of each premium dollar a property/casualty insurer spends on claims and expenses. When the ratio is over 100, the insurer has an underwriting loss.
COMMERCIAL GENERAL LIABILITY INSURANCE / CGL
A broad commercial policy that covers all liability exposures of a business that are not specifically excluded. Coverage includes product liability, completed operations, premises and operations, and independent contractors.
COMMERCIAL LINES
Products designed for and bought by businesses. Among the major coverages are boiler and machinery, business interruption, commercial auto, comprehensive general liability, directors and officers liability, fire and allied lines, inland marine, medical malpractice liability, product liability, professional liability, surety and fidelity, and workers compensation. Most of these commercial coverages can be purchased separately except business interruption which must be added to a fire insurance (property) policy. (See Commercial multiple peril)
COMMERCIAL MULTIPLE PERIL POLICY
Package policy that includes property, boiler and machinery, crime, and general liability coverages.
COMMISSION
Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer, and the marketing methods.
COMMUNITY RATING LAWS
Enacted in several states on health insurance policies. Insurers are required to accept all applicants for coverage and charge all applicants the same premium for the same coverage regardless of age or health. Premiums are based on the rate determined by the geographic region’s health and demographic profile.
COMPETITIVE REPLACEMENT PARTS
Generic auto parts
COMPETITIVE STATE FUND
A facility established by a state to sell workers compensation in competition with private insurers.
COMPLAINT RATIO
A measure used by some state insurance departments to track consumer complaints against insurance companies. Generally, it is written as the number of complaints upheld against an insurance company, as a percentage of premiums written. In some states, complaints from medical providers over the promptness of payments may also be included.
COMPLETED OPERATIONS COVERAGE
Pays for bodily injury or property damage caused by a completed project or job. Protects a business that sells a service against liability claims.
COMPREHENSIVE COVERAGE
Portion of an auto insurance policy that covers damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods, and riots), and theft.
COMPULSORY AUTO INSURANCE
The minimum amount of auto liability insurance that meets a state law. Financial responsibility laws in every state require all automobile drivers to show proof, after an accident, of their ability to pay damages up to the state minimum. In compulsory liability states this proof, which is usually in the form of an insurance policy, is required before you can legally drive a car.
CONTINGENT LIABILITY
Liability of individuals, corporations, or partnerships for accidents caused by people other than employees for whose acts or omissions the corporations or partnerships are responsible.
COURT BONDS
All bonds and undertakings required of litigants to enable them to pursue certain
remedies of the courts.
COVERAGE
Synonym for insurance.
CRASH PARTS
Sheet metal parts that are most often damaged in a car crash. Generic auto parts
CREDIT INSURANCE
Commercial coverage against losses resulting from the failure of business debtors to pay their obligation to the insured, usually due to insolvency. The coverage is geared to manufacturers, wholesalers, and service providers who may be dependent on a few accounts and therefore could lose significant income in the event of an insolvency.
CREDIT LIFE INSURANCE
Life insurance coverage on a borrower designed to repay the balance of a loan in the event the borrower dies before the loan is repaid. It may also include disablement and can be offered as an option in connection with credit cards and auto loans.
CREDIT SCORE
The number produced by an analysis of an individual’s credit history. Studies have shown that credit history provides an indicator of the likelihood of an auto insurance loss. Some companies use insurance scores as an insurance underwriting and rating tool.
CROP-HAIL INSURANCE
Protection against damage to growing crops from hail, fire, or lightning provided by the private market. By contrast, multiple peril crop insurance covers a wider range of yield-reducing conditions, such as drought and insect infestation, and is subsidized by the federal government.
DECLARATION
Part of a property or liability insurance policy that states the name and address of policyholder, property insured, its location and description, the policy period, premiums, and supplemental information. Referred to as the “dec page.”
DECLINE
The company refuses to accept the request for insurance coverage.
DEDUCTIBLE
The amount of the loss which the insured is responsible to pay before benefits from the
insurance company are payable. You may choose a higher deductible to lower your premium.
DEFINED BENEFIT PLAN
A retirement plan under which pension benefits are fixed in advance by a formula based generally on years of service to the company multiplied by a specific percentage of wages, usually average earnings over that period or highest average earnings over the final years with the company.
DEFINED CONTRIBUTION PLAN
An employee benefit plan under which the employer sets up benefit accounts and contributions are made to it by the employer and by the employee. The employer usually matches the employee's contribution up to a stated limit.
DEMUTUALIZATION
The conversion of insurance companies from mutual companies owned by their policyholders into publicly-traded stock companies.
DEPRECIATION
A decrease in value due to age, wear and tear, etc.
DEREGULATION
In insurance, reducing regulatory control over insurance rates and forms. Commercial insurance for businesses of a certain size has been deregulated in many states.
DIMINUTION OF VALUE
The idea that a vehicle loses value after it has been damaged in an accident and repaired.
DIRECT PREMIUMS
Property/casualty premiums collected by the insurer from policyholders, before reinsurance premiums are deducted. Insurers share some direct premiums and the risk involved with their reinsurers.
DIRECT SALES/ DIRECT RESPONSE
Method of selling insurance directly to the insured through an insurance company’s own employees, through the mail, or via the Internet. This is in lieu of using captive or exclusive agents.
DIRECT WRITERS
Insurance companies that sell directly to the public using exclusive agents or their own employees, through the mail, or via Internet. Large insurers, whether predominately direct writers or agency companies, are increasingly using many different channels to sell insurance. In reinsurance, denotes reinsurers that deal directly with the insurance companies they reinsure without using a broker.
DIRECTORS AND OFFICERS LIABILITY / D
Covers directors and officers of a company for negligent acts or omissions, and for misleading statements that result in libel suits against the company.
DIVIDENDS
Money returned to policyholders from an insurance company’s earnings. Considered a partial premium refund rather than a taxable distribution, reflecting the difference between the premium charged and actual losses. Many life insurance policies and some property/casualty policies pay dividends to their owners. Life insurance policies that pay dividends are called participating policies.
DOMESTIC INSURANCE COMPANY
Term used by a state to refer to any company incorporated there.
EARLY WARNING SYSTEM
A system of measuring insurers’ financial stability set up by insurance industry regulators. An example is the Insurance Regulatory Information System (IRIS), which uses financial ratios to identify insurers in need of regulatory attention.
EARNED PREMIUM
The portion of premium that applies to the expired part of the policy period. Insurance premiums are payable in advance but the insurance company does not fully earn them until the policy period expires.
EARTHQUAKE INSURANCE
Covers a building and its contents, but includes a large percentage deductible on each. A special policy exists because earthquakes are not covered by standard homeowners or most business policies.
ECONOMIC LOSS
Total financial loss resulting from the death or disability of a wage earner, or from the destruction of property. Includes the loss of earnings, medical expenses, funeral expenses, the cost of restoring or replacing property, and legal expenses. It does not include noneconomic losses, such as pain caused by an injury.
EFFECTIVE DATE
The date on which an insurance policy or bond goes into effect, and from which
protection is furnished.
ELECTRONIC COMMERCE / E-COMMERCE
The sale of products such as insurance over the Internet.
ELIMINATION PERIOD
A kind of deductible or waiting period usually found in disability policies. It is counted in days from the beginning of the illness or injury.
EMPLOYEE RETIREMENT INCOME SECURITY ACT / ERISA
Federal legislation that protects employees by establishing minimum standards for private pension and welfare plans.
EMPLOYMENT PRACTICES LIABILITY COVERAGE
Liability insurance for employers that covers wrongful termination, discrimination, or sexual harassment toward the insured’s employees or former employees.
ENDORSEMENT
Amendment to the policy used to add or delete coverage. Also referred to as a
"rider."
ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE
A form of insurance designed to cover losses and liabilities arising from damage to property caused by pollution.
ERRORS AND OMISSIONS COVERAGE
A professional liability policy covering the policyholder for negligent acts and omissions that may harm his or her clients.
ESCROW ACCOUNT
Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and sometimes to pay property taxes.
EXCESS & SURPLUS LINES
Property/casualty coverage that isn’t available from insurers licensed by the state (called admitted insurers) and must be purchased from a non-admitted carrier.
EXCLUSION
Certain causes and conditions, listed in the policy, which are not covered.
EXCLUSIVE AGENT
A captive agent, or a person who represents only one insurance company and is restricted by agreement from submitting business to any other company unless it is first rejected by the agent’s company.
EXPENSE RATIO
Percentage of each premium dollar that goes to insurers’ expenses including overhead, marketing, and commissions.
EXPERIENCE
Record of losses.
EXPIRATION DATE
The date on which the policy ends.
EXPOSURE
Possibility of loss.
EXTENDED COVERAGE
An endorsement added to an insurance policy, or clause within a policy, that provides additional coverage for risks other than those in a basic policy.
EXTENDED REPLACEMENT COST COVERAGE
Pays a certain amount above the policy limit to replace a damaged home, generally 120 percent or 125 percent. Similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction.
FACE AMOUNT
The dollar amount to be paid to the beneficiary when the insured dies. It does not
include other amounts that may be paid from insurance purchased with dividends or any
policy riders.
FACULTATIVE REINSURANCE
A reinsurance policy that provides an insurer with coverage for specific individual risks that are unusual or so large that they aren’t covered in the insurance company's reinsurance treaties. This can include policies for jumbo jets or oil rigs. Reinsurers have no obligation to take on facultative reinsurance, but can assess each risk individually. By contrast, under treaty reinsurance, the reinsurer agrees to assume a certain percentage of entire classes of business, such as various kinds of auto, up to preset limits.
FAIR ACCESS TO INSURANCE REQUIREMENTS PLANS / FAIR PLANS
Insurance pools that sell property insurance to people who can’t buy it in the voluntary market because of high risk over which they may have no control. FAIR Plans, which exist in 28 states and the District of Columbia, insure fire, vandalism, riot, and windstorm losses, and some sell homeowners insurance which includes liability. Plans vary by state, but all require property insurers licensed in a state to participate in the pool and share in the profits and losses.
FARMOWNERS-RANCHOWNERS INSURANCE
Package policy that protects the policyholder against named perils and liabilities and usually covers homes and their contents, along with barns, stables, and other structures.
FEDERAL INSURANCE ADMINISTRATION / FIA
Federal agency in charge of administering the National Flood Insurance Program. It does not regulate the insurance industry.
FEDERAL RESERVE BOARD
Seven-member board that supervises the banking system by issuing regulations controlling bank holding companies and federal laws over the banking industry. It also controls and oversees the U.S. monetary system and credit supply.
FIDELITY BOND
An obligation of the insurance company against financial loss caused by the dishonest
acts of employees.
FILE-AND-USE STATES
States where insurers must file rate changes with their regulators, but don’t have to wait for approval to put them into effect.
FINANCIAL GUARANTEE INSURANCE
Covers losses from specific financial transactions and guarantees that investors in debt instruments receive timely payment of principal and interest if there is a default. Raises the credit rating of debt to which the guarantee is attached. Investment bankers who sell securities backed by loan portfolios use this insurance to enhance marketability.
FINANCIAL RESPONSIBILITY LAW
A state law requiring that all automobile drivers show proof that they can pay damages up to a minimum amount if involved in an auto accident. Varies from state to state but can be met by carrying a minimum amount of auto liability insurance.
FINITE RISK REINSURANCE
Contract under which the ultimate liability of the reinsurer is capped and on which anticipated investment income is expressly acknowledged as an underwriting component. Also known as Financial Reinsurance because this type of coverage is often bought to improve the balance sheet effects of statutory accounting principles.
FIRE INSURANCE
Coverage for loss of or damage to a building and/or contents due to fire.
FIRST-PARTY COVERAGE
Coverage for the policyholder’s own property or person. In no-fault auto insurance it pays for the cost of injuries. In no-fault states with the broadest coverage, the personal injury protection (PIP) part of the policy pays for medical care, lost income, funeral expenses and, where the injured person is not able to provide services such as child care, for substitute services.
FLOATER
Attached to a homeowners policy, a floater insures movable property, covering losses wherever they may occur. Among the items often insured with a floater are expensive jewelry, musical instruments, and furs. It provides broader coverage than a regular homeowners policy for these items.
FLOOD INSURANCE
Coverage for flood damage is available from the federal government under the National Flood Insurance Program but is sold by licensed insurance agents. Flood coverage is excluded under homeowners policies and many commercial property policies. However, flood damage is covered under the comprehensive portion of an auto insurance policy.
FORCED PLACE INSURANCE
Insurance purchased by a bank or creditor on an uninsured debtor’s behalf so if the property is damaged, funding is available to repair it.
FOREIGN INSURANCE COMPANY
Name given to an insurance company based in one state by the other states in which it does business..
FRAUD
Intentional lying or concealment by policyholders to obtain payment of an insurance claim that would otherwise not be paid, or lying or misrepresentation by the insurance company managers, employees, agents, and brokers for financial gain.
FREQUENCY
Number of times a loss occurs. One of the criteria used in calculating premium rates.
FRONTING
A procedure in which a primary insurer acts as the insurer of record by issuing a policy, but then passes the entire risk to a reinsurer in exchange for a commission. Often, the fronting insurer is licensed to do business in a state or country where the risk is located, but the reinsurer is not. The reinsurer in this scenario is often a captive or an independent insurance company that cannot sell insurance directly in a particular country.
GAAP ACCOUNTING
Generally accepted accounting principles (GAAP) accounting is used in financial statements that publicly-held companies prepare for the Securities and Exchange Commission.
GAP INSURANCE
An automobile insurance option, available in some states, that covers the difference between a car’s actual cash value when it is stolen or wrecked and the amount the consumer owes the leasing or finance company. Mainly used for leased cars.
GENERIC AUTO PARTS
Auto crash parts produced by firms that are not associated with car manufacturers. Insurers consider these parts, when certified, at least as good as those that come from the original equipment manufacturer (OEM). They are often cheaper than the identical part produced by the OEM.
GLASS INSURANCE
Coverage for glass breakage caused by all risks; fire and war are sometimes excluded. Insurance can be bought for windows, structural glass, leaded glass, and mirrors. Available with or without a deductible.
GRACE PERIOD
A period (usually 31 days) after the premium due date, during which an overdue premium
may be paid without penalty. The policy remains in force throughout this period.
GRADUATED DRIVER LICENSES
Licenses for younger drivers that allow them to improve their skills. Regulations vary by state, but often restrict night time driving. Young drivers receive a learner’s permit, followed by a provisional license, before they can receive a standard drivers license.
GRAMM-LEACH-BLILEY ACT
Financial services legislation, passed by Congress in 1999, that removed Depression-era prohibitions against the combination of commercial banking and investment-banking activities. It allows insurance companies, banks, and securities firms to engage in each others’ activities and own one another.
GROUP INSURANCE
A single policy covering a group of individuals, usually employees of the same company or members of the same association and their dependents. Coverage occurs under a master policy issued to the employer or association.
GUARANTEED INCOME CONTRACT / GIC
Often an option in an employer-sponsored retirement savings plan. Contract between an insurance company and the plan that guarantees a stated rate of return on invested capital over the life of the contract.
GUARANTEED INSURABILITY
An option that permits the policy holder to buy additional stated amounts of life
insurance at stated times in the future without evidence of insurability.
GUARANTEED REPLACEMENT COST COVERAGE
Homeowners policy that pays the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit.
GUARANTY FUND
The mechanism by which solvent insurers bail out the policyholders of companies that fail. Such a fund is required in all 50 states, the District of Columbia, and Puerto Rico, but what is included varies from state to state.
GUN LIABILITY
A new legal concept that holds gun manufacturers liable for the cost of injuries caused by guns. Several cities have filed lawsuits based on this concept.
HACKER INSURANCE
A coverage that protects businesses engaged in electronic commerce from losses caused by hackers.
HARD MARKET
A seller’s market in which insurance is expensive and in short supply.
HEALTH INSURANCE
A policy that will pay specifies sums for medical expenses or treatments. Health
policies can offer many options and vary in their approaches to coverage.
HOMEOWNER INSURANCE
An elective combination of coverages for the risks of owning a home. Can include losses
due to fire, burglary, vandalism, earthquake, and other perils.
HOUSE YEAR
Equal to 365 days of insured coverage for a single dwelling. It is the standard measurement for homeowners insurance.
HURRICANE DEDUCTIBLE
A percentage or dollar amount added to a homeowner’s insurance policy to limit an insurer’s exposure to loss from a hurricane. Higher deductibles are instituted in higher risk areas, such as coastal regions. Specific details, such as the intensity of the storm for the deductible to be triggered and the extent of the high risk area, vary from insurer to insurer and state to state.
INCONTESTABLE CLAUSE
A policy provision in which the company agrees not to contest the validity of the
contract after it has been in force for a certain period of time, usually two years.
INCURRED BUT NOT REPORTED LOSSES / IBNR
Losses that are not reported to the insurer or reinsurer until years after the policy is sold. Liability claims may be filed long after the event that caused the injury to occur. Asbestos-related diseases, for example, do not show up until decades after the exposure. Also, estimates made about claims already reported but where the full extent of the injury or property damage is not yet known. Insurance companies regularly adjust reserves for such losses as new information becomes available.
INCURRED LOSSES
Losses occurring within a fixed period, whether or not adjusted or paid during the same period.
INDEMNIFY
Provide financial compensation for losses.
INDEPENDENT AGENT
Agent who is self-employed, is paid on commission, and represents several insurance companies.
INFLATION GUARD CLAUSE
A provision added to a homeowners insurance policy that automatically adjusts the coverage limit on the dwelling each time the policy is renewed to reflect current construction costs.
INLAND MARINE INSURANCE
A broad type of coverage developed for shipments that do not involve ocean transport. Covers all forms of land and air transit. Floaters are included in this category.
INSOLVENCY
Insurer’s inability to pay debts. Insurance insolvency standards and the regulatory actions taken vary from state to state, but the last resort in the case of insolvency is liquidation.
INSURABLE RISK
Risks for which it is relatively easy to get insurance and that meet certain criteria. These include being definable, accidental in nature, and part of a group of similar risks large enough to make losses predictable. The insurance company also must be able to come up with a reasonable price for the insurance.
INSURANCE
A system to make large financial losses more affordable by transferring the risk from individuals to large groups, or pools, in return for a premium.
INSURANCE POOL
A group of insurance companies that pool assets, enabling them to provide an amount of insurance substantially more than can be provided by individual companies to ensure large risks such as nuclear power stations. Pools may be formed voluntarily or mandated by the state to cover risks that can’t obtain coverage in the voluntary market such as coastal properties subject to hurricanes.
INSURANCE REGULATORY INFORMATION SYSTEM / IRIS
Uses financial ratios to measure insurers’ financial strength. Developed by the National Association of Insurance Commissioners. Each individual state insurance department chooses how to use IRIS.
INSURANCE-TO-VALUE
Insurance written in an amount approximating the value of the insured property.
INSURED
The policyholder - the person(s) protected in case of a loss or claim.
INSURER
The insurance company.
INTEGRATED BENEFITS
Coverage where the distinction between job-related and non-occupational illnesses or injuries is eliminated and workers compensation and general health coverage are combined. Legal obstacles exist, however, because the two coverages are administered separately. Previously called twenty-four hour coverage.
INTERNET INSURER
An insurer that sells exclusively via the Internet.
INTERNET LIABILITY INSURANCE
Coverage designed to protect businesses from liabilities that arise from the conducting of business over the Internet, including copyright infringement, defamation, and violation of privacy.
INVESTMENT INCOME
Income generated by the investment of assets. Insurers have two sources of income, underwriting (premiums less claims and expenses) and investment income. The latter can offset underwriting operations, which are frequently unprofitable.
JOINT UNDERWRITING ASSOCIATION / JUA
Insurers which join together to provide coverage for a particular type of risk or size of exposure, when there are difficulties in obtaining coverage in the regular market, and which share in the profits and losses associated with the program. JUAs may be set up to provide auto and homeowners insurance and various commercial coverages, such as medical malpractice.
JUDICIAL BOND
A bond required in civil and criminal court actions.
JUNK BONDS
Corporate bonds with credit ratings of BB or less. They pay a higher yield than investment grade bonds because issuers have a higher perceived risk of default. Such bonds involve market risk that could force investors, including insurers, to sell the bonds when their value is low. Most states place limits on insurers’ investments in these bonds. In general, because property/casualty insurers can be called upon to provide huge sums of money immediately after a disaster, their investments must be liquid. Less than 2 percent are in real estate and a similarly small percentage are in junk bonds.
LAW OF LARGE NUMBERS
The theory of probability on which the business of insurance is based. Simply put, this mathematical premise says that the larger the group of units insured, such as sport-utility vehicles, the more accurate the predictions of loss will be.
LIABILITY INSURANCE
Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.
LIFE INSURANCE
A policy that will pay a specified sum to beneficiaries upon the death of the insured.
LIMIT
Maximum amount a policy will pay either overall or under a particular coverage.
LINE
Type or kind of insurance, such as personal lines.
LOAN VALUE
The amount which can be borrowed at a specified rate of interest from the issuing
company by the policyholder, using the value of the policy as collateral. In the event the
policyholder dies with the debt partially or fully unpaid, then the amount borrowed plus
any interest is deducted from the amount payable.
LLOYD'S OF LONDON
A marketplace where underwriting syndicates, or mini-insurers, gather to sell insurance policies and reinsurance. Originally, Lloyd’s was a London coffee house in the 1600s patronized by shipowners who insured each other’s hulls and cargoes.
LLOYDS
Corporation formed to market services of a group of underwriters. Does not issue insurance policies or provide insurance protection. Insurance is written by individual underwriters, with each assuming a part of every risk. Has no connection to Lloyd’s of London, and is found primarily in Texas.
LONG-TERM CARE INSURANCE
Coverage that, under specified conditions, provides skilled nursing, intermediate care, or custodial care for a patient (generally over age 65) in a nursing facility or his or her residence following an injury.
LOSS
A reduction in the quality or value of a property, or a legal liability.
LOSS ADJUSTMENT EXPENSES
The sum insurers pay for investigating and settling insurance claims, including the cost of defending a lawsuit in court.
LOSS COSTS
The portion of an insurance rate used to cover claims and the costs of adjusting claims. Insurance companies typically determine their rates by estimating their future loss costs and adding a provision for expenses, profit, and contingencies.
LOSS RATIO
Percentage of each premium dollar an insurer spends on claims.
LOSS RESERVES
The company’s best estimate of what it will pay for claims, which is periodically readjusted. They represent a liability on the insurer’s balance sheet.
MALPRACTICE INSURANCE
Professional liability coverage for physicians, lawyers, and other specialists against suits alleging negligence or errors and omissions that have harmed clients.
MANAGED CARE
Arrangement between an employer or insurer and selected providers to provide comprehensive health care at a discount to members of the insured group and coordinate the financing and delivery of health care. Managed care uses medical protocols and procedures agreed on by the medical profession to be cost effective, also known as medical practice guidelines.
MANUAL
A book published by an insurance or bonding company or a rating association or bureau that gives rates, classifications, and underwriting rules.
MARINE INSURANCE
Coverage for goods in transit, and for the commercial vehicles that transport them, on water and over land. The term may apply to inland marine but more generally applies to ocean marine insurance. Covers damage or destruction of a ship’s hull and cargo and perils include collision, sinking, capsizing, being stranded, fire, piracy, and jettisoning cargo to save other property. Wear and tear, dampness, mold, and war are not included. (See Inland marine and Ocean marine)
MATERIAL MISREPRESENTATION
The policyholder / applicant makes a false statement of any material (important) fact on
his/her application. For instance, the policyholder provides false information regarding
the location where the vehicle is garaged.
MCCARRAN-FERGUSON
Federal law signed in 1945 in which Congress declared that states would continue to regulate the insurance business. Grants insurers a limited exemption from federal antitrust legislation.
MEDICAID
A federal/state public assistance program created in 1965 and administered by the states for people whose income and resources are insufficient to pay for health care.
MEDICAL PAYMENTS INSURANCE
A coverage in which the insurer agrees to reimburse the insured and others up to a certain limit for medical or funeral expenses as a result of bodily injury or death by accident. Payments are without regard to fault.
MEDICAL UTILIZATION REVIEW
The practice used by insurance companies to review claims for medical treatment.
MEDICARE
Federal program for people 65 or older that pays part of the costs associated with hospitalization, surgery, doctors’ bills, home health care, and skilled-nursing care.
MEDIGAP/MEDSUP
Policies that supplement federal insurance benefits particularly for those covered under Medicare.
MINE SUBSIDENCE COVERAGE
An endorsement to a homeowners insurance policy, available in some states, for losses to a home caused by the land under a house sinking into a mine shaft. Excluded from standard homeowners policies, as are other forms of earth movement.
MISQUOTE
An incorrect estimate of the insurance premium.
MORTGAGE GUARANTEE INSURANCE
Coverage for the mortgagee (usually a financial institution) in the event that a mortgage holder defaults on a loan. Also called private mortgage insurance (PMI).
MORTGAGE INSURANCE
A form of decreasing term insurance that covers the life of a person taking out a mortgage. Death benefits provide for payment of the outstanding balance of the loan. Coverage is in decreasing term insurance, so the amount of coverage decreases as the debt decreases. A variant, mortgage unemployment insurance pays the mortgage of a policyholder who becomes involuntarily unemployed.
MULTIPLE PERIL POLICY
A package policy, such as a homeowners or auto insurance policy, that provides coverage against several different perils. It also refers to the combination of property and liability coverage in one policy. In the early days of insurance, coverages for property damage and liability were purchased separately.
MUNICIPAL BOND INSURANCE
Coverage that guarantees bondholders timely payment of interest and principal even if the issuer of the bonds defaults. Offered by insurance companies with high credit ratings, the coverage raises the credit rating of a municipality offering the bond to that of the insurance company. It allows a municipality to raise money at lower interest rates. A form of financial guarantee insurance.
MUNICIPAL LIABILITY INSURANCE
Liability insurance for municipalities.
MUTUAL HOLDING COMPANY
An organizational structure that provides mutual companies with the organizational and capital raising advantages of stock insurers, while retaining the policyholder ownership of the mutual.
MUTUAL INSURANCE COMPANY
A company owned by its policyholders that returns part of its profits to the policyholders as dividends. The insurer uses the rest as a surplus cushion in case of large and unexpected losses.
NAMED PERIL
Peril specifically mentioned as covered in an insurance policy.
NAMED SCHEDULE BOND
A fidelity bond providing coverage for persons listed or scheduled on the bond.
NATIONAL FLOOD INSURANCE PROGRAM
Federal government-sponsored program under which flood insurance is sold to homeowners and businesses.
NO-FAULT
Auto insurance coverage that pays for each driver’s own injuries, regardless of who caused the accident. No-fault varies from state to state. It also refers to an auto liability insurance system that restricts lawsuits to serious cases. Such policies are designed to promote faster reimbursement and to reduce litigation.
NO-FAULT MEDICAL
A type of accident coverage in homeowners policies.
NO-PAY, NO-PLAY
The idea that people who don’t buy coverage should not receive benefits. Prohibits uninsured drivers from collecting damages from insured drivers. In most states with this law, uninsured drivers may not sue for noneconomic damages such as pain and suffering. In other states, uninsured drivers are required to pay the equivalent of a large deductible ($10,000) before they can sue for property damages and another large deductible before they can sue for bodily harm.
NON-ADMITTED ASSETS
Assets that are not included on the balance sheet, including furniture, fixtures, past-due accounts receivable, and agents’ debt balances.
NON-ADMITTED INSURER
Insurers licensed in some states, but not others. States where an insurer is not licensed call that insurer non-admitted. They sell coverage that is unavailable from licensed insurers within the state.
NOTICE OF LOSS
A written notice required by insurance companies immediately after an accident or other loss. Part of the standard provisions defining a policyholder's responsibilities after a loss.
NUCLEAR INSURANCE
Covers operators of nuclear reactors and other facilities for liability and property damage in the case of a nuclear accident and involves both private insurers and the federal government.
NURSING HOME INSURANCE
A form of long-term care policy that covers a policyholder’s stay in a nursing facility.
OBLIGEE
Broadly, anyone in whose favor an obligation runs. Frequently used in surety bonds, this
refers to the person, firm or corporation protected by the bond.
OBLIGOR
Commonly called "principal," one bound by an obligation. Under a bond,
strictly speaking, both the principal and the surety are obligers.
OCCUPATIONAL DISEASE
Abnormal condition or illness caused by factors associated with the workplace. Like occupational injuries, this is covered by workers compensation policies.
OCCURRENCE POLICY
Insurance that pays claims arising out of incidents that occur during the policy term, even if they are filed many years later.
OCEAN MARINE INSURANCE
Coverage of all types of vessels and watercraft, for property damage to the vessel and cargo, including such risks as piracy and the jettisoning of cargo to save the property of others. Coverage for marine-related liabilities. War is excluded from basic policies, but can be bought back.
OPEN COMPETITION STATES
States where insurance companies can set new rates without prior approval, although the state’s commissioner can disallow them if they are not reasonable and adequate or are discriminatory.
ORDINANCE OR LAW COVERAGE
Endorsement to a property policy, including homeowners, that pays for the extra expense of rebuilding to comply with ordinances or laws that did not exist when the building was originally built.
ORDINARY LIFE INSURANCE
A life insurance policy that remains in force for the policyholder’s lifetime. It contrasts with term insurance, which only lasts for a specified number of years but is renewable.
ORIGINAL EQUIPMENT MANUFACTURER PARTS / OEM
Sheet metal auto parts made by the manufacturer of the vehicle.
PACKAGE POLICY
A single insurance policy that combines several coverages previously sold separately. Examples include homeowners insurance and commercial multiple peril insurance.
PAY-AT-THE-PUMP
A system proposed in the 1990s in which auto insurance premiums would be paid to state governments through a per-gallon surcharge on gasoline.
PENSION
Programs to provide employees with retirement income after they meet minimum age and service requirements. Life insurers hold much of these funds.
PERIL
The cause of a possible loss. For example, fire, theft, or hail.
PERSONAL ARTICLES FLOATER
A policy or an addition to a policy used to cover personal valuables, like jewelry or furs.
PERSONAL INJURY PROTECTION COVERAGE / PIP
Portion of an auto insurance policy that covers the treatment of injuries to the driver and passengers of the policyholder’s car.
PERSONAL LINES
Property/casualty insurance products that are designed for and bought by individuals, including homeowners and automobile policies.
POINT-OF-SERVICE PLAN
Health insurance policy that allows the employee to choose between in-network and out-of-network care each time medical treatment is needed.
POLICY
The written contract of insurance.
POLICY LIMIT
The maximum amount a policy will pay, either overall or under a particular coverage.
POLICYHOLDERS' SURPLUS
The amount of money remaining after an insurer’s liabilities are subtracted from its assets. It acts as a financial cushion above and beyond reserves, protecting policyholders against an unexpected or catastrophic situation.
POLITICAL RISK INSURANCE
Coverage for businesses operating abroad against loss due to political upheaval such as war, revolution, or confiscation of property.
POLLUTION INSURANCE
Policies that cover property loss and liability arising from pollution-related damages, for sites that have been inspected and found uncontaminated. It is usually written on a claims-made basis so policies pay only claims presented during the term of the policy or within a specified time frame after the policy expires.
POWER OF ATTORNEY
Authority given one person or corporation to act for and obligate another, to the extent
laid down in the instrument creating the power.
PREFERRED PROVIDER ORGANIZATION
Network of medical providers which charge on a fee-for-service basis, but are paid on a negotiated, discounted fee schedule.
PRINCIPAL
A person or organization whose obligation are guaranteed by a bond.
PREMISES
The particular location of the property or a portion of it as designated in an insurance policy.
PREMIUM
The amount of money an insurance company charges for insurance coverage.
PREMIUM FINANCING
A a policyholder contracts with a lender to pay the insurance premium on his/her behalf.
The policyholder agrees to repay the lender for the cost of the premium, plus interest and
fees.
PREMIUM TAX
A state tax on premiums paid by its residents and businesses and collected by insurers.
PREMIUMS WRITTEN
The total premiums on all policies written by an insurer during a specified period of time, regardless of what portions have been earned. Net premiums written are premiums written after reinsurance transactions.
PRIMARY COMPANY
In a reinsurance transaction, the insurance company that is reinsured.
PRIOR APPROVAL STATES
States where insurance companies must file proposed rate changes with state regulators, and gain approval before they can go into effect.
PRO-RATA CANCELLATION
When the policy is terminated midterm by the insurance company, the earned premium is
calculated only for the period coverage was provided. For example: an annual policy with
premium of $1,000 is cancelled after 40 days of coverage at the company's election. The
earned premium would be calculated as follows: 40/365 days X $1,000=.110 X $1,000=$110.
PRODUCT LIABILITY
A section of tort law that determines who may sue and who may be sued for damages when a defective product injures someone. No uniform federal laws guide manufacturer’s liability, but under strict liability, the injured party can hold the manufacturer responsible for damages without the need to prove negligence or fault.
PRODUCT LIABILITY INSURANCE
Protects manufacturers’ and distributors’ exposure to lawsuits by people who have sustained bodily injury or property damage through the use of the product.
PROFESSIONAL LIABILITY INSURANCE
Covers professionals for negligence and errors or omissions that injure their clients.
PROPERTY/CASUALTY INSURANCE
Covers damage to or loss of a policyholder’s property and a policyholder’s legal liability for damages caused to other people or their property.
PROPERTY/CASUALTY INSURANCE CYCLE
Industry business cycle with recurrent periods of alternating profit and loss.
PROPOSITION 103
A November 1988 California ballot initiative that called for a statewide auto insurance rate rollback and for rates to be based more on driving records and less on geographical location. The initiative changed many aspects of the state’s insurance system and was the subject of lawsuits for more than a decade.
PRO-RATA CANCELLATION
When the policy is terminated midterm by the insurance company, the earned premium is
calculated only for the period coverage was provided. For example: an annual policy with
premium of $1,000 is cancelled after 40 days of coverage at the company's election. The
earned premium would be calculated as follows: 40/365 days X $1,000=.110 X $1,000=$110.
QUOTE
An estimate of the cost of insurance, based on information supplied to the insurance
company by the applicant.
PURCHASING GROUP
An entity that offers insurance to groups of similar businesses with similar exposures to risk.
RATE
The cost of a unit of insurance, usually per $1,000. Rates are based on historical loss experience for similar risks and may be regulated by state insurance offices.
RATE REGULATION
The process by which states monitor insurance companies’ rate changes, done either through prior approval or open competition models.
RATING AGENCIES
Six major credit agencies determine insurers’ financial strength and viability to meet claims obligations. They are A.M. Best Co.; Duff & Phelps Inc.; Fitch, Inc.; Moody’s Investors Services; Standard & Poor’s Corp.; and Weiss Ratings, Inc. Factors considered include company earnings, capital adequacy, operating leverage, liquidity, investment performance, reinsurance programs, and management ability, integrity and experience. A high financial rating is not the same as a high consumer satisfaction rating.
REAL ESTATE INVESTMENTS
Investments generally owned by life insurers that include commercial mortgage loans and real property.
REDLINING
Literally means to draw a red line on a map around areas to receive special treatment. Refusal to issue insurance based solely on where applicants live is illegal in all states. Denial of insurance must be risk-based.
REINSTATEMENT
The restoring of a lapsed policy to full force and effect. The reinstatement may be
effective after the cancellation date, creating a lapse of coverage. Some companies
require evidence of insurability and payment of past due premiums plus interest.
REINSURANCE
Insurance bought by insurers. A reinsurer assumes part of the risk and part of the premium originally taken by the insurer, known as the primary company. Reinsurance effectively increases an insurer's capital and therefore its capacity to sell more coverage. The business is global and some of the largest reinsurers are based abroad. Reinsurers have their own reinsurers, called retrocessionaires. Reinsurers don’t pay policyholder claims. Instead, they reimburse insurers for claims paid.
RENTERS INSURANCE
A form of insurance that covers a policyholder’s belongings against perils such as fire, theft, windstorm, hail, explosion, vandalism, riots, and others. It also provides personal liability coverage for damage the policyholder or dependents cause to third parties. It also provides additional living expenses, known as loss-of-use coverage, if a policyholder must move while his or her dwelling is repaired. It also can include coverage for property improvements. Possessions can be covered for their replacement cost or the actual cash value that includes depreciation.
REPLACEMENT COST
The cost to repair or replace an insured item. Some insurance only pays the actual cash
or market value of the item at the time of the loss, not what it would cost to fix or
replace it. If you have personal property replacement cost coverage, your insurance will
pay the full cost to repair an item or buy a new one once the repairs or purchases have
been made.
REPLACEMENT VALUE
The full cost to repair or replace the damaged property with no deduction for
depreciation, subject to policy limits and contract provisions.
RESERVES
A company’s best estimate of what it will pay for claims.
RESIDUAL MARKET
Facilities that exist to provide coverage for those who cannot get it in the regular market. Insurers generally must participate in these pools. For this reason it is also known as the shared market.
RETENTION
The amount of risk retained by an insurance company that is not reinsured.
RETROCESSION
The reinsurance bought by reinsurers to protect their financial stability.
RETROSPECTIVE RATING
A method of permitting the final premium for a risk to be adjusted, subject to an agreed-upon maximum and minimum limit based on actual loss experience. It is available to large commercial insurance buyers.
RIDER
Usually known as an endorsement, a rider is an amendment to the policy used to add or
delete coverage.
RISK
The chance of loss or the person or entity that is insured.
RISK MANAGEMENT
Management of the varied risks to which a business firm or association might be subject. It includes analyzing all exposures to gauge the likelihood of loss and choosing options to minimize loss. These options typically include reducing and eliminating the risk with safety measures, buying insurance, and self-insurance.
RISK RETENTION GROUPS
Insurance companies that band together as self-insurers and form an organization that is chartered and licensed as an insurer in at least one state to handle liability insurance.
RISK-BASED CAPITAL
The need for insurance companies to be capitalized according to the inherent riskiness of the type of insurance they sell. Higher-risk types of insurance, liability as opposed to property business, generally necessitate higher levels of capital.
SALVAGE
Damaged property an insurer takes over after paying a claim to reduce its loss. Insurers receive salvage rights over property on which they have paid claims, such as badly-damaged cars. Insurers that paid claims on cargoes lost at sea now have the right to recover sunken treasures. Salvage charges are the costs associated with recovering that property.
SCHEDULE
A list of individual items or groups of items that are covered under one policy.
SECURITIES AND EXCHANGE COMMISSION / SEC
The organization that oversees publicly-held insurance companies. Those companies make periodic financial disclosures to the SEC, including an annual financial statement (or 10K), and a quarterly financial statement (or 10-Q). Companies must also disclose any material events and other information about their stock.
SECURITIZATION
The issuance of bonds or notes to third-party investors directly or indirectly by an insurance or reinsurance company or a pooling entity as a means of raising money to cover risks.
SELF-INSURANCE
The concept of assuming a financial risk oneself, instead of paying an insurance company to take it. Every policyholder is a self-insurer in terms of paying a deductible and co-payments. Large firms often self-insure frequent, small losses such as damage to their fleet of vehicles or minor workplace injuries. Self-insurance also refers to employers who assume all or part of the responsibility for paying health insurance claims of their employees. Firms that self insured for health claims are exempt from state insurance laws mandating the illnesses that group health insurers must cover.
SEVERITY
Size of a loss. One of the criteria used in calculating premiums rates.
SEWER BACK-UP COVERAGE
An optional part of homeowners insurance that covers sewers.
SHORT-RATE CANCELLATION
When the policy is terminated prior to the expiration date at the policyholder's
request. Earned premium charged would be more than the pro-rata earned premium. Generally,
the return premium would be approximately 90 percent of the pro-rata return premium.
However, the company may also establish its own short-rate schedule.
SOFT MARKET
An environment where insurance is plentiful and sold at a lower cost, also known as a buyers’ market.
SOLVENCY
Insurance companies’ ability to pay the claims of policyholders. Regulations to promote solvency include minimum capital and surplus requirements, statutory accounting conventions, limits to insurance company investment and corporate activities, financial ratio tests, and financial data disclosure.
SOLICITOR
A licensed employee of a fire and casualty agent or broker who may act for the agent or
broker in some circumstances.
SPREAD OF RISK
The selling of insurance in multiple areas to multiple policyholders to minimize the danger that all policyholders will have losses at the same time. Companies are more likely to insure perils that offer a good spread of risk. Flood insurance is an example of a poor spread of risk because the people most likely to buy it are the people close to rivers and other bodies of water that flood.
STACKING
Practice that increases the money available to pay auto liability claims. In states where this practice is permitted by law, courts may allow policyholders who have several cars insured under a single policy, or multiple vehicles insured under different policies, to add up the limit of liability available for each vehicle.
STATISTICAL DATA
Information that insurance companies often share with one another to more accurately estimate the probabilities of loss.
STATUTORY ACCOUNTING PRINCIPLES / SAP
More conservative standards than under GAAP accounting rules, it is imposed by state laws that emphasize the present solvency of insurance companies. SAP helps ensure that the company will have sufficient funds readily available to meet all anticipated insurance obligations. This method requires that selling expenses be recorded immediately, rather than amortized over the life of the policy.
STOCK INSURANCE COMPANY
An insurance company owned by its stockholders who share in profits through earnings distributions and increases in stock value.
STRUCTURED SETTLEMENT
Legal agreement to pay a designated person, usually someone who has been injured, a specified sum of money in periodic payments, usually for his or her lifetime, instead of in a single lump sum payment.
SUBROGATION
The legal process by which an insurance company, after paying a loss, seeks to recover the amount of the loss from another party who is legally liable for it.
SUPERFUND
A federal law enacted in 1980 to initiate cleanup of the nation’s abandoned hazardous waste dump sites and to respond to accidents that release hazardous substances into the environment. The law is officially called the Comprehensive Environmental Response, Compensation, and Liability Act.
SURCHARGE
An extra charge applied by the insurer. For automobile insurance, a surcharge is usually
for accidents or moving violations.
SURETY
An arrangement whereby one party becomes answerable to a third party for the acts of a
second party. Customarily an insurance company, the party in a suretyship arrangement who
holds himself responsible to one person for the acts of another.
SURETY BOND
a bond which the surety agrees to answer to the obligee for the non-performance of the
principal (also known as the obligor).
SURETYSHIP
Stated in its simplest terms, suretyship embraces all forms of obligation to pay debts
or answer for the default of another.
SURPLUS
The remainder after an insurer’s liabilities are subtracted from its assets. The financial cushion that protects policyholders in case of unexpectedly high claims.
SURPLUS LINES
Property/casualty coverage that isn’t available from insurers licensed by the state, called admitted companies, and must be purchased from a non-admitted carrier. Examples include risks of an unusual nature that require greater flexibility in policy terms and conditions than exist in standard forms or where the highest rates allowed by state regulators are considered inadequate by admitted companies. Laws governing surplus lines vary by state.
SURRENDER
To terminate or cancel a life insurance policy before the maturity date. In the case of
a cash value policy, the policyholder may exercise one of the nonforfeiture options at the
time of surrender.
TERM INSURANCE
Protection against premature death that comes in a form of life insurance. It pays a benefit only when an insured dies within a specified period, and a designated beneficiary receives the death benefit. If the insured lives beyond the specified period, the beneficiary receives nothing.
TERRITORIAL RATING
A method of classifying risks by geographic location to set a fair price for coverage. The location of the insured may have a considerable impact on the cost of losses. The chance of an accident or theft is much higher in an urban area than in a rural one, for example.
THIRD-PARTY ADMINISTRATOR
Outside group that performs clerical functions for an insurance company.
THIRD-PARTY COVERAGE
Liability coverage purchased by the policyholder as a protection against possible lawsuits filed by a third party. The insured and the insurer are the first and second parties to the insurance contract.
TITLE INSURANCE
Insurance that indemnifies the owner of real estate in the event that his or her clear ownership of property is challenged by the discovery of faults in the title.
TORT
A wrongful act, resulting in injury or damage on which a civil action may be based.
TORT LAW
The body of law governing negligence, intentional interference, and other wrongful acts for which civil action can be brought, except for breach of contract, which is covered by contract law.
TORT REFORM
Refers to legislation designed to reduce liability costs through limits on various kinds of damages and through modification of liability rules.
TOTAL LOSS
The condition of an automobile or other property when damage is so extensive that repair costs would exceed the value of the vehicle or property.
TREATY REINSURANCE
A standing agreement between insurers and reinsurers. Under a treaty each party automatically accepts specific percentages of the insurer’s business.
UMBRELLA POLICY
Coverage for losses above the limit of an underlying policy. It applies to losses over a large dollar amount, but terms of coverage are sometimes broader than those of underlying policies.
UNDERWRITING
The process of selecting applicants for insurance and classifying them according to
their degrees of insurability so that the appropriate premium rates may be charged. The
process includes rejection of unacceptable risks.
UNDERWRITING INCOME
The insurer’s profit on the insurance sale after all expenses and losses have been paid. When premiums aren’t sufficient to cover claims and expenses, the result is an underwriting loss. Underwriting losses are typically offset by investment income.
UNEARNED PREMIUM
The portion of a premium already received by the insurer under which protection has not yet been provided. The entire premium is not earned until the policy period expires, even though premiums are typically paid in advance.
UNINSURABLE RISK
Risks for which it is difficult for someone to get insurance.
UNINSURANCE/UNDERINSURANCE
The result of the policyholder’s failure to buy sufficient insurance. An underinsured policyholder may only receive part of the cost of replacing or repairing damaged items covered in the policy.
UNINSURED MOTORISTS COVERAGE
Portion of an auto insurance policy that protects a policyholder from uninsured and hit-and-run drivers.
UNIVERSAL LIFE INSURANCE
A flexible premium policy that combines protection against premature death with a savings account that typically earns a money market rate of interest. Premiums can be changed during the life of the policy within limits and the policy will lapse if there isn’t enough money to cover mortality and administrative costs.
VALUED POLICY
A policy under which the insurer pays a specified amount of money to or on behalf of the insured upon the occurrence of a defined loss. The money amount is not related to the extent of the loss. Life insurance policies are an example.
VANDALISM
The malicious and often random destruction or spoilage of another person’s property.
VARIABLE LIFE INSURANCE
A policy that combines protection against premature death with a savings account that can be invested in stocks, bonds, and money market mutual funds at the policyholder’s discretion.
VIATICAL SETTLEMENT COMPANIES
Insurance firms that buy life insurance policies at a steep discount from policyholders who are often terminally ill and need the payment for medications or treatments. The companies provide early payouts to the policyholder, assume the premium payments, and collect the face value of the policy upon the policyholder’s death.
VOID
A policy contract that for some reason specified in the policy becomes free of all legal effect. One example under which a policy could be voided is when information a policyholder provided is proven untrue.
VOLCANO COVERAGE
Most homeowners policies cover damage from a volcanic eruption.
WAITING PERIOD
A period of time set forth in a policy which must pass before some or all coverages
begin.
WAIVER
The surrender of a right or privilege which is known to exist.
WAR RISK
Special coverage on cargo in overseas ships against the risk of being confiscated by a government in wartime. It is excluded from standard ocean marine insurance and can be purchased separately. It often excludes cargo awaiting shipment on a wharf or on ships after 15 days of arrival in port.
WEATHER INSURANCE
A type of business interruption insurance that compensates for financial losses caused by adverse weather conditions.
WHOLE LIFE INSURANCE
The oldest kind of cash value life insurance that combines protection against premature death with a savings account. Premiums are fixed and guaranteed and remain level throughout the policy’s lifetime.
WORKERS COMPENSATION
Insurance that pays for medical care and physical rehabilitation of injured workers and helps to replace lost wages while they are unable to work.
WRAP-UP INSURANCE
Broad policy coordinated to cover liability exposures for a large group of businesses that have something in common. Might be used to insure all businesses working on a large construction project, such as an apartment complex.
WRITE
To insure, underwrite, or accept an application for insurance.
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