Insurance Glossary
Accident Year (AY)
The year in which an accident occurred.
Act of God
An event that is caused by the forces of nature, without human intervention,
and that could not have been prevented by reasonable care, e.g., flood, earthquake,
hurricane, etc.
Actual Cash Value
An amount equal to the current replacement cost of the lost or damaged property
at the time of the loss, reduced by an allowance for depreciation, wear and
obsolescence.
Adjuster
A person who investigates and settles losses for an insurance carrier.
Admitted Company (Carrier)
An insurance company licensed and authorized to do business in a particular
state or jurisdiction.
Advance Premium
A deposit premium paid by the insured which may later be adjusted up or down,
following an audit of the insured's records (i.e. payroll, inventory, sales
receipts).
Agent
An individual who solicits, negotiates or effects contracts of insurance. Generally
refers to a natural person appointed by a licensed insurer as its representative
for the purpose of soliciting and selling insurance. An agent's right or the
extent of his or her authority to act for the insurer, and the obligations of
the agent and the insurer to one another are governed by the specific terms
of the contract between them, as well as the laws of the jurisdictions in which
they transact insurance.
Agent Balances
The amount of premiums, minus commissions, collected by agents and/or brokers
and owed to an insurer.
Allied Lines
Types of insurance associated with property insurance, which may include earthquake,
sprinkler leakage, and income and extra expense coverage.
Annual Policy
Insurance policy written for a term of one year or renewed one year at a time.
Annual Statement
A report made by a company at the close of its fiscal year. It is the primary
financial report required by the state insurance department to be submitted
by insurers annually. Sometimes referred to as the convention statement or convention
blank.
Annuitant
The person during whose life an annuity is payable, usually the person to receive
the annuity.
Annuity
A contract that provides an income for life or a specified number of years,
or a combination of the two.
Application
The statement of information that a prospective insured gives when applying
for an insurance policy and that an insurance company uses to help decide if
it will issue the policy and what premium rate will be charged.
Apportionment
The dividing of a loss proportionately among two or more insurers which cover
the same loss.
Appraisal
Determination of the value of property, either to help ascertain the appropriate
amount of insurance to be written or to determine the amount of loss to be paid.
Appreciation
Rise in value or price. Increase in worth or value.
Appurtenant Structures
Buildings on the same premises as the main building insured under a property
insurance policy.
Arbitration
Determination by impartial experts of the value of property or the extent of
damage. Many insurance policies provide for arbitration if the company and the
insured cannot agree on the amount or the extent of a loss; may also be used
to resolve liability and policy-coverage issues in certain situations.
Assignment
The transfer of one's interest in an insurance contract to another; in many
kinds of insurance, valid only with the consent of the insurer; the transfer,
after an event insured against, of one's right to collect and amount payable
under an insurance contract.
Assumed Premium
The amount charged by an insurance company in exchange for accepting all or
part of insurance on a risk or exposure.
Authorized Insurer
An insurer licensed or officially permitted to transact specific classes of
insurance business in the state or jurisdiction that issued the licensed or
permission.
Basic Form
An insurance policy providing coverage against a limited number of specified
perils.
Basic Limits
Certain minimum amounts of liability to be covered by insurance. It is customary
to quote premiums in terms of these minimum amounts.
Beneficiary
Any person, institution, trust, etc., named in a life policy to receive the
policy benefits upon the death of the insured.
Binder
Temporary insurance contract providing coverage until a permanent policy is
issued. In property and casualty insurance, some agents have authority to bind
the insurance company to cover until a policy can be issued. For example, the
purchaser of an automobile can call the agent, who can then bind the insurance
company to temporary coverage.
Blanket Coverage
A blanket form is one under which property is insured under a single amount
applying to several different pieces of property rather than a specific amount
of insurance on each property.
Block Policy
An inland marine policy covering all property on or off a merchant's premises,
including property of others in the care, custody or control of the policyholder.
Bodily Injury
Injury to the body of a person. The term is usually specifically defined in
the policy, and these individual definitions have variations.
Bodily Injury Liability Insurance
This coverage protects an insured against legal liability for injury to another
person arising from an accident.
Boiler and Machinery Insurance
A form of property coverage for loss arising out of the operation of pressure,
mechanical and electrical equipment.
Broad Form
A package policy providing coverage for the same perils covered in the basic
form, plus specified additional perils.
Broker
A representative of the buyer of property and liability insurance who deals
with either agents or companies in arranging for the coverage required by the
customer.
Business Interruption Insurance
Coverage for the loss of earnings in the case the policyholder's business is
shut down by fire, windstorm, explosion or other insured peril. It's often added
as a rider to a standard business policy and pays for such expenses as the rebuilding
of an accounts receivable database, cleaning computers, leasing temporary office
space, and similar losses associated with a disaster.
Calendar Year
A 12-month period during which losses are incurred. The calendar year (CY) loss
ratio reflects payments and reserve adjustments on all claims during a particular
year, including those from prior injury years, divided by premiums earned in
that period. Once calculated for a given period, calendar year results do not
change.
Cancelable Policy
A policy which may be cancelled by the company at any time by giving advance
notice in compliance with state requirements to the insured citing the reasons
such insurance is being cancelled and refunding any unearned premium.
Cancellation
The discontinuance of an insurance policy before its normal expiration date,
either by the insured or insurance company.
Captive Insurer
An insurance company set up by a company or group of companies to insure their
own risks or risks common to the group.
Cargo Insurance
A broad classification of marine insurance providing coverage on cargo, as opposed
to hulls, to protect shippers by sea from loss or damage to goods for which
they would be unlikely to collect from the carriers themselves. Whether cargoes
are insured for a particular voyage or under open policies which are in the
nature of reporting-form policies depends upon the volume and regularity with
which a shipper uses ocean transit. Cargo insurance also can cover goods transported
by train or truck.
Casualty Insurance
Insurance primarily concerned with the legal liability for losses caused by
injury to other persons or damage to property of others. Also includes, among
other coverage's: automobile liability, workers' compensation, employers' liability,
general liability, plate glass, theft and directors' and officers' liability.
It excludes life, fire and marine insurance.
Catastrophe
A sudden event causing an extraordinary level of loss; most often associated
with natural disasters such as tornados, hurricanes, floods or earthquakes.
In insurance, it is applied to an incident or series of related incidents involving
an insured loss in excess of $25 million.
Catastrophe Reinsurance
An indemnity contract between a ceding insurer and one or more assuming reinsurers
whereby each reinsurer assumes a stated portion of the ceding insurer's liability
for loss in excess of a specified amount. Catastrophe reinsurance is used to
spread among several insurers the liability in the event of an extraordinary
level or concentration of loss sustained in a single occurrence.
Cede
To transfer all of part of a risk written by an insurer (the ceding, or primary
company) to a reinsurer (the assuming company).
Ceded Premiums
Premium paid by a primary or ceding insurer to an assuming reinsurer as compensation
for assuming all or a stated percentage or portion of liability for losses incurred
under one or more insurance policies issued by the primary or ceding insurer.
Chartered Property Casualty Underwriter (CPCU)
A designation conferred in recognition of the attainment of certain standards
of education and proficiency in the art and science of property and casualty
insurance underwriting.
Claim
A demand for payment of a policy benefit because of the occurrence of an insured
event.
Claim Adjuster
Someone who performs the field work involved in settling a claim, including
investigating, appraising and negotiating a claim.
Claim Frequency
The number of claims occurring under a given coverage divided by the number
of earned exposures for the given coverage. It is usually expressed as the number
of claims paid per 100 of such exposures.
Claim Severity
The average cost per claim.
Claimant
One who makes a claim under an insurance policy.
Claims-Made Form
A type of liability policy which covers claims which occur and are reported
during the policy term.
Combined Ratio (Statutory)
In insurance, combination of the loss ratio and the expense ratio:
- Loss Ratio = Incurred Losses + Loss Adjustment Expense / Earned Premiums
- Expense Ratio = Incurred Expenses / Written Premiums
The combined ratio is important to an insurance company since it indicates
whether or not the company is earning a profit on the business is it writing,
not taking into account investment returns on the premiums received. A combined
ratio under 100% indicates underwriting profitability; a combined ratio exceeding
100% indicates an underwriting loss.
Combined Single Limit
A liability coverage limit that combines both bodily injury and property damage
into one aggregate amount.
Commercial Blanket Bond
A fidelity bond for operators of commercial establishments, etc. (see fidelity
bond).
Commercial Credit Insurance
An insurance contract that insures payment or collection of the accounts receivable
for goods shipped or services provided by manufacturers, wholesaler and service
organizations.
Commercial General Liability (CGL)
Liability coverage section of a Simplified Commercial Lines Portfolio policy
(SCLP). Provides for separate limits of coverage for general liability, fire
legal liability, products and completed operations liability, advertising and
personal liability, and medical payments. An aggregate limit of liability is
in force for the general liability, fire legal liability, advertising and personal
liability, and medical payments claims. When total claims for all of these areas
exceed a given annual aggregate limit of liability, the policy limits are said
to be exhausted and no more claims for the year will be paid under the policy.
There is also an aggregate limit of liability in force for products and completed
operations liability claims. This form has replaced the Comprehensive General
Liability insurance (CGL) form.
Commission
A percentage of an insurance premium paid to an agent or broker for producing
and servicing the business.
Commissioner of Insurance
Title of the head of the state insurance department who is responsible for the
enforcement of insurance laws and for promulgating regulations dealing with
the insurance industry.
Competitive State Fund
State-operated workers' compensation insurer which competes with private insurers
for employers' workers' compensation business in certain states.
Consequential Loss
Value of loss resulting from loss of use of property. For example, a fire damages
the structure of business premises and the business loses customer income until
it can reopen. The loss in income- the consequential loss- can be covered under
Business Interruption Insurance. Basic property insurance policies, such as
the fire policy, do not cover the consequential or indirect loss.
Consideration
In an insurance contract, usually means money. The money or premium paid by
the policyholder for the insurance protection.
Contract Bond
A bond which guarantees faithful performance of a construction contract and
payment of all material and labor bills related to that contract. A Performance
Bond covers faithful performance only; a Payment Bond guarantees payment of
material and labor expenses.
Contractual Liability Insurance
Protects an insured against liability arising under a written or oral contract.
Contributory Negligence
Carelessness of the injured person that helped to cause the accident in which
he or she was injured. Some states bar recovery to the plaintiff if the plaintiff
was contributorily negligent.
Coverage
The protection provided under a contract of insurance.
Covered/Insured Peril
The risks of loss you are protected against by an insurance policy.
Crop-Hail Insurance
Protection against hail damage to growing crops. Coverage is often afforded
under such policies for crop damage due to perils such as fire, windstorm, drought,
frost, snow, etc.
Declarations
That part of that policy describing the named insured, address, effective date,
term of the policy, line of business, the amount of insurance and the premium.
Deductible
The initial amount of loss that the insured is responsible for paying.
Directors and Officers Liability Insurance
Coverage for directors and officers of firms or organizations against liability
claims arising out of alleged errors in judgment, breaches of duty, and wrongful
acts related to their organizational activities.
Direct Premiums Written
The gross amount of property and casualty insurance premiums written (less return
premiums), before any deductions.
Earned Premium
The part of the total property/casualty policy premium attributable to the expired
portion of the policy period.
Employers' Liability Insurance
Covers the liability of employers for occupational injuries sustained by its
employees not covered under the applicable state workers' compensation law.
Endorsement
A writing attached to an insurance policy, which amends or supplements certain
terms, and becomes a legal part of original insurance contract in accordance
with the stated terms.
Errors and Omissions Insurance
A type of liability insurance which indemnifies insured professionals- who include,
but are not limited to, lawyers, insurance agents and brokers, accountants,
real estate agents, appraisers, abstracters, title insurance agents, architects
and engineers, advertising agents, adjusters, directors and trustees, fiduciaries,
travel agents and data processing firms- for losses sustained because of their
errors or oversights.
Excess Insurance
Property, liability or heath coverage above the primary amount of insurance.
For example, the primary coverage is $100,000 and the excess insurance is $1
million. After the losses exceed $100,000, the excess insurance will pay for
the losses up to a total of $2 million.
Excess Limits
Limit above the minimum amount of coverage for which the policy can be written
according to company or legal restrictions.
Exclusion
Provision in an insurance policy that identifies the conditions and risks that
are not covered by the policy. For example, common exclusions are: hazards deemed
so catastrophic in nature that they are uninsurable, such as war; normal wear
and tear.
Expiration Date
Termination date of coverage as indicated on the insurance policy.
Exposure
Possibility of loss. The most cost efficient way to purchase insurance is to
insure an unexpected loss with a low probability of occurrence. Insuring a loss
with a high probability of occurrence means swapping dollars with an insurance
company, since the premium charge would reflect the expected probability of
loss. Expense and profit loadings would also be added by the insurer.
Extended Downcycle
Pricing cycles characterized by intense competition and lower premium rates,
termed a "downcycle", followed by periods of reduced competition,
reduced underwriting capacity resulting from lower policyholders' surplus, and
higher premium rates, known as an "upcycle".
Face Amount
The total amount or principal amount of insurance provided by an insurance policy
at death or maturity.
Facultative Reinsurance
Individual risk offered by an insurer for acceptance or rejection by a reinsurer.
Both parties are free to act in their own best interest regardless of any prior
contractual arrangements. With proportional facultative reinsurance, the reinsurer
assumes a proportional share of premiums and losses. On a nonproportional basis,
the reinsurer is liable only for losses which exceed the insurer's retention
level; premiums vary with loss expectation.
Fidelity Bond
Coverage that guarantees that the insurance company will pay the insured business
or individual for money or other property lost because of dishonest acts of
its bonded employees, either named or by positions. The bond covers all dishonest
acts, such as larceny, theft, embezzlement, forgery, misappropriation, wrongful
abstraction, or willful misapplication, whether employees act alone of as a
team.
Fire Insurance
Covers property damage or destruction caused by fire and lightening.
Fire Policy Form
Policy known as the 165-line policy because of the standard form used in most
states. The policy is not complete, and additional forms and endorsements are
added so that it can cover numerous direct and indirect risks. The Standard
Fire Policy is Section I - property coverage of most package policies such as
the homeowners and special multiperil. It provides the foundation for property
insurance coverage's regardless of the form in which they appear. The Standard
Fire Policy has four sections:
- Declarations- description and location of property, insured amount, name of insured.
- Insuring Agreements- premium amount, obligations of the insured, actions the insured must take in the event of loss and resultant claim.
- Conditions- described that which suspends or restricts the coverage, such as an increase in the hazard with the knowledge of the insured.
- Exclusions- perils not covered under the policy, such as enemy attack including action taken by military force in resisting actual or immediately impending enemy attack.
Forms that can be added to a Standard Fire Policy include Dwelling Buildings
and Contents Basic Form; Dwelling, Buildings and Contents Broad Form; General
Property Form. Since the Standard Fire Policy insures only against fire and
lightening, the Extended Coverage Endorsement can cover the additional perils
of windstorm, hail, riot, civil commotion, vehicle and aircraft damage to the
insured property, explosion, and smoke damage. A Vandalism and Malicious Mischief
Endorsement can also be added.
Flat Cancellation
Cancellation of a policy at or before it becomes effective with the entire premium
refunded to the policyholder.
Fleet Policy
Numerous automotive vehicles covered under a common insurance policy.
Floater
Coverage for property that moves from location to location either on a scheduled
or unscheduled basis. If the floater covers unscheduled property, all property
is covered for the same limits of insurance.
Generally Accepted Accounting Principles (GAAP)
A method of reporting financial results of an insurer in accordance with the
going-concern basis used by other businesses. GAAP is promulgated by the AICPA
(American Institute of Certified Public Accountants) and the FASB (Financial
Accounting Standards Board). GAAP assigns income and disbursements to the proper
periods, as distinguished from the more conservative requirements of statutory
accounting.
General Agent
Individual responsible for insurance agency operation in a particular area,
including sale of life and health insurance, servicing policies already sold,
recruiting and training agents, and providing administrative support. General
agents are compensated on a commission basis and usually pay all expenses of
administering their agencies.
General Liability Insurance
Coverage for an insured when negligent acts and/or omissions result in bodily
injury and/or property damage on the premises of a business, when someone is
injured as the result of using the product manufactured or distributed by a
business or when someone is injured in the general operation of a business.
Gross Premium
In general, original premium amount paid by a policyholder before an agent's
deductions for commissions and operating expenses. In life insurance, premium
before dividends are subtracted.
Group Insurance
Single policy under which individuals in a natural group (such as employees
of a business firm) and their dependents are covered.
Guaranty Fund (Insolvency Fund)
Aggregate sums, in certain states, to pay claims of insolvent insurance companies.
These funds are maintained by contributions of companies operating in a particular
state in proportion to their business written in the state. A guaranty fund
insures the integrity of the insurance business.
Hard Insurance Market
A condition caused by insurance companies lacking sufficient capital to accept
new business, sometimes causing a sharp rise in pricing and the diminishing
of coverage availability.
Hull Policy
An ocean marine or aviation insurance contract covering damage to or loss of
a ship or plane, but not the contents.
Incurred Losses
Losses that have occurred within a stipulated time period whether paid or not.
Indemnity
Compensation for loss. In property and casualty contract, the objective is to
restore an insured to the same financial position after the loss that he or
she was in prior to the loss.
Independent Adjuster
One who adjusts losses on behalf of companies but is not on their payroll. The
independent adjuster is paid by fee for each loss adjusted, as distinguished
from a company adjuster who is paid a regular salary by one company.
Independent Agent
Contractor who solicits and sells insurance for a number of insurance companies.
The independent agent owns the records of policies sold, is not controlled by
any one company, pays agency's expenses out of the commissions earned, and employs
an administrative support staff.
Indirect Loss
Loss that is not a direct result of a peril. For example, damage to property
of a business firm is a direct loss, but the loss of business earnings because
of a fire on its premises is an indirect loss.
Inland Marine Insurance
A broad type of insurance, generally covering articles that may be transported
from one place to another as well as bridges, tunnels and other instrumentalities
of transportation and communication. It includes goods in transit over land
as well as numerous "floater" policies such as personal effects, personal
property, jewelry, furs, fine arts and others.
Insurable Interest
Is a kind of property right the value of which may be calculated and compensated
in money in the event of a loss.
Insurance Services Office (ISO)
An organization that compiles insurance statistics, provides loss costs, drafts
policy forms and coverage provisions, and conducts inspections for rate-makingratemaking
purposes.
Insurance to Value
In property coverage, ratio of the amount of insurance to the value of an insured
property. This ratio, multiplied by the amount of the loss, determines the indemnification
payment.
Insured
Party covered by an insurance policy. The insured persons in property and casualty
policies may include residents of the insured's household, such as spouse, relatives
of either, and other individuals under their care, custody, and control if under
age 21.
Insurer
Company offering protection through the sale of an insurance policy to an insured.
Insuring Agreements
Section describing coverages under a policy. Elsewhere in the policy other sections
may restrict or exclude coverages.
Joint Insurable Interest
Two or more parties with a financial interest in a particular item of property.
Legal Expense Insurance
Prepaid legal insurance coverage plan sold on a group basis. Entitles a group
member to a schedule of benefits, at a stipulated premium, for adoptions, probates,
divorces, and other legal services. This emerging employee benefit has had wide
acceptance in some localities but limited acceptance elsewhere. After scheduled
befits have been exhausted, subsequent legal fees are usually based on the attorney's
customary rate. For example, a prepaid legal insurance plan may provide only
three legal consultations a year.
Legal Liability
Obligations and responsibilities subject to evaluation, interpretation, and
enforcement in a court of law. Casualty insurance provides coverage for an insured
against a civil legal liability suit, not criminal legal liability, intentional
torts, or liability for breach of contract.
Level Premium Life Insurance
Insurance for which the cost is distributed evenly over the period during which
premiums are paid. The premium remains the same from year to year and is more
than the actual cost of protection in the earlier years of the policy and less
than the actual cost in the later years. The excess paid in the early years
builds up a reserve which helps meet the costs in later years.
Liability
Legal obligation or responsibility imposed by law or private contractual arrangement.
Liability insurance may provide coverage for exposure arising from either source.
Liability Insurance
Insurance that pays sums that the insured becomes legally obligated to pay because
of specific events or perils insured in the policy. Personal liability policies
include Comprehensive Personal Liability (CPL), Homeowners Insurance Policy,
Personal Automobile Policy (PAP), Personal Umbrella Liability, and the Uninsured
Motorist Endorsement. Business liability polices include Business Automobile
Policy (BAP), Business owners Policy, Completed Operations and Products Liability,
Commercial General Liability Insurance (CGPL), Employers Liability and Workers
Compensation, Manufacturers and Contractors Liability (M&C), Owners, Landlords
and Tenants Liability Insurance Policy (OL&T), Physicians, Surgeons and
Dentists Professional Liability, Storekeepers Liability Insurance, Umbrella
Liability Policy.
Limit
The maximum amount of benefits that an insurer agrees to pay in the event of
a loss.
Loss
The amount of compensation payable for an injury or damage resulting from an
insured peril.
Loss Adjustment Expenses
Expenses incurred in the course of investigating and settling claims. Loss-adjustment
expenses include any legal and adjusters' fee and the costs of paying claims
and all related expenses. Referred to as LAE.
Loss Adjustment Expense Ratio
Ratio of the relationship of loss adjustment expenses to earned premium.
Loss Control Representative
Insurance company employees, also called safety engineers, that perform loss
control surveys or inspections, and prepare written loss control report that
outline their findings.
Loss Control Service
Engineering or inspection service which assists the insured in reducing its
exposure to loss.
Loss Costs
The amount of money paid by the insurance company on insured loss, not including
expenses of operation.
Loss Expense-Unallocated
Salaries and other expenses incurred in the operation of a claims department
of a property and liability insurance carrier which cannot be charged to individual
claims. Referred to as ULAE.
Loss Exposure
The possibility that a loss may occur.
Loss Ratio
Relationship of incurred losses plus loss adjustment expense to earned premiums.
Loss Reserve
A dedicated account for payment of known claims due but not paid, known claims
not yet due, and provision for incurred but not reported (IBNR) claims. The
critical problem facing a casualty insurance company is the amount of reserves
necessary for the incurred but not reported loses (IBNR) because many of these
claims and their resultant settlements may not manifest themselves until several
years in the future. This is known as the tail end distribution liability.
Malpractice Insurance
Professional liability coverage for a practitioner in a given field of expertise.
Coverage takes the form of defending the practitioner against liability suits
whether or not with foundation, and paying on behalf of the insured, court awarded
damages up to the limits of the policy.
Managing General Agents (MGAs)
An agent that under contract is granted the authority by an insurance company
to underwrite and issue insurance policies and/or to pay claims on behalf of
the insurance company.
Manual Rates
Published cost per unit of insurance, usually the standard rate charged for
a standard risk. For example, one company's yearly rate or premium charged per
$1000 of standard term life insurance for a male age 26 is $12.02.
Manual Rating
A method for determining the cost of an insurance policy using pre-determined
rates, usually obtained from a rate book or manual.
Monoline Policy
An insurance policy that covers only one kind or class of insurance. Title insurance
for real estate is probably the most common type of monocline insurance.
Moral Hazard
Circumstance which increases the probability of loss because of an applicant's
personal habits or morals; for example, if an applicant is a known criminal.
Multi-Peril Policy
A package policy that provides protection against a number of separate perils.
Multi-peril policies are not necessarily multiple-line policies, since the combined
perils may be all within one insurance line, such as property.
Multiple-Line Company
A company that writes a variety of basic or traditional lines of insurance known
as property and casualty (liability) insurance, such as auto, boat owners, homeowners,
commercial, etc.
Multiple-Line Policy
A package policy that provides insurance for more than one kind of insurance.
Mutual Insurance Companies
Insurance companies without capital stock, owned by the policyholders.
Named Perils
Insurance contract under which covered perils are listed. If a loss results
from an unlisted peril or event, no benefits are paid.
National Association of Insurance Commissioners (NAIC)
Membership organization of state insurance commissioners. One of its goals is
to promote uniformity of state regulation and legislation as it concerns the
insurance industry. The NAIC opposes federal regulation of insurance. The organization
has achieved considerable national uniformity through the adoption of a uniform
blank for insurance companies' annual financial reports, a zone system for the
triennial examinations of insurance companies, a standard valuation law for
reserves, standard nonforfeiture benefits, and model laws affecting many aspects
of the insurance business.
Net Premiums Written
The amount of premiums retained by an insurer.
Non-admitted Insurer
Company not licensed by a particular state to sell and service insurance policies
within that state.
Non-Participating Policy
A policy with no provision for payment of dividends to policyholders.
Notice of Loss
Notification to an insurance company by an insured or claimant that a loss has
occurred. Written notice may be required, although many companies accept notice
by telephone.
Obligee
A person, firm, corporation or government agency protected by a surety bond.
Occupational Disease Coverage
A coverage which pays benefits for diseases arising out of or in the course
of employment, as opposed to ordinary diseases to which the general public is
exposed.
Occupational Hazard
Condition surrounding a work environment that increases the probability of death,
disability, or illness to a worker. This class of hazard is considered when
writing Workers Compensation Insurance.
Occurrence
Event that results in bodily injury and/or property damage. Most liability insurance
policies stipulates that all bodily injuries and/or property damages resulting
from the same general conditions are interpreted as resulting from one occurrence
and thus subject to the policy limits per occurrence.
Ocean Marine Insurance
Protection against damage or destruction of a ship's hull and the ship's cargo
(freight) as the result of the occurrence of an insured peril.
Open Peril
Insurance policy that protect the insured from losses caused by any peril that
is not specifically excluded by the policy.
Other Insurance Condition
Condition found in a policy that sets out how other insurance the insured may
have on the same property will affect reimbursement under the policy when a
loss occurs.
Package Policy
A combination of two or more classes or kinds of insurance in a single policy.
A homeowner's policy, for example, is a package combining property, liability
and theft coverages for the homeowner.
Paid Losses
Actual amount of total losses paid by an insurance company during a specified
time interval.
Partial Loss
Loss involving less than all of the values insured or calling on the policy
to pay less than its maximum amount.
Participating Policy
Policy that pays a dividend to its owner.
Peril
The cause of a possible loss, such as fire, windstorm, theft, explosion or riot.
Persistency
Percentage of life insurance or other insurance policies remaining in force;
percentage of policies that have not lapsed. The higher the percentage, the
greater the persistency. It is an important measure of a company's retention
of its life insurance business.
"Personal Injury" Liability Insurance
Liability insurance that provides coverage for injuries to third parties caused
by the insured.
Policies-in-Force
Polices written and recorded on the books of the carrier which are unexpired
as of a given date. Usually applies to property and liability insurance.
Policy
Written agreement under which an insurer is contractually bound to reimburse
or pay losses to or for an insured.
Policyholder
Individual or other entity that owns an insurance policy.
Policyholder Dividends
Sum returned to a policyowner by an insurance company under a participating
policy. Dividends are not deemed as taxable distributions, as the Internal Revenue
Service interprets them as a refund of a portion of the premium paid.
Policyholder's Surplus
The sum an insurance company has remaining after all liabilities are deducted
from all assets. Sums such as paid-in capital and special voluntary reserves
are also included in this term.
Policy Acquisition Costs
Costs that vary with and are primarily related to the acquisition of new and
renewal insurance contracts. Also referred to as underwriting expenses.
Policy Loan
The borrowing against a life insurance policy's cash value. The loan may be
repaid in whole or part at any time until the policy matures or the interest
plus the principal equal or exceed the cash value.
Policy Year
The year during which a policy is effective.
Pool
An organization of insurers or reinsurers through which particular types of
risks are underwritten with premiums, losses and expenses shared in agreed ratios.
Preferred Risk
Insured, or an applicant for insurance, with lower expectation of incurring
a loss than the standard applicant. For example, an applicant for life insurance
who does not smoke can usually obtain a reduced premium rate to reflect his
or her greater life expectancy.
Premium
The payment charged for an insurance policy. The insurance company will assume
the risks of the insured (length of life, state of health, property damage or
destruction, or liability exposure) in exchange for a premium payment. Premiums
are calculated by combining expectation of loss and expense and profit loadings.
Usually, the periodic cost of insurance is computed by multiplying the premium
rate per unit of insurance by the number of units purchased.
Premium Auditor
A person who examines a liability insurance policyholder's insurance records
(sales, payroll, etc.) at the end of the policy term to determine if the basis
for the premium charge has either increased or decreased. If the audited premium
is less than originally estimated and paid, the policyholder will receive a
refund; if greater, the policyholder will receive a statement for the balance.
Premium Receivable
Premium balances, less commissions payable thereon, due from agents, brokers
and insureds.
Producer
Any person directly involved in the sale of insurance.
Prohibited Risk
A risk that a company will not insure.
Proof of Loss
Documentation presented to the insurance company by the insured in support of
a claim so that the insurer can determine its liability under the policy.
Property Damage Liability Insurance
Coverage in the event that the negligent acts or omissions of an insured result
in damage or destruction to another's property.
Property Insurance
Provides financial protection against loss or damage to the insured's property,
other than automobile, caused by specified perils, such as fire, windstorm,
hail, explosion, riot, aircraft, motor vehicle, vandalism, malicious mischief,
riot and civil commotion, and smoke.
Property Losses
Losses an individual might suffer which can be characterized as loss of the
article itself, loss of income from the use of property, or extra expense incurred
due to loss of property.
Pro-Rata Cancellation
Cancellation of a policy before it expires and returning to the policyholder
an amount of premium proportional to the unexpired days of the policy.
Protection Amount
The face amount of a life insurance policy, or amount of money that will be
paid to a beneficiary upon the death of an insured.
Proximate Cause
The dominating cause of loss or damage; an unbroken chain of events between
the occurrence of an insured peril and damage to property. As an illustration,
property damage occurring from fire-fighting activities is covered under the
fire policy because fire was the proximate cause of the loss.
Public Liability Insurance
A very broad term for insurance covering liability exposures for individuals
and business owners. It provides broad coverage, generally including all exposures
for property damage and bodily injury, except exposures that relate to ownership
of airplanes and automobiles, and to employees.
Quotation
An estimate of the premium for a given policy.
Rain Insurance
Business interruption insurance in which the insured is indemnified for loss
of earnings and payment of expenses resulting from adverse weather conditions.
For example, the rain-out of a fair, horse race, or boxing match can cause a
substantial loss of money for a promoter who may have spent huge suns in advance
of the event for rental, advertising, and site conditioning. The policy does
not cover damage to property because of rain.
Rate
A charge per unit in determining insurance premiums.
Rating Bureau
An organization that gathers statistics, develops loss costs, and/or creates
policy forms and provides other services for the property and casualty insurers
affiliated with the bureau.
Rating Territory
In various property and casualty lines, a geographical grouping within which
insureds are likely to share an exposure to similar risks. Grouping of insureds
within a territory helps establish equitable rates for the territory.
Rebating
The granting of any form of inducement, favor or advantage in cost or benefit
to the purchaser of a policy not available to all under the standard policy
terms. Rebating in some states is a penal offense for which both the agent and
the person accepting the rebate can be punished by fine or imprisonment. The
agent is also subject to revocation of license.
Reinstatement
The restoration of a lapsed life or health insurance policy to its original
premium-paying status – usually after evidence of good health has been
submitted and past-due premiums have been paid.
Reinsurance
Form of insurance that insurance companies buy for their own protection, "a
sharing of insurance." An insurer (the ceding insurer) reduces its possible
maximum loss on either an individual risk (facultative reinsurance) or a large
number of risks (automatic reinsurance) by paying another insurance company
(the reinsurer) to assume a portion of the ceding insurer’s risk.
Reinsurance enables an insurance company to (1) expand its capacity; (2) stabilize its underwriting results; (3) finance its expanding volume; (4) secure catastrophic protection against shock losses; (5) withdraw from a class or line of business, or a geographical area, within a relatively short time period; and (6) share large risks with other companies.
Reinsurance Facility
(1) A group of reinsurance companies that share reinsurance contracts on a pro
rata basis as they are submitted to the pool. (2) Market that operates much
like New York Stock Exchange in that reinsurance contracts are bought and sold
on a bid and asked basis.
Release
Written acknowledgement stating that all obligations past, present, or future
arising out of a particular accident or occurrence have been fulfilled. Signing
by the claimant generally relieves the insurance company and insured of further
obligation.
Renewal
Automatic reestablishment of an insurance policy's in-force status, usually
achieved through payment of the premium due.
Renewal Certificate
Form showing notification that an insurance benefit has been renewed with the
same provisions, clauses, and benefits of the previous policy.
Rents or Rental Values Coverage
Endorsement to an existing policy or a separate policy covering loss of rental
income to the property owner, caused by the damage or destruction of a building,
rendering it unrentable. The coverage applies whether or not the dwelling is
rented at the time of the loss. The insured can select a coinsurance requirement
of 50%, 80%, or 100%. The higher that coinsurance amount, the lower the premium.
Replacement Cost Property Coverage
Insurance under which the amount payable is the current replacement cost of
the property new, rather than the depreciated value. Applies to the building
structures (in most cases) and can apply to contents in some policies.
Representations
Statements by an insurance applicant concerning personal health history, family
health history, occupation, and hobbies. These statements are required to be
substantially correct; that is, applicants must answer questions to the best
of their knowledge.
Reserve
An amount representing actual or potential liabilities allocated by an insurer
to cover obligations to policyholders and third-party claimants.
Residual Market
A general term describing the total of all consumers who have had difficulty
purchasing insurance through normal channels. Automobile Insurance Plans, Fair
Access to Insurance Requirements or FAIR Plans, Reinsurance Facilities and Joint
Underwriting Associations all service this market.
Retention
The net amount of risk retained by an insurance company for its own account
and not reinsured.
Retrospective Rating
Method of establishing rates in which the current year's premium is calculated
to reflect the actual current year's loss experience. An initial premium is
charged and then adjusted at the end of the policy year to reflect the actual
loss experience of the business.
Return on Equity (ROE)
Net income expressed as a percentage of average total equity. This percentage
measures profitability by expressing how efficiently invested capital or equity
is being utilized.
Return Premium
Amount received by the policyholder if the policy is canceled, benefits are
reduced, or the premium is reduced.
Rider
Endorsement to an insurance policy that modifies clauses and provisions of the
policy, including or excluding coverage.
Risk
Uncertainty of financial loss; term used to designate an insured or a peril
insured against.
Risk Management
Procedure to minimize the adverse affect of a possible financial loss by (1)
identifying potential sources of loss; (2) measuring the financial consequences
of a loss occurring; and (3) using controls to minimize actual losses or their
financial consequences.
Sales Expense
Compensation of agents, advertising expense and other costs related to selling
insurance policies.
Salvage
The remaining value of property damaged to the extent that it is not economical
to perform repairs.
Schedule
A list describing the property or items insured under the policy and the amount
for which they are insured.
Self- Interest
A form of risk financing through which a firm assumes all or a part of its own
losses. Self-Insurers may purchase insurance to cover excess losses.
Soft Market
A condition where insurance premiums are lowered and the availability of insurance
is high. Opposite of a hard insurance market.
Solicitor
Insurance salesperson who contacts potential customers and handles clerical
responsibilities but has no authority to make insurance contacts.
Special Multi-Peril Policy (SMP)
A business policy that combines several kinds of insurance that are normally
purchased under several policies. Many options and endorsements are available
to tailor it to the policyholder's needs.
Spread of Risk
An insurance theory that states that an insurance company should not insure
great numbers of property in concentrated areas. Helps to avoid catastrophic
losses.
Standard Provisions
Policy provisions required by law.
Standard Risk
One that is regarded by underwriters as normal and insurable at standard rates.
Other classifications of risks are given credits or debits based on their deviation
from the standard.
Statutory Accounting Principles (SAP)
Those principles required by statue that must be followed by an insurance company
when submitting its financial statements to the various state insurance departments.
Such principles differ from Generally Accepted Accounting Principles (GAAP)
in some important respects. For example, SAP require that expenses must be recorded
immediately and cannot be recorded over the policy term at the same rate as
premiums are earned and taken into revenue.
Statutory Underwriting Profit or Loss
The difference between the earned premiums and the losses and expenses of an
insurance company.
Stock Company
A company organized and owned by stockholders, as distinguished from the mutual
form of company, which is owned by its policyholders.
Stopgap Endorsement
Provides employers' liability coverage for work-related injury arising out of
the incidental operations or exposure in states in which the only provider of
workers' compensation coverage is the state (also called monopolistic fund states).
Subrogation
An insurer’s contractual right to take legal action against a third party
responsible for a loss to an insured for which a claim has been paid. For example,
an insurance company pays a claim for $40,000 in damages to an insured storekeeper
for losses cause by a negligent contractor working next door. The policy's subrogation
clause gives the insurer the right to be subrogated to, or take on as its own,
the storekeeper's claim and to sue the contractor for damages.
Surety
Person or organization guaranteeing the actions of another.
Surety Bond
Contract by which an insurer agrees to make good the default or debt of another.
Actually, three parties are involved: the principal, who has primary responsibility
to perform the obligation (after which the bond becomes void); the surety, the
insurer with the secondary responsibility of performing the obligation if the
principal fails to perform. (After the surety performs, recourse is against
the principal for reimbursement of expenses incurred by the surety in the performance
of the obligation, known as surety's rights of exoneration); and the obligee,
to whom the right of performance (obligation) is owed.
Suretyship
Contractual relationship in which one party (surety) guarantees another party
(obligee) against the default or misperformance of a third party (principal).
Surplus
A stock company's surplus is the amount by which its admitted assets exceed
its liabilities and capital stock. In both stock and mutual companies, the term
policyholders' surplus means the excess of admitted assets over liabilities.
Surplus Lines
In a regular market, insurance coverage not available from an admitted company
in the regular market; a surplus lines broker representing an applicant seeks
coverage in the surplus lines market from a non admitted insurer according to
the insurance regulations of a particular state.
Syndicate
Group of insurers or reinsurers involved in joint underwriting. Members typically
take predetermined shares of premiums, losses, expenses, and profits. Syndicates,
more common in reinsurance that in primary insurance, are formed to cover major
risks that are beyond the capacity of a single underwriter.
Term
A period of time for which a policy is issued.
Theft Insurance
Coverage against loss as the result of a burglary or theft. Covers loss of merchandise,
furniture, equipment, fixtures due to force and violence to the exterior of
a business's premises in order to gain entry, and damage to the premises of
the building as a result of the burglary. There is a coinsurance requirement
that ranges from 40 to 80%.
Third Party
Individual other than the insured or insurer who has incurred a loss or is entitled
to receive a benefit payment as the result of the acts or omissions of the insured.
Treaty Reinsurance
A general reinsurance agreement between the ceding or primary company and the
reinsurer containing the contractual terms under which a portion or all of the
primary company's premium or a particular class is passed on to the reinsurer.
Umbrella Liability Policy
A form of insurance protection against losses in excess of amounts covered by
other liability insurance policies; also protects the insured in many situations
not covered by the usual liability policies. This policy is available for both
personal and commercial lines coverage.
Umpire
Arbitrator who settles disputes over the amount of loss when an insurer and
an insured do not agree.
Unauthorized Insurer
Insurer not licensed by a particular state to sell and service insurance policies
within that state.
Underwriter
Employee of an insurance company that determines if an applicant is insurable
at standard rates, substandard rates, insurable at preferred rates, or is uninsurable.
Underwriting
Process of examining, accepting, or rejecting insurance risks, and classifying
those selected, in order to charge the proper premium for each. The purpose
of underwriting is to spread the risk among a pool of insureds in a manner that
is equitable for the insureds and profitable for the insurer.
Underwriting Discipline
Underwriting discipline means that risks are appropriately and carefully assessed
before writing any coverage and priced adequately.
Underwriting Expenses
The sum of salaries, commissions, overhead expenses, memberships in industry
associations and bureaus, guaranty association assessments and premium taxes.
Underwriting Profit or Loss
Profit (deficit) that remains after paying claims and expenses. Insurers generate
profits from underwriting and from investment income. Their chief business is
insuring against risks for a profit, and one measure of success is whether there
is any money left after paying claims and expenses. This amount, if any, is
their underwriting gain.
Underwriting Ratio
On a statutory basis, it is an expression in terms of a ratio of the relationship
of underwriting expenses to net written premiums. On a GAAP basis, it is an
expression in terms of a ratio of the relationship of underwriting expenses
to net earned premiums.
Unearned Premium
The policyholder pays in advance for insurance, but the insurer does not earn
the premium until coverage is provided. For example, if a policy period is one
year, one-twelfth of the premium is earned each month. After six months, one-half
of the premium is still unearned and belongs to the policyholder if the policy
is canceled.
Underwriting Profit/ Loss
The profit derived from insurance exclusive of that derived from investments.
Underwriting profit or loss is typically premiums earned minus incurred losses,
loss adjustment expenses and underwriting expenses.
Variable Life Insurance
Investment-oriented whole life insurance policy that provides a return linked
to an underlying portfolio of securities. The portfolio typically is a group
of mutual funds established by the insurer as a separate account, with the policyholder
given some investment discretion in choosing the mix of assets among, say, a
common stock fund, a bond fund, and a money market fund. Variable life insurance
offers fixed premiums and a minimum death benefit. The better the total return
on the investment portfolio, the higher the death benefit or surrender value
of the variable life policy.
Voluntary Market
The market where a person seeking insurance obtains it with no help from the
state, through an insurer of his or her own selection.
Waiver
Relinquishment of a legal right to act.
Warranty
Pledge by an insured in writing, and a part of the actual contract, that a particular
condition exits or does not exist. For example, an insured warrants that a sprinkler
system works. In exchange, the insurance company charges a reduced premium for
fire coverage. Statements by an insured in an application for property insurance
are deemed to be warranties, not representations, as is generally the case in
life insurance policy applications.
Workers' Compensation
Coverage providing four types of benefits (medical care, death, disability,
rehabilitation) for employee job-related injuries or diseases as a matter of
right (with-out regard to fault). This insurance is usually purchased by the
employer from an insurance company, although in a few states there are monopolistic
state funds through which the insurance must be purchased. The premium rate
is based on a percentage of the employer's payroll and varies according to the
employee's occupation.
Written Premium
Total premiums generated from all policies written by an insurance company within
a given period of time.