Glossary of Insurance Terms

To enable you to understand insurance better, here is a handy glossary of important insurance terminologies:

Accidental Death Benefit - In a life insurance policy, benefit in addition to the death benefit paid to the beneficiary, should death occur due to an accident. There can be certain exclusions as well as time and age limits.

Actual Cash Value - Cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence. For example, a 10-year-old sofa will not be replaced at current full value because of a decade of depreciation.

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

Adjuster - A representative of the insurer who seeks to determine the extent of the insurer's liability for loss when a claim is submitted.

Admitted Assets - Assets permitted by state law to be included in an insurance company's annual statement. These assets are an important factor when regulators measure insurance company solvency. They include mortgages, stocks, bonds and real estate.

Agent -individual who sells and services insurance policies, services clients by searching the market for the most advantageous price for the most coverage. The agent's commission is a percentage of each premium paid and includes a fee for servicing the insured's policy.

Assets - Assets refer to "all the available properties of every kind or possession of an insurance company that might be used to pay its debts." There are three classifications of assets: invested assets, all other assets, and total admitted assets. Invested assets refer to things such as bonds, stocks, cash and income-producing real estate. All other assets refer to nonincome producing possessions such as the building the company occupies, office furniture, and debts owed, usually in the form of deferred and unpaid premiums. Total admitted assets refer to everything a company owns. All other plus invested assets equals total admitted assets. By law, some states don't permit insurance companies to claim certain goods and possessions, such as deferred and unpaid premiums, in the all other assets category, declaring them "nonadmissable."

Broker - Insurance salesperson that searches the marketplace in the interest of clients, not insurance companies.

Business Net Retention - This item represents the percentage of a company's gross writings that are retained for its own account. Gross writings are the sum of direct writings and assumed writings. This measure excludes affiliated writings.

Capital - Equity of shareholders of a stock insurance company. The company's capital and surplus are measured by the difference between its assets minus its liabilities. This value protects the interests of the company's policyowners in the event it develops financial problems; the policyowners' benefits are thus protected by the insurance company's capital. Shareholders' interest is second to that of policyowners.

Casualty - Liability or loss resulting from an accident.

Casualty Insurance - That type of insurance that is primarily concerned with losses caused by injuries to persons and legal liability imposed upon the insured for such injury or for damage to property of others. It also includes such diverse forms as plate glass, insurance against crime, such as robbery, burglary and forgery, boiler and machinery insurance and Aviation insurance. Many casualty companies also write surety business.

Ceded Reinsurance Leverage - The ratio of the reinsurance premiums ceded, plus net ceded reinsurance balances from non-US affiliates for paid losses, unpaid losses, incurred but not reported (IBNR), unearned premiums and commissions, less funds held from reinsurers, plus ceded reinsurance balances payable, to policyholders' surplus. This ratio measures the company's dependence upon the security provided by its reinsurers and its potential exposure to adjustment on such reinsurance.

Claim - A demand made by the insured, or the insured's beneficiary, for payment of the benefits as provided by the policy.

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.

Common Carrier - A business or agency that is available to the public for transportation of persons, goods or messages. Common carriers include trucking companies, bus lines and airlines.

Comprehensive Insurance - Auto insurance coverage providing protection in the event of physical damage (other than collision) or theft of the insured car. For example, fire damage or a cracked windshield would be covered under the comprehensive section.

Compulsory Third Party Liability Insurance - Coverage if an insured is legally liable for bodily injury or property damage caused by an automobile.

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

Death Benefit - The limit of insurance or the amount of benefit that will be paid in the event of the death of a covered person.

Deductible - Amount of loss that the insured pays before the insurance kicks in.

Direct Premiums Written - The aggregate amount of recorded originated premiums, other than reinsurance, written during the year, whether collected or not, at the close of the year, plus retrospective audit premium collections, after deducting all return premiums.

Dividend - The return of part of the policy's premium for a policy issued on a participating basis by either a mutual or stock insurer. A portion of the surplus paid to the stockholders of a corporation.

Earned Premium - The amount of the premium that as been paid for in advance that has been "earned" by virtue of the fact that time has passed without claim. A three-year policy that has been paid in advance and is one year old would have only partly earned the premium.

Elimination Period - The time which must pass after filing a claim before policyholder can collect insurance benefits. Also known as "waiting period."

Encumbrance - A claim on property, such as a mortgage, a lien for work and materials, or a right of dower. The interest of the property owner is reduced by the amount of the encumbrance.

Exclusions - Items or conditions that are not covered by the general insurance contract.

Exposure - Measure of vulnerability to loss, usually expressed in dollars or units.

Floater - A separate policy available to cover the value of goods beyond the coverage of a standard renters insurance policy including movable property such as jewelry or sports equipment.

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

Grace Period - The length of time (usually 31 days) after a premium is due and unpaid during which the policy, including all riders, remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time. In Universal Life policies, it typically provides for coverage to remain in force for 60 days following the date cash value becomes insufficient to support the payment of monthly insurance costs.

Gross Leverage - The sum of net leverage and ceded reinsurance leverage. This ratio measures a company's gross exposure to pricing errors in its current book of business, to errors of estimating its liabilities, and exposure to its reinsurers.

Guaranteed Insurability Option - See "future purchase option."

Guaranteed Issue Right - The right to purchase insurance without physical examination; the present and past physical condition of the applicant are not considered.

Guaranteed Renewable - A policy provision in many products which guarantees the policyowner the right to renew coverage at every policy anniversary date. The company does not have the right to cancel coverage except for nonpayment of premiums by the policyowner; however, the company can raise rates if they choose.

Guaranty Association - An organization of life insurance companies within a state responsible for covering the financial obligations of a member company that becomes insolvent.

Hazard - A circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion.

Hazardous Activity - Bungee jumping, scuba diving, horse riding and other activities not generally covered by standard insurance policies. For insurers that do provide cover for such activities, it is unlikely they will cover liability and personal accident, which should be provided by the company hosting the activity.

Health Maintenance Organization (HMO) - Prepaid group health insurance plan that entitles members to services of participating physicians, hospitals and clinics. Emphasis is on preventative medicine, and members must use contracted health-care providers.

Health Reimbursement Arrangement - Owners of high-deductible health plans who are not qualified for a health savings account can use an HRA.

Health Savings Account - Plan that allows you to contribute pre-tax money to be used for qualified medical expenses. HSAs, which are portable, must be linked to a high-deductible health insurance policy.

Hurricane Deductible - Amount you must pay out-of-pocket before hurricane insurance will kick in. Many insurers in hurricane-prone states are selling homeowners insurance policies with percentage deductibles for storm damage, instead of the traditional dollar deductibles used for claims such as fire and theft. Percentage deductibles vary from one percent of a home's insured value to 15 percent, depending on many factors that differ by state and insurer.

Impaired Insurer - An insurer which is in financial difficulty to the point where its ability to meet financial obligations or regulatory requirements is in question.

Indemnity - Restoration to the victim of a loss by payment, repair or replacement.

Independent Insurance Agents & Brokers of America (IIABA) - Formerly the Independent Insurance Agents of America (IIAA), this is a member organization of independent agents and brokers monitoring and affecting industry issues. Numerous state associations are affiliated with the IIABA.

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

Inflation Protection - An optional property coverage endorsement offered by some insurers that increases the policy's limits of insurance during the policy term to keep pace with inflation.

Insurable Interest - Interest in property such that loss or destruction of the property could cause a financial loss.

Insurance Adjuster - A representative of the insurer who seeks to determine the extent of the insurer's liability for loss when a claim is submitted. Independent insurance adjusters are hired by insurance companies on an "as needed" basis and might work for several insurance companies at the same time. Independent adjusters charge insurance companies both by the hour and by miles traveled. Public adjusters work for the insured in the settlement of claims and receive a percentage of the claim as their fee. A.M. Best's Directory of Recommended Insurance Attorneys and Adjusters lists independent adjusters only.

Insurance Attorneys - An attorney who practices the law as it relates to insurance matters. Attorneys might be solo practitioners or work as part of a law firm. Insurance companies who retain attorneys to defend them against law suits might hire staff attorneys to work for them in-house or they might retain attorneys on an as-needed basis. A.M. Best's Directory of Recommended Attorneys and Adjusters lists insurance defense attorneys who concentrate their practice in insurance defense such as coverage issues, bad faith, malpractice, products liability, and workers' compensation.

Insurance Institute of America (IIA) - An organization which develops programs and conducts national examinations in general insurance, risk management, management, adjusting, underwriting, auditing and loss control management.

Interest-Crediting Methods - There are at least 35 interest-crediting methods that insurers use. They usually involve some combination of point-to-point, annual reset, yield spread, averaging, or high water mark.

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

Investments in Affiliates - Bonds, stocks, collateral loans, short-term investments in affiliated and real estate properties occupied by the company.

Insurance Regulatory Information System (IRIS) - Introduced by the National Association of Insurance Commissioners in 1974 to identify insurance companies that might require further regulatory review.

Lapse Ratio - The ratio of the number of life insurance policies that lapsed within a given period to the number in force at the beginning of that period.

Leverage or Capitalization - Measures the exposure of a company's surplus to various operating and financial practices. A highly leveraged, or poorly capitalized, company can show a high return on surplus, but might be exposed to a high risk of instability.

Liability - Broadly, any legally enforceable obligation. The term is most commonly used in a pecuniary sense.

Liability Insurance - Insurance that pays and renders service on behalf of an insured for loss arising out of his responsibility, due to negligence, to others imposed by law or assumed by contract.

Licensed - Indicates the company is incorporated (or chartered) in another state but is a licensed (admitted) insurer for this state to write specific lines of business for which it qualifies.

Licensed for Reinsurance Only - Indicates the company is a licensed (admitted) insurer to write reinsurance on risks in this state.

Lifetime Reserve Days - Sixty additional days Medicare pays for when you are hospitalized for more than 90 days in a benefit period. These days can only be used once during your lifetime. For each lifetime reserve day, Medicare pays all covered costs except for a daily coinsurance amount.

Liquidity - Liquidity is the ability of an individual or business to quickly convert assets into cash without incurring a considerable loss. There are two kinds of liquidity: quick and current. Quick liquidity refers to funds--cash, short-term investments, and government bonds--and possessions which can immediately be converted into cash in the case of an emergency. Current liquidity refers to current liquidity plus possessions such as real estate which cannot be immediately liquidated, but eventually can be sold and converted into cash. Quick liquidity is a subset of current liquidity. This reflects the financial stability of a company and thus their rating.

Living Benefits - This feature allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care, or confinement to a nursing home. Also known as "accelerated death benefits."

Lloyd's - Generally refers to Lloyd's of London, England, an institution within which individual underwriters accept or reject the risks offered to them. The Lloyd's Corp. provides the support facility for their activities.

Lloyds Organizations - These organizations are voluntary unincorporated associations of individuals. Each individual assumes a specified portion of the liability under each policy issued. The underwriters operate through a common attorney-in-fact appointed for this purpose by the underwriters. The laws of most states contain some provisions governing the formation and operation of such organizations, but these laws don't generally provide as strict a supervision and control as the laws dealing with incorporated stock and mutual insurance companies.

Loss Adjustment Expenses - Expenses incurred to investigate and settle losses.

Loss and Loss - Adjustment Reserves to Policyholder Surplus Ratio - The higher the multiple of loss reserves to surplus, the more a company's solvency is dependent upon having and maintaining reserve adequacy.

Losses and Loss - Adjustment Expenses - This represents the total reserves for unpaid losses and loss-adjustment expenses, including reserves for any incurred but not reported losses, and supplemental reserves established by the company. It is the total for all lines of business and all accident years.

Loss Control - All methods taken to reduce the frequency and/or severity of losses including exposure avoidance, loss prevention, loss reduction, segregation of exposure units and noninsurance transfer of risk. A combination of risk control techniques with risk financing techniques forms the nucleus of a risk management program. The use of appropriate insurance, avoidance of risk, loss control, risk retention, self insuring, and other techniques that minimize the risks of a business, individual, or organization.

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

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

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

Mortgage Insurance Policy - In life and health insurance, a policy covering a mortgagor with benefits intended to pay off the balance due on a mortgage upon the insured's death, or to meet the payments due on a mortgage in case of the insured's death or disability.

Net Premium - The amount of premium minus the agent's commission. Also, the premium necessary to cover only anticipated losses, before loading to cover other expenses.

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

Net Premiums Written - Represents gross premium written, direct and reinsurance assumed, less reinsurance ceded.

Net Underwriting Income - Net premiums earned less incurred losses, loss-adjustment expenses, underwriting expenses incurred, and dividends to policyholders.

Occurrence - An event that results in an insured loss. In some lines of business, such as liability, an occurrence is distinguished from accident in that the loss doesn't have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected not intended by the insured.

Operating Cash Flow - Measures the funds generated from insurance operations, which includes the change in cash and invested assets attributed to underwriting activities, net investment income and federal income taxes. This measure excludes stockholder dividends, capital contributions, unrealized capital gains/losses and various noninsurance related transactions with affiliates. This test measures a company's ability to meet current obligations through the internal generation of funds from insurance operations. Negative balances might indicate unprofitable underwriting results or low yielding assets.

Participation Rate - In equity-indexed annuities, a participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80%, which means the annuity would only be credited with 80% of the gain experienced by the index.

Peril - The cause of a possible loss.

Personal Injury Protection - Pays basic expenses for an insured and his or her family in states with no-fault auto insurance. No-fault laws generally require drivers to carry both liability insurance and personal injury protection coverage to pay for basic needs of the insured, such as medical expenses, in the event of an accident.

Personal Lines - Insurance for individuals and families, such as private-passenger auto and homeowners insurance.

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

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

Profit - A measure of the competence and ability of management to provide viable insurance products at competitive prices and maintain a financially strong company for both policyholders and stockholders.

Quick Liquidity Ratio - Quick assets divided by net liabilities plus ceded reinsurance balances payable. Quick assets are defined as the sum of cash, unaffiliated short-term investments, unaffiliated bonds maturing within one year, government bonds maturing within five years, and 80% of unaffiliated common stocks. These assets can be quickly converted into cash in the case of an emergency.

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

Replacement Cost - The dollar amount needed to replace damaged personal property or dwelling property without deducting for depreciation but limited by the maximum dollar amount shown on the declarations page of the policy.

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

Risk Class - Risk class, in insurance underwriting, is a grouping of insureds with a similar level of risk. Typical underwriting classifications are preferred, standard and substandard, smoking and nonsmoking, male and female.

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

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

Standard Auto - Auto insurance for average drivers with relatively few accidents during lifetime.

Statutory Reserve - A reserve, either specific or general, required by law.

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

Surplus - The amount by which assets exceed liabilities.

Total Admitted Assets - This item is the sum of all admitted assets, and are valued in accordance with state laws and regulations, as reported by the company in its financial statements filed with state insurance regulatory authorities. This item is reported net as to encumbrances on real estate (the amount of any encumbrances on real estate is deducted from the value of the real estate) and net as to amounts recoverable from reinsurers (which are deducted from the corresponding liabilities for unpaid losses and unearned premiums).

Total Loss - A loss of sufficient size that it can be said no value is left. The complete destruction of the property. The term also is used to mean a loss requiring the maximum amount a policy will pay.

Umbrella Policy - Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.

Underwriter - The individual trained in evaluating risks and determining rates and coverages for them. Also, an insurer.

Underwriting - The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

Underwriting Expenses Incurred - Expenses, including net commissions, salaries and advertising costs, which are attributable to the production of net premiums written.

Underwriting Expense Ratio - This represents the percentage of a company's net premiums written that went toward underwriting expenses, such as commissions to agents and brokers, state and municipal taxes, salaries, employee benefits and other operating costs. The ratio is computed by dividing underwriting expenses by net premiums written. The ratio is computed by dividing underwriting expenses by net premiums written. A company with an underwriting expense ratio of 31.3% is spending more than 31 cents of every dollar of net premiums written to pay underwriting costs. It should be noted that different lines of business have intrinsically differing expense ratios. For example, boiler and machinery insurance, which requires a corps of skilled inspectors, is a high expense ratio line. On the other hand, expense ratios are usually low on group health insurance.

Underwriting Guide - Details the underwriting practices of an insurance company and provides specific guidance as to how underwriters should analyze all of the various types of applicants they might encounter. Also called an underwriting manual, underwriting guidelines, or manual of underwriting policy.

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

Uninsured Motorist Coverage - Endorsement to a personal automobile policy that covers an insured collision with a driver who does not have liability insurance.

Usual, Customary and Reasonable Fees - An amount customarily charged for or covered for similar services and supplies which are medically necessary, recommended by a doctor or required for treatment.

Valuation Reserve - A reserve against the contingency that the valuation of assets, particularly investments, might be higher than what can be actually realized or that a liability may turn out to be greater than the valuation placed on it.

Voluntary Reserve - An allocation of surplus not required by law. Insurers often accumulate such reserves to strengthen their financial structure.

Waiver of Premium - A provision in some insurance contracts which enables an insurance company to waive the collection of premiums while keeping the policy in force if the policyholder becomes unable to work because of an accident or injury. The waiver of premium for disability remains in effect as long as the ensured is disabled.

Yield on Invested Assets (IRIS) - Annual net investment income after expenses, divided by the mean of cash and net invested assets. This ratio measures the average return on a company's invested assets. This ratio is before capital gains/losses and income taxes.


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