Insurance Terms

ACCIDENT AND HEALTH INSURANCE Coverage for accidental injury, accidental death, and related health expenses. Benefits will pay, subject to limitations, for preventative services, medical expenses and catastrophic care.

ACTUAL CASH VALUE A form of insurance that pays damages equal to the replacement value of damaged property minus depreciation (wear and tear).

ASSIGNMENT An agreement under which one party—the assignor—transfers some or all of his ownership rights in a particular property, such as a life insurance policy or an annuity contract, to another party—the assignee.

AUTO INSURANCE POLICY There are basically six different types of coverages. Some may be required by law. Others are optional. They are:
1.Bodily injury liability: for injuries the insured driver causes to someone else.
2.Medical payments: for treatment of injuries to the driver and passengers of the insured driver’s car.
3.Property damage liability: for damage the insured driver causes to another person’s property.
4.Collision: for damage to the insured driver’s car when it is hit by, or hits another vehicle or object.
5.Comprehensive: for damage to the insured driver’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods, riots and theft).
6.Uninsured motorists coverage, for costs resulting from an accident involving a hit-and-run driver or a driver who does not have insurance.

AUTO INSURANCE PREMIUM The price an insurance company charges for coverage, based on the frequency and cost of potential accidents, theft and other losses. Prices vary from company to company, as with any product or service.
Premiums also vary depending on the amount and type of coverage purchased; the make and model of the car; and the insured’s driving record, years of driving and the number of miles the car is driven per year. Other factors taken into account include the driver’s age and gender, where the car is most likely to be driven and the times of day—rush hour in an urban neighborhood or leisure time driving in rural areas, for example. Some insurance companies may also use credit history related information.

BENEFICIARY The person or legal entity the owner of an insurance policy names to receive the policy benefit if the event insured against occurs.

BINDER Temporary authorization of coverage issued prior to the actual insurance policy.

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.

BOND A security that obligates the issuer to pay interest at specified intervals and to repay the principal amount of the loan at maturity. In insurance, a form of suretyship. Bonds of various types guarantee a payment or a reimbursement for financial losses resulting from dishonesty, failure to perform and other acts.

BOOK OF BUSINESS Total amount of insurance on an insurer’s books at a particular point in time.

BROKER An intermediary between a customer and an insurance company. Brokers typically search the market for coverage appropriate to their clients. They work on commission and usually sell commercial, not personal, insurance. In life insurance, agents must be licensed as securities brokers/dealers to sell variable annuities, which are similar to stock market-based investments.

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 INCOME AND EXTRA EXPENSE INSURANCE (also known as 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 while the premises are being restored because of physical damage from a covered peril, such as a fire. It also may cover financial losses that may occur if civil authorities limit access to an area after a disaster and their actions prevent customers from reaching the business premises. Depending on the policy, civil authorities coverage may start after a waiting period and last for two or more weeks.

BUSINESSOWNERS POLICY / BOP A policy that combines property, liability and business interruption coverages for small- to medium-sized businesses. Coverage is generally cheaper than if purchased through separate insurance policies.

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.

CASH SURRENDER VALUE 1.For life insurance, the amount, before adjustments for factors such as policy loans, that the owner of a permanent life insurance policy is entitled to receive if the policy does not remain in force until the insured’s death.
2.For annuities, the amount of a deferred annuity’s accumulated value, less any surrender charges, that the contract holder is entitled to receive if the policy is surrendered during its accumulation period. Also known as cash value and surrender value.

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 REINSURANCE Reinsurance for catastrophic losses. The insurance industry is able to absorb the multibillion dollar losses caused by natural and man-made disasters such as hurricanes, earthquakes and terrorist attacks because losses are spread among thousands of companies including catastrophe reinsurers who operate on a global basis. Insurers’ ability and willingness to sell insurance fluctuates with the availability and cost of catastrophe reinsurance. After major disasters, such as Hurricane Andrew and the World Trade Center terrorist attack, the availability of catastrophe reinsurance becomes extremely limited. Claims deplete reinsurers’ capital and, as a result, companies are more selective in the type and amount of risks they assume. In addition, with available supply limited, prices for reinsurance rise. This contributes to an overall increase in prices for property insurance.

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.

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 Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. Also called security.

COLLISION COVERAGE Portion of an auto insurance policy that covers the damage to the policyholder’s car when it is hit by, or hits another vehicle or object.

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 income, 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 income, which must be added to a fire insurance (property) 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.

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.

CREDIT SCORE The number produced by an analysis of an individual’s credit history. The use of credit information affects all consumers in many ways, including getting a job, finding a place to live, securing a loan, getting telephone service and buying insurance. Credit history is routinely reviewed by insurers before issuing a commercial policy because businesses in poor financial condition tend to cut back on safety, which can lead to more accidents and more claims. Auto and home insurers may use information in a credit history to produce an insurance score. Insurance scores may be used in underwriting and rating insurance policies.

CRIME INSURANCE Term referring to property coverages for the perils of burglary, theft and robbery.

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.

DEATH BENEFIT (1) For a life insurance contract, the amount of money paid by an insurer to a beneficiary when a person insured under the life insurance policy dies. (2) For an annuity contract, the amount of money paid to a beneficiary if the contract owner dies before the annuity payments begin.

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.”

DECREASING TERM LIFE INSURANCE Term life insurance that provides a death benefit that decreases in amount over the policy term. Contrast with increasing term life insurance.

DEDUCTIBLEThe amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.

DIRECT WRITERS Insurance companies that sell directly to the public using exclusive agents or their own employees, through the mail, by telephone or via the 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 INSURANCE/D&O Directors and officers liability insurance (D&O) covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in suits against the company. There are a variety of D&O coverages. Corporate reimbursement coverage indemnifies directors and officers of the organization. Side-A coverage provides D&O coverage for personal liability when directors and officers are not indemnified by the firm. Entity coverage, for claims made specifically against the company, is also available. D&O policies may be broadened to include coverage for employment practices liability.

DISABILITY INCOME INSURANCE A type of health insurance designed to compensate an insured person for a portion of the income lost because of a disabling injury or illness. Benefit payments are made either weekly or monthly for a specified period during the continuance of an insured’s disability.

DISABILITY In disability insurance, the inability of an insured person to work due to an injury or sickness. Each disability policy has a definition of disability that must be satisfied in order for the insured to receive the policy’s benefits.

DIVIDEND 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.

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 or endorsement 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.

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 DISHONESTY COVERAGE Covers direct losses and damage to businesses resulting from the dishonest acts of employees.

EMPLOYEE RETIREMENT INCOME SECURITY ACT / ERISA Federal legislation that protects employees by establishing minimum standards for private pension and welfare plans.

EMPLOYER’S LIABILITY Part B of the workers compensation policy that provides coverage for lawsuits filed by injured employees who, under certain circumstances, can sue under common law.

EMPLOYMENT PRACTICES LIABILITY COVERAGE Liability insurance for employers that covers wrongful termination, discrimination and other violations of employees’ legal rights.

ENDORSEMENT A written form attached to an insurance policy that alters the policy’s coverage, terms, or conditions. Sometimes called a rider.

ENDOWMENT INSURANCE Life insurance that provides a policy benefit payable either when the insured dies or on a stated date if the insured is still alive on that date.

ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE A form of insurance designed to cover losses and liabilities arising from damage to property caused by pollution.

EQUITY In investments, the ownership interest of shareholders. In a corporation, stocks as opposed to bonds.

ERRORS AND OMISSIONS COVERAGE / E&O 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 AND SURPLUS LINES Property/casualty coverage that isn’t available from insurers licensed by the state (called admitted insurers) and must be purchased from a nonadmitted carrier.

EXCESS OF LOSS REINSURANCE A contract between an insurer and a reinsurer, whereby the insurer agrees to pay a specified portion of a claim and the reinsurer to pay all or a part of the claim above that amount.

EXCESS WORKER COMPENSATION Excess workers compensation, a coverage geared to employers that self-insure for workers comp, comes into play when claims exceed a designated dollar amount.

EXCLUSION A provision in an insurance policy that eliminates coverage for certain risks, people, property classes, or locations.

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. (See Captive agent )

EXPENSE RATIO Percentage of each premium dollar that goes to insurers’ expenses including overhead, marketing and commissions.

EXPERIENCE Record of losses.

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 For a fixed-amount whole life insurance policy, the amount of the death benefit payable if the insured person dies while the policy is in force.

FAMILY BENEFIT COVERAGE A type of supplementary benefit rider offered in conjunction with a life insurance policy that insures the lives of the insured’s spouse and children. Also known as dependent life insurance and spouse and children’s insurance rider.

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 FUNDS Reserve balances that depository institutions lend each other, usually on an overnight basis. In addition, Federal funds include certain other kinds of borrowing by depository institutions from each other and from federal agencies.

FEDERAL INSURANCE ADMINISTRATION / FIA Federal agency in charge of administering the National Flood Insurance Program. It does not regulate the insurance industry.

FIDELITY BOND A form of protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.

FIDUCIARY BOND A type of surety bond, sometimes called a probate bond, which is required of certain fiduciaries, such as executors and trustees, that guarantees the performance of their responsibilities.

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 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. (See Compulsory auto insurance )

FIRE INSURANCE Coverage protecting property against losses caused by a fire or lightning that is usually included in homeowners or commercial multiple peril policies.

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. (See No-fault, Third-party coverage )

FIXED ANNUITY An annuity that guarantees a specific rate of return. In the case of a deferred annuity, a minimum rate of interest is guaranteed during the savings phase. During the payment phase, a fixed amount of income, paid on a regular schedule, is guaranteed.

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. (See Adverse selection )

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.

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. (See Actual cash value )

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 (1) For insurance premium payments, a specified length of time following a premium due date within which the renewal premium may be paid without penalty. The length of the grace period is specified in a grace period provision that is found in a life insurance, health insurance, or annuity policy. (2) For purchases made on credit, a period of time between the date of a purchase and the date the lender begins to charge interest during which no interest accrues.

GRADED PREMIUM POLICY A type of modified-premium whole life policy that calls for three or more levels of annual premium payment amounts, increasing at specified points in time – such as every three years – until reaching the amount to be paid as a level premium for the rest of the life of the policy.

GRADUATED DRIVER LICENSES Licenses for younger drivers that allow them to improve their skills. Regulations vary by state, but often restrict nighttime driving. Young drivers receive a learner’s permit, followed by a provisional license, before they can receive a standard driver’s 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.

GUARANTEE PERIOD Period during which the level of interest specified under a fixed annuity is guaranteed.

GUARANTEED DEATH BENEFIT Basic death benefits guaranteed under variable annuity contracts.

GUARANTEED INSURABILITY (GI) BENEFIT A supplementary life insurance policy benefit often provided through a policy rider that gives the policy owner the right to purchase additional insurance of the same type as the life insurance policy that provides the GI benefit on specified option dates. Also known as guaranteed insurability option (GIO).

GUARANTEED RENEWABLE POLICY An individual health insurance policy that requires the insurer to renew the policy—as long as premium payments are made—at least until the insured attains a specified age. The insurer can change premium rates for broad classes of insureds but not for an individual insured. Contrast with noncancellable and guaranteed renewable policy.

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. (See Extended replacement cost coverage )

GUARANTY FUND The mechanism by which solvent insurers ensure that some of the policyholder and third-party claims against insurance companies that fail are paid. Such funds are required in all 50 states, the District of Columbia and Puerto Rico, but the type and amount of claim covered by the fund varies from state to state. Some states pay policyholders’ unearned premiums—the portion of the premium for which no coverage was provided because the company was insolvent. Some have deductibles. Most states have no limits on workers compensation payments. Guaranty funds are supported by assessments on insurers doing business in the state.

GUN LIABILITY A 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.

HOMEOWNERS INSURANCE POLICY The typical homeowners insurance policy covers the house, the garage and other structures on the property, as well as personal possessions inside the house such as furniture, appliances and clothing, against a wide variety of perils including windstorms, fire and theft. The extent of the perils covered depends on the type of policy. An all-risk policy offers the broadest coverage. This covers all perils except those specifically excluded in the policy.
Homeowners insurance also covers additional living expenses. Known as Loss of Use, this provision in the policy reimburses the policyholder for the extra cost of living elsewhere while the house is being restored after a disaster. The liability portion of the policy covers the homeowner for accidental injuries caused to third parties and/or their property, such as a guest slipping and falling down improperly maintained stairs. Coverage for flood and earthquake damage is excluded and must be purchased separately. (See Flood insurance, Earthquake insurance) )

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.

IDENTITY THEFT INSURANCE Coverage for expenses incurred as the result of an identity theft. Can include costs for notarizing fraud affidavits and certified mail, lost income from time taken off from work to meet with law-enforcement personnel or credit agencies, fees for reapplying for loans and attorney’s fees to defend against lawsuits and remove criminal or civil judgments.

IMMEDIATE ANNUITY A product purchased with a lump sum, usually at the time retirement begins or afterwards. Payments begin within about a year. Immediate annuities can be either fixed or variable.

INCOME DATEThe date on which an insurer begins or is scheduled to begin making annuity benefit payments under an annuity contract. Also known as maturity date and annuity date.

INCOME PROTECTION INSURANCE A type of disability income coverage that provides an income benefit both, while the insured is totally disabled and unable to work and while he is able to work, but because of a disability, is earning less than he earned before being disabled. Also known as residual disability insurance.

INCONTESTABILITY PROVISION An insurance and annuity policy provision that limits the time within which an insurer has the right to void the contract on the ground of material misrepresentation in the application for the policy. Also known as incontestable clause.

INCREASING TERM LIFE INSURANCE A type of term life insurance that provides a death benefit that increases by some specified amount or percentage at stated intervals over the policy term. Contrast with decreasing term life insurance.

INCURRED BUT NOT REPORTED LOSSES / IBNR Losses that are not filed with the insurer or reinsurer until years after the policy is sold. Some 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. IBNR also refers to estimates made about claims already reported but where the full extent of the injury is not yet known, such as a workers compensation claim where the degree to which work-related injuries prevents a worker from earning what he or she earned before the injury unfolds over time. 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.

INDIVIDUAL RETIREMENT ACCOUNT/IRA A tax-deductible savings plan for those who are self-employed, or those whose earnings are below a certain level or whose employers do not offer retirement plans. Others may make limited contributions on a tax-deferred basis. The Roth IRA, a special kind of retirement account created in 1997, may offer greater tax benefits to certain individuals.

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 This broad type of coverage was developed for shipments that do not involve ocean transport. Covers articles in transit by all forms of land and air transportation as well as bridges, tunnels and other means of transportation and communication. Floaters that cover expensive personal items such as fine art and jewelry are included in this category. (See Floater) )

INSOLVENCY Insurer’s inability to pay debts. Insurance insolvency standards and the regulatory actions taken vary from state to state. When regulators deem an insurance company is in danger of becoming insolvent, they can take one of three actions: place a company in conservatorship or rehabilitation if the company can be saved or liquidation if salvage is deemed impossible. The difference between the first two options is one of degree – regulators guide companies in conservatorship but direct those in rehabilitation. Typically the first sign of problems is inability to pass the financial tests regulators administer as a routine procedure. (See Liquidation, Risk-based capital )

INSTITUTIONAL INVESTOR An organization such as a bank or insurance company that buys and sells large quantities of securities.

INSURABLE INTEREST In insurance, a person exhibits an insurable interest in a potential loss if that person will suffer a genuine economic loss if the event insured against occurs. Without the presence of insurable interest, an insurance contract is not formed for a lawful purpose and, thus, is not a valid contract.

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 pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group 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. (See Beach and windstorm plans, Fair access to insurance requirements plans / FAIR plans, Joint underwriting association / JUA )

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 SCORE Insurance scores are confidential rankings based on credit information. This includes whether the consumer has made timely payments on loans, the number of open credit card accounts and whether a bankruptcy filing has been made. An insurance score is a measure of how well consumers manage their financial affairs, not of their financial assets. It does not include information about income or race.
Studies have shown that people who manage their money well tend also to manage their most important asset, their home, well. And people who manage their money responsibly also tend to handle driving a car responsibly. Some insurance companies use insurance scores as an insurance underwriting and rating tool.

INSURANCE-TO-VALUEInsurance written in an amount approximating the value of the insured property.

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.

IRREVOCABLE BENEFICIARY A life insurance policy beneficiary who has a vested interest in the policy proceeds even during the insured’s lifetime because the policy owner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.

JOINT AND SURVIVOR ANNUITY An annuity with two annuitants, usually spouses. Payments continue until the death of the longest living of the two.

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.

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.

KEY PERSON INSURANCE Insurance on the life or health of a key individual whose services are essential to the continuing success of a business and whose death or disability could cause the firm a substantial financial loss.

KIDNAP/RANSOM INSURANCE Coverage up to specific limits for the cost of ransom or extortion payments and related expenses. Often bought by international corporations to cover employees. Most policies have large deductibles and may exclude certain geographic areas. Some policies require that the policyholder not reveal the existence of the coverage.

LAPSE The termination of an insurance policy because a renewal premium is not paid by the end of the grace period.

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.

LEVEL PREMIUM POLICIES Premiums paid for a life insurance policy or for a deferred annuity that remain the same each year that the contract is in force. Contrast with modified premium policies and single premium policies.

LIABILITY INSURANCE Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.

LIMITS Maximum amount of insurance that can be paid for a covered loss.

LINE Type or kind of insurance, such as personal lines.

LIQUIDITY The ability and speed with which a security can be converted into cash.

LIQUOR LIABILITY Coverage for bodily injury or property damage caused by an intoxicated person who was served liquor by the policyholder.

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.

LLOYD’S OF LONDON A marketplace where underwriting syndicates, or mini-insurers, gather to sell insurance policies and reinsurance. Each syndicate is managed by an underwriter who decides whether or not to accept the risk. The Lloyd’s market is a major player in the international reinsurance market as well as a primary market for marine insurance and large risks. Originally, Lloyd’s was a London coffee house in the 1600s patronized by shipowners who insured each other’s hulls and cargoes. As Lloyd’s developed, wealthy individuals, called “Names,” placed their personal assets behind insurance risks as a business venture. Increasingly since the 1990s, most of the capital comes from corporations.

LONG-TERM CARE INSURANCE Long-term care (LTC) insurance pays for services to help individuals who are unable to perform certain activities of daily living without assistance, or require supervision due to a cognitive impairment such as Alzheimer’s disease. LTC is available as individual insurance or through an employer-sponsored or association plan.

LONG-TERM DISABILITY INCOME INSURANCE A type of disability income insurance that provides disability income benefits after short-term disability income benefits terminate and continues until the earlier of the date when the insured person returns to work, dies, or becomes eligible for pension benefits. Contrast with short-term disability income insurance.

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 OF USE A provision in homeowners and renters insurance policies that reimburses policyholders for any extra living expenses due to having to live elsewhere while their home is being restored following a disaster.

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.

MCCARRAN-FERGUSON ACT 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.

MEDIATION Nonbinding procedure in which a third party attempts to resolve a conflict between two other parties.

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.

MEDIGAP/MEDSUP Policies that supplement federal insurance benefits particularly for those covered under Medicare.

MIB, INC. A nonprofit organization established to provide information to insurers about impairments that applicants have admitted to, or that other insurers have detected, in connection with previous applications for insurance.

MISREPRESENTATION A false or misleading statement. (1) In insurance sales, a false or misleading statement made by a sales agent to induce a customer to purchase insurance is a prohibited sales practice. (2) In insurance underwriting, a false or misleading statement by an insurance applicant may provide a basis for the insurer to avoid the policy.

MISSTATEMENT OF AGE OR SEX PROVISION A life insurance, health insurance, and annuity policy provision that describes how policy benefits will be adjusted if the age or sex of the insured has been misstated in the insurance application. Typically, the benefits payable will be those that the premiums paid would have purchased for the correct age or sex.

MODIFIED PREMIUM POLICIES An insurance policy for which the policy owner first pays a lower premium than she would for a similar level premium policy for a specified initial period and then pays a higher premium than she would for a similar level premium policy. Contrast with level premium policies and single premium policies.

MORAL HAZARD The possibility that a person may act dishonestly in an insurance transaction.

MORBIDITY RATE The rate at which sickness and injury occur within a defined group of people. Insurers base health insurance premiums in part on the morbidity rate for a proposed insured’s age group. Contrast with mortality rate.

MORTALITY AND EXPENSE (M&E) RISK CHARGE A fee that covers such annuity contract guarantees as death benefits.

MORTALITY RATE A percentage rate at which death occurs among a defined group of people of a specified age and sometimes of a specified gender. Insurers base the premiums for life insurance in part on the mortality rate for a proposed insured’s age group. Contrast with morbidity rate.

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 business 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.

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.

NATIONAL FLOOD INSURANCE PROGRAM Federal government-sponsored program under which flood insurance is sold to homeowners and businesses.

NEGLIGENCE Failure to act with the legally required degree of care for others, resulting in harm to them.

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.

NON-ADMITTED ASSETS Assets that are not included on the balance sheet of an insurance company, including furniture, fixtures, past-due accounts receivable, and agents’ debt balances. (See Assets )

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.

NONCANCELLABLE AND GUARANTEED RENEWABLE POLICY An individual health insurance policy, which stipulates that, until the insured reaches a specified age (usually age 65), the insurer will not cancel the coverage, increase the premiums, or change the policy provisions as long as the premiums are paid when due. Also known as noncancellable policy. Contrast with guaranteed renewable policy.

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.

NURSING HOME INSURANCE A form of long-term care policy that covers a policyholder’s stay in a nursing facility

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.

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, often building codes, that did not exist when the building was originally built. For example, a building severely damaged in a hurricane may have to be elevated above the flood line when it is rebuilt. This endorsement would cover part of the additional cost.

ORDINARY LIFE INSURANCE A life insurance policy that remains in force for the policyholder’s lifetime.

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.

PAID-UP ADDITIONAL INSURANCE OPTION An option, available to the owners of participating life insurance policies, that allows the policy owner to use policy dividends to purchase additional insurance on the insured’s life; the paid-up additional insurance is issued on the same plan as the basic policy and in whatever face amount the dividend can provide at the insured’s attained age.

PAID-UP POLICY An insurance policy that requires no further premium payments but continues to provide coverage.

PARTICIPATING POLICY A type of insurance policy that allows policy owners to receive policy dividends.

PENSIONS Programs to provide employees with retirement income after they meet minimum age and service requirements. Life insurers hold some of these funds. Since the 1970s responsibility for funding retirement has increasingly shifted from employers (defined benefit plans that promise workers a specific retirement income) to employees (defined contribution plans financed by employees that may or may not be matched by employer contributions).

PERIL A specific risk or cause of loss covered by an insurance policy, such as a fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the risks named in the policy in contrast to an all-risk policy, which covers all causes of loss except those specifically excluded.

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.

POLICY A written contract for insurance between an insurance company and policyholder stating details of 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.

PRE-EXISTING CONDITION (1) According to most group health insurance policies, a condition for which an individual received medical care during the three months immediately prior to the effective date of her coverage. (2) According to most individual health insurance policies, an injury that occurred or a sickness that first appeared or manifested itself within a specified period—usually two years—before the policy was issued and that was not disclosed on the application for insurance.

PREFERRED PROVIDER ORGANIZATION Network of medical providers which charge on a fee-for-service basis, but are paid on a negotiated, discounted fee schedule.

PREFERRED RISK CLASS In insurance underwriting, the group of proposed insureds who represent a significantly lower than average likelihood of loss within the context of the insurer’s underwriting practices. Contrast with declined risk class, standard risk class and substandard risk class.

PREMISES The particular location of the property or a portion of it as designated in an insurance policy.

PREMIUM The price of an insurance policy, typically charged annually or semiannually.

PREMIUM REDUCTION OPTION An option, available to the owners of participating insurance policies, that allows the insurer to apply policy dividends toward the payment of renewal premiums.

PREMIUM TAX A state tax on premiums paid by its residents and businesses and collected by insurers.

PREMIUMS IN FORCE The sum of the face amounts, plus dividend additions, of life insurance policies outstanding at a given time.

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 BENEFICIARY The party designated to receive the proceeds of a life insurance policy following the death of the insured. Also known as first beneficiary.

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.

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.

PROOF OF LOSS Documents showing the insurance company that a loss occurred.

PROPERTY/CASUALTY INSURANCE Covers damage to or loss of policyholders’ property and legal liability for damages caused to other people or their property. Property/casualty insurance, which includes auto, homeowners and commercial insurance, is one segment of the insurance industry. The other sector is life/health. Outside the United States, property/casualty insurance is referred to as nonlife or general insurance.

PROPERTY/CASUALTY INSURANCE CYCLE Industry business cycle with recurrent periods of hard and soft market conditions. In the 1950s and 1960s, cycles were regular with three year periods each of hard and soft market conditions in almost all lines of property/casualty insurance. Since then they have been less regular and less frequent.

PURCHASING GROUP An entity that offers insurance to groups of similar businesses with similar exposures to risk.

PURE ENDOWMENT A life insurance contract that pays a periodic income benefit for the life of the owner of the annuity. The payment can be monthly, quarterly, semiannually or annually.

PURE LIFE ANNUITY A form of annuity that ends payments when the annuitant dies. Payments may be fixed or variable.

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.

RATED POLICY An insurance policy that is classified as having a greater-than-average likelihood of loss, usually issued with special exclusions, a premium rate that is higher than the rate for a standard policy, a reduced face amount, or any combination of these.

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.

RATING BUREAU The insurance business is based on the spread of risk. The more widely risk is spread, the more accurately loss can be estimated. An insurance company can more accurately estimate the probability of loss on 100,000 homes than on ten. Years ago, insurers were required to use standardized forms and rates developed by rating agencies. Today, large insurers use their own statistical loss data to develop rates. But small insurers, or insurers focusing on special lines of business, with insufficiently broad loss data to make them actuarially reliable depend on pooled industry data collected by such organizations as the Insurance Services Office (ISO) which provides information to help develop rates such as estimates of future losses and loss adjustment expenses like legal defense costs.

REAL ESTATE INVESTMENTS Investments generally owned by life insurers that include commercial mortgage loans and real property.

RECIPROCAL EXCHANGE Unincorporated association organized to write insurance for its members, each of whom assumes a share of the risks covered.

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 process by which an insurer puts back into force an insurance policy that has either been terminated for nonpayment of premiums or continued as extended term or reduced paid-up coverage.

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.

RENEWABLE TERM INSURANCE POLICY A term life insurance policy that gives the policy owner the option to continue the coverage at the end of the specified term without presenting evidence of insurability, although typically at a higher premium based on the insured’s attained age.

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 Insurance that pays 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.

RESERVES A company’s best estimate of what it will pay for claims.

RESIDUAL DISABILITY In disability income insurance, a condition in which the insured is not totally disabled, but is still unable to function as before the sickness or injury, and therefore suffers a reduction in income of at least the percentage—typically 20 percent to 25 percent—specified in the disability income plan. Also known as partial disability.

RESIDUAL MARKET Facilities, such as assigned risk plans and FAIR Plans, that exist to provide coverage for those who cannot get it in the regular market. Insurers doing business in a given state generally must participate in these pools. For this reason the residual market 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.

REVOCABLE BENEFICIARY A life insurance policy beneficiary whose right to the policy’s proceeds can be cancelled or reduced by the policy owner at any time before the insured’s death. Contrast with irrevocable beneficiary.

RIDER An attachment to an insurance policy that alters the policy’s coverage or terms.

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 better manage or 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 to reduce its loss after paying a claim. 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 or a listing of specific benefits, charges, credits, assets or other defined items.

SECTION 1035 EXCHANGE In the United States, a taxfree replacement of an insurance policy for another insurance contract covering the same person that is performed in accordance with the conditions of Section 1035 of the Internal Revenue Code.

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 OF INSURANCE RISK Using the capital markets to expand and diversify the assumption of insurance risk. 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, instead of paying an insurance company to take it on. 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. However, to protect injured employees state laws set out requirements for the assumption of workers compensation programs. Self-insurance also refers to employers who assume all or part of the responsibility for paying the health insurance claims of their employees. Firms that self insure for health claims are exempt from state insurance laws mandating the illnesses that group health insurers must cover.

SETTLEMENT OPTIONS Choices given to the owner or beneficiary of a life insurance policy regarding the method by which the insurer will pay the policy’s proceeds when the policy owner does not receive the benefits in one single payment. Typically, the owner can elect (1) to leave the proceeds with the insurer and earn a specified interest rate, (2) to have the proceeds paid in a series of installments for a pre-selected period, (3) to have the proceeds paid in a pre-selected sum in a series of installments for as long as the proceeds last, or (4) to have the insurer tie payment of the proceeds to the life expectancy of a named individual through a life annuity. Also known as optional modes of settlement.

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-TERM DISABILITY INCOME INSURANCE A type of disability income coverage that provides disability income benefits for a maximum benefit period of from one to five years. Contrast with long-term disability income insurance.

SINGLE PREMIUM ANNUITY An annuity that is paid in full upon purchase.

SINGLE PREMIUM POLICIES A type of life insurance or annuity contract that is purchased by the payment of one lump sum. (1) A single-premium deferred annuity (SPDA) is an annuity contract purchased with a single premium payment whose periodic income payments generally do not begin until several years in the future. (2) A single premium immediate annuity (SPIA) contract is an annuity contract that is purchased with a single premium payment and that will begin making periodic income payments one annuity period after the contract’s issue date.

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.

SPLIT-DOLLAR LIFE INSURANCE PLAN An agreement under which a business provides individual life insurance policies for certain employees, who share in paying the cost of the policies.

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.

STANDARD RISK CLASS In insurance underwriting, the group of proposed insureds who represent average risk within the context of the insurer’s underwriting practices and therefore pay average premiums in relation to others of similar insurability.

STATE FUND A mechanism administered by a state to provide insurance coverage, sometimes for high-risk policyholders

STATUTORY ACCOUNTING PRINCIPLES / SAP More conservative standards than under GAAP accounting rules, they are 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 by recognizing liabilities earlier or at a higher value than GAAP and assets later or at a lower value. For example, SAP 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.

STRAIGHT LIFE ANNUITY
A type of life annuity contract that provides periodic income payments for as long as the annuitant lives but provides no benefit payments after the annuitant’s death.

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.

SUBSTANDARD RISK CLASS In insurance underwriting, the group of proposed insureds who represent a significantly greater-than-average likelihood of loss within the context of the insurer’s underwriting practices. Also known as special class risk.

SUICIDE EXCLUSION PROVISION A life insurance policy provision stating that policy proceeds will not be paid if the insured dies as the result of suicide as defined within the policy within a specified period following the date of policy issue.

SUPPLEMENTAL COVERAGE An amount of coverage that adds to the amount of coverage specified in a basic insurance policy.

SURETY BOND A contract guaranteeing the performance of a specific obligation. Simply put, it is a three-party agreement under which one party, the surety company, answers to a second party, the owner, creditor or “obligee,” for a third party’s debts, default or nonperformance. Contractors are often required to purchase surety bonds if they are working on public projects. The surety company becomes responsible for carrying out the work or paying for the loss up to the bond “penalty” if the contractor fails to perform.

SURPLUS LINES Property/casualty insurance coverage that isn’t available from insurers licensed in 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 CHARGE A charge for withdrawals from an annuity contract before a designated surrender charge period, usually from five to seven years.

SURRENDER COST COMPARISON INDEX A cost comparison index, used to compare insurance policies, which takes into account the time value of money and measures the cost of a policy over a 10- or 20-year period assuming the policy owner surrenders the policy for its cash value at the end of the period. Contrast with net payment cost comparison index.

TERM CERTAIN ANNUITY A form of annuity that pays out over a fixed period rather than when the annuitant dies.

TERM LIFE INSURANCE A form of life insurance that covers the insured person for a certain period of time, the “term” that is specified in the policy. It pays a benefit to a designated beneficiary only when the insured dies within that specified period which can be one, five, 10 or even 20 years. Term life policies are renewable but premiums increase with age.

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.

TERRORISM COVERAGE Included as a part of the package in standard commercial insurance policies before September 11, 2001 virtually free of charge. Since September 11, terrorism coverage prices have increased substantially to reflect the current risk.

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.

TIME LIMIT ON CERTAIN DEFENSES PROVISION An individual health insurance policy provision that limits the time during which the insurer may contest the validity of the contract on the ground of misrepresentation in the application or may reduce or deny a claim on the ground it results from a preexisting condition.

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 legal term denoting a wrongful act resulting in injury or damage on which a civil court action, or legal proceeding, 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.

TRAVEL INSURANCE Insurance to cover problems associated with traveling, generally including trip cancellation due to illness, lost luggage and other incidents.

TWISTING An illegal insurance sales practice, in which a sales agent misrepresents the features of a contract in order to induce the contract owner to replace his current contract, often to the disadvantage of the contract owner.

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.

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.

UNDERWRITING Examining, accepting, or rejecting insurance risks and classifying the ones that are accepted, in order to charge appropriate premiums for them.

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.

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 type of savings vehicle, known as a cash value account, that typically earns a money market rate of interest. Death benefits can be changed during the life of the policy within limits, generally subject to a medical examination. Once funds accumulate in the cash value account, the premium can be paid at any time but the policy will lapse if there isn’t enough money to cover annual mortality charges 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 ANNUITY An annuity whose contract value or income payments vary according to the performance of the stocks, bonds and other investments selected by the contract owner.

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.

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 For a health insurance policy, the period of time that must pass from the date of policy issue before benefits are payable to an insured. Also known as elimination period and probationary period.

WAIVER The surrender of a right or privilege. In life insurance, a provision that sets certain conditions, such as disablement, which allow coverage to remain in force without payment of premiums.

WAIVER OF PREMIUM FOR DISABILITY (WP) BENEFIT A supplementary life insurance policy or annuity contract benefit under which the insurer promises to give up its right to collect premiums that become due while the insured is disabled according to the policy or rider’s definition of disability.

WARRANTY INSURANCE Warranty insurance coverage compensates for the cost of repairing or replacing defective products past the normal warranty period provided by manufacturers.

WATER-DAMAGE INSURANCE COVERAGE Protection provided in most homeowners insurance policies against sudden and accidental water damage, from burst pipes for example. Does not cover damage from problems resulting from a lack of proper maintenance such as dripping air conditioners. Water damage from floods is covered under separate flood insurance policies issued by the federal government.

WEATHER INSURANCE A type of business interruption insurance that compensates for financial losses caused by adverse weather conditions, such as constant rain on the day scheduled for a major outdoor concert.

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. State laws, which vary significantly, govern the amount of benefits paid and other compensation provisions.

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.