Insurance Glossary
A
ACCELERATED DEATH BENEFITS
A life insurance policy option that provides policy proceeds to insured individuals
over their lifetimes, in the event of a terminal illness. This is in lieu
of a traditional policy that pays beneficiaries after the insured's death.
Such benefits kick in if the insured becomes terminally ill, needs extreme
medical intervention, or must reside in a nursing home. The payments made
while the insured is living are deducted from any death benefits paid to
beneficiaries.
ACCIDENT AND HEALTH INSURANCE
Coverage for accidental injury, accidental death, and related health expenses.
Benefits will pay for preventative services, medical expenses, and catastrophic
care, with limits.
ACTUAL CASH VALUE
A form of insurance that pays damages equal to the replacement value of damaged
property minus depreciation. (See Replacement cost)
ACTUARY
An insurance professional skilled in the analysis, evaluation, and management
of statistical information. Evaluates insurance firms' reserves, determines
rates and rating methods, and determines other business and financial risks.
ADDITIONAL LIVING EXPENSES
Extra charges covered by homeowners policies over and above the policyholder's
customary living expenses. They kick in when the insured requires temporary
shelter due to damage by a covered peril that makes the home temporarily
uninhabitable.
ADMITTED ASSETS
Assets recognized and accepted by state insurance laws in determining the
solvency of insurers and reinsurers. To make it easier to assess an insurance
company's financial position, state statutory accounting rules do not permit
certain assets to be included on the balance sheet. Only assets that can
be easily sold in the event of liquidation or borrowed against, and receivables
for which payment can be reasonably anticipated, are included in admitted
assets. (See Assets)
ADMITTED COMPANY
An insurance company licensed and authorized to do business in a particular
state.
ADVERSE SELECTION
The tendency of those exposed to a higher risk to seek more insurance coverage
than those at a lower risk. Insurers react either by charging higher premiums
or not insuring at all, as in the case of floods. (Flood insurance is provided
by the federal government but sold mostly through the private market.)
In the case of natural disasters, such as earthquakes, adverse selection
concentrates risk instead of spreading it. Insurance works best when risk
is shared among large numbers of policyholders.
AFFINITY SALES
Selling insurance through groups such as professional and business associations.
AGENCY COMPANIES
Companies that market and sell products via independent agents.
AGENT
Insurance is sold by two types of agents: independent agents, who are self-employed,
represent several insurance companies and are paid on commission, and exclusive
or captive agents, who represent only one insurance company and are either
salaried or work on commission. Insurance companies that use exclusive
or captive agents are called direct writers.
ALIEN INSURANCE COMPANY
An insurance company incorporated under the laws of a foreign country, as
opposed to a foreign insurance company that does business in states outside
its own.
ALLIED LINES
Property insurance that is usually bought in conjunction with fire insurance;
it includes wind, water damage, and vandalism coverage.
ALTERNATIVE DISPUTE RESOLUTION / ADR
Alternative to going to court to settle disputes. Methods include arbitration,
where disputing parties agree to be bound to the decision of an independent
third party, and mediation, where a third party tries to arrange a settlement
between the two sides.
ALTERNATIVE MARKETS
Mechanisms used to fund self-insurance. This includes captives, which are
insurers owned by one or more non-insurers to provide owners with coverage.
Risk-retention groups, formed by members of similar professions or businesses
to obtain liability insurance, are also a form of self-insurance.
ANNUAL ANNUITY CONTRACT FEE
Covers the cost of administering an annuity contract.
ANNUAL STATEMENT
Summary of an insurer's or reinsurer's financial operations for a particular
year, including a balance sheet. It is filed with the state insurance department
of each jurisdiction in which the company is licensed to conduct business.
ANNUITANT
The person(s) who receives the income from an annuity contract. Usually the
owner of the contract or his or her spouse.
ANNUITIZATION
The conversion of the account balance of a deferred annuity contract to income
payments.
ANNUITY
A life insurance product that pays periodic income benefits for a specific
period of time or over the course of the annuitant's lifetime. There are
two basic types of annuities: deferred and immediate: Deferred annuities
allow assets to grow tax deferred over time before being converted to payments
to the annuitant. Immediate annuities allow payments to begin within about
a year of purchase.
ANNUITY ACCUMULATION PHASE OR PERIOD
The period during which the owner of a deferred annuity makes payments to
build up assets.
ANNUITY ADMINISTRATIVE CHARGES
Covers the cost of customer services for owners of variable annuities.
ANNUITY BENEFICIARY
In certain types of annuities, a person who receives annuity contract payments
if the annuity owner or annuitant dies while payments are still due.
ANNUITY CONTRACT
An agreement similar to an insurance policy for other insurance products
such as auto insurance.
ANNUITY CONTRACT OWNER
The person or entity that purchases an annuity and has all rights to the
contract. Usually, but not always, the annuitant (the person who receives
incomes from the contract).
ANNUITY DEATH BENEFITS
The guarantee that if an annuity contract owner dies before annuitization
(the switchover from the savings to the payment phase) the beneficiary
will receive the value of the annuity that is due.
ANNUITY INSURANCE CHARGES
Covers administrative and mortality and expense risk costs.
ANNUITY INVESTMENT MANAGEMENT FEE
The fee paid for the management of variable annuity invested assets.
ANNUITY ISSUER
The insurance company that issues the annuity.
ANNUITY PROSPECTUS
Legal document providing detailed information about variable annuity contracts.
Must be offered to each prospective buyer.
ANNUITY PURCHASE RATE
The cost of an annuity based on such factors as the age and gender of the
contract owner.
ANTITRUST LAWS
Laws that prohibit companies from working as a group to set prices, restrict
supplies or stop competition in the marketplace. The insurance industry
is subject to state antitrust laws but has a limited exemption from federal
antitrust laws. This exemption, set out in the McCarran-Ferguson Act, permits
insurers to jointly develop common insurance forms and share loss data
to help them price policies.
APPORTIONMENT
The dividing of a loss proportionately among two or more insurers that cover
the same loss.
APPRAISAL
A survey to determine a property's insurable value, or the amount of a loss.
ARBITRATION
Procedure in which an insurance company and the insured or a vendor agree
to settle a claim dispute by accepting a decision made by a third party.
ASSET-BACKED SECURITIES
Bonds that represent pools of loans of similar types, duration and interest
rates. Almost any loan with regular repayments of principal and interest
can be securitized, from auto loans and equipment leases to credit card
receivables and mortgages.
ASSETS
Property owned, in this case by an insurance company, including stocks, bonds,
and real estate. Insurance accounting is concerned with solvency and the
ability to pay claims. State insurance laws therefore require a conservative
valuation of assets, prohibiting insurance companies from listing assets
on their balance sheets whose values are uncertain, such as furniture,
fixtures, debit balances, and accounts receivable that are more than 90
days past due. (See Admitted assets)
ASSIGNED RISK PLANS
Facilities through which drivers can obtain auto insurance if they are unable
to buy it in the regular or voluntary market. These are the most well-known
type of residual auto insurance market, which exist in every state. In
an assigned risk plan, all insurers selling auto insurance in the state
are assigned these drivers to insure, based on the amount of insurance
they sell in the regular market. (See Residual market)
AUTO INSURANCE POLICY
There are basically six different types of coverage's. Some may be required
by law. Others are optional. They are: 1. Bodily injury liability, for
injuries the policyholder causes to someone else. 2. Medical payments or
Personal Injury Protection (PIP) for treatment of injuries to the driver
and passengers of the policyholder's car. 3. Property damage liability,
for damage the policyholder causes to someone else's property. 4. Collision,
for damage to the policyholder's car from a collision. 5. Comprehensive,
for damage to the policyholder's car not involving a collision with another
car (including damage from fire, explosions, earthquakes, floods, and 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. (See Insurance score)
AVIATION INSURANCE
Commercial airlines hold property insurance on airplanes and liability insurance
for negligent acts that result in injury or property damage to passengers
or others. Damage is covered on the ground and in the air. The policy limits
the geographical area and individual pilots covered.
B-SHARE VARIABLE ANNUITY
A form of variable annuity contract with no initial sales charge but if the
contract is cancelled the holder pays deferred sales charges (usually from
5 to 7 percent the first year, declining to zero after from 5 to 7 years).
The most common form of annuity contract.
BALANCE SHEET
Provides a snapshot of a company's financial condition at one point in time.
It shows assets, including investments and reinsurance, and liabilities,
such as loss reserves to pay claims in the future, as of a certain date.
It also states a company's equity, known as policyholder surplus. Changes
in that surplus are one indicator of an insurer's financial standing.
BANK HOLDING COMPANY
A company that owns or controls one or more banks. The Federal Reserve has
responsibility for regulating and supervising bank holding company activities,
such as approving acquisitions and mergers and inspecting the operations
of such companies. This authority applies even though a bank owned by a
holding company may be under the primary supervision of the Comptroller
of the Currency or the FDIC.
BASIS POINT
0.01 percent of the yield of a mortgage, bond or note. The smallest measure
used.
BEACH AND WINDSTORM PLANS
State-sponsored insurance pools that sell property coverage for the peril
of windstorm to people unable to buy it in the voluntary market because
of their high exposure to risk. Seven states (AL, FL, LA, MS, NC, SC, TX)
offer these plans to cover residential and commercial properties against
hurricanes and other windstorms. Georgia and New York provide this kind
of coverage for windstorm and hail in certain coastal communities through
other property pools. Insurance companies that sell property insurance
in the state are required to participate in these plans. Insurers share
in profits and losses. (See Fair access to insurance requirements plans
/ FAIR plans; Residual market)
BINDER
Temporary authorization of coverage issued prior to the actual insurance
policy.
BLANKET INSURANCE
Coverage for more than one type of property at one location or one type of
property at more than one location. Example: chain stores.
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 surety ship. Bonds of various types guarantee a payment or a
reimbursement for financial losses resulting from dishonesty, failure to
perform and other acts.
BOND RATING
An evaluation of a bond's financial strength, conducted by such major ratings
agencies as Standard & Poor's and Moody's Investors Service.
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 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. Business interruption insurance 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 coverage's
for small- to medium-sized businesses. Coverage is generally cheaper than
if purchased through separate insurance policies.
C-SHARE VARIABLE ANNUITIES
A form of variable annuity contract where the contract holder pays no sales
up front or surrender charges. Owners can claim full liquidity at any time.
CAPACITY
The supply of insurance available to meet demand. Capacity depends on the
industry's financial ability to accept risk. For an individual insurer,
the maximum amount of risk it can underwrite based on its financial condition.
The adequacy of an insurer's capital relative to its exposure to loss is
an important measure of solvency. A property/casualty insurer must maintain
a certain level of capital and policyholder surplus to underwrite risks.
This capital is known as capacity. When the industry is hit by high losses,
such as after the World Trade Center terrorist attack, capacity is diminished.
It can be restored by increases in net income, favorable investment returns,
reinsuring more risk and or raising additional capital. When there is excess
capacity, usually because of a high return on investments, premiums tend
to decline as insurers compete for market share. As premiums decline, underwriting
losses are likely to grow, reducing capacity and causing insurers to raise
rates and tighten conditions and limits in an effort to increase profitability.
Policyholder surplus is sometimes used as a measure of capacity.
CAPITAL
Shareholder's equity (for publicly-traded insurance companies) and retained
earnings (for mutual insurance companies). There is no general measure
of capital adequacy for property/casualty insurers. Capital adequacy is
linked to the riskiness of an insurer's business. A company underwriting
medical device manufacturers needs a larger cushion of capital than a company
writing Main Street business, for example. (See Risk-based capital; Surplus;
Solvency)
CAPITAL MARKETS
The markets in which equities and debt are traded. (See Securitization of
insurance risk)
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. (See Exclusive agent)
CAPTIVES
Insurers that are created and wholly-owned by one or more non-insurers, to
provide owners with coverage. A form of self-insurance.
CAR YEAR
Equal to 365 days of insured coverage for a single vehicle. It is the standard
measurement for automobile insurance.
CASE MANAGEMENT
A system of coordinating medical services to treat a patient, improve care,
and reduce cost. A case manager coordinates health care delivery for patients.
CATASTROPHE
Term used for statistical recording purposes to refer to a single incident
or a series of closely related incidents causing severe insured property
losses totaling more than a given amount, currently $25 million.
CATASTROPHE BONDS
Risk-based securities that pay high interest rates and provide insurance
companies with a form of reinsurance to pay losses from a catastrophe such
as those caused by a major hurricane. They allow insurance risk to be sold
to institutional investors in the form of bonds, thus spreading the risk.
(See Securitization of insurance risk)
CATASTROPHE DEDUCTIBLE
A percentage or dollar amount that a homeowner must pay before the insurance
policy kicks in when a major natural disaster occurs. These large deductibles
limit an insurer's potential losses in such cases, allowing it to insure
more property. A property insurer may not be able to buy reinsurance to
protect its own bottom line unless it keeps its potential maximum losses
under a certain level.
CATASTROPHE FACTOR
Probability of catastrophic loss, based on the total number of catastrophes
in a state over a 40-year period.
CATASTROPHE MODEL
Using computers, a method to mesh long-term disaster information with current
demographic, building and other data to determine the potential cost of
natural disasters and other catastrophic losses for a given geographic
area.
CATASTROPHE REINSURANCE
Reinsurance (insurance for insurers) 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.
CELL PHONE INSURANCE
Separate insurance provided to cover cell phones for damage or theft. Policies
are often sold with the cell phones themselves.
CHARTERED FINANCIAL CONSULTANT / ChFC
A professional designation given by The American College to financial services
professionals who complete courses in financial planning.
CHARTERED LIFE UNDERWRITER / CLU
A professional designation by The American College for those who pass business
examinations on insurance, investments, and taxation, and have life insurance
planning experience.
CHARTERED PROPERTY/CASUALTY UNDERWRITER / CPCU
A professional designation given by the American Institute for Property and
Liability Underwriters. National examinations and three years of work experience
are required.
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. (See Occurrence
policy)
COBRA
Short for Consolidated Omnibus Budget Reconciliation Act. A federal law under
which group health plans sponsored by employers with 20 or more employees
must offer continuation of coverage to employees who leave their jobs and
their dependents. The employee must pay the entire premium. Coverage can
be extended up to 18 months. Surviving dependents can receive longer coverage.
COINSURANCE
In property insurance, requires the policyholder to carry insurance equal
to a specified percentage of the value of property to receive full payment
on a loss. For health insurance, it is a percentage of each claim above
the deductible paid by the policyholder. For a 20 percent health insurance
coinsurance clause, the policyholder pays for the deductible plus 20 percent
of his covered losses. After paying 80 percent of losses up to a specified
ceiling, the insurer starts paying 100 percent of losses.
COLLATERAL
Property that is offered to secure a loan or other credit and that becomes
subject to seizure on default. (Also called security.)
COLLATERAL SOURCE RULE
Bars the introduction of information that indicates a person has been compensated
or reimbursed by a source other than the defendant in civil actions related
to negligence or other liability.
COLLISION COVERAGE
Portion of an auto insurance policy that covers the damage to the policyholder's
car from a collision.
COMBINED RATIO
Percentage of each premium dollar a property/casualty insurer spends on claims
and expenses. A decrease in the combined ratio means financial results
are improving; an increase means they are deteriorating.
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 coverage's
are boiler and machinery, business interruption, commercial auto, comprehensive
general liability, directors and officers liability, fire and allied lines,
inland marine, medical malpractice liability, product liability, professional
liability, surety and fidelity, and workers compensation. Most of these
commercial coverage's can be purchased separately except business interruption
which must be added to a fire insurance (property) policy. (See Commercial
multiple peril policy)
COMMERCIAL MULTIPLE PERIL POLICY
Package policy that includes property, boiler and machinery, crime, and general
liability coverage's.
COMMERCIAL PAPER
Short-term, unsecured, and usually discounted promissory note issued by commercial
firms and financial companies often to finance current business. Commercial
paper, which is rated by debt rating agencies, is sold through dealers
or directly placed with an investor.
COMMISSION
Fee paid to an agent or insurance salesperson as a percentage of the policy
premium. The percentage varies widely depending on coverage, the insurer,
and the marketing methods.
COMMUNITY RATING LAWS
Enacted in several states on health insurance policies. Insurers are required
to accept all applicants for coverage and charge all applicants the same
premium for the same coverage regardless of age or health. Premiums are
based on the rate determined by the geographic region's health and demographic
profile.
COMPETITIVE REPLACEMENT PARTS
See Crash parts; Generic auto parts
COMPETITIVE STATE FUND
A facility established by a state to sell workers compensation in competition
with private insurers.
COMPLAINT RATIO
A measure used by some state insurance departments to track consumer complaints
against insurance companies. Generally, it is written as the number of
complaints upheld against an insurance company, as a percentage of premiums
written. In some states, complaints from medical providers over the promptness
of payments may also be included.
COMPLETED OPERATIONS COVERAGE
Pays for bodily injury or property damage caused by a completed project or
job. Protects a business that sells a service against liability claims.
COMPREHENSIVE COVERAGE
Portion of an auto insurance policy that covers damage to the policyholder's
car not involving a collision with another car (including damage from fire,
explosions, earthquakes, floods, and riots), and theft.
COMPULSORY AUTO INSURANCE
The minimum amount of auto liability insurance that meets a state law. Financial
responsibility laws in every state require all automobile drivers to show
proof, after an accident, of their ability to pay damages up to the state
minimum. In compulsory liability states this proof, which is usually in
the form of an insurance policy, is required before you can legally drive
a car.
CONTINGENT LIABILITY
Liability of individuals, corporations, or partnerships for accidents caused
by people other than employees for whose acts or omissions the corporations
or partnerships are responsible.
COVERAGE
Synonym for insurance.
CRASH PARTS
Sheet metal parts that are most often damaged in a car crash. (See Generic
auto parts)
CREDIT
The promise to pay in the future in order to buy or borrow in the present.
The right to defer payment of debt.
CREDIT DERIVATIVES
A contract that enables a user, such as a bank, to better manage its credit
risk. A way of transferring credit risk to another party.
CREDIT ENHANCEMENT
A technique to lower the interest payments on a bond by raising the issue's
credit rating, often through insurance in the form of a financial guarantee
or with standby letters of credit issued by a bank.
CREDIT INSURANCE
Commercial coverage against losses resulting from the failure of business
debtors to pay their obligation to the insured, usually due to insolvency.
The coverage is geared to manufacturers, wholesalers, and service providers
who may be dependent on a few accounts and therefore could lose significant
income in the event of an insolvency.
CREDIT LIFE INSURANCE
Life insurance coverage on a borrower designed to repay the balance of a
loan in the event the borrower dies before the loan is repaid. It may also
include disablement and can be offered as an option in connection with
credit cards and auto loans.
CREDIT RATING
See Bond rating
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, from getting
a job, finding a place to live, securing a loan, getting a telephone, 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. (See Insurance score.)
CRIME INSURANCE
Term referring to property coverage's 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.
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."
DEDUCTIBLE
The 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.
DEFERRED ANNUITY
An annuity contract that is purchased either with a single tax-deferred premium
or with periodic tax-deferred premiums over time. Payments begin at a predetermined
point in time, such as retirement.
DEFINED BENEFIT PLAN
A retirement plan under which pension benefits are fixed in advance by a
formula based generally on years of service to the company multiplied by
a specific percentage of wages, usually average earnings over that period
or highest average earnings over the final years with the company.
DEFINED CONTRIBUTION PLAN
An employee benefit plan under which the employer sets up benefit accounts
and contributions are made to it by the employer and by the employee. The
employer usually matches the employee's contribution up to a stated limit.
DEMAND DEPOSIT
Customer assets that are held in a checking account. Funds can be readily
withdrawn by check, "on demand."
DEMUTUALIZATION
The conversion of insurance companies from mutual companies owned by their
policyholders into publicly-traded stock companies.
DEPOSITORY INSTITUTION
Financial institution that obtains its funds mainly through deposits from
the public. Includes commercial banks, savings and loan associations, savings
banks, and credit unions.
DEREGULATION
In insurance, reducing regulatory control over insurance rates and forms.
Commercial insurance for businesses of a certain size has been deregulated
in many states.
DERIVATIVES
Contracts that derive their value from an underlying financial asset, such
as publicly-traded securities and foreign currencies. Often used as a hedge
against changes in value.
DIFFERENCE IN CONDITIONS
Policy designed to fill in gaps in a business's commercial property insurance
coverage. There is no standard policy. Policies are specifically tailored
to the policyholder's needs.
DIMINUTION OF VALUE
The idea that a vehicle loses value after it has been damaged in an accident
and repaired.
DIRECT PREMIUMS
Property/casualty premiums collected by the insurer from policyholders, before
reinsurance premiums are deducted. Insurers share some direct premiums
and the risk involved with their reinsurers.
DIRECT SALES/ DIRECT RESPONSE
Method of selling insurance directly to the insured through an insurance
company's own employees, through the mail, or via the Internet. This is
in lieu of using captive or exclusive agents.
DIRECT WRITERS
Insurance companies that sell directly to the public using exclusive agents
or their own employees, through the mail, or via Internet. Large insurers,
whether predominately direct writers or agency companies, are increasingly
using many different channels to sell insurance. In reinsurance, denotes
reinsurers that deal directly with the insurance companies they reinsure
without using a broker.
DIRECTORS AND OFFICERS LIABILITY 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,
often by shareholders. Directors and officers insurance policies usually
contain two coverage's: personal coverage for individual directors and
officers who are not indemnified by the corporation for their legal expenses
or judgments against them - some corporations are not required by their
corporate or state charters to provide indemnification; and corporate reimbursement
coverage for indemnifying directors and officers. Entity coverage for claims
made specifically against the company may also be available.
DIVIDENDS
Money returned to policyholders from an insurance company's earnings. Considered
a partial premium refund rather than a taxable distribution, reflecting
the difference between the premium charged and actual losses. Many life
insurance policies and some property/casualty policies pay dividends to
their owners. Life insurance policies that pay dividends are called participating
policies.
DOMESTIC INSURANCE COMPANY
Term used by a state to refer to any company incorporated there.
EARLY WARNING SYSTEM
A system of measuring insurers' financial stability set up by insurance industry
regulators. An example is the Insurance Regulatory Information System (IRIS),
which uses financial ratios to identify insurers in need of regulatory
attention.
EARNED PREMIUM
The portion of premium that applies to the expired part of the policy period.
Insurance premiums are payable in advance but the insurance company does
not fully earn them until the policy period expires.
EARTHQUAKE INSURANCE
Covers a building and its contents, but includes a large percentage deductible
on each. A special policy 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 non economic 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. (See FIDELITY BOND)
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. (See EXCLUSIVE REMEDY)
EMPLOYMENT PRACTICES LIABILITY COVERAGE
Liability insurance for employers that covers wrongful termination, discrimination,
or sexual harassment toward the insured's employees or former employees.
ENDORSEMENT
A written form attached to an insurance policy that alters the policy's coverage,
terms, or conditions. Sometimes called a rider.
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.
EQUITY INDEXED ANNUITY
Non-traditional fixed annuity. The specified rate of interest guarantees
a fixed minimum rate of interest like traditional fixed annuities. At the
same time, additional interest may be credited to policy values based upon
positive changes, if any, in an established index such as the S&P 500.
The amount of additional interest depends upon the particular design of
the policy. They are sold by licensed insurance agents and regulated by
state insurance departments.
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 non-admitted
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.
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)
EXCLUSIVE REMEDY
Part of the social contract that forms the basis for workers compensation
statutes under which employers are responsible for work-related injury
and disease, regardless of whether is was the employee's fault and in return
the injured employee gives up the right to sue when the employer's negligence
causes the harm.
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. (See Guaranteed replacement cost coverage)
FACULTATIVE REINSURANCE
A reinsurance policy that provides an insurer with coverage for specific
individual risks that are unusual or so large that they aren't covered
in the insurance company's reinsurance treaties. This can include policies
for jumbo jets or oil rigs. Reinsurers have no obligation to take on facultative
reinsurance, but can assess each risk individually. By contrast, under
treaty reinsurance, the reinsurer agrees to assume a certain percentage
of entire classes of business, such as various kinds of auto, up to preset
limits.
FAIR ACCESS TO INSURANCE REQUIREMENTS PLANS / FAIR PLANS
Insurance pools that sell property insurance to people who can't buy it in
the voluntary market because of high risk over which they may have no control.
FAIR Plans, which exist in 28 states and the District of Columbia, insure
fire, vandalism, riot, and windstorm losses, and some sell homeowners insurance
which includes liability. Plans vary by state, but all require property
insurers licensed in a state to participate in the pool and share in the
profits and losses. (See Residual market)
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 borrowings 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.
FEDERAL RESERVE BOARD
Seven-member board that supervises the banking system by issuing regulations
controlling bank holding companies and federal laws over the banking industry.
It also controls and oversees the U.S. monetary system and credit supply.
FIDELITY BOND
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.
FIDUCIARY LIABILITY
Legal responsibility of a fiduciary to safeguard assets of beneficiaries.
A fiduciary, for example a pension fund manager, is required to manage
investments held in trust in the best interest of beneficiaries. Fiduciary
liability insurance covers breaches of fiduciary duty such as misstatements
or misleading statements, errors and omissions.
FILE-AND-USE STATES
States where insurers must file rate changes with their regulators, but don't
have to wait for approval to put them into effect.
FINANCIAL GUARANTEE INSURANCE
Covers losses from specific financial transactions and guarantees that investors
in debt instruments, such as municipal bonds, receive timely payment of
principal and interest if there is a default. Raises the credit rating
of debt to which the guarantee is attached. Investment bankers who sell
asset-backed securities, securities backed by loan portfolios, use this
insurance to enhance marketability. (See Municipal bond insurance)
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)
FINITE RISK REINSURANCE
Contract under which the ultimate liability of the reinsurer is capped and
on which anticipated investment income is expressly acknowledged as an
underwriting component. Also known as Financial Reinsurance because this
type of coverage is often bought to improve the balance sheet effects of
statutory accounting principles.
FIRE INSURANCE
Coverage 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.
FREE-LOOK PERIOD
A period of up to one month during which the purchaser of an annuity can
cancel the contract with no penalty. Rules vary by state.
FREQUENCY
Number of times a loss occurs. One of the criteria used in calculating premium
rates.
FRONTING
A procedure in which a primary insurer acts as the insurer of record by issuing
a policy, but then passes the entire risk to a reinsurer in exchange for
a commission. Often, the fronting insurer is licensed to do business in
a state or country where the risk is located, but the reinsurer is not.
The reinsurer in this scenario is often a captive or an independent insurance
company that cannot sell insurance directly in a particular country.
FUTURES
Agreement to buy a security for a set price at a certain date. Futures contracts
usually involve commodities, indexes or financial futures.
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)
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES/GAAP
Generally accepted accounting principles (GAAP) accounting is used in financial
statements that publicly-held companies prepare for the Securities and
Exchange Commission. (See Statutory accounting principles / SAP)
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. (See Crash parts;
Aftermarket parts; Competitive replacement parts; Original equipment manufacturer
parts / 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.
GRADUATED DRIVER LICENSES
Licenses for younger drivers that allow them to improve their skills. Regulations
vary by state, but often restrict night time driving. Young drivers receive
a learner's permit, followed by a provisional license, before they can
receive a standard drivers license.
GRAMM-LEACH-BLILEY ACT
Financial services legislation, passed by Congress in 1999, that removed
Depression-era prohibitions against the combination of commercial banking
and investment-banking activities. It allows insurance companies, banks,
and securities firms to engage in each others' activities and own one another.
GROUP INSURANCE
A single policy covering a group of individuals, usually employees of the
same company or members of the same association and their dependents. Coverage
occurs under a master policy issued to the employer or association.
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 INCOME CONTRACT / GIC
Often an option in an employer-sponsored retirement savings plan. Contract
between an insurance company and the plan that guarantees a stated rate
of return on invested capital over the life of the contract.
GUARANTEED LIVING BENEFIT
A guarantee in a variable annuity that a certain level of annuity payment
will be maintained. Serves as a protection against investment risks. Several
types exists.
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 new legal concept that holds gun manufacturers liable for the cost of injuries
caused by guns. Several cities have filed lawsuits based on this concept.
HACKER INSURANCE
A coverage that protects businesses engaged in electronic commerce from losses
caused by hackers.
HARD MARKET
A seller's market in which insurance is expensive and in short supply. (See
Property/casualty insurance cycle)
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.
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. (See Captive agent)
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 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-VALUE
Insurance written in an amount approximating the value of the insured property.
INTEGRATED BENEFITS
Coverage where the distinction between job-related and non-occupational illnesses
or injuries is eliminated and workers compensation and general health coverage
are combined. Legal obstacles exist, however, because the two coverage's
are administered separately. Previously called twenty-four hour coverage.
INTERMEDIATION
The process of bringing savers, investors and borrowers together so that
savers and investors can obtain a return on their money and borrowers can
use the money to finance their purchases or projects through loans.
INTERNET INSURER
An insurer that sells exclusively via the Internet.
INTERNET LIABILITY INSURANCE
Coverage designed to protect businesses from liabilities that arise from
the conducting of business over the Internet, including copyright infringement,
defamation, and violation of privacy.
INVESTMENT INCOME
Income generated by the investment of assets. Insurers have two sources of
income, underwriting (premiums less claims and expenses) and investment
income. The latter can offset underwriting operations, which are frequently
unprofitable.
JOINT 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 coverage's, such as medical malpractice. (See Assigned
risk plans; Residual market)
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 coverage's existence.
L-SHARE VARIABLE ANNUITIES
A form of variable annuity contract usually with short surrender periods
and higher mortality and expense risk charges.
LADDERING
A technique that consists of staggering the maturity dates and the mix of
different types of bonds.
LAW OF LARGE NUMBERS
The theory of probability on which the business of insurance is based. Simply
put, this mathematical premise says that the larger the group of units
insured, such as sport-utility vehicles, the more accurate the predictions
of loss will be.
LIABILITY INSURANCE
Insurance for what the policyholder is legally obligated to pay because of
bodily injury or property damage caused to another person.
LIFE INSURANCE
See Ordinary life insurance; Term insurance; Variable life insurance; Whole
life insurance
LIMITS
Maximum amount of insurance that can be paid for a covered loss.
LINE
Type or kind of insurance, such as personal lines.
LIQUIDATION
Enables the state insurance department as liquidator or its appointed deputy
to wind up the insurance company's affairs by selling its assets and settling
claims upon those assets. After receiving the liquidation order, the liquidator
notifies insurance departments in other states and state guaranty funds
of the liquidation proceedings. Such insurance company liquidations are
not subject to the Federal Bankruptcy Code but to each state's liquidation
statutes.
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.
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 ship owners 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.
LLOYDS
Corporation formed to market services of a group of underwriters. Does not
issue insurance policies or provide insurance protection. Insurance is
written by individual underwriters, with each assuming a part of every
risk. Has no connection to Lloyd's of London, and is found primarily in
Texas.
LONG-TERM CARE INSURANCE
Coverage that, under specified conditions, provides skilled nursing, intermediate
care, or custodial care for a patient (generally over age 65) in a nursing
facility or his or her residence.
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. (See Inland marine
and Ocean marine)
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
Non binding procedure in which a third party attempts to resolve a conflict
between two other parties.
MEDICAID
A federal/state public assistance program created in 1965 and administered
by the states for people whose income and resources are insufficient to
pay for health care.
MEDICAL MALPRACTICE INSURANCE
See Malpractice insurance
MEDICAL PAYMENTS INSURANCE
A coverage in which the insurer agrees to reimburse the insured and others
up to a certain limit for medical or funeral expenses as a result of bodily
injury or death by accident. Payments are without regard to fault.
MEDICAL UTILIZATION REVIEW
The practice used by insurance companies to review claims for medical treatment.
MEDICARE
Federal program for people 65 or older that pays part of the costs associated
with hospitalization, surgery, doctors' bills, home health care, and skilled-nursing
care.
MEDIGAP/MEDSUP
Policies that supplement federal insurance benefits particularly for those
covered under Medicare.
MINE SUBSIDENCE COVERAGE
An endorsement to a homeowners insurance policy, available in some states,
for losses to a home caused by the land under a house sinking into a mine
shaft. Excluded from standard homeowners policies, as are other forms of
earth movement.
MONEY SUPPLY
Total supply of money in the economy, composed of currency in circulation
and deposits in savings and checking accounts. By changing the interest
rates the Federal Reserve seeks to adjust the money supply to maintain
a strong economy.
MORTALITY AND EXPENSE (M&E) RISK CHARGE
A fee that covers such annuity contract guarantees as death benefits.
MORTGAGE GUARANTEE INSURANCE
Coverage for the mortgage (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. (See Term insurance)
MORTGAGE-BACKED SECURITIES
Investment grade securities backed by a pool of mortgages. The issuer uses
the cash flow from mortgages to meet interest payments on the bonds.
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, coverage's 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.
(See Financial guarantee insurance)
MUNICIPAL LIABILITY INSURANCE
Liability insurance for municipalities.
MUTUAL HOLDING COMPANY
An organizational structure that provides mutual companies with the organizational
and capital raising advantages of stock insurers, while retaining the policyholder
ownership of the mutual.
MUTUAL INSURANCE COMPANY
A company owned by its policyholders that returns part of its profits to
the policyholders as dividends. The insurer uses the rest as a surplus
cushion in case of large and unexpected losses.
NAMED PERIL
Peril specifically mentioned as covered in an insurance policy.
NATIONAL FLOOD INSURANCE PROGRAM
Federal government-sponsored program under which flood insurance is sold
to homeowners and businesses. (See Adverse selection; Flood insurance)
NET PREMIUMS WRITTEN
See Premiums written
NO-FAULT
Auto insurance coverage that pays for each driver's own injuries, regardless
of who caused the accident. No-fault varies from state to state. It also
refers to an auto liability insurance system that restricts lawsuits to
serious cases. Such policies are designed to promote faster reimbursement
and to reduce litigation.
NO-FAULT MEDICAL
A type of accident coverage in homeowners policies.
NO-PAY, NO-PLAY
The idea that people who don't buy coverage should not receive benefits.
Prohibits uninsured drivers from collecting damages from insured drivers.
In most states with this law, uninsured drivers may not sue for non economic
damages such as pain and suffering. In other states, uninsured drivers
are required to pay the equivalent of a large deductible ($10,000) before
they can sue for property damages and another large deductible before they
can sue for bodily harm.
NON-ADMITTED ASSETS
Assets that are not included on the balance sheet 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.
NOTICE OF LOSS
A written notice required by insurance companies immediately after an accident
or other loss. Part of the standard provisions defining a policyholder's
responsibilities after a loss.
NUCLEAR INSURANCE
Covers operators of nuclear reactors and other facilities for liability and
property damage in the case of a nuclear accident and involves both private
insurers and the federal government.
NURSING HOME INSURANCE
A form of long-term care policy that covers a policyholder's stay in a nursing
facility.
OCCUPATIONAL DISEASE
Abnormal condition or illness caused by factors associated with the workplace.
Like occupational injuries, this is covered by workers compensation policies.
(See Workers compensation)
OCCURRENCE POLICY
Insurance that pays claims arising out of incidents that occur during the
policy term, even if they are filed many years later. (See Claims-made
policy)
OCEAN MARINE INSURANCE
Coverage of all types of vessels and watercraft, for property damage to the
vessel and cargo, including such risks as piracy and the jettisoning of
cargo to save the property of others. Coverage for marine-related liabilities.
War is excluded from basic policies, but can be bought back.
OPEN COMPETITION STATES
States where insurance companies can set new rates without prior approval,
although the state's commissioner can disallow them if they are not reasonable
and adequate or are discriminatory.
OPERATING EXPENSES
The cost of maintaining a business's property, includes insurance, property
taxes, utilities and rent, but excludes income tax, depreciation and other
financing expenses.
OPTIONS
Contracts that allow, but do not oblige, the buying or selling of property
or assets at a certain date at a set price.
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.
It contrasts with term insurance, which only lasts for a specified number
of years but is renewable. (See Term insurance)
ORIGINAL EQUIPMENT MANUFACTURER PARTS / OEM
Sheet metal auto parts made by the manufacturer of the vehicle. (See Generic
auto parts)
OVER-THE-COUNTER (OTC)
Security that is not listed or traded on an exchange such as the New York
Stock Exchange. Business in over-the-counter securities is conducted through
dealers using electronic networks.
PACKAGE POLICY
A single insurance policy that combines several coverage's previously sold
separately. Examples include homeowners insurance and commercial multiple
peril insurance.
PAY-AT-THE-PUMP
A system proposed in the 1990s in which auto insurance premiums would be
paid to state governments through a per-gallon surcharge on gasoline.
PENSION BENEFIT GUARANTY CORPORATION
An independent federal government agency that administers the Pension Plan
Termination Insurance program to ensure that vested benefits of employees
whose pension plans are being terminated are paid when they come due. Only
defined benefit plans are covered. Benefits are paid up to certain limits.
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). (See Defined
benefit plan; Defined contribution plan)
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. (See Commercial
lines)
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
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. (See Claims-made policy)
POOL
See Insurance pool
PREFERRED PROVIDER ORGANIZATION
Network of medical providers which charge on a fee-for-service basis, but
are paid on a negotiated, discounted fee schedule.
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.
(See Direct premiums; Earned premium; Unearned premium)
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 COMPANY
In a reinsurance transaction, the insurance company that is reinsured.
PRIMARY MARKET
Market for new issue securities where the proceeds go directly to the issuer.
PRIME RATE
Interest rate that banks charge to their most creditworthy customers. Banks
set this rate according to their cost of funds and market forces.
PRIOR APPROVAL STATES
States where insurance companies must file proposed rate changes with state
regulators, and gain approval before they can go into effect.
PRIVATE MORTGAGE INSURANCE
See Mortgage guarantee insurance
PRIVATE PLACEMENT
Securities that are not registered with the Securities and Exchange Commission
and are sold directly to investors.
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 non life 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.
PROPOSITION 103
A November 1988 California ballot initiative that called for a statewide
auto insurance rate rollback and for rates to be based more on driving
records and less on geographical location. The initiative changed many
aspects of the state's insurance system and was the subject of lawsuits
for more than a decade.
PURCHASING GROUP
An entity that offers insurance to groups of similar businesses with similar
exposures to risk.
PURE LIFE ANNUITY
A form of annuity that ends payments when the annuitant dies. Payments may
be fixed or variable.
QUALIFIED ANNUITY
A form of annuity purchased with pretax dollars as part of a retirement plan
that benefits from special tax treatment, such as a 401(k) plan.
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. (See Open competition
states; Prior approval states)
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.
RECEIVABLES
Amounts owed to a business for goods or services provided.
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.
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. (See Treaty reinsurance; Facultative
reinsurance)
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.
REPURCHASE AGREEMENT /'REPO'
Agreement between a buyer and seller where the seller agrees to repurchase
the securities at an agreed upon time and price. Repurchase agreements
involving U.S. government securities are utilized by the Federal Reserve
to control the money supply.
RESERVES
A company's best estimate of what it will pay for claims.
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.
RETURN ON EQUITY
Net income divided by total equity. Measures profitability by showing how
efficiently invested capital is being used.
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.
SECONDARY MARKET
Market for previously issued and outstanding securities.
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.
SECURITIES OUTSTANDING
Stock held by shareholders.
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. (See Catastrophe bonds)
SELF-INSURANCE
The concept of assuming a financial risk oneself, 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.
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.
SHARED MARKET
See Residual market
SINGLE PREMIUM ANNUITY
An annuity that is paid in full upon purchase.
SOFT MARKET
An environment where insurance is plentiful and sold at a lower cost, also
known as a buyers' market. (See Property/casualty insurance cycle)
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.
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. (See Adverse selection)
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.
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. (See GAAP accounting;
Admitted assets)
STOCK INSURANCE COMPANY
An insurance company owned by its stockholders who share in profits through
earnings distributions and increases in stock value.
STRUCTURED SETTLEMENT
Legal agreement to pay a designated person, usually someone who has been
injured, a specified sum of money in periodic payments, usually for his
or her lifetime, instead of in a single lump sum payment. (See Annuity)
SUBROGATION
The legal process by which an insurance company, after paying a loss, seeks
to recover the amount of the loss from another party who is legally liable
for it.
SUPERFUND
A federal law enacted in 1980 to initiate cleanup of the nation's abandoned
hazardous waste dump sites and to respond to accidents that release hazardous
substances into the environment. The law is officially called the Comprehensive
Environmental Response, Compensation, and Liability Act.
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
The remainder after an insurer's liabilities are subtracted from its assets.
The financial cushion that protects policyholders in case of unexpectedly
high claims. (See Capital; Risk-based capital)
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.
SWAPS
The simultaneous buying, selling or exchange of one security for another
among investors to change maturities in a bond portfolio, for example,
or because investment goals have changed.
TERM CERTAIN ANNUITY
An form of annuity that pays out over a fixed period rather than when the
annuitant dies.
TERM 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. (See First-party
coverage)
TIME DEPOSIT
Funds that are held in a savings account for a predetermined period of time
at a set interest rate. Banks can refuse to allow withdrawals from these
accounts until the period has expired or assess a penalty for early withdrawals.
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.
TRANSPARENCY
A term used to explain the way information on financial matters, such as
financial reports and actions of companies or markets, are communicated
so that they are easily understood and frank.
TRAVEL INSURANCE
Insurance to cover problems associated with traveling, generally including
trip cancellation due to illness, lost luggage and other incidents.
TREASURY SECURITIES
Interest-bearing obligations of the U.S. government issued by the Treasury
as a means of borrowing money to meet government expenditures not covered
by tax revenues. Marketable Treasury securities fall into three categories
- bills, notes and bonds. Marketable Treasury obligations are currently
issued in book entry form only; that is, the purchaser receives a statement,
rather than an engraved certificate.
TREATY REINSURANCE
A standing agreement between insurers and reinsurers. Under a treaty each
party automatically accepts specific percentages of the insurer's business.
UMBRELLA POLICY
Coverage for losses above the limit of an underlying policy 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.
UNBUNDLED CONTRACTS
A form of annuity contract that gives purchasers the freedom to choose among
certain optional features in their contract.
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. (See Insurable
risk)
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.
VIATICAL SETTLEMENT COMPANIES
Insurance firms that buy life insurance policies at a steep discount from
policyholders who are often terminally ill and need the payment for medications
or treatments. The companies provide early payout's to the policyholder,
assume the premium payments, and collect the face value of the policy upon
the policyholder's death.
VOID
A policy contract that for some reason specified in the policy becomes free
of all legal effect. One example under which a policy could be voided is
when information a policyholder provided is proven untrue.
VOLATILITY
A measure of the degree of fluctuation in a stock's price. Volatility is
exemplified by large, frequent price swings up and down.
VOLCANO COVERAGE
Most homeowners policies cover damage from a volcanic eruption.
VOLUME
Number of shares a stock trades either per day or per week.
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.
WAR RISK
Special coverage on cargo in overseas ships against the risk of being confiscated
by a government in wartime. It is excluded from standard ocean marine insurance
and can be purchased separately. It often excludes cargo awaiting shipment
on a wharf or on ships after 15 days of arrival in port.
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 DERIVATIVE
An insurance or securities product used as a hedge by energy-related businesses
and others whose sales tend to fluctuate depending on the weather.
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.