Insurance Glossary

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.

Binder

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

Captives

Insurers that are created and wholly-owned by one or more non-insurers, to provide owners with coverage. A form of self-insurance.

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.

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.

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.

Endorsement

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

Exclusion

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

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.

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.

Independent Agent

Agent who is self-employed, is paid on commission, and represents several insurance companies.

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.

Liability Insurance

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

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.

Policy

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

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)

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.

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.

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.

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)

Reserves

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

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.

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.

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.

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.

Underwriting

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

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.

Terrorism & Insurance

The President signed the Terrorism Risk Insurance Act legislation on November 26, 2002, whereby private insurers and the federal government share the risk of future losses from terrorism for a three-year period. With the President's signature, all state exclusions for terrorism are rescinded. Insurers, over the next 90 days, must notify existing commercial policyholders of the existence of the federal backstop, offer comparable terrorism coverage and specify the cost of that coverage. Policyholders have the option to accept or decline the coverage, or negotiate other terms. These provisions apply to new policies written after enactment.

Workers' Compensation

Workers' compensation insurance covers the cost of medical care and rehabilitation for workers injured on the job. It also compensates them for lost wages and provides death benefits for their dependents if they are killed in work-related accidents, including terrorist attacks.

Workers' compensation systems vary from state to state. State statutes and court decisions control many aspects, including the handling of claims, the evaluation of impairment and settlement of disputes, the amount of benefits injured workers receive and the strategies used to control costs.

Workers' compensation costs are one of the many factors that influence businesses to expand or relocate in a state, generating jobs. When premiums rise sharply, legislators often call for reforms. The last round of widespread reform legislation started in the late 1980s. In general, the reforms enabled employers and insurers to better control medical care costs through coordination and oversight of the treatment plan and return-to-work process and to improve workplace safety. Some states are now approaching a crisis once again as new problems arise.

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