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From a life insurer?s viewpoint, an annuity presents the opposite of mortality risk
from a life insurance policy. Life insurance pays a benefit when the policyholder
dies. An annuity pays benefits as long as the annuitant lives. With both products,
the insurer?s profit or loss depends on whether it made correct assumptions about
the policyholder?s life expectancy and the company?s future investment returns.
ANNUITY CERTAIN:
An annuity that is payable for a specified period of time, without regard to the life or
death of the annuitant.
ANNUITY UNITS:
A measure used in valuing a variable annuity during the time it is being paid to the
annui-tant. Each unit?s value fluctuates with the performance of an investment
portfolio.
APPORTIONMENT:
The dividing of a loss proportion-ately among two or more insurers that cover the
same loss.
APPRAISAL:
A survey to determine a property?s insura-ble 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.
Arson:
The deliberate setting of a fire
ASSESSABLE POLICY:
A policy subject to additional charges, or assessments, on all policyholders in the
company.
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. Insurance laws therefore require a conservative valuation of assets.
ASSIGN:
To use life insurance policy benefits as collat-eral for a loan.
ASSIGNEE:
The party to whom the rights of the insured under a policy are transferred.
ASSIGNMENT:
A clause that allows the transfer of rights under a policy from one person to
another, usually by means of a written document.
ASSIGNOR:
The party granting the transfer of the insured?s rights to the assignee
ASYMMETRIC INFORMATION:
An insured?s knowledge of likely losses that is unavailable to insurers.
AUTO INSURANCE PREMIUM:
The price an insurance company charges for coverage, based on the frequency and
cost of potential accidents, theft and other losses.
AUTOMATIC COVERAGE:
An insurer agrees to cover accidents from all machinery of the same type as that
specifically listed in the endorsement.
AUTOMATIC TREATY:
A fidelity bond that covers all employees of a given class and may also cover perils
other than infidelity.
BLANKET COVERAGE:
Insurance coverage for more than one item of property at a single location, or two
or more items of property in different locations.
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. Prevention of loss is emphasized even more than
indemnification of loss.
BOND:
A security that obligates the issuer to pay interest at specified intervals and to
repay the principal amount of the loan at maturity. In insurance, a form of
suretyship. Bonds of various types guarantee a payment or a reimbursement for
financial losses resulting from dishonesty, failure to perform and other acts.
BOOK OF BUSINESS:
Total amount of insurance on an insurer?s books at a particular point in time.
BROKER:
An intermediary between a customer and an insurance company. Brokers typically
search the market for coverage appropriate to their clients. They work on
commission and usually sell commercial, not personal, insurance. In life insurance,
agents must be licensed as securities brokers/dealers to sell variable annuities,
which are similar to stock market-based investments.
BURGLARY:
The unlawful taking of property from within premises, entry to which has been
obtained by force, leaving visible marks of entry.
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.
A percentage or fixed monetary 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
(or region) 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 huge 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.
CEDING COMPANY:
An insurer, also called a primary insurer, that passes on to other insurers some part
of its risk under insurance policies it has accepted.
CESSION:
A reinsurance term meaning that portion of a risk that is passed on to reinsurers by
ceding compa-nies.
CHANCE OF LOSS:
The long-term chance of occurrence or relative frequency of loss. Expressed by the
ratio of the number of losses likely to occur compared to the larger number of
possible losses in a given group.
CHIEF RISK OFFICER (CRO):
New position within some organizations, denoting the responsibility for coordinating
an enterprise risk management strategy.
CIVIL LAW:
Legal proceedings directed towards wrongs against individuals and organizations.
Breach of contract is an example of a civil wrong.
CLAIMS MANAGEMENT:
The functions performed in handling loss claims
CLAIMS-MADE POLICY:
A form of insurance that pays claims presented to the insurer during the term of the
policy or within a specific term after its expiration. It limits liability insurers?
exposure to unknown future liabilities.
COINSURANCE:
In property insurance, requires the policyholder to carry insurance equal to a
specified percentage of the value of property to receive full pay-ment on a loss. For
health insurance, it is a percentage of each claim above the deductible paid by the
policy-holder. For a 20 percent health insurance coinsurance clause, the
policyholder pays for the deductible plus 20 percent of his covered losses. After
paying 80 per-cent of losses up to a specified ceiling, the insurer starts paying 100
percent of losses.
COLLATERAL:
Property that is offered to secure a loan or other credit and that becomes subject to
seizure on default. (Also called security.)
COLLISION COVERAGE:
Portion of an auto insurance policy that covers the damage to the policyholder?s car
from a collision.
COMBINED RATIO:
Percentage of each premium rupee 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. When the ratio is over 100,
the insurer has an underwriting loss.
CONDITIONS:
Circumstances under which an insurance contract is in force. Breach of the
conditions is grounds for refusal to pay the loss.
CONSEQUENTIAL DAMAGE ENDORSEMENT:
Coverage for losses incurred as a result of the failure of an insured object on the
insured?s premises.
CONSEQUENTIAL LOSSES:
Losses other than property damage that occur as a result of physical loss to a
business for example, the cost of maintaining key employees to help reorganize
after a fire.
CONSIDERATION:
In an insurance contract, the specified premium and an agreement to the provisions
and stipulations that follow.
CONSTRUCTIVE TOTAL LOSS:
Loss occurring when property is not completely destroyed but when it would cost
more to restore it than it is worth
CONTINGENT BENEFICIARY:
A person named in a life insurance contract to receive the benefits of the policy if
other named beneficiaries are not living.
CONTINGENT BUSINESS INCOME INSURANCE:
Coverage for losses that result from losses to a supplier or cus-tomer on whom the
firm depends.
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.
CONTRACT:
Legal proceedings directed towards wrongs against society, such as rape, murder,
and rob-bery. Charges are made by a government body, and the guilty party is
subject to fine and/or imprisonment.
D
DECLARATION:
Part of a property or liability insurance policy that states the name and address of
policy-holder, property insured, its location and description, the policy period,
premiums, and supplemental information.
DECREASING TERM:
Term life insurance in which the amount of coverage declines during the period for
which it is issued.
DEDUCTIBLE:
The amount of loss borne or paid by the policyholder. Either a specified rupee
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.
DEFENSIVE MEDICINE:
The practice of performing extra procedures and tests in addition to those that are
probably necessary for a given patient in an attempt to avoid malpractice litigation.
DEFERRED ANNUITY:
Benefits that begin at some specified time after the annuity is purchased.
DEGREE OF RISK:
Relative variation of actual from expected losses.
DEPENDENT LIFE:
Group term life insurance covering an employee?s dependent.
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.
DIMINUTION OF VALUE:
The idea that a vehicle (or any other asset) loses value after it has been damaged in
an accident and repaired.
DIRECT LOSS:
A loss that stems directly from an unbroken chain of events leading from an insured
peril to the loss.
DIRECT PREMIUMS:
Property/casualty premiums col-lected by the insurer from policyholders, before
rein-surance premiums are deducted. Insurers share some direct premiums and the
risk involved with their rein-surers.
DIRECT RESPONSE:
A system to distribute insurance to customers through direct mail, telephone,
television, or other methods without the use of intermediaries.
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.
ENDOWMENT INSURANCE:
Life insurance that pays the face amount at the end of a specified time period if the
insured is alive; the face amount is payable in the event of death before the end of
the period.
ENTERPRISE RISK MANAGEMENT:
Approach for managing both pure and speculative risks together, another name for
integrated risk management.
ENTIRE CONTRACT CLAUSE:
A life insurance contract stating that the policy and the application form constitute
the entire contract between the parties.
ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE:
A form of insurance designed to cover losses and liabilities arising from damage to
property caused by pollution.
EQUAL SHARES:
A method of apportionment in which insurers covering the same loss share that loss
equally, up to their respective limits of liability.
EQUITY:
In investments, the ownership interest of shareholders. In a corporation, stocks as
opposed to bonds.
ERRORS AND OMISSIONS COVERAGE (E&O):
A profes-sional 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.
ESTOPPEL:
EXPERIENCE RATING:
The system of rating or pricing insurance in which the future premium reflects past
loss experience of the insured.
EXPOSURE:
Possibility of loss.
EXPOSURE DOCTRINE:
A liability limit that provides coverage when a person is exposed to a product or
dangerous substance.
EXPRESS WARRANTY:
A warranty actually stated in a contract.
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.
EXTRA EXPENSE INSURANCE:
The consequential prop-erty insurance that covers the extra expense incurred by
the interruption of a business; the policy pays if the business does not close down
but continues in alternative facilities, with higher than normal costs.
F
FACE AMOUNT:
In a life insurance contract, the stated sum of money to be paid to the beneficiary
upon the insured?s death.
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 trea-ties. 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
FINANCING:
The function of planning and controlling the supply of funds.
FIRE:
Combustion in which oxidation takes place so rapidly that a flame or glow is
produced.
FIRE INSURANCE:
Coverage protecting property against losses caused by a fire or lightning that is
usually included in homeowners or commercial multiple peril policies.
FIXED ANNUITY:
An annuity that pays the annuitant a guaranteed, fixed return every month for a
fixed pre-mium. The guarantee is based on the expected return of the underlying
investments of the insurance com-pany. (See Annuity)
FIXED-AMOUNT OPTION:
A life insurance option allow-ing the beneficiary to take the proceeds in the form of
a fixed periodic payment.
FIXED-PERIOD OPTION:
Payment of a death benefit in equal instalments over a specified time period.
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 jewellery, musical instruments, and expensive apparel. It provides
broader coverage than a regular homeowners policy for these items.
FLOATER POLICY:
An inland marine insurance policy that covers property subject to movement from
one location to another.
FLOOD:
(1) An overflow of inland or tidal waves, (2) unusual and rapid accumulation of
runoff of surface waters, (3) landslides or mudslides, (4) excessive erosion along the
shore of a lake or any other body of water, or (5) erosion or undermining caused by
a body of water exceeding its anticipated cyclical levels.
FLOOR-OF-PROTECTION CONCEPT:
An underlying principle of social insurance specifying that the goal of social
insurance is to provide only limited protection, not one?s entire need.
FRAUD:
Intentional lying or concealment by policy-holders 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-OF-CAPTURE-AND-SEIZURE (FC&S) CLAUSE:
A clause in ocean marine insurance that excludes war as a covered peril.
FREIGHT:
Money paid for the transportation of goods. Freight insurance is a common coverage
in marine insurance, purchased by the owners of transporting vessels.
FREQUENCY:
Number of times a loss occurs. One of the criteria used in calculating premium
rates.
FREQUENCY REDUCTION:
A method of loss control that lessens the chance that a peril will occur.
FRIENDLY FIRE:
A fire confined to the area of a boiler, stove, or other place designed to contain it.
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 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.
G
GENERAL AVERAGE CLAUSE:
A clause in ocean marine insurance that requires ship and freight interests other
than the insured to respond to loses suffered by the insured interest when those
losses result from voluntary, necessary, and successful sacrifice of the insured?s
freight because of shipping peril.
GENERAL INSURANCE:
Another term for property insurance.
GRACE PERIOD CLAUSE:
A clause in life insurance giv-ing the insured an extra 30 days to pay a premium due
before lapse takes place.
GROSS PREMIUM:
The premium charge for insurance that includes anticipated cost of losses,
overhead, and profit.
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.
GUARANTEED RENEWABLE:
A policy that cannot be cancelled by the insurer prior to a specified age. Premiums
may be increased only for an entire class of insureds.
H
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.
HAZARDS:
Conditions that introduce or increase the probability of loss stemming from the
existence of a given peril.
HEDGER:
The transferor of a speculative risk via a hedging contract
HEDGING:
A transfer of risk from one party to another; similar to speculation and may be used
to handle risks not subject to insurance, such as price fluctuations.
HOMEOWNERS INSURANCE POLICY :
The typical home-owners 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.
HOSPICE:
A health care organization that provides humane, dignified care for dying patients.
HOSPITAL INSURANCE:
An insurance contract designed to pay hospital room and board, laboratory fees,
nursing care, use of the operating room, and medicines and similar expenses.
HOSTILE FIRE:
INCREASING TERM:
Term life insurance in which the face amount of the policy increases periodically on
a predetermined basis.
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. Asbestosrelated 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 workrelated injuries prevents a worker from
earning what he or she earned before the injury unfolds over time. Insurance
companies regu-larly 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.
INDEMNIFY:
To restore insureds to the situations that existed prior to a loss.
INDEPENDENT ADJUSTER:
An individual or firm employed by an insurer to settle loss claims.
INDEPENDENT AGENT:
Agent who is self-employed, is paid on commission, and represents several
insurance companies.
INDIRECT LOSS:
A loss that occurs indirectly as a con-sequence of a given peril.
INFLATION GUARD CLAUSE:
In business income coverage, the amount obtained by deducting variable costs and
expenses (those that may be discontinued in the event of a shutdown) from the
total sales.
INSURANCE:
A system to make large financial losses more affordable by pooling the risks of
many individ-uals and business entities and transferring them to an insurance
company or other large group in return for a premium.
INSURANCE RATE:
The price of insurance, expressed as a price per unit of coverage.
INSURED PENSION PLANS:
Employee benefit plans managed by an insurance company.
INSURER:
The transferee; the person or agency providing insurance.
INSURING AGREEMENT:
The part of an insurance contract that states what the insurer agrees to do and the
conditions under which it so agrees.
INTEGRATED RISK MANAGEMENT:
Approach for managing both pure and speculative risks together; another name for
enterprise risk management.
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.
INTESTACY LAWS:
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
sportutility vehicles, the more accurate the predictions of loss will be.
LEASEHOLD:
An interest in real property created by an agreement (a lease) that gives the lessee
(the tenant) the right of enjoyment and use of the property or a period of time.
LEGAL INJURY:
Wrongful violation of a person?s rights.
LIABILITY INSURANCE:
Insurance for what the policy-holder is legally obligated to pay because of bodily
injury or property damage caused to another person.
LIBEL:
Written, printed, or pictorial material that damages a person?s reputation by
defaming or ridiculing the person.
LIFE INSURANCE:
See Ordinary life insurance; Term insurance; Whole life insurance
LIFETIME MAXIMUM:
A limit that applies to all benefits payable under an insurance plan. The maximum
can often be restored over time, eventually allowing an insured to collect more than
the stated maximum.
LIMITS:
Maximum amount of insurance that can be paid for a covered loss.
LIQUIDITY:
The ability and speed with which a security can be converted into cash.
LLOYD?S OF LONDON:
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 EXPOSURE:
A potential loss that may be associ-ated with a specific type of risk.
LOSS EXPOSURE CHECKLIST:
A risk identification tool used by businesses and individuals that lists many different
potential losses. The user can determine which of the potential losses is relevant.
LOSS OF USE:
A provision in homeowners and renters insurance policies that reimburses
policyholders for any extra living expenses due to having to live else-where while
their home is being restored following a disaster.
LOSS RATIO:
Percentage of each premium rupee 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
LOSS SETTLEMENT CLAUSE:
A provision that helps determine if items will be valued at actual cash value or at
replacement cost after a loss.
M
MALPRACTICE INSURANCE:
Professional liability cover-age for physicians, lawyers, and other specialists against
suits alleging negligence or errors and omissions that have harmed clients.
MANIFESTATION DOCTRINE:
A liability limit that provides coverage when a claimant?s disease or injury is
discovered.
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,
mould, and war are not usually included.
MATERIAL:
Describes misrepresentations that, had they been known at the time of a contract?s
issuance, would have caused it not to be issued at all or issued on different terms.
MAXIMUM POSSIBLE LOSS:
An estimate of the worst loss that might result from a given occurrence.
MAXIMUM PROBABLE LOSS:
An estimate of the likely severity of loss that might result from a given occur-rence.
MEDIATION:
Nonbinding procedure in which a third party attempts to resolve a conflict between
two other parties.
MEDICAL PAYMENTS:
Reasonable and necessary medi-cal expenses caused by an accident and sustained
by the insured. Such expenses must occur within three years of the accident.
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.
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.
OBJECTIVE RISK:
The probable variation of actual from expected experience.
OBLIGEE:
In a bond, the party to be reimbursed if he or she suffers a loss because of some
failure by the obligor.
OCCUPATIONAL DISEASE:
Abnormal condition or illness caused by factors associated with the workplace. Like
occupational injuries, this is covered by workers compensation policies.
OCCURRENCE POLICY:
Insurance that pays claims arising out of incidents that occur during the policy term,
even if they are filed many years later.
OCEAN MARINE INSURANCE:
Coverage of all types of vessels and watercraft, for property damage to the ves-sel
and cargo, including such risks as piracy and the jettisoning of cargo to save the
property of others. Coverage for marinerelated liabilities. War is excluded from basic
policies, but can be bought back.
OPEN-PERILS AGREEMENT:
States that it is the insurer?s intention to cover risks of accidental loss to the
described property except due to those perils specifically excluded; also called ?all
risks.?
OPERATING EXPENSES:
The cost of maintaining a busi-ness?s property, includes insurance, property taxes,
utilities and rent, but excludes income tax, depreciation and other financing
expenses.
OPPORTUNITY COST:
The cost of keeping monies liquid in a loss reserve fund rather than using them as
working capital.
OPTIONALLY RENEWABLE:
A condition stemming from the material characteristics of an object, e.g., wet or icy
street (increasing chance of car collision) and earth faults (hazard for earthquakes)
PLANNED RETENTION:
A conscious and deliberate assumption of recognized risk.
POLICY:
A written contract for insurance between an insurance company and policyholder
stating details of coverage.
POLICY WRITING:
The function of creating a specific insurance policy for a client, usually by the agent.
POLICYHOLDER:
The insured in an insurance policy.
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 dur-ing the term of
the policy or within a specified time frame after the policy expires.
POOLING:
Sharing total losses among a group
POSITIVE ACT:
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:
Describes policies that will pay up to their limits before any other coverage
becomes payable.
PRIMARY COMPANY:
In a reinsurance transaction, the insurance company that is reinsured.
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.
PRINCIPAL:
Another name for the obligor, the person bonded, in a fidelity or security bond.
PRINCIPLE OF INDEMNITY:
A doctrine that limits the amount that an insured may collect to the actual cash
value of the property insured.
PRIVATE INSURANCE:
Insurance coverage written by firms in the private sector of the economy (as
opposed to government insurers).
PROBATE:
A court process under which property is distributed and the terms of the will are
carried out at the owner?s death.
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.
PRODUCT LIABILITY INSURANCE:
Reinsurance agreements under which premiums and losses are shared in some
stated proportion.
PROTECTION AND INDEMNITY (P&I) CLAUSE:
Marine liability insurance covering ocean-going vessels.
PROXIMATE CAUSE:
The direct cause of loss; exists if there is no unbroken chain of events leading from
one act to a resulting injury or loss.
PUBLIC ADJUSTER:
An individual or firm hired by the insured to obtain satisfactory settlement of a loss
claim.
PUBLIC INSURANCE:
Insurance coverage written by government bodies or operated by private agencies
under government supervision and control.
PUNITIVE DAMAGES:
Assessed when it is deemed that the defendant acted in a grossly negligent manner
and deserves to have an example made of his or her behaviour so as to discourage
others from acting that way. Usually imposed in addition to other damages.
PURE PREMIUM:
The portion of an insurance premium that reflects the basic costs of loss, not
including over-head or profit.
PURE RISK:
Uncertainty as to whether a loss will occur.
Q
QUOTA SHARE TREATIES:
Reinsurance arrangements in which each insurer accepts a certain percentage of
premiums and losses in a given line of insurance.
R
RATE:
The cost of a unit of insurance. Rates are based on historical loss experience for
similar risks and may be regulated.
RATE MAKING:
The process of developing pricing structures for insurance.
RATIFICATION:
A method by which an agent gains authority to write insurance. The agent writes a
policy and, after the fact, presents it to the insurance company. If the insurance
company approves the policy, the agent?s authority is ratified.
REASONABLE AND CUSTOMARY:
A test used to judge what expenses an insurance policy will pay. The fee is
compared to prevailing fees in the area.
REASONABLE EXPECTATIONS:
An extension of the concept of adhesion, this doctrine makes the proposition that
coverage should be interpreted to be what the insured can reasonably expect.
REBATING:
A practice, usually prohibited by law or the regulator, in which a sales agent in
insurance returns part of the commission to the purchaser.
RECEIVABLES:
Amounts owed to a business for goods or services provided.
RECIPROCAL:
A form of insurer owned by policy-holders who exchange coverage with each other;
commonly found in the field of automobile insurance.
REINSTATEMENT CLAUSE:
A contract in life insurance that allows a policy that has lapsed to be reinstated.
REINSURANCE:
Insurance bought by insurers. A rein-surer 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 the largest reinsurers are based
abroad. Reinsurers have their own reinsurers, called retrocessionaires.
REINSURANCE:
The shifting of risk by a primary answer (known as the ceding company) to another
insurer (known as the reinsurer).
REINSURANCE POOL:
Provides reinsurance for a specific class of business.
RENEWABLE TERM:
A life insurance policy initially written from a specified number of years and
subsequently renewable for similar periods of time.
RENTAL INCOME:
Rents collected from others who occupy property owned by the insured.
RENTAL VALUE:
Consequential coverage that insures the loss of rents in the event of the destruction
of the insured property.
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 policy-holder must move while his or her dwelling is repaired.
REPLACEMENT COST:
Insurance that pays the amount needed to replace damaged personal property or
dwelling property without deducting for depreciation but limited by the maximum
amount shown on the declarations page of the policy.
REPRESENTATION:
A statement made by an applicant for insurance, before the contract is made, which
affects the willingness of the insurer to accept the risk.
REQUISITES OF INSURABLE RISKS:
From the view of the insurer, there must be a sufficient number of similar objects,
the loss must be accidental and measurable, and the objects must not be subject to
simultaneous destruction. From the view of the insured, the potential loss must be
large enough to cause financial hard-ship, and the probability of loss must not be
too high.
RES IPSA LOQUITUR:
?The thing speaks for itself? - a legal doctrine that enables a plaintiff to collect for
losses without proving negligence on the part of the defendant.
RESERVES:
A company?s best estimate of what it will pay for claims.
RESPONDEAT SUPERIOR:
A legal doctrine under which a principal is responsible for the acts of his or her
agent.
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
agreedupon maximum and minimum limit based on actual loss experience. It is
available to large commercial insurance buyers.
REVOCABLE BENEFICIARY:
A life insurance beneficiary designation that may be changed by the owner.
RIDER:
An attachment to an insurance policy that alters the policy?s coverage or terms.
RIGHT OF SURVIVORSHIP:
Ownership of property automatically transfers to surviving owners when one of the
owners dies.
RISK:
The chance of loss or the person or entity that is insured.
RISK:
Uncertainty as to economic loss. RISK AVOIDANCE: A conscious decision not to
expose oneself or one?s firm to a particular risk of loss.
RISK MANAGEMENT:
Management of the varied risks to which a business firm or association might be
subject. It includes analysing all exposures to gauge the likelihood of loss and
choosing options to better man-age or minimize loss. These options typically include
reducing and eliminating the risk with safety meas-ures, buying insurance, and selfinsurance.
RISK MANAGEMENT POLICY:
A plan, procedure, or rule of action followed for the purpose of securing consist-ent
action over a period of time.
RISK MANAGEMENT PROCESS:
(1) Identify risks; (2) evaluate risks as to frequency and severity; (3) select risk
management techniques; and (4) implement and review decisions.
RISK MANAGER:
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.
SECOND-TO-DIE LIFE INSURANCE:
Life insurance policy covering two insureds, with proceeds payable only after both
persons are dead.
SECURITIES OUTSTANDING:
Stock held by sharehold-ers.
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
insur-ance or reinsurance company or a pooling entity as a means of raising money
to cover risks.
SELF-INSURANCE:
The concept of assuming a financial risk 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. Also, a special form of risk etention in which a firm can
establish a fund to pay for losses because it has a group of exposure units large
enough to reduce risk and thereby predict losses.
SEVERITY:
Size of a loss. One of the criteria used in calculating premiums rates
SEVERITY REDUCTION:
A method of loss control that will reduce the seriousness and extent of damage
should a loss occur.
SINGLE-PREMIUM ANNUITY:
An annuity whose purchase price is paid in one lump sum.
SINGLE-PREMIUM LIFE:
A whole life policy paid for with one premium
SLANDER:
Spoken words that are defamatory and/or injurious to a person?s reputation.
SOCIAL INSURANCE:
Insurance plans operated by public agencies, usually on a compulsory basis.
SOFT MARKET:
An environment where insurance is plentiful and sold at a lower cost, also known as
a buyers? market.
SOLVENCY:
Insurance companies? ability to pay the claims of policyholders. Regulations to
promote solvency include minimum capital and surplus require-ments, statutory
accounting conventions, limits to insurance company investment and corporate
activities, financial ratio tests, and financial data disclosure.
SPECIAL AGENT:
A person who is authorized to perform only a specific act or function and who has
no general powers within the insurance company.
SPECULATIVE RISK:
The uncertainty of an event that could produce either a profit or a loss, such as a
business venture or a gambling transaction.
SPECULATOR:
A third party to which the risk of price fluctuations is transferred during hedging.
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.
SPREAD-OF-LOSS TREATY:
A type of reinsurance wherein losses are spread over a five-year period with little or
no risk transfer after the five-year period ends.
STANDARD PREMIUM:
What an employer would pay at manual rates after adjustment for experience rating
but before adjustment for retrospective rating.
STATE-MANDATED BENEFITS:
Benefits that the state requires be offered to employees by employers.
STATIC RISKS:
Uncertainties, either pure or speculative, that stem from an unchanging society that
is in stable equilibrium.
STRAIGHT DEDUCTIBLE:
A deductible that applies to each loss and is subtracted before any loss payment is
made.
STRAIGHT LIFE:
A whole life policy in which premiums are payable as long as the insured lives.
STRAIGHT LIFE ANNUITY:
A life annuity in which there is no refund to any beneficiary at the death of the
annuitant.
STRAIGHT TERM:
Term insurance that covers a specific period of time and which cannot be renewed.
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.
SUBJECTIVE RISK:
The risk based on the mental state of an individual who experiences uncertainty or
doubt as to the outcome of a given event.
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.
SUICIDE CLAUSE:
A clause in life insurance that requires payment by the insurer, even in the event of
suicide, if the suicide occurs after a two-year period from the date the policy was
issued.
SURETY:
In a bond, the party who agrees to reimburse the oblige.
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.
SURVIVORSHIP BENEFIT:
That amount of money that becomes available for distribution to living annuitants
as a result of the death of other annuitants.
T
TEMPORARY DISABILITIES:
Illnesses or injuries that prevent a person from working for a limited time.
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.
TORTFEASOR:
A wrongdoer; one who commits a tort.
TOTAL DISABILITY:
An illness or injury that renders a person completely incapable of gainful
employment during the period of disability.
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.
TREATIES:
Reinsurance contracts.
TREATY REINSURANCE :
A standing agreement between insurers and reinsurers. Under a treaty each party
automatically accepts specific percentages of the insurer?s business.
TRUSTEE:
The person having legal ownership of the trust property; required by law to manage
and distribute it in accordance with the instructions specified in the trust
agreement.
TWISTING:
The acts of a life insurance agent to per-suade a client to drop one life policy and
accept another, by misrepresenting the terms of either the present policy or the
new policy, or both, to the detriment of the insured.
U
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 amount stated
in the underlying policies, terms of coverage are sometimes broader than those of
under-lying policies.
UNDERINSURANCE:
The result of the policyholder?s failure to buy sufficient insurance. An underinsured
policyholder may only receive part of the cost of replacing or repairing damaged
items covered in the policy.
UNDERWRITING:
Examining, accepting, or rejecting insurance risks and classifying the ones that are
accepted, in order to charge appropriate premiums for them.
UNDERWRITING INCOME:
The insurer?s profit on the insurance sale after all expenses and losses have been
paid. When premiums aren?t sufficient to cover claims and expenses, the result is
an underwriting loss. Underwriting losses are typically offset by investment income.
UNEARNED PREMIUM:
The portion of a premium already received by the insurer under which protection
has not yet been provided. The entire premium is not earned until the policy period
expires, even though premiums are typically paid in advance.
UNFUNDED RETENTION:
Absorbing the expense of losses as they occur, rather than making any special
advance arrangements to pay for them.
UNILATERAL CONTRACT:
A contract, such as an insurance contract, in which only one of the parties makes
promises that are legally enforceable.
UNINSURABLE RISK:
Risks for which it is difficult for someone to get insurance.
UNPLANNED RETENTION:
The implicit assumption of risk by a firm or individual that does not recognize that a
risk is acknowledge to exist but the maximum possible loss associated with it is
significantly underes-timated.
UTMOST GOOD FAITH:
A legal doctrine in which a higher standard of honesty is imposed on parties to an
insurance agreement than is imposed through ordi-nary commercial contracts.
V
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 value may fluctuate according to the value of underlying
securities in which the funds are invested.
VIATICAL SETTLEMENT:
The purchase of a life insur-ance policy from a terminally ill individual by an
unrelated third party.
VICARIOUS LIABILITY:
Legal responsibility for the wrong committed by another person.
VICARIOUS LIABILITY LAWS:
Laws requiring that parents assume liability for the acts of their children and that
bar owners assume liability for the acts of their patrons. Also makes car owners
liable for acts of driv-ers of their cars.
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.
VOLUNTARY ACT:
A characteristic of a negligent act- the person committing the act chose to do so
and could have chosen not to.
VOLUNTARY COVERAGE:
Insurance coverage purchased at the discretion of the buyer.
W
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 HAZARD EXCLUSION:
Eliminates insurance coverage for death that is a direct result of war or other hostile
action.
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.
WARRANTY:
A clause in an insurance contract that requires certain conditions, circumstances, or
facts to be true before or after the contract is in force.
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.