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Glossary Of Insurance Terms (Rev. 04/07) Ohio Insurance Institute • 172 E. State St., Suite 201, Columbus, Ohio 43215-4321 • Phone: (614) 228-1593 • www.ohioinsurance.org • firstname.lastname@example.org NOTE: This glossary provides a comprehensive list of the most commonly used terms in property/casualty insurance. Some life and health insurance terms are included. This is not an all-conclusive glossary of terms. A Accidental Death Benefit (Auto or Health Insurance): Provision for payment of a dollar amount—usually equal to the face amount of insurance—if the insured is killed in an accident. This coverage is available either as a health insurance policy, or as an auto insurance option with some companies. (Also see Accidental Death Benefit [Life Insurance].) Accidental Death Benefit (Life Insurance): Provision under a life insurance policy for payment of an additional amount—usually equal to the face amount of insurance—if the insured is killed in an accident. Popularly known as “double indemnity.” (Also see Accidental Death Benefit [Auto or Health Insurance].) Accident and Health Insurance: See Health Insurance. Account Receivables: See Receivables. Act of God (Act of Nature): Perils that occur naturally such as tornadoes, earthquakes and hurricanes. Actual Cash Value: Insurance under which the amount payable is the current replacement cost of the property new; reduced by an allowance for depreciation, wear and obsolescence. Actuary: A highly specialized mathematician professionally trained in the risk aspects of insurance, whose functions include the calculations involved in determining proper insurance rates, evaluating reserves, and in various aspects of insurance research. Additional Living Expense: A property coverage which pays for the increased expense of living while the insured’s residence is being rebuilt or repaired after damage from an insured peril. Examples are the extra cost of housing the insured’s family in a hotel, dining in restaurants, etc. Adjuster: A person who investigates and settles losses for an insurance carrier. 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 antici- pated, are included in admitted assets. (See Assets.) Admitted Company (Carrier): 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 charg- ing 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. OII Glossary Of Insurance Terms 1 Glossary Of Insurance Terms (Rev. 04/07) A (continued) Aftermarket Parts: See Crash Parts; Generic Auto Parts. Agency Companies: Companies that market and sell products via independent agents. Agent: Laws of all states require all insurance agents to be licensed by the state to sell insurance. Agents may be categorized as: (1) An Exclusive Agent, who is a sales employee or sales representative of one and only one insurance company or its affiliated group of insurance companies, and seeks and services business exclusively for that company or group. (See Direct Writer.) (2) An Independent Agent, who usually represents two or more insurance companies or groups in a sales and service capacity as an independent business person. Alien Insurance Company: An insurance company incorporated under the laws of a foreign country. Allied Lines: Types of insurance associated with property insurance, which may include earthquake, sprinkler leakage, and income and extra expense coverages. 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 Policy: Insurance policy written for a term of one year or renewed one year at a time. Annual Statement: A report made by a company at the close of its fiscal year. It is the primary financial report required by state insurance departments to be submitted by insurers annually. Annuitant: The person during whose life an annuity is payable, usually the person to receive the annuity. Annuity: A contract that provides an income for life, a specified number of years, or a combination of the two. 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. Application: The statement of information that a prospective insured gives when applying for an insurance policy and that an insurance company uses to help decide if it will issue the policy and what premium rate will be charged. 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. OII Glossary Of Insurance Terms 2 Glossary Of Insurance Terms (Rev. 04/07) A (continued) Appraiser: In insurance, a specialist that evaluates the size and cost of an object, such as jewelry or art; or the extent of damage based on a claim. Often works with a claims adjuster. Appurtenant Structures: Buildings on the same premises as the main building insured under a property insurance policy. 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. 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. Assessment: The extra premium a mutual or reciprocal insurer’s policyholder may be required to pay in the event the insurer’s losses are greater than anticipated. Assets: (1) All of the property owned by a carrier. (2) The items on the balance sheet of the insurer that show the book value of property owned. Under state regulations, not all property or other resources can be admitted on the statement of the insurer. This gives rise to the term “non- admitted assets.” (Examples would be furniture, fixtures, agents’ debt balances and accounts receivable that are over 90 days old.) Assigned Risk Plan (Automobile Insurance Plans): A mechanism used in some states to insure people who cannot obtain insurance in the voluntary market. There is one rate level and the indi- vidual policies are assigned to specific companies according to the percentage of the market they insure. Assurance–Insurance: These terms are today generally accepted as synonymous, although not originally so. The term “assurance” is used more commonly in Canada and Great Britain than in the United States. Assured: Synonymous with “insured.” One who has an insurance policy with an insurance carrier. “Insured” is preferred. Audit: An examination of the books of accounts, vouchers or other records of a person, corporation, firm or other organization for the purpose of ascertaining the accuracy or inaccuracy of the record. Automobile Death Indemnity Coverage: Provides limited life insurance protection to insured persons specifically named in the policy in the event of a death that is a direct result of a vehicle accident. Payment is not contingent upon the establishment of negligence, but death by an intentional act of the insured is not covered. Automobile Disability Income Coverage: Provides persons specifically named in the policy with the weekly benefit shown in the policy in the event of continuous total disability as a direct result of bodily injury, sickness, or infection caused by an auto accident. OII Glossary Of Insurance Terms 3 Glossary Of Insurance Terms (Rev. 04/07) A (continued) Automobile Insurance (Coverages): For definitions of specific types available, see following auto insurance coverages listed alphabetically throughout the Glossary—Automobile Death Indemnity Coverage, Automobile Disability Income Coverage, Automobile Liability Insurance, Automobile Physical Damage Insurance, Bodily Injury Liability Insurance, Collision Insurance, Comprehensive Automobile Insurance, Deductible Collision and Deductible Comprehen- sive Coverages, Medical Payments Automobile Insurance, Personal Injury Protection Automobile Insurance (PIP), Property Damage Liability Insurance, Towing Coverage, Underinsured Motorists Coverage, Uninsured Motorists Coverage and Uninsured Motorists Property Damage Coverage. 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 pur- chased; 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.) Automobile Liability Insurance: Protection for the insured against loss arising out of legal liability when his or her car injures others or damages their property. (Includes Bodily Injury Liability and Property Damage Liability Coverages.) Automobile Physical Damage Insurance: The Collision and Comprehensive coverages in the automobile insurance policy. Aviation Insurance: Coverage against aviation perils, primarily involving operation of aircraft and characterized by a constant exposure to potential catastrophe loss. Types of coverages include insurance for damage to the aircraft or contents, aircraft owner’s liability insurance on passenger bodily injury or death, Airport Liability, Hangarkeeper’s Liability, and Aviation Products Liability insurance. OII Glossary Of Insurance Terms 4 Glossary Of Insurance Terms (Rev. 04/07) B Bailee: One who has temporary possession of property belonging to another. Balance Sheet: Provides a snapshot of a company’s financial condition at one point in time. It shows assets, including investments and reinsurance, and liabili- ties, 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. Basic Form: A package insurance policy providing coverage against a limited number of specified perils. 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 proper- ties 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 Plan–FAIR Plan; Residual Market.) Beneficiary: Any person, institution, trust, etc., named in a life policy to receive the policy benefits upon the death of the insured. Binder: A written or oral contract issued temporarily to place insurance in force immediately prior to issuance of a new policy or endorsement of an existing one. A binder is subject to payment of the premium and provides coverage under the terms of the policy to be issued, unless other- wise specified. Blanket Coverage: A blanket form is one under which property is insured under a single amount applying to several different pieces of property rather than a specific amount of insurance on each property. Block Policy: An inland marine policy covering all property on or off a merchant’s premises, including property of others in the care, custody or control of the policyholder. Bodily Injury Liability Insurance: This coverage protects an insured against legal liability for injury to another person arising from an accident. Boiler and Machinery Insurance: A form of property coverage for loss arising out of the operation of pressure, mechanical and electrical equipment. It may cover loss to the boiler and machinery itself and business interruption losses. 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 insur- ance, 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. 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. Broad Form: A package policy providing coverage for the same perils covered in the basic form, plus specified additional perils. OII Glossary Of Insurance Terms 5 Glossary Of Insurance Terms (Rev. 04/07) B (continued) Broker: A representative of the buyer of property and liability insurance who deals with either agents or companies in arranging for the coverage required by the customer. A broker is paid a commission by the company or its agent. Burglary: The loss of property due to theft when there is visible evidence of forcible entry to the exterior of the building. 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 mul- tiple peril policy. Business Income Insurance (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 coverages for small- to medium-sized businesses. Coverage is generally cheaper than if purchased through separate insurance policies. Business Interruption Insurance: See Business Income Insurance. Buy-Out Policy: A professional liability policy covering future claims resulting from incidents which occurred during the period that an expired claims-made policy was in force. OII Glossary Of Insurance Terms 6 Glossary Of Insurance Terms (Rev. 04/07) C Cancellable Policy: A policy which may be cancelled by the company at any time by giving advance notice in compliance with state requirements to the insured citing the reasons such insurance is being cancelled and refunding any unearned premium. (Term is not usually applicable to life or health insurance.) Cancellation: The discontinuance of an insurance policy before its normal expiration date. 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 ca- pacity. 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 capac- ity, 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. (See Risk- Based Capital; Surplus; Solvency.) Capital Markets: The markets in which equities and debt are traded. (See Securitization of Insurance Risk.) Capital Stock Insurance Company: An insurance company which is owned and controlled by stockholders or investors. 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.) Captive Insurer: Insurers that are created and wholly-owned by one or more non-insurers, to provide owners with coverage. A form of self-insurance. Cargo Insurance: A broad classification of marine insurance providing coverage on cargo, as opposed to hulls, to protect shippers by sea from loss or damage to goods for which they would be unlikely to collect from the carriers themselves. Whether cargoes are insured for a particular voyage or under open policies which are in the nature of reporting-form policies depends upon the volume and regularity with which a shipper uses ocean transit. Cargo insurance also can cover goods transported by train or truck. Carrier: The insurance company or the one who agrees to pay the losses. The carrier may be organized as a stock or mutual company, a reciprocal exchange, as an association of underwriters or as a state fund. Car Year: Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for automobile insurance. Cash Value: The cash fund which a life policy develops usually after the first or second year the policy has been in force. It is available when the policy is surrendered or may be borrowed earlier as a policy loan. OII Glossary Of Insurance Terms 7 Glossary Of Insurance Terms (Rev. 04/07) C (continued) Casualty Insurance: Insurance primarily concerned with the legal liability for losses caused by injury to persons or damage to property of others. Also includes, among other coverages: automobile, Workers’ Compensation, employers’ liability, general liability, plate glass, theft and personal liability. It excludes life, fire and marine insurance. 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 catas- trophe 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 po- tential 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. Cede: To transfer all or part of a risk written by an insurer (the ceding, or primary company) to a reinsurer. Cell Phone Insurance: Separate insurance provided to cover cell phones for damage or theft. Policies are often sold with the cell phones themselves. Cession: The unit of insurance passed to the reinsurer by the ceding company. The unit (cession) may accordingly be the whole or a portion of (a) single risks, (b) defined type or class of policies or (c) defined divisions of a policy as agreed. Chartered Life Underwriter (CLU): A designation conferred in recognition of the attainment of certain standards of education and proficiency in the uses of life insurance to satisfy the financial needs of the insured in light of current tax and other laws. A Chartered Life Underwriter is normally an agent or someone responsible for sales or marketing activities. Chartered Property Casualty Underwriter (CPCU): A designation conferred in recognition of the attainment of certain standards of education and proficiency in the art and science of property and casualty insurance underwriting. OII Glossary Of Insurance Terms 8 Glossary Of Insurance Terms (Rev. 04/07) C (continued) Claim: A request for payment for a loss which may come under the terms of an insurance contract. There are two types of claims. A first-party claim is one made by the policyholder for reimbursement by his or her company. A third-party claim is one by a person against a policyholder of another company and the payment, if any, will be made by that company. Claim Frequency: The number of claims occurring under a given coverage divided by the number of earned exposures for the given coverage. It is usually expressed as the number of claims paid per 100 of such exposures. Example: For auto bodily injury (BI), the frequency of 2.50% means that bodily injury accidents were incurred at the rate of 2-1/2 for every 100 cars insured for BI for one year. Claim Severity: The average cost per claim. Claims-Made Form: A type of liability policy which covers claims which occur and are reported while the policy is in effect. Classification: The combining of policyholders or properties into groups with the same general characteristics so that the various groups’ inherent differences in exposure to loss can be recognized for rating or underwriting purposes. Coinsurance (Health Insurance): A provision in a medical-expense insurance policy which requires that the insured person pay part of the expense and the insurance company will pay the remaining part. (Also see Coinsurance [Property Insurance].) Coinsurance (Property Insurance): A provision in a property insurance policy which requires the insured to carry insurance equal to a certain specified percentage of the value of the property for the insured to receive full payment on a loss up to the amount of the policy. Otherwise, payment would be only a percentage of the actual loss, that percentage determined by the amount of insurance carried relative to the amount that is required to be carried by the policy for full protection up to policy limits. (Also see Coinsurance [Health Insurance].) 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 Insurance: Protection against loss resulting from any damage to the policyholder’s car caused by collision with another vehicle or object, or by upset of the insured car, whether it was the insured’s fault or not (other than his/her own willful act). This does not cover other people’s property. (See Deductible Collision.) Combined Ratio: The sum of the ratio of losses incurred to premiums earned and the ratio of commissions and expenses incurred to premiums written. Combined Single Limit: A liability coverage limit that combines both bodily injury and property damage into one aggregate amount. Commercial Blanket Bond: A fidelity bond for operators of commercial establishments, etc. (See Fidelity Bond.) Commercial Credit Insurance: A guarantee to manufacturers, wholesalers and service organizations that they will be paid for goods shipped or services rendered. It is a guarantee of that part of their working capital that is represented by accounts receivable. OII Glossary Of Insurance Terms 9 Glossary Of Insurance Terms (Rev. 04/07) C (continued) Commercial General Liability Policy: Often referred to as the CGL, this policy provides broad protection against situations in which a business must defend itself against lawsuits or pay damages for personal injury or property damage to third parties. Commercial Insurance (Coverages): Definitions of many commercial coverages are listed alphabetically throughout the Glossary. Among these coverages are Aviation Insurance, Cargo Insurance, Commercial Credit Insurance, Commercial Multiple-Line Policy, Crop-Hail Insurance, Employers’ Liability Insurance, General Liability Insurance, Kidnap and Ransom Insurance, Marine Insurance, Products Liability Insurance, Professional Liability Insurance, Public Li- ability Insurance, Rain Insurance, Surplus Lines, Title Insurance and Workers’ Compensation. Commercial Lines: The various kinds of insurance which are written for businesses. (Also see Commercial Insurance [Coverages].) Commercial Multiple-Line Policy: Package type of policy that includes a wide range of essential property and liability coverages for businesses. Commission: A percentage of an insurance premium paid to an agent or broker for producing and servicing the business. Commissioner of Insurance: Title of the head of the state insurance department who is responsible for the enforcement of insurance laws and for promulgating regulations dealing with the insurance industry. Comparative Negligence: Under this concept a plaintiff (the person bringing suit) may recover damages even though guilty of some negligence. His or her recovery, however, is reduced by the amount or percent of that negligence. There are various forms of comparative negligence, such as: “Pure Com- parative,” in which the plaintiff recovers so long as he or she is not solely at fault; “Less Than,” in which the plaintiff recovers so long as his or her negligence is less than that of the defendant; and “Not Greater Than,” in which the plaintiff recovers so long as his or her negligence is not greater than the defendant’s. 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 medi- cal 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 Automobile Insurance: Protection against loss resulting from damage to the insured auto, commonly referred to as ”other than collision” coverage. Broad coverage is provided and includes protection from such hazards as fire, theft, glass damage, wind, hail and malicious mischief. This is a first-party cover- age. Comprehensive Personal Liability Insurance: Protection for an insured against loss arising out of his or her legal liability to pay money for damage or injury he or she has caused to others. This does not include automobile liability, but includes almost every activity of the insured except “personal injury” and his or her business operations. (See “Personal Injury” Liability Insurance.) Compulsory Auto Liability Insurance: Insurance laws in some states require motorists to carry at least certain minimum auto liability coverages for bodily injury and property dam- age. OII Glossary Of Insurance Terms 10 Glossary Of Insurance Terms (Rev. 04/07) C (continued) Concealment: Normally means the willful withholding of material fact which could affect an insurer’s issuance of a policy or processing of a claim. Conditions: Provisions of an insurance policy which state the rights and duties of the insured and insurer. Condominium Insurance: A policy designed for the special needs of condominium unit owner-occupants to cover personal property and liability, to complement the insurance normally purchased by the condominium association for the building, structures and liability. Additional coverages are offered unit owners by many insurers. Consequential Loss: A loss resulting from, but not caused directly by, another insured loss. A “consequential loss” (spoilage of meat stored in a refrigerated build- ing, for example) usually arises out of a change in temperature resulting from damage to the building (but not directly to the meat) by a covered peril such as fire. “Consequential Loss” coverages are available to protect the insured against this specific indirect loss. Contingent Liability Insurance: Covers the insured individual or business in cases of indirect or “contingent” liability, where direct liability for an accident, for example, falls on another, but because of the relationship between the insured and the other party, the insured might still be held indirectly liable. (Example: A business being responsible for the work performed by an independent contractor.) Contract: The “Law of Contracts” specifies four requirements for the formation of a single contract: (1) parties of legal capacity; (2) expression of mu- tual consent of the parties to a promise, or set of promises; (3) a valid consideration; and (4) the absence of any statute or other rule declar- ing such agreement void. An insurance policy qualifies as a contract under the above definition. Contract Bond: A bond which guarantees faithful performance of a construction contract and payment of all material and labor bills related to that contract. A Performance Bond covers faithful performance only; a Payment Bond guarantees payment of material and labor expenses. Contractual Liability Insurance: Provides coverage for claims arising out of liability that has been assumed by the insured under a written or oral contract. Contributory Negligence: Carelessness of the injured person that helped cause the accident in which he or she was injured. Some states bar recovery to the plaintiff if the plaintiff was contributorily negligent. Coverage: The scope of the protection provided under a contract of insurance; any of several risks covered by a policy. Covered/Insured Peril: The perils of loss you are protected against by an insurance policy. Examples of perils include fire, lightning, theft, vandalism and the threat of a lawsuit. 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. OII Glossary Of Insurance Terms 11 Glossary Of Insurance Terms (Rev. 04/07) C (continued) Credit Disability Insurance: Disability insurance on the borrower, payable to the creditor while the borrower is disabled, to cover the loan payment (usually small loans repayable in installments). This insurance is usually issued through the creditor (a lender or lending agency) and is provided by an insurance company under a group credit disability policy. Credit disability insurance also can be purchased by an individual directly from an insurance company. (Also see Credit Life Insurance.) 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): See Commercial Credit Insurance. Credit Life Insurance: Term life insurance on the life of a borrower, payable to the creditor, to repay a loan (usually small loans repayable in installments) in case of death. This insurance is usually issued through the creditor (a lender or lending agency) and is provided by a life insurance company under a group credit life insurance policy to insure the lives of those who borrow from the creditor. Credit life insurance also can be purchased by an individual directly from a life insurance company. (Also see Credit Disability Insurance.) 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 insur- ers before issuing a commercial policy because businesses in poor financial condition tend to cut back on safety which can lead to more ac- cidents 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 coverages for the perils of burglary, theft and robbery. Crop-Hail Insurance: Protection against hail damage to growing crops. Coverage is often afforded under such policies for crop damage due to fire, windstorm, drought, frost, snow, etc. Customer Service Representative: The assistant that supports the sales efforts of the sales agent or producer. Other titles include administrative assistant, agency underwriter and marketing specialist. CSR is also a designation for a certified customer service representative. OII Glossary Of Insurance Terms 12 Glossary Of Insurance Terms (Rev. 04/07) D Declarations: That part of the policy describing the named insured, address, effective date, term of the policy, applicable coverages, the amount of insur- ance and the premium. Decreasing Term Life Insurance: Term insurance, the face value of which decreases each year over a stated period. Family income and mortgage cancellation are common types of decreasing term insurance. Deductible: A provision in an insurance contract stating that the insurer will pay that amount of any insured loss that is in excess of a specified amount. The specified amount is the deductible. Deductible Collision and Deductible Comprehensive Coverages: Forms of collision or comprehensive auto insurance coverages which specify that an insurance company will pay the damage less a specified amount under the particular coverage. For example: For $100 Deductible Collision Coverage, the company would deduct $100 from the total damage under the collision coverage and be liable for the amount in excess of $100. Rates are reduced as the amount of the deductible is increased. Demutualization: The conversion of insurance companies from mutual companies owned by their policyholders into publicly-traded stock companies. Depreciation: A decrease in the value of property due to age, wear and tear. 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. Diminution of Value: The idea that a vehicle loses value after it has been damaged in an accident and repaired. Directors and Officers Liability Insurance (D&O): Coverage for directors and officers of firms or organizations against liability claims arising out of alleged errors in judgment, breaches of duty, and wrongful acts related to their organizational activities. Direct Premiums Written: 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 Writer: An insurer whose distribution mechanism is either the direct selling system or the exclusive agent system. (See Agent.) Disability Threshold: In no-fault insurance states with the disability threshold, it provides that a victim may not sue in tort unless he/she has been disabled (defined differently in various state plans) from an accident for a specific period of time. Dividends: (1) Policyholder Dividend—The return of part of the premium paid for a policy issued on a participating basis by an insurer. Any such dividend is dependent upon premiums collected in excess of losses and expenses for the particular class of business at the end of the policy period. (2) Stockholder Dividend—A portion of the surplus paid to the stockholders of a corporation. OII Glossary Of Insurance Terms 13 Glossary Of Insurance Terms (Rev. 04/07) D (continued) Dollar Threshold: In no-fault auto insurance states with the dollar threshold, it prevents individuals from suing in tort to recover for pain and suffering unless their medical expenses exceed a certain dollar amount. Domestic Insurance Company: An insurance company organized or domiciled in a given state is referred to in that state as a domestic carrier. Double Indemnity: See Accidental Death Benefit (Life Insurance). OII Glossary Of Insurance Terms 14 Glossary Of Insurance Terms (Rev. 04/07) E 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 part of the total property/casualty policy premium earned by the insurance company which applies to the expired portion of the policy period. Earthquake Insurance: Covers a building and its contents, but includes a large percentage deductible on each. A special policy or endorsement exists because earth- quakes 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.) Employers’ Liability Insurance: Provides protection for the employer for those injuries arising out of and in the course of employment which were not covered under the workers’ compensation law. Endorsement: An additional piece of paper, not a part of the original contract, which cites certain terms and which becomes a legal part of that insurance contract. Additions to life insurance contracts are accomplished through the use of riders, which are similar to endorsements. Environmental Impairment Insurance: A form of insurance designed to cover losses and liabilities arising from damages to property by pollution. Equipment Breakdown Insurance: See Boiler and Machinery Insurance. Equity: In investments, the ownership interest of shareholders. In a corporation, stocks as opposed to bonds. Errors and Omissions Insurance (E&O): A type of professional liability insurance which indemnifies insured professionals—who include, but are not limited to, lawyers, insurance agents and brokers, accountants, real estate agents, appraisers, abstracters, title insurance agents, architects and engineers, advertising agents, adjusters, directors and trustees, fiduciaries, travel agents and data processing firms—for losses sustained because of their errors or oversights. 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. OII Glossary Of Insurance Terms 15 Glossary Of Insurance Terms (Rev. 04/07) E (continued) Excess of Loss Reinsurance: A contract between an insurer and a reinsurer, whereby the insurer agrees to pay a specified portion of a claim and the reinsurer to pay all or a part of the claim above that amount. Excess Limits: Coverage against losses in excess of a specified dollar limit. 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: The ratio of a company’s operating expenses to premiums written. (Expenses include losses and loss adjustment expenses.) Experience: The loss record of an insured or of a particular class of coverage. Expiration Date: The date shown on the declarations page of the policy when coverage will stop. It may be a specific date or a statement that coverage is continuous until cancelled. Exposure: This term in the insurance field may have several meanings: (1) possibility of loss; (2) a loss potential as measured by type of construction, area or values; (3) a possibility of a loss being communicated to an insurance risk from its surroundings; or (4) a unit of measure of the amount of risk a company assumes (for example, one car insured for one year). 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 Coverage Property Insurance: An extension of the fire insurance policy to protect the insured against property damage caused by the additional perils of windstorm, hail, explosion, or riot, civil commotion, aircraft, vehicle and smoke. Extended Replacement Cost Coverage: Pays a certain amount above the policy limit to replace a damaged home, generally 120% or 125%. 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 Replacement Cost Coverage.) OII Glossary Of Insurance Terms 16 Glossary Of Insurance Terms (Rev. 04/07) F Face Amount: See Protection Amount. Facultative Reinsurance: Reinsurance on an individual policy basis wherein each risk which an insurance company wishes to reinsure is reviewed by the reinsurer, which has the “faculty” or option to accept or decline all or part of each risk offered to it. FAIR (Fair Access to Insurance Requirements) Plan: A facility, operating under a government-insurance industry cooperative program, to make fire insurance and other forms of property insur- ance readily available to persons who have difficulty obtaining such coverage. Family Auto Insurance: The automobile policy (most common in the industry) which provides protection for the insured and resident relatives in the same household. Family Plan Insurance: This is insurance in which the head of the household has one master policy on his/her life (usually whole life) and term coverage for wife/hus- band and children in lesser amounts. Farm-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 Crime Insurance: Insurance against burglary, larceny and robbery losses offered by the federal government where the Federal Insurance Administration has determined that such insurance is not otherwise readily available. Federal Insurance Administration: 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. Fee For Service (FFS): Formerly a standard health insurance policy. Now a form of health insurance that allows the insured to go to any doctor, hospital or other provider which would bill for each service given, and the insurer and the patient share in the cost of the services provided. 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 guaran- tees 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 misstate- ments 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. OII Glossary Of Insurance Terms 17 Glossary Of Insurance Terms (Rev. 04/07) F (continued) 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 Insur- ance.) Financial Responsibility Law: A state law which may require motorists to furnish evidence, either before or after involvement in an auto accident (depending on the indi- vidual state’s law), of ability to pay for damages up to certain minimum dollar limits. These requirements commonly are met by carrying auto liability insurance with specified minimum limits or more. 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.) Fleet Policy: An auto policy covering a number of vehicles owned by a single insured. Floater: A form of insurance that applies to movable property, whatever its location, within the territorial limits imposed by the contract. The coverage “floats” with the property. Flood Insurance: Coverage against loss resulting from the flood peril, widely available under a program developed in 1968 by the private insurance industry and the federal government. 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: In a given state, an insurer domiciled in another state. Fraternal Benefit Society: An organization that exists to provide social and insurance benefits to its members. In such a society, members often share a common reli- gious, ethnic or vocational background, although some fraternals are open to the general public. Fraud: Intentional concealment or misrepresentation with the objective of forcing an insurer to provide a benefit (such as paying a claim) which otherwise would not be provided. Frequency: Number of times a loss occurs. One of the criteria used in calculating premium rates. OII Glossary Of Insurance Terms 18 Glossary Of Insurance Terms (Rev. 04/07) F (continued) 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 ex- change 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. Funded Reserve: Bookkeeping account of sums set aside periodically by a business for the purpose of paying for losses as they occur. Usually, the sums are invested conservatively. OII Glossary Of Insurance Terms 19 Glossary Of Insurance Terms (Rev. 04/07) G 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.) General Average: In ocean marine insurance, a concept which provides that, where a portion of a vessel or cargo is jettisoned to save the entire venture from peril at sea, the resulting loss is shared by all parties involved. The owners of property that is saved contribute in proportion to the interests suffering loss, provided the latter are free of fault in the danger and the venture ultimately is successful. (Distinct from Particular Average.) General Damages: In auto insurance, typically refers to awards for pain and suffering. General Liability Insurance: A broad term meaning liability insurance, other than automobile liability or employers’ liability, written to cover professional and commercial risks. In respect to commercial liability, various available coverages could cover such risks as premises and operations, contractual liability, products and completed operations. Generally Accepted Accounting Principles (GAAP): Generally accepted accounting principles (GAAP) accounting is used in financial statements that publicly-held companies prepare for the Secu- rities 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. Good Driver Plan: An auto insurance rating program that reflects the insured’s accident and traffic violation record as a factor in determining the premium. Grace Period: The number of days (31 in most cases) a life insurance policy will remain in force when a payment is overdue. Graduated Drivers License: Licenses for younger drivers that allow them to improve their skills. Regulations vary by state, but often restrict night time driving. Young driv- ers 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 depen- dents. 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 Cost Insurance: The life insurance sold by some companies, with all cost factors guaranteed at the time of issue. Policies of this type usually have lower premi- ums than the pre-divided premiums of comparable participating policies. OII Glossary Of Insurance Terms 20 Glossary Of Insurance Terms (Rev. 04/07) G (continued) Guaranty Fund: A fund, derived from assessment against solvent insurance companies, to absorb losses of claimants against insolvent insurers. 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. OII Glossary Of Insurance Terms 21 Glossary Of Insurance Terms (Rev. 04/07) H Hacker Insurance: A coverage that protects businesses engaged in electronic commerce from losses caused by hackers. Hail Insurance: See Crop-Hail Insurance. Hard Market: A seller’s market in which insurance is expensive and in short supply. (See Property/Casualty Insurance Cycle.) Hazard: The presence of a condition that could cause loss or injury to property or persons. For example, smoking in bed increases the chance for loss of property and life resulting from fire. Health Insurance: There are two major types: Disability income insurance pays for loss of income due to disability; medical expense insurance pays for hospital, doctor and other medical expenses. Both of these generally pay for losses arising from sickness or accidents. Some policies, referred to as “accident policies,” do not cover sickness. Health Maintenance Organization (HMO): The oldest form of managed health care. In exchange for a monthly fee, HMOs offer members a comprehensive range of health services, usu- ally including preventive medical care. Hold Harmless Agreement: A contract under which one party’s legal liability for damages is assumed by the other party to the contract. Homeowners Policy: A package policy for the homeowner that combines “named peril” (including theft coverage) protection on contents, coverage on the dwelling ranging from “named peril” to physical loss, additional living expense protection and personal liability insurance. House Year: Equal to 365 days of insured coverage for a single dwelling. It is the standard measurement for homeowners insurance. Hull Policy: An ocean marine or aviation insurance contract covering damage to or loss of a ship or plane, but not the contents. Hurricane: A tropical storm with sustained winds of 75 or more miles an hour that is usually accompanied by rain and abnormally high tides. Hurricane Deductible: A percentage or dollar amount added to a homeowners insurance policy to limit an insurer’s exposure to loss from a hurricane. Higher de- ductibles 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. OII Glossary Of Insurance Terms 22 Glossary Of Insurance Terms (Rev. 04/07) I Indemnify: Provide financial compensation for losses. Indemnity: In general, means reimbursement for loss, but also is used to mean a benefit provided by a policy. In health insurance it sometimes is used to designate an amount paid regardless of actual loss or expense incurred. Identity Theft Coverage: 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. 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. Independent Agent: Agent who is self-employed, is paid on commission, and represents several insurance companies. (See Captive Agent.) 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 per- sonal 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.) Inspection Report: A report filed by an investigator employed by the insurance company or a credit agency, giving general information on the health and finances of the applicant and the physical condition of the property (if property is to be insured). 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 reason- able 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. OII Glossary Of Insurance Terms 23 Glossary Of Insurance Terms (Rev. 04/07) I (continued) 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 Plan–FAIR Plan; 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 indi- vidual 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 under- writing and rating tool. Insurance-to-Value: Insurance written in an amount approximating the value of the insured property. Insured: A person covered by an insurance policy. Internal Fraud: An act of deception or strategy used to deceive or cheat an insurer by an employee, including misrepresentation or concealment. 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: The income generated by a company’s portfolio of investments (such as bonds, stocks or other financial ventures). OII Glossary Of Insurance Terms 24 Glossary Of Insurance Terms (Rev. 04/07) J Joint Underwriting Association (JUA): A device used to provide insurance to those who cannot obtain insurance in the voluntary market. Certain companies issue policies at one rate level and handle claims, but the ultimate costs are borne by all companies writing insurance in that state. 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 per- ceived 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. OII Glossary Of Insurance Terms 25 Glossary Of Insurance Terms (Rev. 04/07) K 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 dis- ability could cause the firm a substantial financial loss. Kidnap and Ransom Insurance: Written for financial institutions and other corporations, this insurance covers named employees for individual or aggregate amounts paid as ransom, with deductibles requiring the insured to participate in approximately 10% of any loss. OII Glossary Of Insurance Terms 26 Glossary Of Insurance Terms (Rev. 04/07) L Lapsed Policy: A life or health insurance policy terminated as a result of non payment of a premium before the end of the grace period. Law of Large Numbers: The theory of probability on which the business of insurance is based. Simply put, this mathematical premise says that the larger the group of units insured, such as sport-utility vehicles, the more accurate the predictions of loss will be. Legal Expense Insurance: Insurance to reimburse policyholders for legal fees incurred for defense from lawsuits involving areas of civil law not covered by standard li- ability insurance. Examples include: discrimination, wrongful discharge, contract disputes and patent disputes. Level Premium Life Insurance: Insurance for which the cost is distributed evenly over the period during which premiums are paid. The premium remains the same from year to year and is more than the actual cost of protection in the earlier years of the policy and less than the actual cost in the later years. The excess paid in the early years builds up a reserve which helps meet the costs in later years. Liabilities: An insurance company’s liabilities consist of its immediate or contingent policy obligations and unpaid claims, as well as the usual obligations arising out of doing business such as taxes, payroll, etc. Liability Insurance: Provides protection for the insured against loss arising out of his/her legal liability to third parties. Liability Limits: The stipulated sum or sums beyond which an insurance company is not liable to protect the insured. License—Agent or Broker: Certification issued by a state’s department of insurance that an individual is qualified to solicit insurance applications in the state for the period covered. License—Company: Certification issued by a state’s department of insurance that an insurance company is qualified to do business in the state. Limit: The maximum amount of benefits that an insurer agrees to pay in the event of a loss. Line: A type or kind of insurance. 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. Litigation: The process of a lawsuit. OII Glossary Of Insurance Terms 27 Glossary Of Insurance Terms (Rev. 04/07) L (continued) Lloyd’s of London: A marketplace where underwriting syndicates, or mini-insurers, gather to sell insurance policies and reinsurance. Each syndicate is managed by an underwriter who decides whether or not to accept the risk. The Lloyd’s market is a major player in the international reinsurance market as well as a primary market for marine insurance and large risks. Originally, Lloyd’s was a London coffee house in the 1600s patronized by shipowners who insured each other’s hulls and cargoes. As Lloyd’s developed, wealthy individuals, called “Names,” placed their personal assets behind insurance risks as a business venture. Increasingly since the 1990s, most of the capital comes from corporations. 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 following an injury. 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 Control Representative: Insurance company employees, also called safety engineers, that perform loss control surveys or inspections, and prepare written loss control reports that outline their findings. Loss Control Service: Engineering or inspection service which assists the insured in reducing its exposure to loss. 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 Expense—Unallocated: Salaries and other expenses incurred in connection with the operation of a claims department of a property and liability insurance carrier which cannot be charged to individual claims. Loss Exposure: The possibility that a loss may occur. 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: In property and liability insurance, the percent that losses bear to premiums for a given period. Loss Reserve: The estimated liability on an insurer’s balance sheet for unpaid insurance claims or losses that have occurred as of a given reporting date. On an individual claim, the loss reserve is the estimate of what will ultimately be paid out on that case. OII Glossary Of Insurance Terms 28 Glossary Of Insurance Terms (Rev. 04/07) M Malicious Mischief: The willful or intentional damage to or destruction of another’s property. Coverage for malicious mischief is usually combined with the vandal- ism peril in insurance policies. Malpractice Insurance: Coverage afforded to a professional practitioner, such as a doctor or a lawyer, against liability claims for damages resulting from alleged negli- gence in the performance of the insured’s services. Manual: A book published by an insurance company, rating association or bureau, containing its rates, classifications and rules for rating a policy. Marine Insurance: See Inland Marine Insurance and Ocean Marine Insurance. Material Damage: Insurance against damage to a vehicle or boat itself. It includes automobile comprehensive, collision, fire and theft. Material damage and physical damage are terms that are often used interchangeably. Maturity: The date at which the endowment amount of a life policy becomes payable. McCarran-Ferguson Act: Federal law signed in 1945 in which Congress declared that states would continue to regulate the insurance business. Grants insurers a limited exemption from federal antitrust legislation. Mediation: Nonbinding procedure in which a third party attempts to resolve a conflict between two other parties. Medical Payments Automobile Insurance: Coverage in non-no-fault states, which pays medical and hospital expenses and the expense of funeral services resulting from an automobile accident, regardless of the liability of the insured. This is a first-party coverage. 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. Mortgage Insurance: (1) A basic type of life insurance or disability insurance purchased for the specific purpose of paying off any mortgage balance outstanding at death or paying mortgage payments while the insured is disabled. (2) ”Private mortgage insurance“ offers a method of providing minimum down payment residential mortgages by insuring mortgage lenders against losses in the event of borrower default. Multi-Peril Policy: A package policy that provides protection against a number of separate perils. Multi-peril policies are not necessarily multiple-line policies, since the combined perils may be all within one insurance line, such as property. (See Multiple-Line Policy.) Multiple-Line Company: A company that writes a variety of basic or traditional lines of insurance known as property and casualty (liability) insurance, such as auto, boat owners, homeowners, commercial, etc. Multiple-Line Policy: A package policy which combines coverages from both the traditional property and liability insurance lines. 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.) OII Glossary Of Insurance Terms 29 Glossary Of Insurance Terms (Rev. 04/07) N Named Peril: Peril specifically mentioned as covered in an insurance policy. Non-Admitted Company (Carrier): An insurance company not licensed to do business in the state in question. 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. No-Fault Automobile Insurance: A form of insurance by which a person’s financial losses resulting from an automobile accident, such as medical and hospital expenses and loss of income, are paid by his/her own insurance company without concern for who was at fault. The right to sue may be restricted in some cases. Non-Forfeiture Options: The choices available to an insured as to how the cost value of a life insurance policy will be received—as a lump-sum payment, as extended term insurance, or as reduced paid-up life insurance. These options guarantee that the cash value will not be forfeited by the insured. Non-Participating Insurance: See Guaranteed Cost Insurance. 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 noneconomic 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. Notice of Loss: A written notice required by insurance companies immediately after an accident or other loss. Part of the standard provisions defining a policy- holder’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. OII Glossary Of Insurance Terms 30 Glossary Of Insurance Terms (Rev. 04/07) O Obligee: A person, firm, corporation or government agency protected by a surety bond. Occupational Disease: Abnormal condition or illness caused by factors associated with the workplace. Like occupational injuries, this is covered by workers compen- sation policies. (See Workers’ Compensation.) Occupational Hazard: Dangers inherent in an occupation which increase the risk of sickness or injury. 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. Omnibus Clause: An automobile policy provision that covers persons driving the named insured’s auto with the named insured’s permission. 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’ 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 of 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. Original Equipment Manufacturer Parts (OEM): Sheet metal auto parts made by the manufacturer of the vehicle. (See Generic Auto Parts.) Other Than Collision Coverage: See Comprehensive Automobile Insurance. OII Glossary Of Insurance Terms 31 Glossary Of Insurance Terms (Rev. 04/07) P Package Policy: A combination of two or more individual policies or coverages into a single policy. A homeowners policy, for example, is a package combining property, liability and theft coverages for the homeowner. Paid Losses: The actual dollar total that has been paid on incurred losses by issuing checks or drafts to claimants. Partial Disability: An impairment that prevents the insured from performing one or more, but not all, important duties of his/her job. Participating Insurance: The life insurance, sold by some life companies, on which dividends may be payable to policy owners. The amount and timing of the dividend payments are determined by the company board of directors. Particular Average: In ocean marine insurance, a concept providing that, where a portion of vessel or cargo is jettisoned to save the entire venture from peril at sea, the resulting loss is borne entirely by that individual owning the property that is damaged or sacrificed. No other interests contribute to payment of the loss. (Distinct from General Average.) 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. Peril: The cause of a possible loss, such as fire, windstorm, theft, explosion or riot. Permanent Insurance: The type of life insurance that develops cash value and includes whole life, endowment, universal life and variable life insurance. Persistency: An insurance term used to refer to the probability of insurance remaining in force. Personal Articles Floater: A form of coverage designed to meet the needs for insurance on property of a movable nature. The coverage usually protects against all physical loss, subject to special exclusions and conditions. Examples of property covered include jewelry, furs, silverware and fine arts. “Personal Injury” Liability Insurance: Protects against liability for damages other than physical injury arising out of false arrest, detention or imprisonment, or malicious prosecu- tion; libel, slander or defamation of character; invasion of privacy, wrongful eviction or wrongful entry. Personal Injury Protection Automobile Insurance (PIP): First-party coverage in no-fault states that usually pays for medical expenses, loss of income and certain other expenses resulting from an auto accident. Coverage’s scope varies widely by state law so no two states have identical coverages. (See No-Fault Automobile Insurance.) Personal Lines: Types of insurance written for individuals or families, rather than for businesses. Personal Property: This type of property is usually movable and easily transportable. On the other hand, real property generally is considered to be immovable, such as land and things affixed to it. A rule of thumb definition for personal property is “everything other than real property.” Physical Hazard: This refers to the material, structural or operational features of the risk itself, apart from the persons owning or managing it. Electrical wiring, building construction and type of heating system are examples of physical hazards. OII Glossary Of Insurance Terms 32 Glossary Of Insurance Terms (Rev. 04/07) P (continued) Physical Loss Form: This property coverage protects against loss from risk of physical loss to buildings except as limited or excluded in the form. Point of Service (POS) Plan: An HMO that offers an indemnity-type option. The primary care doctors in a POS plan make referrals to other providers in the plan. However, members can refer themselves outside the plan and still get some coverage as well. Policies-in-Force: Policies written and recorded on the books of the carrier which are unexpired as of a given date. Usually applies to property and liability insur- ance. Policy: The name generally used to mean the written contract of insurance. Policyholder: One who owns an insurance policy. A mortgagee often is issued a copy of an insurance policy or certificate of insurance at the request of the insured, but it is not a policyholder. Policyholders’ Surplus: The sum an insurance company has remaining after all liabilities are deducted from all assets. Sums such as paid-in capital and special vol- untary reserves are also included in this term. This surplus is one form of financial protection to policyholders in the event a company suffers unexpected or catastrophic losses. Policy Loan: The borrowing against a life insurance policy’s cash value. 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 uncontami- nated. 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. Pool: An organization of insurers or reinsurers through which particular types of risks are underwritten with premiums, losses and expenses shared in agreed ratios. Pre-Existing Condition: A physical condition that existed prior to the issuance of an insurance policy. Premises: The building, other structures and land where the insurance protection is applicable. It is usually described and defined in the property and casualty policy. Premium: The amount of money charged a policyholder for an insurance policy. (Also see Direct Premiums Written, Earned Premium, Net Premiums Written, Unearned Premium.) Premium Auditor: A person who examines a liability insurance policyholder’s insurance records (sales, payroll, etc.) at the end of the policy term to determine if the basis for the premium charge has either increased or decreased. If the audited premium is less than originally estimated and paid, the policyholder will receive a refund; if greater, the policyholder will receive a statement for the balance. Premium Tax: A state tax on premiums paid by its residents and businesses and collected by insurers. OII Glossary Of Insurance Terms 33 Glossary Of Insurance Terms (Rev. 04/07) P (continued) 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. Principal: In suretyship, the party whose honesty or performance is guaranteed. 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 Insurance. Private Placement: Securities that are not registered with the Securities and Exchange Commission and are sold directly to investors. Producer: Any person directly involved in the sale of insurance. 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 with- out the need to prove negligence or fault. Product Liability Insurance: Protects manufacturers’ and distributors’ exposure to lawsuits by people who have sustained bodily injury or property damage through the use of the product. Professional Liability Insurance: Covers professionals for negligence and errors or omissions that injure their clients. Proof of Loss: Documents showing the insurance company that a loss occurred. Property/Casualty Insurance: Covers damage to or loss of policyholders’ property and legal liability for damages caused to other people or their property. Property/casualty insurance, which includes auto, homeowners and commercial insurance, is one segment of the insurance industry. The other sector is life/ health. Outside the United States, property/casualty insurance is referred to as nonlife or general insurance. Property/Casualty Insurance Cycle: Industry business cycle with recurrent periods of hard and soft market conditions. In the 1950s and 1960s, cycles were regular with three year periods each of hard and soft market conditions in almost all lines of property/casualty insurance. Since then they have been less regular and less frequent. OII Glossary Of Insurance Terms 34 Glossary Of Insurance Terms (Rev. 04/07) P (continued) Property Damage Liability Insurance: Protection against loss from legal liability for damage to the property of another. Property Insurance: Provides financial protection against loss or damage to the insured’s property, other than automobile, caused by specified perils, such as fire, windstorm, hail, explosion, riot, aircraft, motor vehicles, vandalism, malicious mischief, riot and civil commotion, and smoke. 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. Protection Amount: The face amount of a life insurance policy, or amount of money that will be paid to a beneficiary upon the death of an insured—depending upon the policy. This amount will be reduced by the amount of any outstanding policy loan. Proximate Cause: The dominating cause of loss or damage; an unbroken chain of events between the occurrence of an insured peril and damage to property. As an illustration, weather damage occurring from fire-fighting activities is covered under the fire policy because fire was the proximate cause of the loss. Public Liability Insurance: A broad term meaning insurance to cover professional and commercial risks against liability exposures other than those involving employees or arising out of ownership or use of autos or airplanes. Purchasing Group: An entity that offers insurance to groups of similar businesses with similar exposures to risk. OII Glossary Of Insurance Terms 35 Glossary Of Insurance Terms (Rev. 04/07) R Rain Insurance: Insurance protection against loss due to rain, hail, snow or sleet, which causes cancellation or reduced earnings of an outdoor event. Rate: A charge per unit in determining insurance premiums. 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.; Mayday’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 experi- ence. A high financial rating is not the same as a high consumer satisfaction rating. Rating Bureau: An organization that gathers statistics, makes rates and/or creates policy forms and provides other services for the property and casualty insurers affiliated with the bureau. Rating Territory: In various property and casualty lines, a geographical grouping within which insureds are likely to share an exposure to similar risks. Grouping of insureds within a territory helps establish equitable rates for the territory. 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: An illegal act to refuse to lend money or issue insurance based only on geographic area. Reinstatement: The restoration of a lapsed life or health insurance policy to its original premium-paying status—usually after evidence of good health has been submitted and past-due premiums have been paid. Reinsurance: An arrangement by which one insurer transfers all or a portion of its risk under a policy or group of policies to another insurer (reinsurer). Thus reinsurance is insurance purchased by an insurance company from another insurer, to reduce risk for the original insurer. Reinsurance Facility: An alternative mechanism to service those insureds who cannot obtain insurance in the voluntary market. Premiums and losses for the busi- ness that is ceded to the facility are pooled and all insurers share according to their proportion of the voluntary market. Renters Policy: A package type of insurance that includes coverage similar to a homeowners policy to cover the personal property of a renter or tenant in a building. Rents or Rental Value Coverages: Insurance against loss of the rental value of a property; protects against loss of rents resulting from an insured peril. Replacement Cost Property Coverage: Insurance under which the amount payable is the current replacement cost of the property new, rather than the depreciated value. Applies to the building structures (in most cases) and can apply to contents in some policies. OII Glossary Of Insurance Terms 36 Glossary Of Insurance Terms (Rev. 04/07) R (continued) Reserve: (1) An amount representing actual or potential liabilities kept by an insurer to cover obligations to policyholders and third-party claimants. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion, a reserve may be an asset, such as a reserve for taxes not yet due. Residual Market: A general term describing the total of all consumers who have had difficulty purchasing insurance through normal channels. Automobile Insur- ance Plans, FAIR Plans, Reinsurance Facilities and Joint Underwriting Associations all service this market. Retention: The net amount of risk retained by an insurance company for its own account or that of specified others, and not reinsured. Retrocession: The reinsurance bought by reinsurers to protect their financial stability. Retrospective Rating: Rating procedure that allows adjustment of an insured’s final rate on the basis of the insured’s own loss experience. Rider: Additional provision added to a policy by issuance of an amending document. (See Endorsement.) Risk: Chance of loss with respect to person, liability or the property of the insured. Also is used to mean “the insured.” 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 Risk Management: The management of the various risks that might affect a business firm. Its purpose is to identify potential loss situations and control or reduce them through insurance, elimination of risk, or improved or additional safety practices. 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. Robbery: The loss of property due to theft when a person is threatened with physical harm or injury. OII Glossary Of Insurance Terms 37 Glossary Of Insurance Terms (Rev. 04/07) S Sales Expense: Compensation of agents, advertising expense and other costs related to selling insurance policies. Salvage: Property damaged to the extent that it is not economical to perform repairs, taken over by an insurer after it has paid a claim, to reduce its loss by “salvaging” the remaining value of the property. Schedule: A list describing the property or items insured under the policy and the extent to which they are insured. 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: A form of risk financing through which a firm assumes all or a part of its own losses. Self-insurers may purchase insurance to cover excess losses. Severity: Size of a loss. One of the criteria used in calculating premiums rates. Sewer-Drain Back-Up Coverage: An optional part of homeowners insurance that covers sewers. Shared Market: See Residual Market. Soft Market: A condition where insurance premiums are lowered and the availability of insurance is high. Opposite of a hard insurance market. Solicitor: A person authorized by an agent to solicit and receive applications for insurance. 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 Multi-Peril Policy (SMP): A business policy which combines in one contract the coverages normally purchased under several policies. Many options and endorsements are available to tailor it to the policyholder’s needs. Specified Perils: See Named Peril. OII Glossary Of Insurance Terms 38 Glossary Of Insurance Terms (Rev. 04/07) S (continued) Speculative Risk: A type of risk with three possible outcomes: gain, loss or no change. 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 be- cause 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. Standard Provisions: Policy provisions required by law. Standard Risk: A person who according to a company’s underwriting standards is entitled to insurance without extra rating or special restrictions. Statutory Accounting Principles (SAP): Those principles required by statute that must be followed by an insurance company when submitting its financial statements to the various state insurance departments. Such principles differ from Generally Accepted Accounting Principles (GAAP) in some important respects. For example, SAP requires that expenses must be recorded immediately and cannot be deferred to track with premiums as they are earned and taken into revenue. Statutory Underwriting Profit or Loss: Earnings or losses as shown by an insurer on its Statutory Income Statement (convention blank) as required by state insurance departments. More specifically: (1) the profit or loss realized from insurance operations as distinct from that realized from investments; (2) the excess of premiums over losses and expenses (profit), or the excess of losses and expenses over premiums (loss). Stock Company: A company organized and owned by stockholders, as distinguished from the mutual form of company, which is owned by its policyholders. Stopgap Endorsement: Provides employer liability coverage for work-related injury arising out of incidental operations or exposure in the monopolistic fund states. 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: A principle of law incorporated in insurance policies that enables an insurance company, after paying a loss to its insured, to recover the amount of the loss from another who is legally liable for it. Substandard or Extra Risk: An individual who, because of health history or physical limitations, does not measure up to the qualifications of a standard life or health insurance risk. 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: An agreement providing for monetary compensation should there be a failure to perform specified acts within a stated period. The surety company, for example, becomes responsible for fulfillment of a contract if the contractor defaults. OII Glossary Of Insurance Terms 39 Glossary Of Insurance Terms (Rev. 04/07) S (continued) Suretyship: Contractual relationship in which one party (surety) guarantees another party (obligee) against the default or misperformance of a third party (principal). (See Fidelity Bond and Surety Bond.) Surplus: A stock company’s surplus is the amount by which its admitted assets exceed its liabilities and capital stock. In both stock and mutual compa- nies, the term surplus-to-policyholders means the excess of admitted assets over liabilities. Surplus Lines: A term originating in property/casualty insurance, used to describe any risk or part thereof for which insurance is not available through a company licensed in the applicant’s state (an “admitted” insurer). The business, therefore, is placed with “non-admitted” insurers (insurers not licensed in the state) in accordance with surplus or excess lines provisions of state insurance laws. These provisions generally allow operations on a relatively unregulated basis; that is, the non-admitted insurer is not subject to the same rate or coverage requirements that apply to an admitted insurer. 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 ex- ample, or because investment goals have changed. Syndicate: A group of insurers or underwriters that join to insure certain property that may be of such value or high hazard or so expensive to underwrite that it can be covered more safely or efficiently on a cooperative basis. OII Glossary Of Insurance Terms 40 Glossary Of Insurance Terms (Rev. 04/07) T Tenants Policy: See Renters Policy. Term: A period of time for which a policy is issued. Term Insurance: Life insurance protection during a limited number of years but expiring without value if the insured survives the stated period. 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 im- pact 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 Sep- tember 11, terrorism coverage prices have increased substantially to reflect the current risk. Theft Insurance: Protection for loss of property due to stealing, including burglary, robbery and larceny. 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.) Threshold: Used in no-fault auto insurance to remove non-serious cases from the tort system by establishing a point of “threshold” that must be met or exceeded to sue in tort. Of those states and the District of Columbia that have no-fault auto insurance, many, including the District of Colum- bia, have a threshold in their plan. There are three types of thresholds: the dollar threshold, the disability threshold and the verbal threshold. Title Insurance: An insurance contract relating to real estate described in the policy which protects the insured landowner against loss or damage by reason of defects, liens or encumbrances in the insured title, if these faults exist at the date of the policy and are not expressly excluded from its terms. Tort: Any wrongful act, damage or injury done willfully, negligently or in circumstances involving strict liability, but not involving breach of contract, for which a civil lawsuit can be brought. 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 Disability: Disability that prevents a person from performing (a) any of his/her occupational duties, or (b) any duties for which he/she is reasonably qualified. Definitions vary within policies. 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. OII Glossary Of Insurance Terms 41 Glossary Of Insurance Terms (Rev. 04/07) T (continued) Towing Coverage: Insures against charges for towing and road service at the place of disablement, with a maximum amount stipulated for each occurrence. Transparency: A term used to explain the way information on financial matters, such as financial reports and actions of companies or markets, are communi- cated 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. Treaty Reinsurance: A general reinsurance agreement between the ceding or primary company and the reinsurer containing the contractual terms under which a portion or all of the primary company’s business or a particular class is passed on to the reinsurer. OII Glossary Of Insurance Terms 42 Glossary Of Insurance Terms (Rev. 04/07) U Umbrella Liability Policy: A form of insurance protection against losses in excess of amounts covered by other liability insurance policies; also protects the insured in many situations not covered by the usual liability policies. This policy is available for both personal and commercial lines coverage. 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. Underinsured Motorists Coverage (UIM): Coverage is intended to cover you and passengers in your car for losses unpaid because sufficient bodily injury liability limits are not available from the policy of an at-fault driver. How and under what circumstances the coverage becomes operative varies in different states. Underwriter: An employee of an insurance company who is a selector of risks. The underwriter is expected to select business that will produce an average risk of loss no greater than anticipated for the class of business. In the life insurance industry, “underwriter” may also mean an agent or other field representative who is referred to as a “field underwriter.” Underwriting: The process of selecting risks for insurance and determining in what amounts and on what terms the insurance company accepts the risk. Underwriting Profit or Loss: The profit or loss experienced by a property/casualty insurance company after deducting from earned premiums the incurred losses and expenses of doing business, but before provision of federal income tax. It excludes investment income. Unearned Premium: The portion of a property/casualty insurance premium that applies to the unexpired portion of the policy period. Uninsurable Risk: Risks for which it is difficult for someone to get insurance. (See Insurable Risk.) Uninsured Motorists Coverage: Pays the policyholder and passengers in his/her car for losses sustained by reason of bodily injury, sickness, disease or death caused by the owner or operator of an uninsured automobile or a “hit-and-run” driver. Uninsured Motorists Property Damage Coverage (UMPD): Provides coverage to a vehicle involved in an accident with an uninsured motorist. UMPD is similar to “collision coverage,” and is not available to those who purchase collision coverage. OII Glossary Of Insurance Terms 43 Glossary Of Insurance Terms (Rev. 04/07) V Valuation: The process of determining a company’s liabilities under its policy obligations is known as policy valuation. The process of determining the value of a company’s investments is known as asset valuation. Minimum valuation standards are usually prescribed by state laws. Valued Policy: An insurance policy under which the insurance company is obligated to pay the full amount of the policy written to insure real property against loss by fire (and, sometimes, other perils) when the property insured is totally destroyed. Several states have laws that are known as Valued Policy Laws. Vandalism: Willful, intentional, often random, destruction or defacement of private or public property. Insurance against the vandalism peril is usually combined with the malicious mischief peril. Variable Life Insurance: A type of permanent life insurance in which the death benefit and the policy value vary in relation to the investment experience of a selected fund in which the policy values are invested. Verbal Threshold: In no-fault auto insurance states with the verbal threshold, victims are allowed to sue in tort only if their injuries meet certain verbal descrip- tions of the types of injuries that should, as a matter of policy, render one eligible to seek to recover for pain and suffering in a cause of action in tort. 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 payouts 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. Voluntary Market: The market where a person seeking insurance obtains it with no help from the state, through an insurer of his or her own selection. OII Glossary Of Insurance Terms 44 Glossary Of Insurance Terms (Rev. 04/07) 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 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. Workers’ Compensation: A system (established under state laws) under which employers provide insurance for benefit payments to employees for their work-related injury, death and disease regardless of fault. Not to be mistaken as health insurance. 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. Written Premiums: See Premiums Written. Sources: Original glossary reprinted, with permission, Allstate Insurance Company, Northbrook, IL, with all rights. Excerpts also from Insuring Your Business, by Sean Mooney, Chief Economist, Director of Research, and Senior Vice President at Guy Carpenter & Company in New York, and former economist, Insurance Information Institute; Ensuring Availability: Residual Property Insurance Plans, Property Insurance Plans Service Office and The Buyers’ Guide to Business Insurance, PSI Research. Additional glossary terms from online glossary of the Insurance Information Institute, www.iii.org/media/glossary/. OII Glossary Of Insurance Terms 45
"Glossary Of Insurance Terms"