Insurance Glossary

ACCIDENT

an event that is unforeseen, unexpected, and unintended.

ACCIDENT REPORT FORM

a form used to record key information about the accident.

ACCIDENTAL BODILY INJURY

physical injury sustained as the result of an accident.

ACCOUNTS RECEIVABLE INSURANCE

pays for the cost of reconstructing accounts receivable records that have been damaged or destroyed. It also covers any payments that cannot be collected because records cannot be reconstructed.

ACTUAL CASH VALUE (ACV)

the value of property as figured by determining what it would cost to replace the property, and then adjusting the replacement cost by subtracting an amount that reflects depreciation.

ADJUSTABLE RATE MORTGAGE (ARM)

a mortgage whose rate of interest changes from time to time according to a predetermined index or according to the decisions of its originator.

ADJUSTED CASH FLOW/BENEFITS PAID

the ratio of adjusted cash flow to total cash benefits paid to policyholders.

ADMINISTRATIVE SERVICES ONLY (ISO) AGREEMENT

contract between an insurer (or its subsidiary) and a group employer, eligible group, trustee, or other party, in which the insurer provides certain administrative services. These services may include actuarial support, plan design, claims processing, data recovery and analysis, benefits communications, financial advice, medical care conversions, data preparation for governmental reports, and stop-loss coverage.

ADVERSE SELECTION

when people with a very high probability of loss purchase insurance to a greater extent that people with average or below average probabilities of loss.

AGENT

an authorized representative of an insurance company who sells and services insurance contracts. See producer, exclusive agent, independent agent.

AGGREGATE INDEMNITY

the maximum amount that may be collected for any disability, or period of disability, under an insurance policy.

ALL RISKS

property policies, often called “special” policies, that cover any loss unless it is caused by an excluded peril listed in the policy.

ALLOCATED BENEFITS

maximum amount for specific services as itemized in an insurance contract.

AMENDMENT

document changing the provisions of an insurance contract signed jointly by the insurer and the policyholder.

ASSIGNED RISK PLANS

see automobile insurance plans.

ASSIGNMENT

the legal transfer of one person’s interest in an insurance policy to another person.

AUDIT

during an audit, members of the home office staff underwriting department examine files to see whether the underwriting guidelines are being followed. Also see premium auditor.

AUTO LIABILITY

pays for damages that you cause to other people and their property. If you cause an accident and injure your car or yourself, your auto liability insurance will not pay for your medical bills or the repairs to your car. Auto medical payments coverage would. But it will pay for the other motorist’s, up to the limits of your policy. Without the coverage, your assets would be subject to seizure to pay the medical bills, car repairs and other damages that you caused in an accident. Once the insurance company pays out the limits of your policy, you’re liable for the rest, which is why it’s advisable to purchase higher limits than your state requires. Auto liability coverage has three parts: bodily injury per person, bodily injury per accident, and property damage. Limits for liability are usually written like this: “20/40/10.” That means a policy will pay bodily injury losses up to $20,000 per person, and up to $40,000 per accident. It will also pay property damage losses up to $10,000 per accident.

AUTO MEDICAL PAYMENTS

if you cause an accident, the coverage works like this: Auto liability coverage pays the bodily injury and property damage losses of the other person. Collision coverage pays for repairs to your own vehicle. Auto medical payments coverage pays medical and funeral expenses for you and your passengers. If you already have health and disability insurance, the coverage may be redundant.

AUTO PHYSICAL COVERAGE DAMAGE

insures against loss resulting from damage to an auto owned by the insured; also provides coverage if the car is stolen.

AUTOMOBILE INSURANCE PLANS

also known as assigned risk plans, these are residual market programs providing auto insurance. See Residual Market.

BENEFIT

amount payable by the insurance company to a claimant, assignee, or beneficiary when the insured suffers a loss.

BROKER

a sales and service representative who handles insurance for clients, generally selling insurance of various kinds and for several companies. Brokers resemble agents, except for the fact that, in a legal sense, brokers represent the party seeking insurance rather than the insurance company. See Agent, Producer.

BUSINESS INSURANCE

a policy that provides coverage to a business. It is often purchased to indemnify a business for the loss of services if a key employee becomes disabled.

CEDE

to reinsure the liabilities associated with insurance policies by passing a portion of the risk exposure and the related premium to a reinsurer.

CERTIFICATE

a statement issued to individuals insured under a group policy, setting forth the essential provisions relating to their coverage.

CLAIM

notification to an insurance company that payment of an amount is due under the terms of the policy. A claim is a demand by a person or business who is seeking to recover for a loss. A claim may be made against an individual. A claim may also be made against an insurance company, when an insured asks the insurance company to pay for a loss that may be covered by an insurance policy.

CO-INSURANCE

arrangement by which the insurer and the insured share, in a specific ratio, payment for losses covered by the policy, after the deductible is met.

COMPUTER INSURANCE

covers computer equipment and peripherals beyond the normal coverage provided in homeowner’s insurance policies. Usually, homeowner’s policies only cover up to between $1,000 and $3,000 in computer equipment. With more people owning expensive computers and peripherals, and using them for home-based businesses, riders and separate policies are becoming more popular. Some policies are also designed to cover damage and/or theft of portable equipment, such as laptop computers, and even the costs of data recovery.

CONTINGENCY RESERVE

a reserve for losses in excess of those that are expected. An insurer generally contributes up to 50% of premiums earned in any year to this reserve, and amounts contributed are to remain there for 10 years, subject to transfer to the surplus account either at the end of that period or before to the extent that the loss ratio exceeds 35% in any given year. Federal income taxes on amounts in the contingency reserve are deferred as long as the funds remain allocated there and are paid when they are transferred to surplus (see tax and loss bonds).

CONTRIBUTORY PLAN

group plan under which the insured shares in the cost of the plan with the policyholder.

COVERAGE

the percentage of the original appraised value of a home that is covered by mortgage insurance. The GSEs require that all residential mortgages they guarantee have effective LTVs of 80% or less. Mortgage insurance is the primary method of reducing the effective LTVs.

CREDIT INSURANCE

optional coverage that pays off the balance of an outstanding loan in the event you become disabled, unemployed or die. Exact coverage depends on the particular policy.

D&OL

directors’ and officers’ liability.

DEDUCTIBLE

amount that must be paid by the insured before benefits will be paid by the insurer.

DISABILITY

physical or mental condition that prevents a person from performing one or more occupational duties temporarily (short-term), long-term, or totally (total disability).

DISIBILITY INCOME INSURANCE

insurance that provides periodic payments when an insured person is unable to work as a result of illness or injury.

DUPLICATION OF COVERAGE

coverage under two or more policies for the same potential loss.

E&O

errors and omissions.

EARTHQUAKE INSURANCE

similar to regular homeowner’s policies but without the liability coverage. You choose a dollar ceiling for the dwelling coverage, and a percentage of this ceiling is then applied to coverages for personal property and additional living expenses (hotel expenses if your home becomes uninhabitable). Premiums for these policies are usually rather steep in the places where you would need to buy one. Until recently, the only place Californians could buy the coverage was from the California Earthquake Authority, which offered skimpy coverage. But the market is opening up again and some other companies are offering old-fashioned policies with better coverage.

EFFECTIVE DATE

date when insurance coverage begins.

ELIGIBILITY DATE

date when a member of an insured group applies for insurance.

ELIGIBILITY PERIOD

time following the eligibility date during which a member of a group may apply for insurance without evidence of insurability.

ELIGIBLE EMPLOYEES

employees who meet the eligibility requirements for insurance set forth in a group policy.

ELIMINATION PERIOD

days at the beginning of a period of disability when no benefits are paid.

EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (E

federal law that affects pension and profit-sharing plans. Among other provisions, this law specifies a published summary plan must be distributed to participants within 120 days after adoption of the plan and within 90 days after an employee becomes a participant. The law requires that a summary plan description be issued every 5 years.

ENROLLMENT CARD

document signed by an eligible person indicating a desire to participate in a group insurance plan. The document or card authorizes an employer to deduct contributions from an employee’s pay.

EVIDENCE OF INSURABILITY

a statement or proof of physical condition and/or other factual information affecting a person’s eligibility for insurance. In group insurance, evidence of insurability is required only in specific situations such as when a person fails to enroll during the open enrollment period and when a person applies for reinstatement after having previously withdrawn from the plan when receiving an overall maximum benefit.

EXCLUSIONS/EXCEPTIONS

conditions or circumstances, listed in the policy, for which the insurer will not provide benefits.

EXPERIENCE RATING

process of determining the premium rate for a group based wholly or partially on that risk’s experience.

EXPERIENCE REFUND

amount returned by an insurer to a group policyholder when the financial experience of a particular group (or class to which the group belongs) has been more favorable than anticipated.

FACE AMOUNT

the amount stated on the face of the insurance policy that will be paid in case of death or at maturity. It does not include dividend additions or additional amounts payable under accidental death or other special provisions.

FACULTATIVE REINSURANCE

reinsurance negotiated on an individual issue-by-issue basis rather than on a treaty basis.

FLOOD INSURANCE

a regular homeowner’s policy will not pay for damages caused by flooding. In order to get the coverage, you’ll have to go to some outfit that writes for the National Flood Insurance Program. Outside of fire, flooding is the most widespread natural disaster. If your community participates in NFIP’s floodplain management program, you should be eligible to buy the coverage. The only people who may have trouble finding flood coverage are residents of “coastal barrier resource system” areas and communities that do not participate in NFIP’s programs. Flood insurance is also available to renters, condominium owners, and co-op owners.

GRACE PERIOD

a period (usually 31 days) following each premium due date, other than the first due date, during which an overdue premium may be paid. All provisions of the policy remain in force throughout this period.

GUARANTEED RENEWABLE CONTRACT

contract under which an insured has the right, commonly up to a certain age, to continue the policy by the timely payment of premiums. Under renewable contracts, the insurer reserves the right to change premium rates by policy class.

INCONTESTABLE CLAUSE

provision in a policy that the insurer may not contest the validity of an insurance contract after it has been in force for two a certain number of years.

INDEMNITY

benefits of a predetermined amount paid for a loss.

INLAND MARINE INSURANCE

a broad type of insurance, generally covering articles that may be transported from one place to another as well as bridges, tunnels and other means of transportation. It includes goods in transit (generally excepting transoceanic) as well as numerous “floater” policies such as personal effects, personal property, jewelry, furs, and other such items.

INSURABILITY

acceptability to the company of an applicant for insurance.

INSURABLE RISK

conditions that make a risk insurable are (1) the peril insured against must produce a definite loss not under the control of the insured, (2) there must be a large number of homogeneous exposures subject to the same perils, (3) the loss must be calculable and the cost of insuring it must be economically feasible, (4) the peril must be unlikely to affect all insureds simultaneously, and (5) the loss produced by a risk must be definite and have a potential to be financially serious.

INSURANCE

risk management plan that, for a price, offers the insured an opportunity to share the costs of possible financial loss through an insurer.

INSURED

person(s) or entity(ies) on which a policy for insurance has been issued.

INSURING CLAUSE

stipulation in an insurance policy that states the type of loss the policy covers and lists the parties to the contract.

INTEGRATION

the combining of two or more benefit plans to prevent duplication of payments.

ISO

Insurance Services Office.

LAE

loss adjustment expenses.

LAPSE

termination of coverage because policyholder does not pay premium within a specified period of time.

LAPSED POLICY

a policy terminated because the policyholder doesn’t pay the premiums by the due date.

LEGAL RESERVE

a specified amount of money that an insurance company–by state law–must keep in reserve to pay future claims.

LEVEL PREMIUM

rating structure in which the premium level does not change for the life of the policy.

LEVEL PREMIUM INSURANCE

insurance in which the total premium payment is divided into equal payments for the life of the premium payment period.

LIABILITY

involves the cause of damage to someone’s property and the bodily injury someone incurs as a result of the negligence of another party. Liability insurance provides coverage for either individuals or businesses.

LIFETIME DISABILITY BENEFIT

benefit that is paid to the insured as long as the person is totally disabled.

LIMITED POLICY

policy that covers only specified accidents or sicknesses.

LONG-TERM DISABILITY INCOME INSURANCE

replaces lost income when a person cannot work for a long period of time because of an accident or illness.

LOSS ADJUSTMENT EXPENSES

costs related to claims adjudication, management and payment.

LOSS RATIO

ratio of losses and expenses compared to net premiums paid to the insurance company.

LOSS RESERVE

liability recorded on the balance sheet for unpaid losses. The loss reserve consists of the case basis reserve, the reserve for claims known to the company but not yet paid; and the reserve for incurred but not reported losses (IBNR). IBNR in residential mortgage insurance is a small amount compared to IBNR in many long-tail property-casualty lines of business and consists mainly of an estimate of the aggregate dollar amount of currently delinquent mortgages which will remain delinquent or go to claim in a short period of time, causing the establishment or increase of case basis reserves for those mortgages.

MANUAL PREMIUM RATE

premium for a group quoted that is determined by an insurer’s underwriting manual or standard rate tables.

MULTILINE INSURER

writes financial guaranty and property/casualty insurance.

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

national organization of state officials that regulates insurance. It has no official power, but acts as a major industry advisor. NAIC was formed to provide national standards in insurance.

NCCI

National Council on Compensation Insurance.

NET INCOME

income after dividends and taxes (including realized capital gains).

NET PREMIUMS WRITTEN

total premiums written minus premiums ceded.

NO-FAULT INSURANCE

no-fault auto insurance pays the insured for expenses related to a minor accident, regardless of who was at-fault.

NON-DISABLING INJURY

injury that requires medical care, but that does not incur work absences or lost income.

NON-FORFEITURE OPTION

one of the choices available if the policyholder discontinues payments on a policy with a cash value. This may be taken in cash as extended term insurance or as reduced paid-up insurance.

NON-FORFEITURE VALUES

value of the policy if canceled, either in cash or in another form of insurance. Also available to the policyholder if required premium payments are not paid.

NON-PARTICIPATING INSURANCE

insurance on which no dividends are paid.

OCCUPATIONAL HAZARDS

factors that are related to a particular occupation that may put workers at a higher risk for physical injury.

OPTIONAL RENEWABLE POLICY

contract that enables the insurer to terminate a policy on a particular anniversary or premium date.

OVERHEAD EXPENSE INSURANCE

for business owners to help offset continuing business expenses if the owner is disabled.

PAID-UP INSURANCE

insurance on which all premiums have been paid.

PARTIAL DISABILITY

a disability that prevents a person from performing one or more functions of his or her regular job.

PARTICIPATING INSURANCE

insurance on which the policyholder is entitled to share in the surplus earnings of the company, through policy dividends that reflect the difference between the premium charged and the cost to the company of providing the insurance.

PARTICIPATING POLICY

policy under which the policyholder is eligible to receive dividends.

POLICY

printed document issued to the policyholder by the company, stating the terms of the insurance contract.

POLICY TERM

the period for which an insurance policy provides coverage.

PREMIUM

the payment, or one of the regular periodic payments, that a policyholder makes to own an insurance policy.

PROPERTY/CASUALTY

type of insurance that protects against theft, damage and injury.

QUALIFIED ANNUITY

an annuity that is sold as part of a tax-qualified Keogh plan or company pension plan.

RATED POLICY

issued at a higher-than-standard premium rate to cover the extra risk where, for example, an insured has impaired health or a hazardous occupation. Sometimes called an “extra-risk” policy.

REDUCED PAID-UP INSURANCE

available as a non-forfeiture option. It provides for continuation of the original insurance plan, but for a reduced amount.

REINSTATEMENT

the restoration of a lapsed policy to full force and effect. The company requires evidence of insurability and payment of past-due premiums, plus interest.

REINSURANCE

acceptance by one insurer (the reinsurer) of all or part of the risk or loss underwritten by another insurer (the ceding insurer).

REINSURER

an insurance company that assumes risk initially assumed by another insurer.

RENEWAL

continuance of coverage beyond original terms, signified by acceptance of a premium payment for a new term.

REPLACEMENT VS. ACTUAL CASH VALUE

coverage that permits the policyholder to claim the cost of replacing an insured item, as opposed to the item’s actual cash value. Its most important use is on your home and, second, the personal property in your home. Actual cash value of an item can be very small after only a brief period of ownership and may not be enough to pay for replacing the item. Actual cash value of any damaged property would be even lower.

RESERVE

amount required to be carried as a liability in the financial statement of an insurer to provide for future commitments under policies outstanding.

RIDER

an amendment to an insurance policy that modifies the policy by expanding or restricting its benefits or excluding certain conditions from coverage.

RISK

the probable amount of loss foreseen by an insurer in issuing a contract. The term sometimes applies to the person insured or to the hazard insured against.

SELF-ADMINISTRATION

maintenance of all records and assumption of responsibility, by a group policyholder, for those covered under its insurance plan. Responsibilities include preparing the premium statement for each payment date and submitting it with a check to the insurer. The insurance company, in most instances, has the contractual prerogative to audit the policyholder’s records.

SELF-INSURANCE

a program for insuring employees that is financed entirely by the employer, instead of purchasing coverage from a commercial carrier.

SETTLEMENT OPTIONS

several ways, other than immediate payment in a lump sum, in which the insured or beneficiary may choose to have policy proceeds paid.

SEVERITY

the ultimate loss on a mortgage incurred by an insurer, as a percentage of the insurer’s exposure.

SPECIAL RISK INSURANCE

coverage for risks or hazards of a special or unusual nature.

STANDARD INSURANCE

insurance written on the basis of regular morbidity underwriting assumptions and issued at normal rates.

STANDARD RISK

person who, according to an insurer’s underwriting standards, is entitled to purchase insurance without paying an extra premium or special restrictions.

STATE (COMPULSORY) DISABILITY PLAN

plan for short-term income replacement, required by some states to cover eligible persons employed within that state.

STATE INSURANCE DEPARTMENT

administrative agency that implements state insurance laws and supervises (within the scope of these laws) the activities of insurers operating within the state.

STATE REGULATION OF INSURANCE

Unlike the securities and banking industries, the insurance industry is not subject to strong federal oversight. Instead, through the 1945 McCarran-Ferguson Act, the domestic industry faces 55 sets of overseers (the 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam and American Samoa). With so many different sites of regulation, and so many sources of local sales outlets for insurance policies, insurance policies are not standardized commodities. This is particularly true in property/casualty coverage. In addition, state-based regulation means that insurers may base their rates in each state on their business profile in that state. Auto rates, for example, reflect accident and theft trends in local territories.

STOP-LOSS INSURANCE

protection purchased by self-funded buyers against the risk of large losses or a severe, adverse claim experience.

SUBSTANDARD INSURANCE

insurance issued with an extra premium or special restriction, to persons who do not qualify for insurance at standard rates.

TERM

period during which an insurance policy is valid.

TERM RIDER

an addendum to an insurance policy, modifying the period during which it is valid.

THIRD-PARTY ADMINISTRATION

an outside person or firm (not a party to a contract) that maintains all records of persons covered under an insurance plan. The TPA also may pay claims using the draft book system.

TIME LIMIT

a specified number of days within which a notice of claim or proof of a loss must be filed.

TITLE INSURANCE

protects against the various financial losses associated with having the title to a piece of real estate challenged, including court costs and loss of the property. For a one-time fee, most title insurers will investigate public records to make sure that the property is free of title defects. This coverage can benefit either the homeowner or the mortgage company, so you should know which kind you’re paying for.

TOTAL DISABILITY

prevents a person from performing all occupational duties. The exact definition varies among policies.

TPA

third-party administrators.

TRAVEL ACCIDENT POLICIES

limited contracts covering accidents that occur only while an insured person is traveling on business for an employer, away from the usual place of business, and on named conveyances.

TREATY REINSURANCE

reinsurance covering broad groups of policies. All policies written by the primary insurer within the defined groups will be covered and ceded to the reinsurer until the policies’ expiration. This occurs on an ongoing basis until the agreement is canceled.

UMBRELLA LIABILITY

a contingency plan by which the umbrella increases the total liability coverage limits of underlying policies. Once an underlying policy’s limit of liability have been exhausted, this policy is goes into effect.

UNDERWRITER

1) a company that receives the premiums and accepts responsibility for the fulfillment of the policy contract; 2) the company employee who decides whether or not the company should assume a particular risk; 3) the agent who sells the policy.

UNDERWRITING

The process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept the risk.

UNINSURED/UNDERINSURED MOTORISTS COVERAGE

a form of insurance that pays the policy holder and passengers in his/her car for bodily injury caused by the owner or operator of an uninsured or inadequately insured automobile.

WAITING PERIOD

the length of time an employee must wait from his/her date of employment or application for coverage, to the date his/her insurance is effective. Also known as Elimination period.

WAIVER OF PREMIUM

a provision in some policies to relieve the insured of premium payments falling due during a period of continuous total disability that has lasted for a specified length of time.

WORKERS’ COMPENSATION

a system established under state law that provides payments, without regard to fault, to employees injured in the course and scope of their employment.