Glossary
Insurance | Insurance Ordinance | Insurance Rules | Reinsurance | Glossary
Below is a list of insurance terms and definitions which we have compiled to help you understand the sometimes confusing world of insurance.
ACTUARY mathematician in the insurance field. Actuaries conduct various statistical studies; construct MORBIDITY and MORTALITY TABLES; calculate premiums, reserves, and dividends for participating policies; develop products; construct annual reports in compliance with numerous regulatory requirements.
AGENT individual who sells and services insurance policies in either of two classifications:
1. Independent agent represents at lease two insurance companies and (at least in theory) services clients by searching the market for the most advantageous price for the most coverage. The agent's commission is a percentage of each premium paid and includes a fee for servicing the insured's policy.
2. Direct writer represents only one company and sells only its policies. This agent is paid on a commission basis in much the same manner as the independent agent.
AMBIGUITY language in the insurance policy that can be considered unclear or subject to different interpretations. Under these circumstances, the courts have generally ruled in favor of insured individuals and against insurance companies since insurance policies are deemed to be contracts of adhesion, and also that insurance companies have sufficient legal talent at their disposal to make policy language clear.
ANNUAL REPORT statement of the financial condition of the insurance company, as well as significant events during the year in which the company has been involved and/or that have affected the company. This statement is furnished to the stockholders (if a STOCK INSURANCE COMPANY) or POLICYHOLDERS (if a MUTUAL INSURANCE COMPANY).
APPOINTED ACTUARY , appointed by the life insurance company, required by the NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) under the NAIC: STANDARD VALUATION LAW to provide an opinion as to the compliance of the insurance company’s statutory statement with the law and the level of assets needed to support the statement of liabilities of the insurance company. In essence, this actuary is responsible for documenting the adequacy of the liability reserves according to the RESERVE LIABLITIES REGLULATION as established by the NAIC.
BALANCE SHEET accounting statement showing the financial condition of a company at a particular date. Listed on the statement are the company’s assets and liabilities, and capital and surplus.
CALLOPTION contract that gives the insurance company the right, not the obligation, to buy a stipulated stock or bond at a specified price(strike price) at or before the date of expiration of the contract.
CARGO INSURANCE shipper’s policies covering one cargo exposure or all cargo exposures by sea on ALL RISKS basis. Exclusions include war, nuclear disaster, wear and tear, dampness, mold, losses due to delay of shipment, and loss of market for the cargo.
CEDE to transfer a risk from an insurance company to a reinsurance company.
CEDING COMPANY insurance company that transfers a risk to a reinsurance company.
CLAIM request by an insured for indemnification by an insurance company for loss incurred from an insured peril.
CLAUSE in an insurance policy, sentences and paragraphs describing various coverage’s, exclusions, duties of the insured, locations covered, and conditions that suspend or terminate coverage.
COMMISSION fee paid to an insurance salesperson as a percentage of the premium generated by a sold insurance policy.
CONTRACT in insurance, agreement between an insurer and an insured under which the insurer has a legally enforceable obligation to make all benefit payments for which it has received premiums.
DAMAGES sum the insurance company is legally obligated to pay an insured for losses incurred.
DEATH CLAIM Proof of death of the INSURED form filed with the INSURANCE COMPANY establishing the rights of the BENEFICIARY to the DEATH BENEFIT.
DEPRECIATION actual or accounting recognition of the decrease in the value of a hard asset (property) over a period of time, according to a predetermined schedule such as straight-line depreciation.
DISCOUNT VALUE present value of a future sum of money to be paid at a stipulated future date.
EARNED PREMIUM portion of a premium paid by an insured that has been allocated to the insurance company’s loss experience, expenses, and profit year to date.
ENDOWMENT INSURANCE life insurance under which an insured receives the face value of a policy if the individual survives the endowment period. If the insured does not survive, a beneficiary receives the face value of the policy. An endowment policy is the most expensive type of life insurance.
EXPENSE RATIO formula used by insurance companies to relate income and expenses:
EXPIRY point in time when a TERM LIFE INSURANCE Policy terminates its coverage.
FACULTATIVE REINSURANCE term under which the REINSURER exercised its faculty or prerogative to insure a risk or reject a risk from a CEDING COMPANY.
FINANCIAL STATEMENT balance sheet and profit and loss statement of an insurance company. This statement is used by State Insurance Commissioners to regulate an insurance company according to reserve requirements, assets, and other liabilities.
FOREIGN INSURER insurance company whose domicile is in a state other than the one in which the company is writing business.
GROUP INSURANCE single policy under which individuals in a natural group (such as employees of a business firm) and their dependents are covered.
GROUP LIFE INSURANCE basic employee benefit under which an employer buys a master policy and issues certificates to employees denoting participation in the plan. Group life is also available through unions and associations. It is usually issued as yearly renewable term insurance, although some plans provide permanent insurance.
HEDGING method of transferring RISK to permit the RISK BEARER to assume two offsetting positions at the same time so that, regardless of the outcome of an event, the risk bearer is left in a no win/no lose position. For example, in the options market, a stockowner of an underlying stock can write calls or buy puts. In the same options market, the short sellers of the underlying stock can buy calls or write puts.
INCOME POLICY proceeds from a life insurance policy paid on a monthly basis instead of in a lump sum.
INDEMNITY compensation for loss. In a property and casualty contract, the objective is to restore an insured to the same financial position after the loss that he or she was in prior to the loss. But the insured should not be able to profit by damage or destruction of property, nor should the insured be in a worse financial position after a loss. In life insurance the situation is totally different. By the payment of a single premium, the beneficiary of an insured can be placed in a much better financial position at the death of an insured than he or she was in prior to the death. However, the payment of a predetermined amount upon the insured’s death does not make a life insurance policy a contract of indemnity.
INDIRECT LOSS loss that is not a direct result of a peril. For example, damage to property of a business firm would be a direct loss, but the loss of business earnings because of a fire on its premises would be an indirect loss.
INSOLVENCY bankruptcy. If an insured business firm becomes bankrupt, the circumstance does not relieve an insurance company of its obligations under an insurance contract.
INSURABILITY circumstance in which an insurance company can issue life or health insurance to an applicant based on standards set by the company.
INSURANCE AGENT representative of an insurance company in soliciting and servicing policyholders. An agent’s knowledge concerning an insurance transaction is said to be the knowledge of the insurance company as well. Wrongful acts of the agent are the responsibility of the company; these bind the company to the customer. Notice given by an insured to the agent is the same as notice to the company.
INSURANCE BROKER representative of an insured, not of an insurance company. Acts of a broker are not the responsibility of the company, and notice given by an insured to a broker is not the same as notice to the company. The broker searches the insurance marketplace for a company in which to place the insured’s business for the most coverage at the best price. The broker is not restricted to placing business with any one company.
INSURANCE CONTRACT, GENERAL legally binding unilateral agreement between an insured and an insurance company to indemnify the buyer of a contract under specified circumstances . In exchange for premium payment(s) the company covers stipulated perils
INSURANCE POLICY written contract between an insured and an insurance company stating the obligations and responsibilities of each party.
INSURED Party covered by an insurance policy. In life insurance policies there is one designated insured, the person so named; or a policy can be issued to numerous insureds on a group basis. The insured persons in property and casualty policies may also include residents of the insured’s household, such as a spouse, relatives of either, and other individuals under their care, custody, and control if under age 21.
INSURER company offering protection through the sale of an insurance policy to an insured.
JACKET outer covering containing an insurance policy; in many instances it lists provisions common to several types of policies.
LAG time that has elapsed between when claims actually occurred and when claims are actually paid.
LAPSE RATIO Percentage of a life insurance company’s policies in force at the beginning of the year that are no longer in force at the end of the year. This ratio is critical because it indicates the rate at which policies are going off the books and the resultant loss of earnings to the company.
LAW OF LARGE NUMBERS mathematical premise stating that the greater the number of exposures,(1) the more accurate the prediction; (2) the less the deviation of the actual losses from the expected losses(X-x approaches zero); and (3) the greater the credibility of the prediction(credibility approaches 1). This law forms the basis for the statistical expectation of loss upon which premium rates for insurance policies are calculated. Out of a large group of policyholders the insurance company can fairly accurately predict no;t byt name but by number, the number of policyholders who will suffer a loss. Life insurance premiums are loaded for the expected loss plus modest deviations. For example, if a life insurance company expects (x) 10,000 of its policyholders to die in a particular year and that number or fewer actually die (x), there is no cause for concern on the part of the company’s actuaries. However, if the life insurance company expects (x ) 10,000 of its policyholders to die in a particular year and more than that number dies (x) there is much cause for concern by actuaries.
LIABILITY legal obligation to perform or not perform specified act(s). In insurance the concern is with the circumstance in which (1) one party’s property is damaged or destroyed, or (2) that party incurs bodily injury as the result of the negligent acts or omissions of another party. Liability insurance is designed to provide coverage f or exposure on either a business or a personal basis.
LLOYD’S OF LONDON insurance facility composed of many different syndicates, each specializing in a particular risk; for example, hull risks. Lloyd’s provides coverage for primary jumbo risks as well as offering REINSURANCE and RETROCESSIONS. Membership in a syndicate is limited to individuals with a large personal net worth, and each member may belong to one or more syndicates depending upon his or her not worth. Although much of the publicity Lloyd’s receives involves insuring exotic risks such as an actress, legs, this represents only a very small portion of its total business, most of which involves reinsurance and retrocessions.
LOSS RATIO relationship of incurred losses plus loss adjustment expense to earned premiums.
MARINE INSURANCE coverage for goods in transit and the vehicles of transportation on waterways, land, and air.
MATURITY DATE time at which life insurance death proceeds or endowments are paid, either at the death of an insured or at the end of the endowment period.
MORAL HAZARD circumstance which increases the probability of loss because of an applicant’s personal habits or morals; for example, if an applicant is a known criminal.
NET INCOME AFTER TAXES total of OPERATING INCOME Plus realized capital gains (losses) from investment and underwriting operations minus federal income taxes.
NET RETAINED LINES amount of insurance remaining on a CEDING COMPANY’S books, net of the amount reinsured.
NET SINGLE PREMIUM Pure cost of protection, or the premium covering the present value of future claims (not including loadings for the various expenses).
OVER-THE-COUNTER SELLING OF INSURANCE method of selling insurance in which the INSURED purchases the product directly from the insurance company and not through an AGENT.
PAID-IN- CAPITAL sum received by an insurance company at the sale of its stock. This capital represents the interest of the stockholders in the company.
PAID LOSSES actual amount of total losses paid by an insurance company during a specified time interval.
PAID-UP INSURANCE life insurance policy under which all premiums have already been paid, with no further premium payment due.
PARENT COMPANY insurer in a group of companies that act as subsidiaries.
PENSION PLAN retirement program to provide employees (and often spouses) with a monthly income payment for the rest of their lives. To qualify, an employee must have met minimum age and service requirements.
PER CAPITA distribution of a deceased beneficiary’s s hare of an estate among all of his or her living heirs.
POLICY written agreement that puts insurance coverage into effect.
PREFERRED RISK insured, or an applicant for insurance, with lower expectation of incurring a loss than the standard applicant. For example, an applicant for life insurance who does not smoke can usually obtain a reduced premium rate to reflect his or her greater LIFE EXPECTANCY.
PREMIUM rate that an insured is charged, reflecting his or her expectation of loss or risk. The insurance company will assume the risks of the insured (length of life, state of health, property damage or destruction or liability exposure) in exchange for a premium payment premiums are calculated by combining expectation of loss and expense and profit loadings. Usually, the periodic cost of insurance is computed by multiplying the premium rate per unit of insurance by the number of units purchased. The rate class in which the insured is placed includes large numbers of individuals with like characteristics who pose the same risk. Every individual in a given class will not incur the same loss; rather each has approximately the same expectation of loss (known as the Principle of Equity).
RECISSION cancellation of a contract, Under the federal Truth in Lending Act, a person who signs a contract can nullify it within three business days of having signed it without penalty; funds paid into the contract by the signer must be returned. Also, fraud or misrepresentation provides legal grounds for cancellation of a contract. For example, life insurance contracts with minors are voidable (by minors but not by insurers) since they are under legal age for making a contract.
REINSURANCE form of insurance that insurance companies buy for their own protection, “a sharing of insurance. “ An insurer (the reinsured) reduces its possible maximum loss on either an individual risk (FACULTATIVE REINSURANCE) or a large number of risks (AUTOMATIC REINSURANCE) by giving (ceding) a portion of its liability to another; insurance company (the reinsurer).
UNDERWRITING process of examining, accepting, or rejecting insurance risks, and classifying those selected, in order to charge the proper premium for each. The purpose of under writing is to spread the risk among a pool of insureds in a manner that is equitable for the insureds and profitable for the insurer.
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