Glossary of Terms

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A

“A” (or Judgment) Rates

Rates that are not backed up by loss experience statistics. They are based on the judgment of the underwriter on an individual risk basis.

Accident

An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place. See also Occurrence.

Accident Frequency

The rate of the occurrence of accidents, often expressed in terms of the number of accidents over a period of time. It is one method used for measuring the effectiveness of loss prevention services. Contrast with Accident Severity.

Accidental Bodily Injury

An injury sustained accidentally. Only the result need be accidental. Contrast with Accidental Means.

Accidental Means

Unexpected or undesigned cause of an accidental bodily injury. Under a definition of accidental means, the mishap itself must be accidental, not just the resulting injury. An example would be an individual chopping wood: If the axe slipped out of his hand and cut his foot, it would have been accidental means. However, if his finger got in the way of the axe, it would not have been.

Accommodation Line

Business accepted from an agent or broker which would normally be rejected according to strict underwriting standards but which is accepted because of the overall profitability of the agent’s or customer’s other business. As an example, an insurer might accept coverage on property that would not normally meet its underwriting standards, if the other lines of insurance which it carries for the customer were profitable.

Account Current

A monthly financial statement provided to an agent by an insurer showing premiums written, cancellations, endorsements, and commissions.

Act of God

An event arising out of natural causes with no human intervention which could not have been prevented by reasonable care or foresight. Examples are floods, lightning, and earthquakes.

Actual Cash Value

An amount equivalent to the replacement cost of lost or damaged property at the time of the loss, less depreciation. With regard to buildings, there is a tendency for the actual cash value to closely parallel the market value of the property. See also Market Value.

Actuarial

Having to do with insurance mathematics.

Actuary

A specialist trained in mathematics, statistics, and accounting who is responsible for rate, reserve, and dividend calculations and other statistical studies.

Additional Insured

A person other than the named insured who is protected under the terms of the contract. Usually, additional insureds are added by endorsement or referred to in the wording of the definition of “insured” in the policy itself.

Adjuster

A representative of the insurer who seeks to determine the extent of the firm’s liability for loss when a claim is submitted. Same as Claim Representative.

Agency

An insurance sales office which is directed by a agent, manager, independent agent, or company manager.

Agent

One who solicits, negotiates or effects contracts of insurance on behalf of an insurer. His right to exercise various functions, his authority, and his obligations and the obligations of the insurer to the agent are subject to the terms of the agency contract with the insurer, to statutory law, and to common law.

Agent’s Appointment

Official authorization from an insurance company granting an agent the authority to act as its agent. In most states, agents must be appointed by at least one insurer in addition to being licensed by the state.

Aggregate Limit

Usually refers to Liability Insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents may occur.

Aleatory Contract

A contract in which the number of dollars to be given up by each party is not equal. Insurance contracts are of this type, as the policyholder pays a premium and may collect nothing from the insurer or may collect a great deal more than the amount of the premium if a loss occurs.

Alienated

In insurance, this term describes property that an insured no longer owns or holds title to. Generally a Public Liability policy will cover the insured’s liability for premises alienated by him.

Alliance of American Insurers (AAI)

An association of insurance companies working together in the following areas of common interest: (1) Government affairs affecting insurance; (2) Education of the employees of member companies; (3) Loss prevention, and (4) Other insurance activities.

American Association of Insurance Services (AAIS)

An association of insurance companies performing various technical functions for its member and subscribers. AAIS is licensed to operate in all states, the District of Columbia, and the Commonwealth of Puerto Rico. AAIS offers program services, files rates, rules and forms on behalf of member and subscriber companies, acts as an official statistical agent, and offers a variety of professional services for its member companies.

American Institute for Property and Liability Underwriters, Inc.

An insurance educational organization which establishes insurance standards and fosters educational work. Properly qualified individuals who pass a series of examinations given by this body receive the designation Chartered Property and Casualty Underwriter (CPCU).

American Insurance Association (AIA)

The informational, educational, technical and legislative organization of the capital stock insurance companies in the Property and Liability fields.

Annual Statement

A report to the state insurance department of the year’s financial results. The insurer’s income and expenses are stated in detail as well as its assets and liabilities.

Application

A form on which the prospective insured states facts requested by the insurer on the basis of which, together with information from other sources, the insurer decides whether to accept the risk, modify the coverage offered, or decline the risk.

Apportionment

The method of dividing a loss among insurers in the same proportions as their participation when two of more companies cover the same loss.

Appraisal

An evaluation of property made to ascertain either the appropriate amount of insurance to be written or the amount of loss to be paid.

Assessed Value

The value of real estate or personal property as determined by a governmental unit, such as a city, for the purpose of determining taxes.

Assets

The items on the balance sheet of the insurer which show the book value of property owned. Under state regulations, not all property or other resources can be admitted in the statement of the insurer. This gives rise to the term “nonadmitted assets.”

Assigned Risk

A risk which is not ordinarily acceptable to insurers and which is, therefore, assigned to insurers participating in an assigned risk pool or plan. Each participating company agrees to accept its share of These risks.

Authorization

The amount of insurance an underwriter says he will accept on a risk of a given class on specific property. It is given for the guidance and information of agents.

Authorized Insurer

An insurer authorized by the state to transact business in that state for specific types of insurance.

Automatic Cover

Coverage given automatically by a policy, usually for a specified period and limited amount, to cover increasing values and newly acquired and changing interests.

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B

Balance Sheet

An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.

Basic Limit

Usually refers to Liability policies and indicates the lowest amount for which a policy can be written. This amount is either prescribed by law or company policy.

Basic Premium

A fixed cost charged in a retrospective rating plan. It is a percentage of the standard premium and is designed to give the insurer the money needed for administrative expenses and the agent’s commission plus an insurance charge. See also Retrospective Rating.

Basic Rate

The manual rate from which discounts are taken or to which charges are added to reflect the individual circumstances of a risk.

Benefits

Financial reimbursement and other services provided insureds by insurers under the terms of an insurance contract. An example would be the benefits listed under a Life or Health Insurance policy or benefits as prescribed by a Workers Compensation law.

Binder

An agreement executed by an agent or insurer (usually the latter) putting insurance into force before the contract has been written or the premium paid. This term is not usually used in Life Insurance.

Book of Business

A total of all insurance accounts written by a company or agent. It may be treated in different ways. For example: an insurer’s book of automobile business, or an agent’s overall book of business, or an agent’s book of business with each insurer.

Borderline Risk

An insurance prospect of doubtful quality from an underwriting point of view.

Broker

One who represents an insured in the solicitation, negotiation or procurement of contracts of insurance, and who may render services incidental to those functions. By law the broker may also be an agent of the insurer for certain purposes such as delivery of the policy or collection of the premium.

Business

In Property, Liability, and Health lines, it usually refers to the volume of premiums.

Burning Ratio

The ratio of losses suffered to the amount of insurance in effect.

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C

Calendar Year Experience

This measures the premiums and losses entered on accounting records during the 12-month calendar.

Cancelable

A contract of insurance that may be terminated by the insurer or insured at any time. Practically every form of insurance is cancelable, except Life Insurance and those Health Insurance policies designated as a “guaranteed renewable” or “noncancelable and guaranteed renew-able.” Some states also regulate when or if Automobile policies can be cancelled.

Cancellation

Termination of a contract of insurance in force by voluntary act of the insurer or insured in accordance with the provisions in the contract or by mutual agreement.

Capacity

The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.

Captive Agent

One who sells insurance for only one company as opposed to an agent who represents several companies.

Captive Insurer

A legally recognized insurance company organized and owned by a corporation or firm whose purpose is to use the captive to write its own insurance at rates lower than those of other insurers. Usually it is a nonadmitted insurer that has the right, under special circumstances, to reinsure with an admitted insurer.

Carrier

Sometimes used to designate the insurer. The term “insurer” is preferred because of the possible confusion of “carrier” with transportation.

Cash Flow Plans

Premium payment schemes which allow the insured to retain a large part of the premium and pay it out over a time period such as a year.

Catastrophe Hazard

The hazard of large loss by reason of occurrence of a peril to which a very large number of insureds are subject. An example would be widespread loss due to a hurricane or tornado.

Certificate of Authority

(1) A certificate showing the powers that an insurer grants to its agents. (2) A certificate issued by a state department of insurance showing the power of an insurer to write contracts of insurance in that state.

Certificate of Convenience

A term used in some jurisdictions to refer to a temporary license or permit empowering a person to act as an agent even though not fully licensed according to the law. Usually this certificate is granted to an agent who is studying for a licensing examination. It might also be issued to the administrator or executor of the estate of an insurance agent, who must have the authority of an agent to settle the estate, or to someone acting for an agent during a disability or an absence such as military duty.

Certificate of Insurance

(1) A statement of the coverage and provisions of a master contract in group insurance that is issued to individuals covered in the group. (2) A form which verifies that a policy has been written and states the coverage in general, often used as proof of insurance in loan transactions and for other legal requirements.

Claim

A demand made by the insured, or the insured’s beneficiary, for payment of the benefits provided by the contract.

Claim Expense

The expense of adjusting a claim, such as investigation and attorneys’ fees. It does not include the cost of the claim itself.

Claim Report

A report filed by an agent setting forth the facts of a claim. Same as Loss Report.

Claimant

The person making a demand for payment of benefits.

Claims Reserve

Amounts set aside to meet costs of claims incurred but not yet finally settled. An example might be a Workers Compensation case where benefits are payable for several years. At any given point in time, the reserve would be the funds kept based on the estimate of what the claim will cost when finally settled.

Class (or Classification)

A group of insureds having the same characteristics and who are, therefore, grouped together for rating purposes. Class rates apply to dwellings and apartments, since they usually have the same characteristics and are exposed to the same perils.

Clause

A section of a policy contract or endorsement dealing with a particular subject. For instance, a Subrogation Clause deals with the rights of the insurer in the event of payment of a loss under the contract.

Collusion

An agreement, usually secret, between two or more persons to defraud or deprive another or others of their property or rights.

Combined Ratio

The sum of an expense ratio and a loss ratio. An underwriting profit occurs when the combined ratio is under 100% and an underwriting loss occurs when the combined ratio is over 100%.

Commercial Lines

This term is used to refer to insurance for businesses, professionals, and commercial establishments. Contrast with Personal Lines.

Commercial Package Policy (CPP)

A commercial lines policy that contains more than one of the following coverage parts: Commercial Property, Commercial Liability, Commercial Inland Marine, Commercial Crime, Boiler and Machinery Insurance, Commercial Automobile Insurance, and Farm Coverage.

Commissioner of Insurance

The title of the head of most state insurance departments. In some states, the title Director or Superintendent of Insurance is used instead.

Common Law Liability

Responsibility based on common law for injury or damage to another’s person or property which rests on an individual because of his actions or negligence. This is opposed to liability based on statutory law.

Contingent Fund

A reserve to cover possible liabilities resulting from an unusual happening.

Continuing Education Requirement

State-level requirement that insurance licensees periodically complete a minimum number of hours of insurance-related education in order to be eligible for license renewal.

Contract

(1) An agreement entered into by two or more persons under which one or more of them agree, for a consideration, to do or refrain from doing acts in accordance with the wishes of the other party(s). (2) In insurance, the agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A “policy” is the written statement of the terms of the contract. (3) An agreement under which an agency or agent does business with an insurer.

Cover

(1) A contract of insurance. (2) To effect insurance, that is, to “cover” an insured, for instance, for Automobile Insurance effective as of a given time. (3) To include within the coverage of a contract of insurance. For example, one could “cover” additional buildings under a Property Insurance contract.

Coverage

The scope of the protection provided under a contract of insurance.

Covered Loss

Illness, injury, death, property loss, legal liability, or any other situation or loss for which an insurance company will pay benefits under a policy when such event occurs.

Credit Report

A confidential report made by an independent individual or organization that has investigated the reputation and record of an applicant for insurance.

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D

Date of Issue

The date stated in a policy as the date on which the contract was issued by the insurer. This is not necessarily the effective date of the policy.

Declination

Rejection of an application for insurance by the insurer.

Deductible

The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.

Deductible Clause

A contract provision that sets forth the deductible.

Deficit

Any excess of debits over credits at the end of a given accounting period.

Deficit Carried Forward

The transfer of a debit balance from one accounting period to another.

Deflation

An economic period characterized by falling prices, high unemployment and a generally sluggish or slow economy.

Degree of Risk

The amount of uncertainty that exists in a given situation. For instance, if you’ve chosen heads in the flip of a coin, the degree of risk present is 50%, since there is a 50% chance any flip of the coin will come up tails.

Dependent

An individual who depends on another for support and maintenance.

Depreciation

A decrease in the value of any type of tangible property over a period of time resulting from use, wear and tear, or obsolescence.

Director of Insurance

A title used in some states for the head of the department of insurance.

Disability

A condition that curtails to some degree a person’s ability to carry on his normal pursuits. A disability may be partial or total, and temporary or permanent.

Disclosure Authorization Form

A form authorizing the disclosure of personal information obtained in connection with an insurance transaction. Insurers are required to give applicants advance notice of their information practices. Among other things, the form must state the kind of information collected and to whom information may be disclosed.

Discrimination

Refusal of an insurer to provide comparable insurance or use comparable rates for certain individuals or groups with basic characteristics the same as those to whom the coverage or rates are offered. Unfair discrimination is prohibited by law.

Dividend

(1) The return of part of the premium paid for a policy issued on a participating basis by either a mutual or a stock insurer. (2) A portion of the surplus paid to the stockholders of a corporation.

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E

Earned Income

The money individuals earn as a result of working at some job or occupation for which they are paid a salary.

Earned Premium

The amount of the premium that has been “used up” during the term of a policy. For example, if a one-year policy has been in effect six months, half of the total premium has been earned.

Effective Date

The date on which the protection of an insurance policy or bond goes into effect.

Endorsement

A written or printed form attached to the policy which alters provisions of the contract.

Equity

The money value of an insurance company that is over and above its liabilities. Liabilities include almost all of its reserves.

Estate Plan

A plan for the disposition of one’s property at death, including the handling of property in the event of the incompetency or total disability of the estate owner. A will is part of an estate plan.

Estimated Premium

A provisional premium which is adjusted at the end of the year. For example, in Workers Compensation Insurance an estimated premium is based on estimated payrolls for the coming year. At the end of the year, final payrolls are determined and the final premium is computed.

Examiner

An employee assigned by the state insurance department to audit insurers’ records.

Exclusion

A contractual provision that denies coverage for certain perils, persons, property, or locations.

Exclusions

Specific situations, conditions, or circumstances that are listed in the contract as being not covered.-

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F

Fiduciary

A person holding the funds or property of another in a position of trust. An example would be the executor of an estate.

Financial Statement

The disclosure of the financial results of a firm’s operations. It involves the balance sheet, profit and loss statement, and associated information.

Fine Print

A reference to imaginary small type in a policy contract supposedly containing exclusions, reductions, exemptions, and limitations of coverage. Most state laws include specifications for the minimum type size that can be used in a policy, and they also provide that exclusions cannot be printed in type smaller than that used to print the benefits.

First Party Insurance

Insurance which applies to coverage for the insured’s own property or person. Contrast with Third Party Insurance.

Flat

Without interest or service charges.

Form

(1) An insurance document which, when attached to a policy, makes it complete. For example, a Standard Fire policy would have to have a Business Interruption form attached to it to make up a Business Interruption policy. (2) Any rider or endorsement, such as a Deductible Endorsement “form.”

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G

Goodwill

An intangible business asset. It refers to the value of a business which has been built up through the reputation of the business concern and its owners.

Gross Line

The total limit accepted by an insurer on an individual risk, including the amount to be reinsured.

Guaranty Funds

Funds created by state law from contributions by insurance companies operating in the state which are used to make good any unpaid claims or otherwise to make money available to insolvent companies. Each state which has a fund has a different plan.

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H

Health Care Provider

A doctor, hospital, laboratory, nurse, or anyone who delivers medical or health-related care.

Hammer Clause

This language of many insurance policies states that if the Insured refuses to accept a settlement offer from the claimant/plaintiff that is acceptable to the Insurer, then the Insurer’s liability for damages and defense costs is limited to amount of the proposed settlement and defense cost incurred up to the point of the settlement offer.

Hazard

A specific situation that increases the probability of the occurrence of loss arising from a peril, or that may influence the extent of the loss. For example, accident, sickness, fire, flood, liability, burglary, and explosion are perils. Slippery floors, unsanitary conditions, shingled roofs, congested traffic, unguarded premises, and uninspected boilers are also hazards.

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I

Impaired Insurer

An insurer which is in financial difficulty to the point where its ability to meet financial obligations or regulatory requirements is in question.

Import

Goods or services purchased from another country and brought into one’s own country.

Incurred But Not Reported

This refers to losses which have occurred during a stated period, usually a calendar year, but have not yet been reported to the insurer as of the date under consideration. For instance, insurance company statements prepared after the end of the calendar year would have to include an estimate of losses that occurred during that year but have not yet been reported.

Incurred Expense

Expenses not yet paid. Can also include paid expenses in some accounting systems.

Incurred Loss Ratio

The percentage of losses incurred to premiums earned.

Incurred Losses

The losses occurring within a fixed period, whether or not adjusted or paid during the same period. As an example, in Workers Compensation claims losses occur during a given policy period, but benefits may continue to be paid for many years. The estimated value of the total claim would be an “incurred loss” for the policy period during which the loss occurred.

Indemnify

To restore the victim of a loss to the same position as before the loss occurred.

Indemnity

Restoration to the victim of a loss by payment, repair, or replacement.

Independent Agent

An agent operating as an independent contractor under the independent agency system.

Independent Insurance Agents of America (IIAA)

An association of independent insurance agents historically known to represent stock insurance companies more than mutual companies. Members are also members of their state associations.

Initial Premium

An amount paid at the inception of an insurance contract, usually subject to adjustment at the end of the policy period.

Inspection Report

A summary statement of the physical, financial, and moral attributes of an insured or an applicant for insurance on his property. Such reports are prepared by inspection bureaus, specialized organizations, and insurers.

Insurability

Acceptability to the insurer of an applicant for insurance.

Insurable Interest

Any interest a person has in a possible subject of insurance, such as a car or home, of such a nature that a certain happening might cause him financial loss.

Insurable Risk

A risk which meets most of the following requisites: (1) The loss insured against must be capable of being defined. (2) It must be accidental. (3) It must be large enough to cause a hardship to the insured. (4) It must belong to a homogeneous group of risks large enough to make losses predictable. (5) It must not be subject to the same loss at the same time as a large number of other risks. (6) The insurance company must be able to determine a reasonable cost for the insurance. (7) The insurance company must be able to calculate the chance of loss.

Insurance

A formal social device for reducing risk by transferring the risks of several individual entities to an insurer. The insurer agrees, for a consideration, to assume, to a specified extent, the losses suffered by the insured.

Insurance Commissioner

The head of a state’s insurance regulatory agency in most jurisdictions. In some states the title of Director or Superintendent is used.

Insurance Department

A governmental bureau in each state and the federal government in Canada charged with the administration of insurance laws, including the licensing of agents and insurers and their regulation and examination. In some jurisdictions the department is a division of another state department or bureau.

Insurance Examiner

The representative of a state insurance department assigned to participate in the official audit and examination of an insurer.

Insurance Institute of America, Inc (IIA)

An organization which develops programs and conducts national examinations in Insurance, Risk Management, Management, Adjusting, Underwriting, Auditing, and Loss Control Management. Diplomas are given to recognize achievement in these areas.

Insurance Policy

The printed form which serves as the contract between an insurer and an insured.

Insurance Regulatory Information System (IRIS)

Information and early-warning system used by the National Association of Insurance Commissioners (NAIC) to keep track of the financial soundness of insurers.

Insured

The party to an insurance arrangement whom the insurer agrees to indemnify for losses, provide benefits for, or render services to. This term is preferred to such terms as policyholder, policy owner, and assured.

Insurer

The party to an insurance arrangement who undertakes to indemnify for losses, provide pecuniary benefits, or render services. It is desirable to use the word “insurer” in preference to “carrier” or “company” since it is a functional word applicable without ambiguity to all types of individuals or organizations performing the insurance function. The word insurer is generally used in statutory law.

Insuring Agreement (or Clause)

That portion of an insurance contract which states the perils insured against, the persons and/or property covered, their locations, and the period of the contract.

Item

(1) A term used to identify a statement in a policy as to what is insured. In a Fire policy one might refer to the contents item, meaning the coverage in the policy which applies to the contents. (2) An individual entry, such as a piece of jewelry, listed with its description and valuation on a schedule by a policy showing items covered.

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J

Joint Venture

This expression is applied most often to construction ventures where several contractors agrees to combine together on a construction project rather than to act as separate contractors. Under the joint venture agreement, they share profits and losses in some agreed-upon proportion.

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K

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L

Lapse

Termination of a policy because of failure to pay the premium. In Life Insurance, the term refers to nonpayment before the policy has developed any nonforfeiture values. If it has, and the premium is not paid, it is said to have lapsed “except as to any nonforfeiture benefits that may apply.”

Lapsed Policy

One which has been allowed to expire because of nonpayment of premiums.

Liabilities

Money owed or expected to be owed. Insurance company financial statements, for instance, show assets and liabilities.

License

A certification of authority for an agent or insurer to operate, given by the appropriate jurisdiction.

Limitations

Exceptions to coverage and limitations of coverage as contained in an insurance contract. For instance, a limit of liability would be one limitation on an Automobile policy. Another example would be policies written to cover only certain described automobiles, or, in the case of Liability Insurance, certain described premises.

Limits

(1) Ages below or above which the insurer will not issue a policy or above which it will not continue a policy presently in force. (2) The maximum amount of benefits payable for a given situation or occurrence, e.g., a limit of $50,000 on the contents of a home, or a $40,000 per accident limit for Property Damage Liability. See also Limit of Liability.

Line

A colloquial term with several meanings. It may be used to mean a particular type of insurance, such as the Liability “line.” It may be used to describe all the various types of insurance written for a property owner, e.g., carrying all “lines” of the XYZ Company. It is also used to describe the amount of insurance on a given property, e.g., a $250,000 “line” on buildings of the XYZ Company.

Line of Business

The classification of business as utilized in the insurance industry, e.g., Fire, Allied Lines and Homeowners.

Liquidation of Insurer

Action undertaken by a state Insurance Department to dissolve an impaired or insolvent insurer which cannot be restored to sound financial standing.

Liquidity

The ability of an insurer to convert its assets into cash to pay claims if necessary.

Loss

Generally refers to (1) the amount of reduction in the value of an insured’s property caused by an insured peril, (2) the amount sought through an insured’s claim, or (3) the amount paid on behalf of an insured under an insurance contract.

Loss Control

Any combination of actions taken to reduce the frequency or severity of losses. Installing locks, burglar or fire alarms and sprinkler systems are loss control techniques.

Loss Development

The difference between the amount of losses initially estimated by the insurer and the amount reported in an evaluation on a later date.

Loss Expectancy

An underwriter’s estimate of the probable maximum loss to be suffered on an exposure being considered, with attention given to the expected level of loss prevention activities on the part of the insured.

Loss Frequency

The number of times a loss occurs over a specific period of time.

Loss Prevention Service

Engineering and inspection work done by an insurance company or independent organization with the aim of removing or reducing dangerous conditions in order to prevent losses.

Loss Ratio

The losses divided by the premiums paid. The numerator (losses) can be losses incurred or losses paid, and the denominator (premium) can be earned premiums or written premiums, depending on what use is going to be made of the loss ratio.

Losses Incurred

The total losses, whether paid or not, sustained by an insurer during a given period, e.g., 12 months.

Losses Outstanding

A summary statement prepared by Property, Life, and Liability insurers showing claims not yet settled.

Losses Paid

A summary of claims paid.

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M

Malicious Mischief

Similar to vandalism. Purposely damaging the rights or property of another.

Manager

A common title for the head of an agency that is operated as a branch office, as opposed to being operated as a agency. The manager is a salaried employee, usually with an incentive bonus based on the agency’s volume.

Manual

A book giving rates, classifications, and underwriting rules for some line of insurance. An example would be the Automobile Manual which gives such information for Automobile Insurance.

Market Value

The price for which something would sell, especially the value of certain types of assets, such as stocks and bonds. It is based on what they would sell for under current market conditions. For example, common stock market value would be the price of the stock as of a specified date.

Master Policy

(1) The policy contract issued to an employer or other entity authorized by state law for a group insurance plan. (2) A Property Insurance policy issued to an insured who can issue certificates of coverage to cover the property of others.

Mental (or Emotional) Distress

Usually not covered if a claimant was a bystander to an accident, but usually covered if he was physically involved.

Merit Rating

A type of rating plan used in several forms of insurance but most commonly in Personal Auto. It is a method whereby the insured’s premium will vary up or down depending on his own past loss record.

Minimum Premium

The smallest amount of premium for which an insurer will issue coverage under a given policy.

Monoline Policy

Any insurance coverage written as a single line policy. Contrast with Multiple Line or Package policy.

Mutual Fund

An investment company that raises money by selling its own stock to the public. It then invests the proceeds in other securities. and the value of its own stock fluctuates with its experience with the securities in its portfolio. Mutual funds are of two types: (1) Open-end, in which capitalization is not fixed and more shares may be sold at any time. (2) Closed-end, in which capitalization is fixed and only the number of shares originally authorized may be sold.

Mutual Insurer

An incorporated insurer without incorporated capital owned by its policyholders. Although mutual insurers do distribute their earnings to their policyholders in the form of dividends, the term should not be used in a sense that makes it synonymous with participating. In most jurisdictions, a mutual insurer is free to issue nonparticipating insurance if it chooses and a stock insurer is free to issue participating insurance. Contrast with Stock Insurer.

Mutual Insurer Policy

Insurance issued by a mutual insurer.

Mutualization

The process of converting a stock insurer to a mutual insurer, accomplished by having the insurer buy stock and retire it.

Multi-Peril Policies

Policies which cover a number of perils, such as fire, burglary, and liability, in a single contract.

Multiple Line Policy

A policy that includes several different coverages such as Property, Liability, and Crime. Any personal or commercial package policy.

Mutual Benefit Association

An organization offering benefits to members on a plan under which no fixed premiums are paid in advance but assessments are levied on members to meet specific losses as they occur.

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N

Named Insured

Any person, firm, or corporation, or any member thereof, specifically designated by name as the insured(s) in a policy. Others may be protected as insureds even though their names do not appear on the policy. A common application of this latter principle is in Automobile policies where, under the definition of insured, protection is extended to cover other drivers using the car with the permission of the named insured.

National Association of Independent Insurers (NAII)

An association comprised of Fire, Casualty, and Surety insurers which do not belong to large rating bureaus. The association distributes considerable information about legislation and litigation.

National Association of Insurance Agents, Inc. (NAIA)

The former name of the Independent Insurance Agents of America. See the listing under this name.

National Association of Insurance Commissioners (NAIC)

Originally National Convention of Insurance Commissioners. An association of state insurance commissioners formed for the purpose of exchanging information and of developing uniformity in the regulatory practices of the several states through drafting model legislation and regulations. The NAIC has no official power to enforce compliance with its recommendations.

National Association of Mutual Insurance Companies (NAMIC)

A voluntary intercompany organization of Mutual Property and Liability insurers formed for the exchange of information and discussion.

National Association of Securities Dealers (NASD)

A voluntary association of brokers and securities dealers handling over-the-counter securities. It serves a quasi-official function in the regulation of licensing and also acts as a bureau which formulates rates, rating plans and policy wording for about half of the states. Many other states subscribe to the various services it provides. It is supported by the insurance companies which belong to it.

National Auto Theft Bureau

An organization engaged in the prevention and reduction of motor vehicle fire and theft losses.

National Convention of Insurance Commissioners

See National Association of Insurance Commissioners.

National Insurance Association, Inc

An intercompany association of insurers formed to exchange information and ideas on common problems unique to the black community.

National Safety Council

A nonprofit organization chartered by Congress in 1913. It is made up of approximately 12,000 industry members nationwide. The purpose of the council is the dissemination of safety education material.

Natural Death

Death by means other than accident or homicide.

Negligence

Failure to use that degree of care which an ordinary person of reasonable prudence would use under the given or similar circumstances. A person may be negligent by acts of omission or commission or both.

Net Loss

The amount of loss sustained by an insurer after giving effect to all applicable reinsurance, salvage, and subrogation recoveries.

Net Premium

(1) The amount of premium minus the agent’s commission. (2) The premium necessary to cover only anticipated losses, before loading to cover other expenses. (3) The original premium minus dividends paid or anticipated in participating Life Insurance when the insured elects to use his dividends toward payment of the premiums. Contrast with Gross Premium.

Noninsurable Risk

A risk that cannot be measured actuarially or in which the chance of loss is so high that insurance cannot be written against it.

Nonrenewal

Termination of insurance coverage at an expiration date or anniversary date. This action may be taken by an insurer who refuses to renew, or by an insured who rejects a renewal offer.

Nonresident Agent

An agent licensed in a state in which he does not live.

Notice of Cancellation

Written notice by an insurer of intent to cancel insurance, or written notice by an insured requesting cancellation.

Notice of Loss

Notice to an insurer that a loss has occurred. Notice of loss is a condition of most policies, and it is frequently required within a given time and in a particular manner.

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Occupational Accident

An accident arising out of or occurring in the course of one’s employment and caused by hazards inherent in or related to it.

Occupational Safety and Health Act (OSHA)

A federal statute which establishes safety and health standards on a nationwide basis. The act is enforced by Labor Department safety inspectors and also provides for the recordkeeping of statistics relevant to work injuries and illnesses.

Occurrence

An event that results in an insured loss. In some lines of insurance, such as Liability, it is distinguished from accident in that the loss does not have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected nor intended by the insured.

Offer

The terms of a contract proposed by one party to another. In Property and Casualty Insurance, submitting an application to the company is usually considered an offer. In Life Insurance, the application plus the initial premium constitutes an offer.

Omnibus Clause

An agreement in most Automobile Liability policies and some others that, by its definition of insured, extends the protection of the policy to others within the definition without the necessity of specifically naming them in the policy. An example would be a policy which covers the named insured and “those residing with him.”

Open Rating

A system whereby a state allows an insurer to use rates without prior approval.

Overinsured

A term used to describe the condition that exists when an insured has purchased coverage for more than the actual cash value or replacement cost of a subject of insurance. It is also used to describe a situation where so much insurance is in force as to constitute a moral or morale hazard, such as having so much Disability Income Insurance in force that it becomes profitable to be disabled.

Overlapping Insurance

Coverage from two or more policies or insurers which duplicates coverage of certain risks.

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PIA

Professional Insurance Agents. An association of independent agents involved in educational programs, consumer efforts, and government and industry affairs pertaining to the insurance industry.

Package Policy

Any insurance policy including two or more lines or types of coverages in the same contract. Personal and commercial package policies are very common today. In fact, most policies sold are package policies.

Paid-For

Insurance on which the premium has been paid.

Paid Losses

The amount actually paid in losses during a specified period of time, not including estimates of amounts that will be paid in the future for losses that occurred then.

Partial Loss

A loss covered by an insurance policy which does not completely destroy or render worthless the insured property.

Payee

The person receiving money.

Peril

The cause of a possible loss. Contrast with Hazard and Risk.

Persistency

The tendency or likelihood of insurance business not lapsing or being replaced by another insurer’s product; an important underwriting factor.

Personal Assets

Wealth and things of value accumulated and owned by an individual. These would include real estate, cash, investments and other items of value.

Personal Lines

This term is used to refer to insurance for individuals and families, such as private passenger automobile insurance and homeowner policies. Contrast with Business Insurance and Commercial Lines.

Personal Property of Others

Property, other than real property, which is not owned by an insured. Liability forms have traditionally excluded coverage for property of others in an insured’s care, custody or control. Modern homeowner forms and commercial property forms provide some coverage for property of others.

Physical Hazard

Any hazard arising from the material, structural, or operational features of the risk itself apart from the persons owning or managing it.

Policy

The written statement of a contract effecting insurance, or certificates thereof, by whatever name called, and including all clauses, riders, endorsements, and papers attached thereto and made a part thereof.

Policy Anniversary

The anniversary of the date of issue of a policy as shown in the policy declarations.

Policy Owner

(1) The person who has ownership rights in an insurance policy and who may or may not be either the policyholder or the insured. (2) Often used loosely to refer to the policyholder and/or the insured. See also Insured.

Policy Period (or Term)

The period during which the policy contract affords protection, e.g., six months or one or three years.

Policyholder

(1) The person in actual possession of an insurance policy. (2) Often used loosely to refer to the policy owner and/or insured. See also Insured.

Preferred Risk

Any risk considered to be better than the standard risk on which the premium rate was calculated.

Preliminary Term

The period of a short-term insurance issued to cover a risk to a date which the policy owner wishes to establish as the anniversary date for future premiums.

Premium

The price of insurance protection for a specified risk for a specified period of time.

Premium Discount

(1) A discount allowed on premiums paid in advance of one year, which is based on projected interest to be earned. (2) A discount allowed on certain Workers Compensation and Comprehensive Liability policies to allow for the fact that larger premium policies do not require the same percentage of the premium for basic insurer expenses such as policywriting. The discount percentage increases with the size of the premium. This is not available in all states.

Premium Notice

A form notice from an insurer or agency to a policy owner that a premium will be due on a given date.

Premium Rate

The price per unit of insurance. An example would be a Property Insurance rate of 10 cents per $100 of the value of the property to be insured.

Prepayment of Premiums

Payment by an insured of future premiums through paying the present (discount) value of future premiums or having interest paid on his deposit by the insurer.

Primary Coverage

Insurance coverage which covers from the first dollar, perhaps after a deductible, as distinguished from excess coverage which pays only after some primary coverage has been exhausted. Contrast with Excess Insurance.

Probability

The likelihood or relative frequency of an event expressed in a number between zero and one. The throw of a die is an example. The probability of throwing five is found by dividing the number of faces that have a five (1) by the total number of faces (6). That is a probability of one-sixth or one divided by six, which is .17.

Professional Insurance Agents Association

A trade association of mutual insurance agents.

Prohibited List

A list of types of business or types of risks that an insurance company will not insure. Also called the “undesirable list,” the “do not solicit list,” and other designations.

Promulgate

1) To develop, publish and put into effect insurance rates or forms. (2) To make public, by publishing or announcing, the fact that a statute or rule of court is a legal order or direction enforceable by law, and violation of such is punishable as provided by law.

Proof of Loss

A formal statement made by a policy owner to an insurer regarding a loss. It is intended to give information to the insurer to enable it to detemine the extent of its liability.

Prospect

The term commonly used to refer to a potential buyer of insurance.

Protection

(1) A term used interchangeably with “coverage” to denote insurance provided under the terms of a policy. (2) The fire-fighting facilities in the area in which a risk is located.

Provisions

Statements contained in an insurance policy which explain the benefits, conditions and other features of the insurance contract.

Pure Risk

Uncertainty as to whether a loss will occur. Under a pure risk situation, there is no possibility for gain.

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Quick Assets

Assets that are quickly convertible into cash.

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Rate

The cost of a given unit of insurance. For example, in Ordinary Life Insurance, it is the price of $1,000 of the face amount. In Disability Income Insurance, it is usually the price per $10 or per $100 of monthly benefits. In Property Insurance, it is the rate per $100 of value to be insured. The premium, then, is the rate multiplied by the number of units of insurance purchased.

Rate Card

A pocket size card issued by an insurer giving rates for various coverages. It is carried by an agent or sales representative for quotation purposes.

Rate Discrimination

The use of different rates for insureds or risks of the same class and characteristics. Rate discrimination is prohibited by all state insurance laws.

Rate Manual

A manual containing rates for various coverages, information and instructions for field underwriting, insurer’s rules for the guidance of agents, and, in the case of Life Insurance rate manuals, cash amount forfeiture values and dividend scales (if any).

Renewal

The reestablishment of the in-force status of a policy, the term of which has expired or will expire unless it is renewed.

Replacement

A new policy written to take the place of one currently in force.

Representative

An agent or sales representative.

Rescission

(1) Repudiation of a contract. A party whose consent to a contract was induced by fraud, misrepresentation or duress may repudiate it. A contract may also be repudiated for failure to perform a duty. (2) The termination of an insurance contract by the insurer when material misrepresentation has occurred.

Resident Agent

An agent domiciled in the state in which he writes insurance.

Retention of Risk

Assuming all or part of a risk instead of purchasing insurance or otherwise transferring the risk. One of the four major risk management techniques.

Return Premium

A portion of the premium returned to a policy owner as a result of cancellation, rate adjustment, or a calculation that an advance premium was in excess of the actual premium.

Risk

(1) Uncertainty as to the outcome of an event when two or more possibilities exist. See also Pure Risk and Speculative Risk. (2) A person or thing insured. Contrast with Hazard and Peril.

Risk Management

Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through such practices as avoiding the risk, reducing the risk, retaining the risk, or transferring the risk, usually by insurance.

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Salvage

Property taken over by an insurer to reduce its loss.

Schedule P Reserve

(1) A reserve required in Automobile Liability, other Liability, and Workers Compensation by the NAIC Convention Blank. (2) A formula set up for the calculation of such reserves.

Seasonal Risk

A risk which is present only during certain parts of the year. Examples might be manufacturing concerns such as canners who have operations only during the summer and seasonal dwellings such as cottages used for vacations.

Settlement

Usually, a policy benefit or claim payment. It connotes an agreement between both parties to the policy contract as to the amount and method of payment.

Shock Loss

A catastrophic loss so large that it has a material effect on the underwriting results of a company.

Short Rate Cancellation

A cancellation procedure in which the premium returned to the insured is not in direct proportion to the number of days remaining in the policy period. In effect, the insured has paid more for each day of coverage than if the policy had remained in force for the full term.

Short Rate Premium

The premium required for issuing a policy for a period less than its normal term.

Short-Term Policy

A policy written for a period of less time than is normal for that type of policy.

Society of Chartered Property and Casualty Underwriters

The society of people who have been awarded the CPCU (Chartered Property and Casualty Underwriter) designation. Its primary purpose is the continuing education of its members. It also encourages insurance research.

Society of Insurance Research

An organization which encourages insurance research and promotes the exchange of ideas and methods of research.

Solicitor

An individual appointed and authorized by an agent to solicit and receive applications for insurance as his representative. Solicitors are not usually given the power to bind coverage but are required to be licensed.

Standard Policy

(1) Coverage which has identical provisions regardless of the issuing insurer. Many common policies are standardized. (2) Insurance issued to a standard risk.

Statutory

Required by or having to do with law or statute.

Stock Insurer

An incorporated insurer with capital contributed by stockholders, to whom the earnings are distributed as dividends on their shares. Contrast with Mutual Insurer.

Stop Loss

Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.

Substandard Risk

A risk not measuring up to underwriting standards. It may still be written but usually at a surcharged premium.

Surplus

The amount by which assets exceed liabilities.

Surplus Lines

A risk or a part of a risk for which there is no market available through the original broker or agent in its jurisdiction. Therefore, it is placed with nonadmitted insurers on an unregulated basis, in accordance with the surplus or excess lines provisions of the state law.

Syndicate

A group of insurers or underwriters who join to insure property that may be of such total value or high hazard that it can be covered more safely or efficiently on a cooperative basis.

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Target Risk

(1) Certain high-value bridges, tunnels, and fine art collections that are excluded from an automatic reinsurance contract to permit specific handling of the capacity problem and to release the reinsurer from the potential heavy accumulation of liability on any one risk. (2) A large, hazardous risk on which insurance is difficult to place. (3) A large, attractive risk that is considered a target for competing insurance companies.

Temporary Agent

A person who is licensed to act as an agent for a brief period of time (usually 90 days) without taking a written examination. Temporary licenses are commonly granted to allow someone to continue the business of an agent who has died, become disabled, or entered active military service.

Term

The period of time for which a policy or bond is issued.

Term Rule

The provision in a rating manual which states the periods for which coverages run, and discounts, if any, which apply to the rates or premiums of policies issued for more than one year.

Termination

The time the coverage under an insurance policy ends, either because its term has expired or because it has been cancelled by either party.

Theory of Probability

The mathematical principle upon which insurance is based.

Time Limits

The limits of time within which notice of a claim and proof of a loss must be submitted.

Title Insurance

Insurance which indemnifies the owner of real estate in the event that his clear ownership of property is challenged by the discovery of faults in the title that was passed to him.

Total Loss

A loss of sufficient size so that it can be said there is nothing left of value. The complete destruction of the property. The term is also used to mean a loss requiring the maximum amount a policy will pay.

Transfer of Risk

Shifting all or part of a risk to another party. Insurance is the most common method of risk transfer, but other devices, such as hold harmless agreements, also transfer risk. One of the four major risk management techniques. See Risk Management.

Traumatic Injury

An injury to a person’s physical body caused by an outside source, as distinct from physical disability caused by sickness or disease.

Trustee

A person appointed to manage the property of another.

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Utilization Management

A method of managing medical care costs by controlling the fees charged by providers for various medical treatments, as well as the appropriateness of the treatment. Utilization management controls the component of appropriateness for medical care by using established criteria to review the care patients receive and make sure it is necessary and appropriate.

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WARN (Worker Readjustment and Retraining Notification Act)

The Worker Readjustment and Retraining Notification Act (“WARN”) requires employers to give notice to employees and other interested individuals and parties prior to implementing a wide range of work force reductions.

Warranty

A question in an application form which asks if the directors and officers are aware of any issues which are not currently claims, but have the potential to become claims in the future. Underwriters will not want to provide coverage for any such issues.

Worker’s Compensation

Each state has a worker’s compensation statute. Generally, the worker’s compensation system requires an employer to provide compensation and pay for medical expenses incurred by injured employees, regardless of fault, when they suffer work-related injuries or illness. In exchange, the employer is given immunity from common law tort suits brought by the employees for work-related injuries.;

Wrongful Act (Directors and Officers)

Any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty by an insured person in his or her capacity as a director or officer of the company.

Wrongful Act

This definition usually lists the defined perils covered by the policy. Among other things, this definition in most Employment Practices Liability policies includes discrimination, harassment, retaliation, and wrongful termination as those terms are defined under the policies.

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