Insurance Glossary A-K
A-SHARE VARIABLE ANNUITY:
A form of variable annuity contract where the contract holder pays sales charges up front rather than eventually having to pay a surrender charge.
ACCELERATED DEATH BENEFITS:
A benefit that can be attached to a life insurance policy that enables the policy holder to receive cash advances against the death benefit in the case of being diagnosed with a terminal illness. Many individuals who choose the accelerated death benefit have less than one year to live and use the money for treatments and other costs needed to stay alive.
ACCIDENT AND HEALTH INSURANCE
Coverage for accidental injury, accidental death, and related health expenses. Benefits will pay for preventative services, medical expenses, and catastrophic care, with limits.
ACTUAL CASH VALUE
A form of insurance that pays damages equal to the replacement value of damaged property minus depreciation.
An insurance professional skilled in the analysis, evaluation, and management of statistical information. Evaluates insurance firms’ reserves, determines rates and rating methods, and determines other business and financial risks.
ADDITIONAL LIVING EXPENSES
Extra charges covered by homeowners policies over and above the policyholder's customary living expenses. They kick in when the insured requires temporary shelter due to damage by a covered peril that makes the home temporarily uninhabitable.
An individual employed by a property/casualty insurer to evaluate losses and settle policyholder claims. These adjusters differ from public adjusters, who negotiate with insurers on behalf of policyholders, and receive a portion of a claims settlement. Independent adjusters are independent contractors who adjust claims for different insurance companies.
Assets recognized and accepted by state insurance laws in determining the solvency of insurers and reinsurers. To make it easier to assess an insurance company’s financial position, state statutory accounting rules do not permit certain assets to be included on the balance sheet. Only assets that can be easily sold in the event of liquidation or borrowed against, and receivables for which payment can be reasonably anticipated, are included in admitted assets.
An insurance company licensed and authorized to do business in a particular state.
The tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk. Insurers react either by charging higher premiums or not insuring at all, as in the case of floods. (Flood insurance is provided by the federal government but sold mostly through the private market.) In the case of natural disasters, such as earthquakes, adverse selection concentrates risk instead of spreading it. Insurance works best when risk is shared among large numbers of policyholders.
Companies that market and sell products via independent agents.
Insurance is sold by two types of agents: independent agents, who are self-employed, represent several insurance companies and are paid on commission, and exclusive or captive agents, who represent only one insurance company and are either salaried or work on commission. Insurance companies that use exclusive or captive agents are called direct writers.
ALIEN INSURANCE COMPANY
An insurance company incorporated under the laws of a foreign country, as opposed to a foreign insurance company that does business in states outside its own.
Property insurance that is usually bought in conjunction with fire insurance; it includes wind, water damage, and vandalism coverage
ALTERNATIVE DISPUTE RESOLUTION / ADR
Alternative to going to court to settle disputes. Methods include arbitration, where disputing parties agree to be bound to the decision of an independent third party, and mediation, where a third party tries to arrange a settlement between the two sides.
Mechanisms used to fund self-insurance. This includes captives, which are insurers owned by one or more non-insurers to provide owners with coverage. Risk-retention groups, formed by members of similar professions or businesses to obtain liability insurance, are also a form of self-insurance.
ANNUAL ANNUITY CONTRACT FEE
Covers the cost of administering an annuity contract.
Summary of an insurer’s or reinsurer’s financial operations for a particular year, including a balance sheet. It is filed with the state insurance department of each jurisdiction in which the company is licensed to conduct business.
The person(s) who receives the income from an annuity contract. Usually the owner of the contract or his or her spouse.
The conversion of the account balance of a deferred annuity contract to income payments.
A life insurance product that pays periodic income benefits for a specific period of time or over the course of the annuitant’s lifetime. There are two basic types of annuities: deferred and immediate: Deferred annuities allow assets to grow tax deferred over time before being converted to payments to the annuitant. Immediate annuities allow payments to begin within about a year of purchase.
ANNUITY ACCUMULATION PHASE OR PERIOD
The period during which the owner of a deferred annuity makes payments to build up assets.
ANNUITY ADMINISTRATIVE CHARGES
Covers the cost of customer services for owners of variable annuities.
In certain types of annuities, a person who receives annuity contract payments if the annuity owner or annuitant dies while payments are still due.
A written agreement between an insurance company and a customer outlining each party's obligations in an annuity coverage agreement. This document will include the specific details of the contract, such as the structure of the annuity (variable or fixed), any penalties for early withdrawal, spousal provisions such as a survivor clause and rate of spousal coverage, and more.
ANNUITY CONTRACT OWNER
The person or entity that purchases an annuity and has all rights to the contract. Usually, but not always, the annuitant (the person who receives incomes from the contract).
ANNUITY DEATH BENEFITS
The guarantee that if an annuity contract owner dies before annuitization (the switchover from the savings to the payment phase) the beneficiary will receive the value of the annuity that is due.
ANNUITY INSURANCE CHARGES
Covers administrative and mortality and expense risk costs.
ANNUITY INVESTMENT MANAGEMENT FEE
The fee paid for the management of variable annuity invested assets.
The insurance company that issues the annuity.
Legal document providing detailed information about variable annuity contracts. Must be offered to each prospective buyer.
ANNUITY PURCHASE RATE
The cost of an annuity based on such factors as the age and gender of the contract owner
Laws that prohibit companies from working as a group to set prices, restrict supplies or stop competition in the marketplace. The insurance industry is subject to state antitrust laws but has a limited exemption from federal antitrust laws. This exemption, set out in the McCarran-Ferguson Act, permits insurers to jointly develop common insurance forms and share loss data to help them price policies.
The dividing of a loss proportionately among two or more insurers that cover the same loss.
A survey to determine a property’s insurable value, or the amount of a loss.
Procedure in which an insurance company and the insured or a vendor agree to settle a claim dispute by accepting a decision made by a third party.
The deliberate setting of a fire.
Bonds that represent pools of loans of similar types, duration and interest rates. Almost any loan with regular repayments of principal and interest can be securitized, from auto loans and equipment leases to credit card receivables and mortgages.
Property owned, in this case by an insurance company, including stocks, bonds, and real estate. Insurance accounting is concerned with solvency and the ability to pay claims. State insurance laws therefore require a conservative valuation of assets, prohibiting insurance companies from listing assets on their balance sheets whose values are uncertain, such as furniture, fixtures, debit balances, and accounts receivable that are more than 90 days past due.
ASSIGNED RISK PLANS
Facilities through which drivers can obtain auto insurance if they are unable to buy it in the regular or voluntary market. These are the most well-known type of residual auto insurance market, which exist in every state. In an assigned risk plan, all insurers selling auto insurance in the state are assigned these drivers to insure, based on the amount of insurance they sell in the regular market.
AUTO INSURANCE POLICY
There are basically six different types of coverages. Some may be required by law. Others are optional. They are:
1. Bodily injury liability, for injuries the policyholder causes to someone else.
2. Medical payments or Personal Injury Protection (PIP) for treatment of injuries to the driver and passengers of the policyholder’s car.
3. Property damage liability, for damage the policyholder causes to someone else’s property.
4. Collision, for damage to the policyholder’s car from a collision.
5. Comprehensive, for damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods, and riots), and theft.
6. Uninsured motorists coverage, for costs resulting from an accident involving a hit-and-run driver or a driver who does not have insurance.
Coverages and benefits listed above may be available at an additional charge, talk to us today to find out more.
AUTO INSURANCE PREMIUM
The price an insurance company charges for coverage, based on the frequency and cost of potential accidents, theft and other losses. Prices vary from company to company, as with any product or service.
Premiums also vary depending on the amount and type of coverage purchased; the make and model of the car; and the insured’s driving record, years of driving and the number of miles the car is driven per year. Other factors taken into account include the driver’s age and gender, where the car is most likely to be driven and the times of day – rush hour in an urban neighborhood or leisure-time driving in rural areas, for example. Some insurance companies may also use credit history-related information
Commercial airlines hold property insurance on airplanes and liability insurance for negligent acts that result in injury or property damage to passengers or others. Damage is covered on the ground and in the air. The policy limits the geographical area and individual pilots covered.
B-SHARE VARIABLE ANNUITY
A form of variable annuity contract with no initial sales charge but if the contract is cancelled the holder pays deferred sales charges (usually from 5 to 7 percent the first year, declining to zero after from 5 to 7 years). The most common form of annuity contract.
Provides a snapshot of a company’s financial condition at one point in time. It shows assets, including investments and reinsurance, and liabilities, such as loss reserves to pay claims in the future, as of a certain date. It also states a company’s equity, known as policyholder surplus. Changes in that surplus are one indicator of an insurer’s financial standing.
BANK HOLDING COMPANY
A company that owns or controls one or more banks. The Federal Reserve has responsibility for regulating and supervising bank holding company activities, such as approving acquisitions and mergers and inspecting the operations of such companies. This authority applies even though a bank owned by a holding company may be under the primary supervision of the Comptroller of the Currency or the FDIC.
0.01 percent of the yield of a mortgage, bond or note. The smallest measure used.
BEACH AND WINDSTORM PLANS
State-sponsored insurance pools that sell property coverage for the peril of windstorm to people unable to buy it in the voluntary market because of their high exposure to risk. Seven states (AL, FL, LA, MS, NC, SC, TX) offer these plans to cover residential and commercial properties against hurricanes and other windstorms. Georgia and New York provide this kind of coverage for windstorm and hail in certain coastal communities through other property pools. Insurance companies that sell property insurance in the state are required to participate in these plans. Insurers share in profits and losses
Temporary authorization of coverage issued prior to the actual insurance policy.
Coverage for more than one type of property at one location or one type of property at more than one location. Example: chain stores.
BODILY INJURY LIABILITY COVERAGE
Portion of an auto insurance policy that covers injuries the policyholder causes to someone else.
BOILER AND MACHINERY INSURANCE
Often called Equipment Breakdown, or Systems Breakdown insurance. Commercial insurance that covers damage caused by the malfunction or breakdown of boilers, and a vast array of other equipment including air conditioners, heating, electrical, telephone, and computer systems.
A security that obligates the issuer to pay interest at specified intervals and to repay the principal amount of the loan at maturity. In insurance, a form of suretyship. Bonds of various types guarantee a payment or a reimbursement for financial losses resulting from dishonesty, failure to perform and other acts.
An evaluation of a bond’s financial strength, conducted by such major ratings agencies as Standard & Poor’s and Moody’s Investors Service.
BOOK OF BUSINESS
Total amount of insurance on an insurer's books at a particular point in time.
An intermediary between a customer and an insurance company. Brokers typically search the market for coverage appropriate to their clients. They work on commission and usually sell commercial, not personal, insurance. In life insurance, agents must be licensed as securities brokers/dealers to sell variable annuities, which are similar to stock market-based investments.
BURGLARY AND THEFT INSURANCE
Insurance for the loss of property due to burglary, robbery or larceny. It is provided in a standard homeowners policy and in a business multiple peril policy.
BUSINESS INCOME INSURANCE (also known as BUSINESS INTERRUPTION INSURANCE)
Commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time that a business must stay closed while the premises are being restored because of physical damage from a covered peril, such as a fire. Business interruption insurance also may cover financial losses that may occur if civil authorities limit access to an area after a disaster and their actions prevent customers from reaching the business premises. Depending on the policy, civil authorities coverage may start after a waiting period and last for two or more weeks.
BUSINESSOWNERS POLICY / BOP
A policy that combines property, liability and business interruption coverages for small- to medium-sized businesses. Coverage is generally cheaper than if purchased through separate insurance policies
C-SHARE VARIABLE ANNUITIES
A form of variable annuity contract where the contract holder pays no sales up front or surrender charges. Owners can claim full liquidity at any time.
The supply of insurance available to meet demand. Capacity depends on the industry’s financial ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite based on its financial condition. The adequacy of an insurer’s capital relative to its exposure to loss is an important measure of solvency.
A property/casualty insurer must maintain a certain level of capital and policyholder surplus to underwrite risks. This capital is known as capacity. When the industry is hit by high losses, such as after the World Trade Center terrorist attack, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk and or raising additional capital. When there is excess capacity, usually because of a high return on investments, premiums tend to decline as insurers compete for market share. As premiums decline, underwriting losses are likely to grow, reducing capacity and causing insurers to raise rates and tighten conditions and limits in an effort to increase profitability. Policyholder surplus is sometimes used as a measure of capacity.
Shareholder’s equity (for publicly-traded insurance companies) and retained earnings (for mutual insurance companies). There is no general measure of capital adequacy for property/casualty insurers. Capital adequacy is linked to the riskiness of an insurer’s business. A company underwriting medical device manufacturers needs a larger cushion of capital than a company writing Main Street business, for example.
The markets in which equities and debt are traded.
A person who represents only one insurance company and is restricted by agreement from submitting business to any other company, unless it is first rejected by the agent’s captive company
Insurers that are created and wholly-owned by one or more non-insurers, to provide owners with coverage. A form of self-insurance.
Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for automobile insurance
A system of coordinating medical services to treat a patient, improve care, and reduce cost. A case manager coordinates health care delivery for patients.
Term used for statistical recording purposes to refer to a single incident or a series of closely related incidents causing severe insured property losses totaling more than a given amount, currently $25 million (per the Insurance Information Institute, iii.org).
Risk-based securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catastrophe such as those caused by a major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk.
A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in when a major natural disaster occurs. These large deductibles limit an insurer’s potential losses in such cases, allowing it to insure more property. A property insurer may not be able to buy reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a certain level.
Probability of catastrophic loss, based on the total number of catastrophes in a state over a 40-year period.
Using computers, a method to mesh long-term disaster information with current demographic, building and other data to determine the potential cost of natural disasters and other catastrophic losses for a given geographic area.
Reinsurance (insurance for insurers) for catastrophic losses. The insurance industry is able to absorb the multibillion dollar losses caused by natural and man-made disasters such as hurricanes, earthquakes and terrorist attacks because losses are spread among thousands of companies including catastrophe reinsurers who operate on a global basis. Insurers’ ability and willingness to sell insurance fluctuates with the availability and cost of catastrophe reinsurance.
After major disasters, such as Hurricane Andrew and the World Trade Center terrorist attack, the availability of catastrophe reinsurance becomes extremely limited. Claims deplete reinsurers’ capital and, as a result, companies are more selective in the type and amount of risks they assume. In addition, with available supply limited, prices for reinsurance rise. This contributes to an overall increase in prices for property insurance.
CELL PHONE INSURANCE
Separate insurance provided to cover cell phones for damage or theft. Policies are often sold with the cell phones themselves.
CHARTERED FINANCIAL CONSULTANT / ChFC
A professional designation given by The American College to financial services professionals who complete courses in financial planning.
CHARTERED LIFE UNDERWRITER / CLU
A professional designation by The American College for those who pass business examinations on insurance, investments, and taxation, and have life insurance planning experience.
CHARTERED PROPERTY/CASUALTY UNDERWRITER / CPCU
A professional designation given by the American Institute for Property and Liability Underwriters. National examinations and three years of work experience are required.
A form of insurance that pays claims presented to the insurer during the term of the policy or within a specific term after its expiration. It limits liability insurers’ exposure to unknown future liabilities.
Short for Consolidated Omnibus Budget Reconciliation Act. A federal law under which group health plans sponsored by employers with 20 or more employees must offer continuation of coverage to employees who leave their jobs and their dependents. The employee must pay the entire premium. Coverage can be extended up to 18 months. Surviving dependents can receive longer coverage.
In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20 percent health insurance coinsurance clause, the policyholder pays for the deductible plus 20 percent of his covered losses. After paying 80 percent of losses up to a specified ceiling, the insurer starts paying 100 percent of losses.
Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security.)
COLLATERAL SOURCE RULE
Bars the introduction of information that indicates a person has been compensated or reimbursed by a source other than the defendant in civil actions related to negligence or other liability.
Portion of an auto insurance policy that covers the damage to the policyholder’s car from a collision.
Percentage of each premium dollar a property/casualty insurer spends on claims and expenses. A decrease in the combined ratio means financial results are improving; an increase means they are deteriorating.
COMMERCIAL GENERAL LIABILITY INSURANCE / CGL
A broad commercial policy that covers all liability exposures of a business that are not specifically excluded. Coverage includes product liability, completed operations, premises and operations, and independent contractors.
Products designed for and bought by businesses. Among the major coverages are boiler and machinery, business interruption, commercial auto, comprehensive general liability, directors and officers liability, fire and allied lines, inland marine, medical malpractice liability, product liability, professional liability, surety and fidelity, and workers compensation. Most of these commercial coverages can be purchased separately except business interruption which must be added to a fire insurance (property) policy.
COMMERCIAL MULTIPLE PERIL POLICY
Package policy that includes property, boiler and machinery, crime, and general liability coverages.
Short-term, unsecured, and usually discounted promissory note issued by commercial firms and financial companies often to finance current business. Commercial paper, which is rated by debt rating agencies, is sold through dealers or directly placed with an investor.
Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer, and the marketing methods.
COMMUNITY RATING LAWS
Enacted in several states on health insurance policies. Insurers are required to accept all applicants for coverage and charge all applicants the same premium for the same coverage regardless of age or health. Premiums are based on the rate determined by the geographic region’s health and demographic profile.
COMPETITIVE STATE FUND
A facility established by a state to sell workers compensation in competition with private insurers.
COMPLETED OPERATIONS COVERAGE
Pays for bodily injury or property damage caused by a completed project or job. Protects a business that sells a service against liability claims.
Portion of an auto insurance policy that covers damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods, and riots), and theft.
COMPULSORY AUTO INSURANCE
The minimum amount of auto liability insurance that meets a state law. Financial responsibility laws in every state require all automobile drivers to show proof, after an accident, of their ability to pay damages up to the state minimum. In compulsory liability states this proof, which is usually in the form of an insurance policy, is required before you can legally drive a car.
Liability of individuals, corporations, or partnerships for accidents caused by people other than employees for whose acts or omissions the corporations or partnerships are responsible.
Synonym for insurance.
Sheet metal parts that are most often damaged in a car crash.
The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.
A contract that enables a user, such as a bank, to better manage its credit risk. A way of transferring credit risk to another party.
A technique to lower the interest payments on a bond by raising the issue’s credit rating, often through insurance in the form of a financial guarantee or with standby letters of credit issued by a bank
Commercial coverage against losses resulting from the failure of business debtors to pay their obligation to the insured, usually due to insolvency. The coverage is geared to manufacturers, wholesalers, and service providers who may be dependent on a few accounts and therefore could lose significant income in the event of an insolvency.
CREDIT LIFE INSURANCE
Life insurance coverage on a borrower designed to repay the balance of a loan in the event the borrower dies before the loan is repaid. It may also include disablement and can be offered as an option in connection with credit cards and auto loans.
The number produced by an analysis of an individual’s credit history. The use of credit information affects all consumers in many ways, from getting a job, finding a place to live, securing a loan, getting a telephone, and buying insurance. Credit history is routinely reviewed by insurers before issuing a commercial policy because businesses in poor financial condition tend to cut back on safety which can lead to more accidents and more claims. Auto and home insurers may use information in a credit history to produce an insurance score. Insurance scores may be used in underwriting and rating insurance policies.
Term referring to property coverages for the perils of burglary, theft and robbery.
Protection against damage to growing crops from hail, fire, or lightning provided by the private market. By contrast, multiple peril crop insurance covers a wider range of yield-reducing conditions, such as drought and insect infestation, and is subsidized by the federal government.
Part of a property or liability insurance policy that states the name and address of policyholder, property insured, its location and description, the policy period, premiums, and supplemental information. Referred to as the “dec page.”
The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.
An annuity under which the annuity payment period is scheduled to begin at some future date.
DEFINED BENEFIT PLAN
A retirement plan under which pension benefits are fixed in advance by a formula based generally on years of service to the company multiplied by a specific percentage of wages, usually average earnings over that period or highest average earnings over the final years with the company.
DEFINED CONTRIBUTION PLAN
An employee benefit plan under which the employer sets up benefit accounts and contributions are made to it by the employer and by the employee. The employer usually matches the employee's contribution up to a stated limit.
Customer assets that are held in a checking account. Funds can be readily withdrawn by check, “on demand.”
The conversion of insurance companies from mutual companies owned by their policyholders into publicly-traded stock companies.
Financial institution that obtains its funds mainly through deposits from the public. Includes commercial banks, savings and loan associations, savings banks, and credit unions.
In insurance, reducing regulatory control over insurance rates and forms. Commercial insurance for businesses of a certain size has been deregulated in many states.
Contracts that derive their value from an underlying financial asset, such as publicly-traded securities and foreign currencies. Often used as a hedge against changes in value.
DIFFERENCE IN CONDITIONS
Policy designed to fill in gaps in a business’s commercial property insurance coverage. There is no standard policy. Policies are specifically tailored to the policyholder’s needs.
DIMINUTION OF VALUE
The idea that a vehicle loses value after it has been damaged in an accident and repaired.
Property/casualty premiums collected by the insurer from policyholders, before reinsurance premiums are deducted. Insurers share some direct premiums and the risk involved with their reinsurers.
DIRECT SALES/ DIRECT RESPONSE
Method of selling insurance directly to the insured through an insurance company’s own employees, through the mail, or via the Internet. This is in lieu of using captive or exclusive agents.
Insurance companies that sell directly to the public using exclusive agents or their own employees, through the mail, or via Internet. Large insurers, whether predominately direct writers or agency companies, are increasingly using many different channels to sell insurance. In reinsurance, denotes reinsurers that deal directly with the insurance companies they reinsure without using a broker.
DIRECTORS AND OFFICERS LIABILITY INSURANCE/D&O
Covers directors and officers of a company for negligent acts or omissions, and for misleading statements that result in suits against the company, often by shareholders. Directors and officers insurance policies usually contain two coverages: personal coverage for individual directors and officers who are not indemnified by the corporation for their legal expenses or judgments against them – some corporations are not required by their corporate or state charters to provide indemnification; and corporate reimbursement coverage for indemnifying directors and officers. Entity coverage for claims made specifically against the company may also be available.
Money returned to policyholders from an insurance company’s earnings. Considered a partial premium refund rather than a taxable distribution, reflecting the difference between the premium charged and actual losses. Many life insurance policies and some property/casualty policies pay dividends to their owners. Life insurance policies that pay dividends are called participating policies.
DOMESTIC INSURANCE COMPANY
Term used by a state to refer to any company incorporated there.
EARLY WARNING SYSTEM
A system of measuring insurers’ financial stability set up by insurance industry regulators. An example is the Insurance Regulatory Information System (IRIS), which uses financial ratios to identify insurers in need of regulatory attention.
The portion of premium that applies to the expired part of the policy period. Insurance premiums are payable in advance but the insurance company does not fully earn them until the policy period expires.
Covers a building and its contents, but includes a large percentage deductible on each. A special policy or endorsement exists because earthquakes are not covered by standard homeowners or most business policies.
Coverages and benefits listed above may be available at an additional charge, talk to us today to find out more.
Total financial loss resulting from the death or disability of a wage earner, or from the destruction of property. Includes the loss of earnings, medical expenses, funeral expenses, the cost of restoring or replacing property, and legal expenses. It does not include noneconomic losses, such as pain caused by an injury.
ELECTRONIC COMMERCE / E-COMMERCE
The sale of products such as insurance over the Internet.
A kind of deductible or waiting period usually found in disability policies. It is counted in days from the beginning of the illness or injury.
EMPLOYEE DISHONESTY COVERAGE
Covers direct losses and damage to businesses resulting from the dishonest acts of employees.
EMPLOYEE RETIREMENT INCOME SECURITY ACT / ERISA
Federal legislation that protects employees by establishing minimum standards for private pension and welfare plans.
Part B of the workers compensation policy that provides coverage for lawsuits filed by injured employees who, under certain circumstances, can sue under common law.
EMPLOYMENT PRACTICES LIABILITY COVERAGE
Liability insurance for employers that covers wrongful termination, discrimination, or sexual harassment toward the insured’s employees or former employees.
A written form attached to an insurance policy that alters the policy’s coverage, terms, or conditions. Sometimes called a rider.
ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE
A form of insurance designed to cover losses and liabilities arising from damage to property caused by pollution.
In investments, the ownership interest of shareholders. In a corporation, stocks as opposed to bonds
EQUITY INDEXED ANNUITY
Non-traditional fixed annuity. The specified rate of interest guarantees a fixed minimum rate of interest like traditional fixed annuities. At the same time, additional interest may be credited to policy values based upon positive changes, if any, in an established index such as the S&P 500. The amount of additional interest depends upon the particular design of the policy. They are sold by licensed insurance agents and regulated by state insurance departments.
ERRORS AND OMISSIONS COVERAGE / E&O
A professional liability policy covering the policyholder for negligent acts and omissions that may harm his or her clients.
Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and sometimes to pay property taxes.
EXCESS AND SURPLUS LINES
Property/casualty coverage that isn’t available from insurers licensed by the state (called admitted insurers) and must be purchased from a non-admitted carrier.
EXCESS OF LOSS REINSURANCE
A contract between an insurer and a reinsurer, whereby the insurer agrees to pay a specified portion of a claim and the reinsurer to pay all or a part of the claim above that amount.
A provision in an insurance policy that eliminates coverage for certain risks, people, property classes, or locations.
A captive agent, or a person who represents only one insurance company and is restricted by agreement from submitting business to any other company unless it is first rejected by the agent’s company
Part of the social contract that forms the basis for workers compensation statutes under which employers are responsible for work-related injury and disease, regardless of whether is was the employee’s fault and in return the injured employee gives up the right to sue when the employer’s negligence causes the harm.
Percentage of each premium dollar that goes to insurers’ expenses including overhead, marketing, and commissions.
Record of losses.
The possibility of loss.
An endorsement added to an insurance policy, or clause within a policy, that provides additional coverage for risks other than those in a basic policy.
EXTENDED REPLACEMENT COST COVERAGE
Pays a certain amount above the policy limit to replace a damaged home, generally 120 percent or 125 percent. Similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction
A reinsurance policy that provides an insurer with coverage for specific individual risks that are unusual or so large that they aren’t covered in the insurance company's reinsurance treaties. This can include policies for jumbo jets or oil rigs. Reinsurers have no obligation to take on facultative reinsurance, but can assess each risk individually. By contrast, under treaty reinsurance, the reinsurer agrees to assume a certain percentage of entire classes of business, such as various kinds of auto, up to preset limits.
FAIR ACCESS TO INSURANCE REQUIREMENTS PLANS / FAIR PLANS
Insurance pools that sell property insurance to people who can’t buy it in the voluntary market because of high risk over which they may have no control. FAIR Plans, which exist in 28 states and the District of Columbia, insure fire, vandalism, riot, and windstorm losses, and some sell homeowners insurance which includes liability. Plans vary by state, but all require property insurers licensed in a state to participate in the pool and share in the profits and losses.
Package policy that protects the policyholder against named perils and liabilities and usually covers homes and their contents, along with barns, stables, and other structures.
Reserve balances that depository institutions lend each other, usually on an overnight basis. In addition, Federal funds include certain other kinds of borrowings by depository institutions from each other and from federal agencies.
FEDERAL INSURANCE ADMINISTRATION / FIA
Federal agency in charge of administering the National Flood Insurance Program. It does not regulate the insurance industry.
FEDERAL RESERVE BOARD
Seven-member board that supervises the banking system by issuing regulations controlling bank holding companies and federal laws over the banking industry. It also controls and oversees the U.S. monetary system and credit supply.
A form of protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
A type of surety bond, sometimes called a probate bond, which is required of certain fiduciaries, such as executors and trustees, that guarantees the performance of their responsibilities.
Legal responsibility of a fiduciary to safeguard assets of beneficiaries. A fiduciary, for example a pension fund manager, is required to manage investments held in trust in the best interest of beneficiaries. Fiduciary liability insurance covers breaches of fiduciary duty such as misstatements or misleading statements, errors and omissions.
States where insurers must file rate changes with their regulators, but don’t have to wait for approval to put them into effect.
FINANCIAL GUARANTEE INSURANCE
Covers losses from specific financial transactions and guarantees that investors in debt instruments, such as municipal bonds, receive timely payment of principal and interest if there is a default. Raises the credit rating of debt to which the guarantee is attached. Investment bankers who sell asset-backed securities, securities backed by loan portfolios, use this insurance to enhance marketability.
FINANCIAL RESPONSIBILITY LAW
A state law requiring that all automobile drivers show proof that they can pay damages up to a minimum amount if involved in an auto accident. Varies from state to state but can be met by carrying a minimum amount of auto liability insurance.
FINITE RISK REINSURANCE
Contract under which the ultimate liability of the reinsurer is capped and on which anticipated investment income is expressly acknowledged as an underwriting component. Also known as Financial Reinsurance because this type of coverage is often bought to improve the balance sheet effects of statutory accounting principles.
Coverage protecting property against losses caused by a fire or lightning that is usually included in homeowners or commercial multiple peril policies.
Coverage for the policyholder’s own property or person. In no-fault auto insurance it pays for the cost of injuries. In no-fault states with the broadest coverage, the personal injury protection (PIP) part of the policy pays for medical care, lost income, funeral expenses and, where the injured person is not able to provide services such as child care, for substitute services.
An annuity that guarantees a specific rate of return. In the case of a deferred annuity, a minimum rate of interest is guaranteed during the savings phase. During the payment phase, a fixed amount of income, paid on a regular schedule, is guaranteed.
Attached to a homeowners policy, a floater insures movable property, covering losses wherever they may occur. Among the items often insured with a floater are expensive jewelry, musical instruments, and furs. It provides broader coverage than a regular homeowners policy for these items.
Coverage for flood damage is available from the federal government under the National Flood Insurance Program but is sold by licensed insurance agents. Flood coverage is excluded under homeowners policies and many commercial property policies. However, flood damage is covered under the comprehensive portion of an auto insurance policy
FORCED PLACE INSURANCE
Insurance purchased by a bank or creditor on an uninsured debtor’s behalf so if the property is damaged, funding is available to repair it.
FOREIGN INSURANCE COMPANY
Name given to an insurance company based in one state by the other states in which it does business.
Intentional lying or concealment by policyholders to obtain payment of an insurance claim that would otherwise not be paid, or lying or misrepresentation by the insurance company managers, employees, agents, and brokers for financial gain.
A period of up to one month during which the purchaser of an annuity can cancel the contract with no penalty. Rules vary by state.
Number of times a loss occurs. One of the criteria used in calculating premium rates.
A procedure in which a primary insurer acts as the insurer of record by issuing a policy, but then passes the entire risk to a reinsurer in exchange for a commission. Often, the fronting insurer is licensed to do business in a state or country where the risk is located, but the reinsurer is not. The reinsurer in this scenario is often a captive or an independent insurance company that cannot sell insurance directly in a particular country.
Agreement to buy a security for a set price at a certain date. Futures contracts usually involve commodities, indexes or financial futures.
An automobile insurance option, available in some states, that covers the difference between a car’s actual cash value when it is stolen or wrecked and the amount the consumer owes the leasing or finance company.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES/GAAP
Generally accepted accounting principles (GAAP) accounting is used in financial statements that publicly-held companies prepare for the Securities and Exchange Commission.
GENERIC AUTO PARTS
Auto crash parts produced by firms that are not associated with car manufacturers. Insurers consider these parts, when certified, at least as good as those that come from the original equipment manufacturer (OEM). They are often cheaper than the identical part produced by the OEM
Coverage for glass breakage caused by all risks; fire and war are sometimes excluded. Insurance can be bought for windows, structural glass, leaded glass, and mirrors. Available with or without a deductible.
GRADUATED DRIVER LICENSES
Licenses for younger drivers that allow them to improve their skills. Regulations vary by state, but often restrict night time driving. Young drivers receive a learner’s permit, followed by a provisional license, before they can receive a standard drivers license.
Financial services legislation, passed by Congress in 1999, that removed Depression-era prohibitions against the combination of commercial banking and investment-banking activities. It allows insurance companies, banks, and securities firms to engage in each others’ activities and own one another.
A single policy covering a group of individuals, usually employees of the same company or members of the same association and their dependents. Coverage occurs under a master policy issued to the employer or association.
Period during which the level of interest specified under a fixed annuity is guaranteed.
GUARANTEED DEATH BENEFIT
Basic death benefits guaranteed under variable annuity contracts.
GUARANTEED INCOME CONTRACT / GIC
Often an option in an employer-sponsored retirement savings plan. Contract between an insurance company and the plan that guarantees a stated rate of return on invested capital over the life of the contract.
GUARANTEED LIVING BENEFIT
A guarantee in a variable annuity that a certain level of annuity payment will be maintained. Serves as a protection against investment risks. Several types exists.
GUARANTEED REPLACEMENT COST COVERAGE
Homeowners policy that pays the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit.
A new legal concept that holds gun manufacturers liable for the cost of injuries caused by guns. Several cities have filed lawsuits based on this concept.
A coverage that protects businesses engaged in electronic commerce from losses caused by hackers.
A seller’s market in which insurance is expensive and in short supply.
HOMEOWNERS INSURANCE POLICY
The typical homeowners insurance policy covers the house, the garage and other structures on the property, as well as personal possessions inside the house such as furniture, appliances and clothing, against a wide variety of perils including windstorms, fire and theft. The extent of the perils covered depends on the type of policy. An all-risk policy offers the broadest coverage. This covers all perils except those specifically excluded in the policy.
Homeowners insurance also covers additional living expenses. Known as Loss of Use, this provision in the policy reimburses the policyholder for the extra cost of living elsewhere while the house is being restored after a disaster. The liability portion of the policy covers the homeowner for accidental injuries caused to third parties and/or their property, such as a guest slipping and falling down improperly maintained stairs. Coverage for flood and earthquake damage is excluded and must be purchased separately.
Equal to 365 days of insured coverage for a single dwelling. It is the standard measurement for homeowners insurance.
A percentage or dollar amount added to a homeowner’s insurance policy to limit an insurer’s exposure to loss from a hurricane. Higher deductibles are instituted in higher risk areas, such as coastal regions. Specific details, such as the intensity of the storm for the deductible to be triggered and the extent of the high risk area, vary from insurer to insurer and state to state.
IDENTITY THEFT INSURANCE
Coverage for expenses incurred as the result of an identity theft. Can include costs for notarizing fraud affidavits and certified mail, lost income from time taken off from work to meet with law-enforcement personnel or credit agencies, fees for reapplying for loans and attorney's fees to defend against lawsuits and remove criminal or civil judgments.
A product purchased with a lump sum, usually at the time retirement begins or afterwards. Payments begin within about a year. Immediate annuities can be either fixed or variable.
INCURRED BUT NOT REPORTED LOSSES / IBNR
Losses that are not filed with the insurer or reinsurer until years after the policy is sold. Some liability claims may be filed long after the event that caused the injury to occur. Asbestos-related diseases, for example, do not show up until decades after the exposure. IBNR also refers to estimates made about claims already reported but where the full extent of the injury is not yet known, such as a workers compensation claim where the degree to which work-related injuries prevents a worker from earning what he or she earned before the injury unfolds over time. Insurance companies regularly adjust reserves for such losses as new information becomes available.
Losses occurring within a fixed period, whether or not adjusted or paid during the same period.
Provide financial compensation for losses.
Agent who is self-employed, is paid on commission, and represents several insurance companies.
INDIVIDUAL RETIREMENT ACCOUNT/IRA
A tax-deductible savings plan for those who are self-employed, or those whose earnings are below a certain level or whose employers do not offer retirement plans. Others may make limited contributions on a tax-deferred basis. The Roth IRA, a special kind of retirement account created in 1997, may offer greater tax benefits to certain individuals.
INFLATION GUARD CLAUSE
A provision added to a homeowners insurance policy that automatically adjusts the coverage limit on the dwelling each time the policy is renewed to reflect current construction costs.
INLAND MARINE INSURANCE
This broad type of coverage was developed for shipments that do not involve ocean transport. Covers articles in transit by all forms of land and air transportation as well as bridges, tunnels and other means of transportation and communication. Floaters that cover expensive personal items such as fine art and jewelry are included in this category.
Insurer’s inability to pay debts. Insurance insolvency standards and the regulatory actions taken vary from state to state. When regulators deem an insurance company is in danger of becoming insolvent, they can take one of three actions: place a company in conservatorship or rehabilitation if the company can be saved or liquidation if salvage is deemed impossible. The difference between the first two options is one of degree – regulators guide companies in conservatorship but direct those in rehabilitation. Typically the first sign of problems is inability to pass the financial tests regulators administer as a routine procedure.
An organization such as a bank or insurance company that buys and sells large quantities of securities
Risks for which it is relatively easy to get insurance and that meet certain criteria. These include being definable, accidental in nature, and part of a group of similar risks large enough to make losses predictable. The insurance company also must be able to come up with a reasonable price for the insurance.
A system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium.
A group of insurance companies that pool assets, enabling them to provide an amount of insurance substantially more than can be provided by individual companies to ensure large risks such as nuclear power stations. Pools may be formed voluntarily or mandated by the state to cover risks that can’t obtain coverage in the voluntary market such as coastal properties subject to hurricanes.
INSURANCE REGULATORY INFORMATION SYSTEM / IRIS
Uses financial ratios to measure insurers’ financial strength. Developed by the National Association of Insurance Commissioners. Each individual state insurance department chooses how to use IRIS.
Insurance scores are confidential rankings based on credit information. This includes whether the consumer has made timely payments on loans, the number of open credit card accounts and whether a bankruptcy filing has been made. An insurance score is a measure of how well consumers manage their financial affairs, not of their financial assets. It does not include information about income or race.
Studies (1) have shown that people who manage their money well tend also to manage their most important asset, their home, well. And people who manage their money responsibly also tend to handle driving a car responsibly. Some insurance companies use insurance scores as an insurance underwriting and rating tool.
Related Study - The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity, by EPIC Actuaries, LLC, June 2003
Insurance written in an amount approximating the value of the insured property.
Coverage where the distinction between job-related and non-occupational illnesses or injuries is eliminated and workers compensation and general health coverage are combined. Legal obstacles exist, however, because the two coverages are administered separately. Previously called twenty-four hour coverage.
The process of bringing savers, investors and borrowers together so that savers and investors can obtain a return on their money and borrowers can use the money to finance their purchases or projects through loans.
An insurer that sells exclusively via the Internet.
INTERNET LIABILITY INSURANCE
Coverage designed to protect businesses from liabilities that arise from the conducting of business over the Internet, including copyright infringement, defamation, and violation of privacy.
Income generated by the investment of assets. Insurers have two sources of income, underwriting (premiums less claims and expenses) and investment income. The latter can offset underwriting operations, which are frequently unprofitable.
JOINT AND SURVIVOR ANNUITY
An annuity with two annuitants, usually spouses. Payments continue until the death of the longest living of the two.
JOINT UNDERWRITING ASSOCIATION / JUA
Insurers which join together to provide coverage for a particular type of risk or size of exposure, when there are difficulties in obtaining coverage in the regular market, and which share in the profits and losses associated with the program. JUAs may be set up to provide auto and homeowners insurance and various commercial coverages, such as medical malpractice
Corporate bonds with credit ratings of BB or less. They pay a higher yield than investment grade bonds because issuers have a higher perceived risk of default. Such bonds involve market risk that could force investors, including insurers, to sell the bonds when their value is low. Most states place limits on insurers’ investments in these bonds. In general, because property/casualty insurers can be called upon to provide huge sums of money immediately after a disaster, their investments must be liquid. Less than 2 percent are in real estate and a similarly small percentage are in junk bonds.
KEY PERSON INSURANCE
Insurance on the life or health of a key individual whose services are essential to the continuing success of a business and whose death or disability could cause the firm a substantial financial loss.
Coverage up to specific limits for the cost of ransom or extortion payments and related expenses. Often bought by international corporations to cover employees. Most policies have large deductibles and may exclude certain geographic areas. Some policies require that the policyholder not reveal the coverage’s existence.
NOTICE: These glossary definitions provide a brief description of the terms and phrases used within the insurance industry. These definitions are not applicable in all states or for all insurance and financial products. This is not an insurance contract. Other terms, conditions and exclusions apply. Please read your official policy for full details about coverages. These definitions do not alter or modify the terms of any insurance contract. If there is any conflict between these definitions and the provisions of the applicable insurance policy, the terms of the policy control. Additionally, this informational resource is not intended to fully set out your rights and obligations or the rights and obligations of the insurance company, agent or agency. If you have questions about your insurance, you should contact your insurance agent, the insurance company, or the language of the insurance policy.