Glossary

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Sometimes insurance terms can be like a whole different language and can be confusing.  Here is a glossary of insurance terminology courtesy of www.iii.org to help you make sense of your insurance policy. Of course, if you have questions, you can always contact us at info@aspireins.com or at (913) 904-1020. 

A

ABSOLUTE ASSIGNMENT*

An irrevocable transfer of complete ownership of a life insurance policy or an annuity from one
party to another. Contrast with collateral assignment. (See Assignment )

ACCELERATED DEATH BENEFITS

A life insurance policy option that provides policy proceeds to insured individuals over their
lifetimes, in the event of a terminal illness. This is in lieu of a traditional policy that pays
beneficiaries after the insured’s death. Such benefits kick in if the insured becomes terminally ill,
needs extreme medical intervention, or must reside in a nursing home. The payments made
while the insured is living are deducted from any death benefits paid to beneficiaries.

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.

ACCIDENTAL DEATH AND DISMEMBERMENT (AD&D) BENEFIT*

A supplementary life insurance policy benefit that provides for an amount of money in addition to
the policy’s basic death benefit. This additional amount is payable if the insured dies as the
result of an accident or if the insured loses any two limbs or the sight in both eyes as the result
of an accident.

ACCIDENTAL DEATH BENEFIT (ADB)*

A supplementary life insurance policy benefit that provides a death benefit in addition to the
policy’s basic death benefit if the insured’s death occurs as the result of an accident. (See
Double indemnity benefit )

ACCOUNT RECEIVABLES

See Receivables

ACCUMULATION AT INTEREST DIVIDEND OPTION*

An option, available to the owners of participating insurance policies, that allows a policy owner
to leave policy dividends on deposit with the insurer and earn interest. (See Dividend )

ACTUAL CASH VALUE

A form of insurance that pays damages equal to the replacement value of damaged property
minus depreciation. (See Replacement cost )

ACTUARY

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.

ADDITIONAL TERM INSURANCE OPTION*

An option available to owners of participating insurance policies under which the insurer uses a
policy dividend as a net single premium to purchase one-year term insurance on the insured’s
life. Also known as fifth dividend option. (See Dividend, Policy dividend options )

ADJUSTABLE LIFE INSURANCE*

A form of life insurance that allows policy owners to vary the type of coverage provided by their
policies as their insurance needs change.

ADJUSTER

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.

ADMITTED ASSETS

Assets recognized and accepted by state insurance laws in determining the solvency of insurers
and reinsurers. To make it easier to assess an insurance company’s financial position, state
statutory accounting rules do not permit certain assets to be included on the balance sheet. Only
assets that can be easily sold in the event of liquidation or borrowed against, and receivables for
which payment can be reasonably anticipated, are included in admitted assets. (See Assets )

ADMITTED COMPANY

An insurance company licensed and authorized to do business in a particular state.

ADVERSE SELECTION

The tendency of those exposed to a higher risk to seek more insurance coverage than those at
a lower risk. Insurers react either by 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.

AFFINITY SALES

Selling insurance through groups such as professional and business associations.

AFTERMARKET PARTS

See Crash parts; Generic auto parts

AGENCY COMPANIES

Companies that market and sell products via independent agents.

AGENT

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.

ALEATORY CONTRACT*

A contract in which one party provides something of value to another party in exchange for a
conditional promise, which is a promise that the other party will perform a stated act upon the
occurrence of an uncertain event. Insurance contracts are aleatory because the policyowner
pays premiums to the insurer, and in return the insurer promises to pay benefits if the event
insured against occurs. Contrast with commutative contract.

ALIEN INSURANCE COMPANY

An insurance company incorporated under the laws of a foreign country, as opposed to a
“foreign” insurance company which does business in states outside its own.

ALLIED LINES

Property insurance that is usually bought in conjunction with fire insurance; it includes wind,
water damage and vandalism coverage.

ALTERNATIVE DISPUTE RESOLUTION / ADR

An alternative to going to court to settle disputes. Methods include arbitration, where disputing
parties agree to be bound to the decision of an independent third party, and mediation, where a
third party tries to arrange a settlement between the two sides.

ALTERNATIVE MARKETS

Nontraditional mechanisms used to finance risk. 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 and
selfinsurance, are also included.

ANNUAL ANNUITY CONTRACT FEE

Covers the cost of administering an annuity contract.

ANNUAL STATEMENT

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.

ANNUITANT

The person who receives the income from an annuity contract. Usually the owner of the contract
or his or her spouse.

ANNUITIZATION

The conversion of the account balance of a deferred annuity contract to income payments.

ANNUITY

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.

ANNUITY BENEFICIARY

In certain types of annuities, a person who receives annuity contract payments if the annuity
owner or annuitant dies while payments are still due.

ANNUITY CERTAIN*

A type of annuity contract that pays periodic income benefits for a stated period of time,
regardless of whether the annuitant lives or dies. Also known as period certain annuity. Contrast
with straight life annuity. (See Payout options )

ANNUITY CONTRACT

An agreement similar to an insurance policy for other insurance products such as auto
insurance.

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 COST*

A monetary amount that is equal to the present value of future periodic income payments under
an annuity. (See Gross annuity cost, Income date, Net annuity cost )

ANNUITY DATE*

See Income date

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.

ANNUITY ISSUER

The insurance company that issues the annuity.

ANNUITY PROSPECTUS

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.

ANTISELECTION*

The tendency of individuals who suspect or know they are more likely than average to
experience loss to apply for or renew insurance to a greater extent than people who lack such
knowledge of probable loss. Also known as adverse selection and selection against the
company.

ANTITRUST LAWS

Laws that prohibit companies from working as a group to set prices, restrict supplies or stop
competition in the marketplace. The insurance industry is subject to state antitrust laws but has a
limited exemption from federal antitrust laws. This exemption, set out in the McCarran- Ferguson
Act, permits insurers to jointly develop common insurance forms and share loss data to help
them price policies.

APPORTIONMENT

The dividing of a loss proportionately among two or more insurers that cover the same loss.

APPRAISAL

A survey to determine a property’s insurable value, or the amount of a loss

ARBITRATION

Procedure in which an insurance company and the insured or a vendor agree to settle a claim
dispute by accepting a decision made by a third party.

ARSON

The deliberate setting of a fire.

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.

ASSET-BACKED SECURITIES

Bonds that represent pools of loans of similar types, duration and interest rates. Almost any loan
with regular repayments of principal and interest can be securitized, from auto loans and
equipment leases to credit card receivables and mortgages.

ASSETS

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. (See Admitted
assets )

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. (See Residual market )

ASSIGNMENT*

An agreement under which one party—the assignor—transfers some or all of his ownership
rights in a particular property, such as a life insurance policy or an annuity contract, to another
party—the assignee. (See Absolute assignment, Collateral assignment )

ASSOCIATION GROUP*

A type of group that generally is eligible for group insurance and that consists of members of an
association of individuals formed for a purpose other than to obtain insurance coverage, such as
teachers’ associations and physicians’ associations.

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.

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. (See Insurance score )

AVIATION INSURANCE

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.
 

 

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BALANCE SHEET

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.

BASIS POINT

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. (See Fair access to insurance requirements plans /
FAIR plans, Residual market )

BENEFICIARY*

The person or legal entity the owner of an insurance policy names to receive the policy benefit if
the event insured against occurs. (See Annuity beneficiary, Contingent beneficiary,
Irrevocable beneficiary )

BINDER

Temporary authorization of coverage issued prior to the actual insurance policy.

BLANKET INSURANCE

Coverage for more than one type of property at one location or one type of proerty at more than
one location. Example: chain store

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.

BOND

A security that obligates the issuer to pay interest at specified intervals and to repay the principal
amount of the loan at maturity. In 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.

BOND RATING

An evaluation of a bond’s financial strength, conducted by such major ratings agencies as
Standard & Poor’s and Moody’s Investors Service.

BOOK OF BUSINESS

Total amount of insurance on an insurer’s books at a particular point in time.

BROKER

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.

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.

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 AND EXTRA EXPENSE 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. It 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.

 

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CAPACITY

The supply of insurance available to meet demand. Capacity depends on the industry’s financial
ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite
based on its financial condition. The adequacy of an insurer’s capital relative to its exposure to
loss is an important measure of solvency.

A property/casualty insurer must maintain a certain level of capital and policyholder surplus to
underwrite risks. This capital is known as 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.

CAPITAL

Shareholder’s equity (for publicly traded insurance companies) and retained earnings (for mutual
insurance companies). There is no general measure of capital adequacy for property/casualty
insurers. Capital adequacy is linked to the riskiness of an insurer’s business. A company
underwriting medical device manufacturers needs a larger cushion of capital than a company
writing Main Street business, for example. (See Risk-based capital, Solvency, Surplus )

CAPITAL MARKETS

The markets in which equities and debt are traded. (See Securitization of insurance risk )

CAPTIVE AGENT

A person who represents only one insurance company and is restricted by agreement from
submitting business to any other company, unless it is first rejected by the agent’s captive
company. (See Exclusive agent )

CAPTIVES

Insurers that are created and wholly owned by one or more non-insurers, to provide owners with
coverage. A form of self-insurance.

CAR YEAR

Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for
automobile insurance.

CASE MANAGEMENT

A system of coordinating medical services to treat a patient, improve care and reduce cost. A
case manager coordinates health care delivery for patients.

CASH DIVIDEND OPTION*

For participating insurance policies, a dividend option under which the insurer sends the policy
owner a check in the amount of the policy dividend. (See Dividend, Policy dividend options )

CASH PAYMENT OPTION*

One of several nonforfeiture options included in life insurance policies and some annuity
contracts that allows a policy owner to receive the cash surrender value of a life insurance policy
or an annuity contract in a single payment. Also known as cash surrender option. (See Cash
surrender value, Nonforfeiture options )

CASH SURRENDER VALUE*

1. 1.For life insurance, the amount, before adjustments for factors such as policy loans, that the
   owner of a permanent life insurance policy is entitled to receive if the policy does not remain
   in force until the insured’s death.
2. For annuities, the amount of a deferred annuity’s accumulated value, less any surrender
   charges, that the contract holder is entitled to receive if the policy is surrendered during its
   accumulation period. Also known as cash value and surrender value.

CASH VALUE*

See Cash surrender value

CATASTROPHE

Term used for statistical recording purposes to refer to a single incident or a series of closely
related incidents causing severe insured property losses totaling more than a given amount,
currently $25 million

CATASTROPHE BONDS

Risk-based securities that pay high interest rates and provide insurance companies with a form
of reinsurance to pay losses from a 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. (See Securitization of insurance risk) )

CATASTROPHE DEDUCTIBLE

A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in
when a major natural disaster occurs. These large deductibles limit an insurer’s potential losses
in such cases, allowing it to insure more property. A property insurer may not be able to buy
reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a
certain level.

CATASTROPHE FACTOR

Probability of catastrophic loss, based on the total number of catastrophes in a state over a
40-year period.

CATASTROPHE MODEL

Using computers, a method to mesh long-term disaster information with current demographic,
building and other data to determine the potential cost of natural disasters and other catastrophic
losses for a given geographic area.

CATASTROPHE REINSURANCE

Reinsurance 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 Chartered Property Casualty
Underwriters. National examinations and three years of work experience are required.

CLAIMS MADE POLICY

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. (See Occurrence policy )

COBRA

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.

COINSURANCE

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.

COLLATERAL

Property that is offered to secure a loan or other credit and that becomes subject to seizure on
default. Also called security.

COLLATERAL ASSIGNMENT*

A temporary transfer of some of the ownership rights in a particular property, such as a life
insurance policy or an annuity contract, as collateral for a loan. The transfer is made on the
condition that upon payment of the debt for which the contract is collateral, all transferred rights
shall revert back to the original owner. Contrast with absolute assignment.

COLLATERAL SOURCE RULE

Bars the introduction of information that indicates a person has been compensated or
reimbursed by a source other than the defendant in civil actions related to negligence or other
liability.

COLLISION COVERAGE

Portion of an auto insurance policy that covers the damage to the policyholder’s car from a
collision.

COMBINED RATIO

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.

COMMERCIAL LINES

Products designed for and bought by businesses. Among the major coverages are boiler and
machinery, business income, 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 income, which must be added to a fire
insurance (property) policy. (See Commercial multiple peril policy )

COMMERCIAL MULTIPLE PERIL POLICY

Package policy that includes property, boiler and machinery, crime and general liability
coverages.

COMMERCIAL PAPER

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.

COMMISSION

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.

COMMUTATIVE CONTRACT*

An agreement under which the contracting parties specify the values that they will exchange;
moreover, the parties generally exchange items or services that they think are of relatively equal
value. Contrast with aleatory contract.

COMPETITIVE REPLACEMENT PARTS

See Crash parts; Generic auto parts

COMPETITIVE STATE FUND

A facility established by a state to sell workers compensation in competition with private insurers.

COMPLAINT RATIO

A measure used by some state insurance departments to track consumer complaints against
insurance companies. Generally, it is stated as the number of complaints upheld against an
insurance company, as a percentage of premiums written. In some states, complaints from
medical providers over the promptness of payments may also be included.

COMPLETED OPERATIONS COVERAGE

Pays for bodily injury or property damage caused by a completed project or job. Protects a
business that sells a service against liability claims.

COMPREHENSIVE COVERAGE

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.

CONTESTABLE PERIOD*

The time during which an insurer has the right to cancel or rescind an insurance policy if the
application contained a material misrepresentation. (See Incontestability provision) )

CONTINGENT BENEFICIARY*

The party designated to receive the proceeds of a life insurance policy following the insured’s
death if the primary beneficiary predeceased the insured. Also known as secondary beneficiary
and successor beneficiary. (See Primary beneficiary )

CONTINGENT LIABILITY

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.

CONVERTIBLE TERM INSURANCE POLICY*

A term life insurance policy that gives the policy owner the right to convert the policy to a
permanent plan of insurance.

COVERAGE

Synonym for insurance.

CRASH PARTS

Sheet metal parts that are most often damaged in a car crash. (See Generic auto parts )

CREDIT

The promise to pay in the future in order to buy or borrow in the present. The right to defer
payment of debt.

CREDIT DERIVATIVES

A contract that enables a user, such as a bank, to better manage its credit risk. A way of
transferring credit risk to another party.

CREDIT ENHANCEMENT

A technique to lower the interest payments on a bond by raising the issue’s credit rating, often
through insurance in the form of a financial guarantee or with standby letters of credit issued by a
bank.

CREDIT INSURANCE

Commercial 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.

CREDIT RATING

See Bond rating

CREDIT SCORE

The number produced by an analysis of an individual’s credit history. The use of credit
information affects all consumers in many ways, including getting a job, finding a place to live,
securing a loan, getting telephone service 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. (See Insurance
score )

CRIME INSURANCE

Term referring to property coverages for the perils of burglary, theft and robbery.

CRITICAL ILLNESS (CI) INSURANCE*

A type of individual health insurance that pays a lump-sum benefit when the insured is
diagnosed with a specified illness. Also known as critical diagnosis insurance. Contrast with
specified disease coverage.

CROP-HAIL INSURANCE

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.

C-SHARE VARIABLE ANNUITIES

A form of variable annuity contract where the contract holder pays no sales fee up front or
surrender charges. Owners can claim full liquidity at any time.

CURRENT ASSUMPTION WHOLE LIFE INSURANCE*

See Interest-sensitive insurance

 

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DEATH BENEFIT*

(1) For a life insurance contract, the amount of money paid by an insurer to a beneficiary when a
person insured under the life insurance policy dies. (2) For an annuity contract, the amount of
money paid to a beneficiary if the contract owner dies before the annuity payments begin.

DECLARATION

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.”

DECLINED RISK CLASS*

In insurance underwriting, the group of proposed insureds whose impairments or anticipated
extra mortality are so great that an insurer cannot provide insurance coverage to them at an
affordable cost. Also known as uninsurable class. Contrast with preferred risk class, standard
risk class and substandard risk class.

DECREASING TERM LIFE INSURANCE*

Term life insurance that provides a death benefit that decreases in amount over the policy term.
Contrast with increasing term life insurance.

DEDUCTIBLE

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.

DEFERRED ANNUITY

An annuity contract, also referred to as an investment annuity, that is purchased either with a
single tax-deferred premium or with periodic tax-deferred premiums over time. Payments begin
at a predetermined point in time, such as retirement. Money contributed to such an annuity is
intended primarily to grow tax-deferred for future use.

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.

DEMAND DEPOSIT

Customer assets that are held in a checking account. Funds can be readily withdrawn by check,
“on demand.”

DEMUTUALIZATION

The conversion of insurance companies from mutual companies owned by their policyholders
into publicly traded stock companies.

DEPOSITORY INSTITUTION

Financial institutions that obtain their funds mainly through deposits from the public. They include
commercial banks, savings and loan associations, savings banks and credit unions.

DEREGULATION

In insurance, reducing regulatory control over insurance rates and forms. Commercial insurance
for businesses of a certain size has been deregulated in many states.

DERIVATIVES

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.

DIRECT PREMIUMS

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, by telephone or via the Internet. This is in lieu of using captive or
exclusive agents.

DIRECT WRITERS

Insurance companies that sell directly to the public using exclusive agents or their own
employees, through the mail, by telephone or via the 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

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. There are a variety of D&O coverages. Corporate reimbursement coverage
indemnifies directors and officers of the organization. Side-A coverage provides D&O coverage
for personal liability when directors and officers are not indemnified by the firm. Entity coverage,
for claims made specifically against the company, is also available. D&O policies may be
broadened to include coverage for employment practices liability.

DISABILITY INCOME INSURANCE*

A type of health insurance designed to compensate an insured person for a portion of the
income lost because of a disabling injury or illness. Benefit payments are made either weekly or
monthly for a specified period during the continuance of an insured’s disability. (See income
protection insurance )

DISABILITY*

In disability insurance, the inability of an insured person to work due to an injury or sickness.
Each disability policy has a definition of disability that must be satisfied in order for the insured to
receive the policy’s benefits. (See Residual disability, Total disability )

DIVIDEND

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.

DIVIDEND ACCUMULATIONS OPTION*

See Accumulation at interest option.

DOMESTIC INSURANCE COMPANY

Term used by a state to refer to any company incorporated there.

DOUBLE INDEMNITY BENEFIT*

An accidental death benefit that is equal to the face amount of a life insurance policy’s basic
death benefit and is paid when the insured’s death is the result of an accident as defined in the
policy. (See Accidental death benefit/ADB )

DREAD DISEASE COVERAGE*

See Specified disease coverage

 

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EARLY WARNING SYSTEM

A system of measuring insurers’ financial stability set up by insurance industry regulators. An
example is the Insurance Regulatory Information System (IRIS), which uses financial ratios to
identify insurers in need of regulatory attention.

EARNED PREMIUM

The 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.

EARTHQUAKE INSURANCE

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.

ECONOMIC LOSS

Total financial loss resulting from the death or disability of a wage earner, or from the destruction
of property. Includes the loss of earnings, medical expenses, funeral expenses, the cost of
restoring or replacing property and legal expenses. It does not include noneconomic losses,
such as pain caused by an injury.

ELECTRONIC COMMERCE / E-COMMERCE

The sale of products such as insurance over the Internet.

ELIMINATION PERIOD

A kind of deductible or waiting period usually found in disability policies. It is counted in days
from the beginning of the illness or injury.

EMPLOYEE DISHONESTY COVERAGE

Covers direct losses and damage to businesses resulting from the dishonest acts of employees.
(See Fidelity bond )

EMPLOYEE RETIREMENT INCOME SECURITY ACT / ERISA

Federal legislation that protects employees by establishing minimum standards for private
pension and welfare plans.

EMPLOYER’S LIABILITY

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. (See Exclusive
remedy )

EMPLOYMENT PRACTICES LIABILITY COVERAGE

Liability insurance for employers that covers wrongful termination, discrimination and other
violations of employees’ legal rights.

ENDORSEMENT

A written form attached to an insurance policy that alters the policy’s coverage, terms, or
conditions. Sometimes called a rider.

ENDOWMENT INSURANCE*

Life insurance that provides a policy benefit payable either when the insured dies or on a stated
date if the insured is still alive on that date.

ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE

A form of insurance designed to cover losses and liabilities arising from damage to property
caused by pollution.

EQUITY

In investments, the ownership interest of shareholders. In a corporation, stocks as opposed to
bonds.

EQUITY INDEXED ANNUITY

Nontraditional 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.

ESCROW ACCOUNT

Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance,
and sometimes to pay property taxes.

EXCESS AND SURPLUS LINES

Property/casualty coverage that isn’t available from insurers licensed by the state (called
admitted insurers) and must be purchased from a nonadmitted 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.

EXCESS WORKER COMPENSATION

Excess workers compensation, a coverage geared to employers that self-insure for workers
comp, comes into play when claims exceed a designated dollar amount.

EXCLUSION

A provision in an insurance policy that eliminates coverage for certain risks, people, property
classes, or locations.

EXCLUSIVE AGENT

A captive agent, or a person who represents only one insurance company and is restricted by
agreement from submitting business to any other company unless it is first rejected by the
agent’s company. (See Captive agent )

EXCLUSIVE REMEDY

Part of the social contract that forms the basis for workers compensation statutes under which
employers are responsible for work-related injury and disease, regardless of whether it was the
employee’s fault and in return the injured employee gives up the right to sue when the
employer’s negligence causes the harm.

EXPENSE RATIO

Percentage of each premium dollar that goes to insurers’ expenses including overhead,
marketing and commissions.

EXPERIENCE

Record of losses.

EXPOSURE

Possibility of loss.

EXTENDED COVERAGE

An endorsement added to an insurance policy, or clause within a policy, that provides additional
coverage for risks other than those in a basic policy.

EXTENDED 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. (See Guaranteed replacement cost coverage )

EXTENDED TERM INSURANCE OPTION*

One of several nonforfeiture options included in life insurance policies that allows the owner of a
policy with a cash value to discontinue premium payments and to use the policy’s net cash value
to purchase term insurance for the full coverage amount provided under the original policy for as
long a term as the net cash value can provide. (See Nonforfeiture options )

 

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*Terms marked with an asterisk are from LOMA's Glossary of Insurance and Financial Services Terms. Copyright © 2002 LOMA (Life Office Management Association, Inc.). Used with permission from LOMA.