API-c.com - Insurance Terms and Glossary

Insurance Terms & Glossary

Acquisition Costs: The insurer's cost of putting new business in force.
Actuarial Adjustment: This term refers to the revisions that are made to reserves or rates based on a company's experience and projected claims
Actuary: A social mathematician who uses mathematical skills to define, analyze and solve complex business and social problems involving insurance and employee benefit programs.
Additional Insured: A person, other than the named insured, who is protected by the terms of the policy.
Admitted Assets: Permitted by state law to be included in an insurance company's annual statement. These assets are an important factor when regulators measure insurance company solvency. They include cash and cash equivalents, mortgages, stocks, bonds, and real estate. They would exclude such items as: prepaid expenses, delinquent receivables and furnishings and equipment not readily convertible to cash.
Admitted Company: A foreign or alien insurance company which has been licensed by the insurance department of the state in question and which, thereby, is authorized to conduct business within that state to the extent licensed. Also called admitted market or admitted insured.
Adverse Selection: The insuring of one or more risks with a higher chance of loss than that contemplated by the applicable insurance rate. The selection of such risks is adverse because the rate is inadequate. Also called anti-selection.
Aggregate Limit: A limit in an insurance policy stipulating the most it will pay for all covered losses sustained during a specified period of time, usually one year. Aggregate limits are commonly included in liability policies. Aggregates can apply at the individual and group level of a policy.
Application: In all types of insurance requiring it, a written statement by a prospective policyholder, which gives the information the company, relies upon when underwriting, rating, and issuing the insurance.
Assets: Refer to "all the available properties of every kind or possession of an insurance company that may be used to pay its debts." There are three classifications of assets: invested assets, all other assets, and total admitted assets. Invested Assets refer to things such as bonds, stocks, cash, and income-producing real estate. All other assets refer to non-income producing possessions such as the building the company is in, office furniture, and debts owed (usually in the form of deferred and unpaid premiums.) Total Admitted Assets refer to everything a company owns. All other invested assets = Total Admitted Assets. Some states by law do not permit insurance companies to claim certain goods and possessions, such as deferred and unpaid premiums, in the all other assets category, declaring them "non-admissible."
Audit: Verification of books or accounts to determine their accuracy. Certain policies written on a reporting or adjustable form give the insurer the privilege of auditing the policyholder's records to verify the accuracy of the premiums paid.
Average Risk: The type of risk that an insurer defines as average or standard for class as far as size, quality and acceptability. The baseline set by the insurer as the proverbial company normal.

Binder: An oral or written agreement to provide insurance, which serves as evidence of coverage prior to the issuance of a policy. It is often considered to be a temporary insurance policy to provide coverage until a permanent policy has been issued.
Bordereau: A detailed listing of accounts or documents. Usually required as proof or documentation under reinsurance contracts.

Cancellation: The termination of a contract. Usually applied to the termination of a policy before its natural expiration, but may be used to describe the ending of any contract during its natural life, such as an agent's contract.
Cancellation Notice: The notice issued by one party of the policy to the other, informing of the intent and request to cancel. The policy provisions must be followed during the notification process with respect to how the notice must be given (normally in writing), the number of days that must be allowed, and how the notice must be delivered (registered mail, delivery, etc.).
Certificate Of Insurance: A short-form documentation of an insurance policy.
Claim: The formal request by a policyholder or claimant for payment of loss under an insurance policy.
Claims-Made: A liability insurance method covering losses from claims asserted against the insured during the policy period, regardless of whether the liability-imposing causes occurred during or prior to the policy period. (However, many underwriters may not cover liability-imposing causes occurring prior to the policy period.) The coverage trigger is based on the retroactive date stated in the Declarations.
Clash Reinsurance: A form of casualty excess of loss treaty reinsurance for coverage in the event that two or more named insured for the primary group are involved in the same loss occurrence. API's retention on this coverage is limited to the one clash dollar amount per occurrence on any one claim.
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.

Declaration: Part of the 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."
Declination: The insurer's refusal to insure an individual after evaluation of the application for insurance and any other pertinent factors.
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. Our standard normally includes Indemnity and Expense.
Direct Premiums: Premiums collected by the insurer from policyholders, before reinsurance premiums are deducted.
Directors And Officers Liability / D&O: Covers directors and officers of a company for negligent acts or omissions, and for misleading statements that result in libel suits against the company.

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.

Endorsement

A document with language attached to and becoming part of a basic policy for the purpose of modifying the policy, either at inception or mid-term.

Errors and Omissions (E&O)

A provision or policy in an agreement which is intended to eliminate or remove liability as a result of an inadvertent error or omission by either party.

Excess Liability Insurance

Liability insurance designed to provide an extra layer of coverage above the primary layer. The excess insurance does not respond, however, until the limits of liability in the primary layer have been exhausted. Because of the method of response, it is often much less costly than the primary layer, per $1,000,000 of coverage. The excess layer provides not only higher limits, but catastrophic protection for very large losses.

Exclusion

The condition or circumstance that is not covered by the insurance and is so stated in the policy. A clause in an insurance policy which specifies what is excluded from the policy's coverage.

Experience

Provides statistics of claims and losses related to specific classes or ratings. This experience then can be used to prospectively predict future claims and adjust rates as necessary.

Exposure

Exposure provides a unit of measure or a standard on which all policies can be evaluated on its risk. A Rated Exposure takes the measurement one step further and attempts to measure each subscriber to a base risk by evaluating each to a base or lowest risk policy level. By measuring exposures we can provide comparative measures of risk for each period reported and provides a good benchmark to compare against claims history. In each case, an exposure or individual subscriber is weighted based upon the following:

Hours Worked and Length of Policy
Rating Factors including: New to Practice, Rating Year, Limits, Relativity (Location)

Extended Reporting Period (ERP)

We often refer to this as "RPC" for Reporting Period Coverage. In "claims-made" liability policies, only those claims that occur after the retroactive date and are reported or filed against the insured during the policy period are covered by the policy. The ERP, or tail, is an endorsement available to extend the reporting period for the filing of a claim to give additional time in order to be considered covered.

Facultative Reinsurance: 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. 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.
Frequency: Number of times a loss occurs. One of the criteria used in calculating premium rates.
Fronting: 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.

GAAP Accounting: Generally accepted accounting principles (GAAP) accounting is used in financial statements that publicly-held companies prepare for the Securities and Exchange Commission. (See Statutory accounting principles / SAP)

Incurred But Not Reported Losses / IBNR: Losses that are not reported to the insurer or reinsurer until years after the policy is sold. Liability claims may be filed long after the event that caused the injury to occur. Also, estimates made about claims already reported but where the full extent of the injury or property damage is not yet known. Insurance companies regularly adjust reserves for such losses as new information becomes available.
Incurred Losses: Losses occurring within a fixed period, whether or not paid or open.
Incurred Loss Ratio: Percentage of each premium dollar an insurer spends on claims. An insurance company's Incurred Loss Ratio is ratio of the earned premiums divided by the amount of incurred losses. It provides a measure or indicator of the company's performance and adequacy of the pricing model. The ratio can provide a measure of the company's financial strength since it measures the margin of profitability built into premium pricing. A company that has a ration in excess of 100% is paying out more claims then it is taking in from premiums. The lower the ratio, the greater the company's financial strength. The ratio is reported both at gross and net of ceding.
Indemnity: Used interchangeably with Losses
Insurance Contract: The written contract or insurance policy between the insured and the insurer detailing the coverage provided, exclusions and limitations, conditions in case of loss, and other details pertinent to the terms of the agreement.
Insured: The policyholder - the person(s) protected in case of a loss or claim.
Investment Income: Investment income refers to dividends and interest derived from any stocks or bonds owned by an insurance company. It also includes any profit/loss made from the sale of any stocks or bonds but does not include the value of any stocks or bonds that the company currently owns.

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. Texas has an established JUA provided through the Texas department of Insurance to provide medical malpractice insurance. The policies are assessable up to 100% of the premiums if there are excess losses and P&C insurers in the state can also be assessed for the remaining shortfalls to be offset against premium taxes over a ten year period.

Lapsed Policy: The termination or discontinuance of an insurance policy due to non-payment of a premium.
Liability: 1) An obligation imposed by law or equity. 2) Money owed or expected to be owed. In an insurance company financial statement, the two columns it contains are its "assets" (or the amounts it owns) and the "liabilities" (or the amount it owes or expects to owe). Liabilities generally are defined by state statute or insurance department regulation for use in the annual statement of an insurer. The term is also defined for special purposes by other regulatory officials, such as the Securities and Exchange Commission.
Loss Adjustment Expenses (LAE): The sum insurers pay for investigating and settling insurance claims, including the cost of defending a lawsuit in court.
Loss Ratio: Percentage of each premium dollar an insurer spends on paid claims.

Midi-Tail: A claims-made liability policy endorsement or coverage option that may be purchased for an additional premium, that will allow the insured an extended reporting period to make claims to the insurer after the expiration of the policy. Often known by the acronym ERP's, which stands for extended reporting period endorsements.

National Association Of Insurance Commissioners (NAIC): The association of insurance commissioners of various states formed to promote national uniformity in the regulation of insurance.
Negligence: The failure to exercise the care that an ordinary prudent person would exercise: either doing that which a prudent person would not do, or failing to do that which a prudent person would do.
Non-admitted Insurer: If an insurer is not licensed to write insurance in a specific state, then the insurer is non-admitted insurer for that state.
Non-renewal: When an insurer chooses not to offer renewal coverage on a policy for cause such as higher than expected hazards or losses, lack of compliance with safety recommendations, or because the insurer is withdrawing from a territory or from offering a type of coverage. When an insurer non-renews coverage, it must be done within the applicable state law as far as the reasons permitted, type of notice that is sent to the insured and the amount of time the insurer must give the insured prior to policy expiration.
Notice Of Loss (Reported Date): A written notice required by insurance companies immediately after an accident or other loss. Part of the standard provisions defining a policyholder's responsibilities after a loss. This is an important date in a claims made policy.

Occurrence Policy: The traditional occurrence liability insurance method provides coverage for losses from liability-imposing causes which occurred during the policy period, regardless of when the claim is asserted. Once the policy period is over in a claims made form, the approximate extent of the underwriter's liability is known. With the traditional occurrence liability coverage method, the underwriter may not discover the extent of liability for years to come from losses claimed to have occurred within the policy period.

Premium Tax: A state tax on premiums. Paid by the insurer, a resident company is paying approximately 1.7% and a non-resident company's premium tax can be higher depending on its level of investment in the state.
Premium To Surplus Ratio: An insurance company's surplus, the equivalent of capital and retained earnings or is the amount by which assets exceed liabilities. It provides a cushion for absorbing above-average losses. The premium to surplus ratio is designed to measure the adequacy of this cushion or the company's financial strength. The ratio is computed by dividing net premiums written by the surplus. A company that has $3 in net premiums written for every $1 of surplus has a 3-to-1 premium to surplus ratio. The lower the ratio, the greater the company's perceived financial strength. State regulators have established as a guideline a premium to surplus ratio no higher than 3 to 1.
Prior Acts Coverage: Coverage that may be necessary for a person who has been uninsured or who has canceled a claims-made liability policy that does not provide an adequate claims discovery period. Insurance may be available from the new insurer or, occasionally, from a separate insurer who provides a policy only for claims arising from acts that occurred before the beginning of the policy period.
Purchasing Group: An entity that offers insurance to groups of similar businesses with similar exposures to risk.

Quota Share Reinsurance: A proportional or pro rata reinsurance treaty where the same proportion is ceded on all cessions. The reinsurer assumes a set percentage of risk for the same percentage of the premium.

Reciprocal Exchanges: These organizations are composed of a group of persons, firms or corporations commonly termed "Subscribers" who exchange contracts of insurance on the Reciprocal or Inter-Insurance plan through the medium of an attorney-in-fact. Under this plan, each Subscriber executes an agreement identical with that executed by every other Subscriber, empowering the attorney-in-fact to assume on his behalf an underwriting liability on policies issued by the Exchange covering the risks of the other Subscribers. The attorney-in-fact assumes no liability as an underwriter. The Subscribers' Liability is several and not joint and is limited by the terms of the Subscribers' Agreement.
Reinstatement: The restoring of a lapsed policy to full force and effect. The reinstatement may be effective after the cancellation date, creating a lapse of coverage. Some companies require evidence of insurability and payment of past due premiums plus interest.
Reinsurance: Insurance bought by insurers. A reinsurer assumes part of the risk and part of the premium originally taken by the insurer, known as the primary company. Reinsurance effectively increases an insurer's capital and therefore its capacity to sell more coverage. The business is global and some of the largest reinsurers are based abroad. Reinsurers have their own reinsurers, called retrocessionaires. Reinsurers don't pay policyholder claims. Instead, they reimburse insurers for claims paid. (See Treaty reinsurance; Facultative reinsurance)
Reinsurance Ceded: Premiums ceded to other affiliated and nonaffiliated insurance companies.
Renewal: A policy issued to replace one which has expired.
Reporting Period Coverage (RPC): In the industry it is sometimes referred to as Extended Reporting Period or "ERP". In "claims-made" liability policies, only those claims that occur after the retroactive date and are reported or filed against the insured during the policy period are covered by the policy. The RPC, or tail, is an endorsement available to extend the reporting period for the filing of a claim to give additional time in order to be considered covered.
Reserves: Amounts set aside for future liabilities. See Ultimate, Case and Statutory for different measurement levels.
Reserves-Case: An estimated liability from outstanding claims for losses and allocated loss adjustment expenses. Established by the Claims Department, the estimate provides the initial basis for evaluating statutory reserves, a statistical review measures redundancies (excess estimates) or deficiencies (shortfall in estimates) and adjust for other factors including reinsurance and recoveries.
Reserve Deficiency: Also compare to Case Reserves. The opposite of a Reserve Redundancy. Reserves are established based upon individual claims and a deficiency indicates that there may be a trend to "under-estimate" the actual or ultimate paid claim.
Reserve Redundancy: Also compare to Case Reserves. The opposite of a Reserve Deficiency. Reserves are established based upon individual claims and a redundancy indicates that there may be a trend to "over-estimate" the actual or ultimate paid claim.
Reserves-Statutory: The amount established under Statutory Accounting to pay current claims. The amount is established based upon historical trends and analysis that includes adjustments or reductions for any reinsurance ceding or other recoveries. This will be the amount recorded at period end for statutory accounting
Reserves-Ultimate: Using statistical measures and models to evaluate claim and insurance policy data actuaries are able to predict what the "ultimate" or best forecast of claim payments will be. Usually, the data is developed by reporting period and treaty year and provides the basis for recording the amount of liability for statutory reserves. The more developed the data the greater the confidence level in this projection.
Retention: The amount of risk retained by an insurance company that is not reinsured.
Retroactive Date: The earliest date for which coverage is afforded under a claims-made form. Usually the effective date of the first year of such policy form provided to the insured.
Retrocession: The process by which a reinsurer obtains reinsurance from another company.
Risk: Defined variously as uncertainty of loss, chance or loss, or the variance of actual from expected results. However defined, its existence is the reason people buy insurance.
Risk Management: The active identification, evaluations, and management of all the potential hazards and exposures to loss a risk may experience. The handling of those exposures is not limited to insurance options, but includes a variety of methods such as alternative financing, retention, reduction, elimination, transfer, and/or any combination of methods.
Risk Retention Groups: Insurance companies that band together as self-insurers and form an organization that is chartered and licensed as an insurer in at least one state to handle liability insurance.
Risk-Based Capital (RBC): Beginning in the early 1990s, members of the NAIC examined the diversity of underwriting and investment practices due a large number of failed insurance companies and adopted a formula for establishing the minimum capital requirement for a company based upon type of risks to which it was exposed. This model was developed as an additional tool to help regulators with solvency issues. The six main categories of risk measures are: Asset Risk of Subsidiaries, Asset Risk of Fixed Income Investments, Asset Risks of Equity Instruments, Asset Risks of Credit, Underwriting Risk of Reserves, and Underwriting Risks of Net Written Premium. The model then compared the surplus requirement to actual and assesses increasing levels of regulatory control at four levels should actual capital fall below those minimum levels.

Severity: Size of a loss. One of the criteria used in calculating premiums rates.
Solvency: Insurance companies' ability to pay the claims of policyholders. Regulations to promote solvency include minimum capital and surplus requirements, statutory accounting conventions, limits to insurance company investment and corporate activities, financial ratio tests, and financial data disclosure.
Statutory Accounting Principles / SAP: More conservative standards than under GAAP accounting rules, it is imposed by state laws that emphasize the present solvency of insurance companies. SAP helps ensure that the company will have sufficient funds readily available to meet all anticipated insurance obligations. This method requires that selling expenses be recorded immediately, rather than amortized over the life of the policy. (See GAAP accounting)
Surplus: The remainder after an insurer's liabilities are subtracted from its assets.
Swing Rated Treaty: A reinsurance agreement that has both minimum and maximum caps on payments. Usually the minimum level will include a base amount to allow the reinsurer to recoup acquisition costs plus an estimated profit level.

Tail Coverage: Insurance coverage available to provide protection for tail exposures. The present occurrence version of the commercial general liability (CGL) form already provides protection for losses that occurred during the policy period, regardless of when they are reported or claims made. The claims-made version of the CGL must be endorsed to provide coverage for claims that are not made during the policy period.
Territorial Rating: A method of classifying risks by geographic location to set a fair price for coverage. The location of the insured may have a considerable impact on the cost of losses. The risk of a claim may be higher in certain parts of the state due to economic or judicial differences.
Treaty Reinsurance: A standing agreement between insurers and reinsurers. Under a treaty each party automatically accepts specific percentages of the insurer's business.

Underwriting: Examining, accepting, or rejecting insurance risks and classifying the ones that are accepted, in order to charge appropriate premiums for them.
Underwriting Income: The insurer's profit on the premiums after all expenses and losses. When premiums aren't sufficient to cover claims and expenses, the result is an underwriting loss. Underwriting losses are typically offset by investment income.
Unearned Premium: The portion of a premium already received by the insurer under which protection has not yet been provided. The entire premium is not earned until the policy period expires, even though premiums are typically paid in advance.

Written Premiums: The total premiums on all policies written by an insurer during a specified period of time, regardless of what portions have been earned. Net premiums written are premiums written after reinsurance transactions.

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Insurance Terms & Glossary