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Accounts receivable insurance – Insurance against loss of revenue that cannot be collected because accounts receivable records are destroyed by an insured peril. Coverage commonly includes any extra expense to recapture records and payment of interest on loans needed to cover the interim period reduction in collections. An insured’s keeping duplicate records in safe storage off premises is a highly recommended risk reduction technique—and the cost of coverage is considerably reduced thereby. Insurance may be arranged to cover electronic records as well as paper.
Actual cash value (ACV) – A method for placing value on property as of the time of its loss or damage. ACV may be determined by market value (the current price for a like item in the same general condition) or replacement cost new less use depreciation (the cost of the same item brand new minus the insured’s contribution to pay for the added life expectancy of the property new property). The insured may generally select whichever method is more favorable. Contrast with replacement cost.
Actuary – A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics. (Americanism: In most other countries the individual is known as “mathematician.”)
Additional insured – One who qualifies as “insured” under the terms of a policy even though not named as insured. Officers of a corporation may be included as insureds under the terms of a policy written in the name of the corporation.
Adjuster - A person may act either on behalf of the insurance company or the insured in the settling a claim. Independent adjusters represent the insurance company on a fee basis; public adjusters represent the insured on a fee basis.
Admitted company - An insurance company that is licensed (admitted) to conduct business within a given state.
Admitted Assets - 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 mortgages, stocks, bonds and real estate.
Admitted market - The range of insurance available through admitted companies.
Agent - individual who sells and services insurance policies in either of two classifications:
1. Independent agent represents at least two insurance companies and (at least in theory) services clients by searching the market for the most advantageous price for the most coverage. The agent’s commission is a percentage of each premium paid and includes a fee for servicing the insured’s policy.
2. Direct or career agent represents only one company and sells only its policies. This agent is paid on a commission basis in much the same manner as the independent agent.
Aggregate deductible - A deductible applied annually to the total amount paid in claims during a policy period. Claims are generally subject to a per-occurrence deductible; the aggregate is the limit beyond which no further deductibles are applied.
Aggregate Limit - Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents might occur.
Anniversary date - The anniversary of the original date of issue of a policy as shown in the declarations.
Annuity - An agreement by an insurer to make periodic payments that continue during the survival of the annuitant(s) or for a specified period.
Approved for Reinsurance - Indicates the company is approved (or authorized) to write reinsurance on risks in this state. A license to write reinsurance might not be required in these states.
Approved or Not Disapproved for Surplus Lines - Indicates the company is approved (or not disapproved) to write excess or surplus lines in this state.
Assets - Assets refer to “all the available properties of every kind or possession of an insurance company that might 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 nonincome producing possessions such as the building the company occupies, 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 plus invested assets equals total admitted assets. By law, some states don’t 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.”
Assigned risk - A risk that may not be generally acceptable to any insurance company but for which the law says that insurance must be acquired. Personal auto liability is one such necessary coverage. Insurance companies doing personal auto business in a state can be required to accept assignment of a portion of the state’s unacceptable drivers as insureds.
Authorized Under Federal Products Liability Risk Retention Act (Risk Retention Groups) – Indicates companies operating under the Federal Products Liability Risk Retention Act of 1981 and the Liability Risk Retention Act of 1986.
Avoidable Consequences – Consequences that are caused by lack of care on the part of an individual, and that could have been avoided had the individual exercised proper care. Generally refers to events that occur following a loss as the result of a person’s failure to take steps to prevent the consequences.
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Balance Sheet - An accounting term referring to a listing of a company’s assets, liabilities and surplus as of a specific date.
Basic named perils - Covered perils in a property insurance contract: fire, lightning, windstorm, civil commotion, smoke, hail, aircraft, vehicles, explosions and riot.
Best’s Capital Adequacy Relativity (BCAR) - This percentage measures a company’s relative capital strength compared to its industry peer composite. A company’s BCAR, which is an important component in determining the appropriateness of its rating, is calculated by dividing a company’s capital adequacy ratio by the capital adequacy ratio of the median of its industry peer composite using Best’s proprietary capital mode. Capital adequacy ratios are calculated as the net required capital necessary to support components of underwriting, asset, and credit risks in relation to economic surplus.
Binder - An insurer’s agreement, by way of an agent, to provide non-life insurance on the spot, pending issuance of the policy contract.
Blanket coverage - A means of insuring various items of property under one limit of liability.
Blanket insurance - Insurance covering multiple items of property as a group. Covered property may be at one location or several.
Bodily Injury - In Commercial General Liability insurance, refers to injuries to a person, as well as sickness, disease and death.
Bond - A document for expressing surety. A bond engages three entities; the “surety” (bonding company) sells the bond to the “principal” for the purpose of paying off the party the principal will owe to the “obligee” upon failure of the “principal” to perform some act or provide some service under agreed terms.
Bond, surety - A surety bond is the financial assumption of responsibility by one or more persons for fulfilling another’s obligations.
Broad form perils - A property insurance designation for coverage that extends beyond the basic named perils.
Broker - Insurance salesperson that searches the marketplace in the interest of clients, not insurance companies.
Broker-Agent - Independent insurance salesperson who represents particular insurers but also might function as a broker by searching the entire insurance market to place an applicant’s coverage to maximize protection and minimize cost. This person is licensed as an agent and a broker.
Builders risk insurance - A variation of property coverage specifically applicable to construction projects. It is commonly written in an amount to cover the value of the structure when completed. The premium charged takes into account that values at risk increase gradually over the term of the policy.
Business Auto Policy (BAP) - A standardized contract for writing liability and property coverage on commercial autos.
Business income coverage - Insurance protecting the income derived from an insured’s business activities when curtailed peril. Coverage includes reasonable extra the insured undertakes to expedite return to business operations.
Business Net Retention - This item represents the percentage of a company’s gross writings that are retained for its own account. Gross writings are the sum of direct writings and assumed writings. This measure excludes affiliated writings.
Business Owners policy (BOP) - A package of property and liability insurance for small and medium size businesses, the BOP owes its origin to the success of the homeowners policy.
Business personal property - A tern relating to “contents” of a commercial enterprise, it may include furniture, fixtures, machinery and equipment as well as stock, all other chattels owned by the insured, and even use interest in building improvements and betterments.
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Cancellation; flat, pro rata, or short rate - In a flat cancellation the full premium is returned to the insured. A pro rata cancellation means the insurer has charged for the time the coverage was in force. Short rate cancellation entails a penalty in excess of pro rata for early termination.
Capital - Equity of shareholders of a stock insurance company. The company’s capital and surplus are measured by the difference between its assets minus its liabilities. This value protects the interests of the company’s policy owners in the event it develops financial problems; the policy owners’ benefits are thus protected by the insurance company’s capital. Shareholders’ interest is second to that of policy owners.
Capitalization or Leverage - Measures the exposure of a company’s surplus to various operating and financial practices. A highly leveraged, or poorly capitalized, company can show a high return on surplus, but might be exposed to a high risk of instability.
Captive Agent - Representative of a single insurer or fleet of insurers who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights on a sale. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as an extensive list of employee benefits such as pensions, life insurance, health insurance, and credit unions.
Casualty - Liability or loss resulting from an accident.
Casualty Insurance - That type of insurance that is primarily concerned with losses caused by injuries to persons and legal liability imposed upon the insured for such injury or for damage to property of others. It also includes such diverse forms as plate glass, insurance against crime, such as robbery, burglary and forgery, boiler and machinery insurance and Aviation insurance. Many casualty companies also write surety business.
Ceded Reinsurance Leverage - The ratio of the reinsurance premiums ceded, plus net ceded reinsurance balances from non-US affiliates for paid losses, unpaid losses, incurred but not reported (IBNR), unearned premiums and commissions, less funds held from reinsurers, plus ceded reinsurance balances payable, to policyholders’ surplus. This ratio measures the company’s dependence upon the security provided by its re-insurers and its potential exposure to adjustment on such reinsurance.
Certificate of insurance - A written description of insurance in effect as of the date and time of the certificate. The certificate does not ordinarily confer any rights on the holder, i.e., the issuing insurer does not promise to inform the holder of change in or cancellation of coverage.
Change in Net Premiums Written (IRIS) - The annual percentage change in Net Premiums Written. A company should demonstrate its ability to support controlled business growth with quality surplus growth from strong internal capital generation.
Change in Policyholder Surplus (IRIS) - The percentage change in policyholder surplus from the prior year-end derived from operating earnings, investment gains, net contributed capital and other miscellaneous sources. This ratio measures a company’s ability to increase policyholders’ security.
Chartered Property and Casualty Underwriter (CPCU) - Professional designation earned after the successful completion of 10 national examinations given by the American Institute for Property and Liability Underwriters. Covers such areas of expertise as insurance, risk management, economics, finance, management, accounting, and law. Three years of work experience also are required in the insurance business or a related area.
Claim - A demand made by the insured, or the insured’s beneficiary, for payment of the benefits as provided by the policy. A demand to recover under an insurance policy for loss. In Commercial General Liability insurance, a policy for loss. In Commercial Liability insurance, the claim may be against the insured by a third party under the insurance policy held by the insured. In this case, claims are referred to the insurer to handle on behalf of the insured in accordance with the term of the policy.
Claim expenses - fees charged by attorneys designated by the insurance company or by the Insured with the Company’s written consent; and all other reasonable and necessary fees, costs and expenses resulting from the investigation, adjustment, defense and appeal of a claim if incurred by the insurance company, or by the Insured with the written consent of the insurance company, including, but not limited to, premiums for any appeal bond, attachment bond or similar bond but without any obligation of the insurance company to apply for or furnish any such bond. Claim expenses with respect to a claim may be paid first and payment may reduce the amount available to pay damages. Claim expenses may or may not include fees, costs or expenses of employees or officers of the insurance company.
Claims Expenses within the Limits - Claims expenses are paid first by an insurance company and reduces the amount available to pay damages.
Claims Expenses outside the Limits - Claims expenses paid by an insurance company do not reduce the amount available to pay damages. This type of coverage is usually limited to a set dollar amount. If claims expenses exceed this set aside dollar amount, the excess expenses usually will begin to reduce the amount available to pay damages (the policy limit).
Claims Made Basis Liability Coverage - method of determining whether or not coverage is available for a specific claim. If a claim is made during the time period when a liability policy is in effect an insurance company is responsible for its payment, up to the limits of the policy, regardless of when the event causing the claim occurred. Typically this type of coverage is endorsed with a prior acts date or retroactive date before which the insurance company has excluded coverage.
Claims-Made Policy - A type of public liability insurance that responds only to claims for injury or damage that are brought (to the insurer) during the policy period (or during a designated extended reporting period beyond expiration). In Commercial General Liability insurance, a policy that pays for events occurring during a specified period and for which a claim is made during the policy period, subject to stipulated limitations and extensions. Typically endorsed with a prior acts date or retroactive date before which the insurance company has excluded coverage. This is different than most public liability policies which are written on an “occurrence” basis, covering injury or damage occurring during the policy period even if a claim is brought months or even years later.
Class 3-6 Bonds (% of PHS) - This test measures exposure to non-investment grade bonds as a percentage of surplus. Generally, non-investment grade bonds carry higher default and illiquidity risks. The designation of quality classifications that coincide with different bond ratings assigned by major credit rating agencies.
Coinsurance clause - “Coinsurance” refers to the bargain between commercial property owners and the insurance industry. The clause in property policies encourages the property owner to gauge coverage needs by possible, not probable, maximum loss. With $1 million at risk but a probable maximum loss of $100,000, for example, the property owner would probably buy $100,000 insurance and bank on avoiding the larger disaster. The bargain offered by the insurance industry is a reduced rate per $100 of coverage if the owner agrees to buy coverage at a specified relation (80% commonly) to value (to possible maximum loss in other words). If the insured accepts the bargain but events prove the amount of insurance is inadequate to the stated coinsurance percentage, the insured becomes “co-insurer” in the same ratio as the amount of insurance bears to the amount that should have been carried.
Combined Ratio After Policyholder Dividends - The sum of the loss, expense and policyholder dividend ratios not reflecting investment income or income taxes. This ratio measures the company’s overall underwriting profitability, and a combined ratio of less than 100 indicates an underwriting profit.
Combined Single Limit (CSL) - Liability policies commonly offer separate limits that apply to bodily injury claims for property damage. “50/100/25″ is shorthand under such a policy for $50,000 per person/$100,000 per accident for bodily injury claims and $25,000 for property damage. A combined single limits policy might cover for $100,000 per covered occurrence whether bodily injury or property damage, one person or many.
Commercial General Liability (CGL) - The CGL policy is an ISO form, widely used to provide commercial enterprises with premises and operations liability coverage, products and completed operations insurance and personal injury coverage. Premises medical payments coverage is often included as well.
Commercial Lines - Refers to insurance for businesses, professionals and commercial establishments.
Commercial Package Policy (CPP) - The Insurance Services Office (ISO) commercial lines policy that contains two or more lines of insurance or two or more coverage parts. It will include some forms and/or endorsements that are common to all lines of insurance or coverage parts, as well as the individual forms and endorsements required for the individual coverages selected. In order to quality as a CPP, the policy must include two or more of these coverage parts: Commercial General Liability, various other liability coverage parts, Commercial Property, Commercial Crime, Commercial Inland Marine, Boiler and Machinery, Farm or Commercial Auto. Individual insurers may have similar commercial packages with different requirements.
Commissioner of Insurance - The official in a state (or territory) responsible for administering insurance regulation: sometimes called the Superintended of Insurance.
Compensatory damages – The award, usually monetary, that is intended to compensate the claimant for injury sustained.
Conditional Reserves - This item represents the aggregate of various reserves which, for technical reasons, are treated by companies as liabilities. Such reserves, which are similar to free resources or surplus, include unauthorized reinsurance, excess of statutory loss reserves over statement reserves, dividends to policyholders undeclared and other similar reserves established voluntarily or in compliance with statutory regulations.
Contract - A legal agreement between two or more parties. An insurance policy is a contract.
Contractual liability - Liability that does not arise by the way of negligence but by assumption under contract. For example, in certain leases, a tenant may assume a landlord’s liability to others unsafe conditions on the premises. Some such assumptions are covered automatically under the Commercial General Liability form.
Contributory negligence - A defense to a negligence action in which it is asserted that the claimant failed to meet the standard required for his or her own protection, and that the failure contributed to the loss.
Coverage - The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed.
Covered loss - An accident, including accidental damage by forces of nature, that brings a contract of insurance into play.
Current Liquidity (IRIS) - The sum of cash, unaffiliated invested assets and encumbrances on other properties to net liabilities plus ceded reinsurance balances payable, expressed as a percent. This ratio measures the proportion of liabilities covered by unencumbered cash and unaffiliated investments. If this ratio is less than 100, the company’s solvency is dependent on the collectibility or marketability of premium balances and investments in affiliates. This ratio assumes the collectibility of all amounts recoverable from re-insurers on paid and unpaid losses and unearned premiums.
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Declaration page – That part of a property or liability insurance policy that discloses information pertinent to the coverage promised including names, addresses, limits, locations, term, premium, forms, and so on. The same information, perhaps in a shorthand version, is contained as well in the daily.
Deductible - The part of the loss that is to be borne by the insured; it comes off the top of any payment from the insurer.
Deposit premium - When the price of insurance is tied to fluctuating values or costs that cannot be known until the end of the policy period, inventory or payroll are two common examples, a deposit or provisional premium or estimated premium may be charged at the outset of a policy with final adjustment to come at the end of the term.
Depreciation - A property ages and becomes worn it often loses value and that has to be taken into account in any property insurance that covers loss of actual cash value.
Developed to Net Premiums Earned- The ratio of developed premiums through the year to net premiums earned. If premium growth was relatively steady, and the mix of business by line didn’t materially change, this ratio measures whether or not a company’s loss reserves are keeping pace with premium growth.
Development to Policyholder Surplus (IRIS) - The ratio measures reserve deficiency or redundancy in relation to policyholder surplus. This ratio reflects the degree to which year-end surplus was either overstated (+) or understated (-) in each of the past several years, if original reserves had been restated to reflect subsequent development through year end.
Direct Premiums Written - The aggregate amount of recorded originated premiums, other than reinsurance, written during the year, whether collected or not, at the close of the year, plus retrospective audit premium collections, after deducting all return premiums.
Direct Writer – An insurer whose distribution mechanism is either the direct selling system or the exclusive agency system.
Dividend - The return of part of the policy’s premium for a policy issued on a participating basis by either a mutual or stock insurer. A portion of the surplus paid to the stockholders of a corporation.
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Employment practices liability – Coverage against allegations of illegal or discriminatory hiring firing practices, sexual harassment of employees, and so on.
Encumbrance – A claim on property, such as a mortgage, a lien for work and materials, or a right of dower. The interest of the property owner is reduced by the amount of the encumbrance.
Endorsement - An amendment to a policy form.
Errors and omissions coverage – polices generally available to the various professions that require protection for negligent acts and/or omissions resulting in bodily injury, personal injury, and/or property damage liability to a client. For example, law firms are often exposed to the claim that inadequate or improper legal advice was provided, resulting in a claim by the client that they suffered a loss.
Excess insurance – Coverage that applies on top of underlying insurance that is primary, i.e., that pays until its coverage limit is exhausted at which point that excess coverage takes over.
Excess or surplus lines market – The range of insurance available through non-admitted insurers, i.e., insurance companies that are not licensed in a particular state or territory. Specific provisions of state or territorial law control placements.
Expense Ratio – The ratio of underwriting expenses (including commissions) to net premiums written. This ratio measures the company’s operational efficiency in underwriting its book of business.
Exposure - Measure of vulnerability to loss, usually expressed in dollars or units.
Experience - A record of losses.
Experience modification - The rising or lowering of premiums under term of an experience rating plan.
Expiration Date - termination date of coverage as indicated on the insurance policy. Typically 12:01 A.M. Standard Time at the address of the Named Insured as stated on the declarations page of the policy.
Excess Insurance – Insurance coverage that pays only after other insurance, called primary insurance, has been exhausted.
Exclusion - Anything specifically stated in an insurance policy as not covered by the policy.
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Fiduciary liability insurance – The insurance covers claims arising from a breach of the responsibilities or duties imposed on a benefit administrator, or a negligent act, error, or omission of the administrator.
File-and-Use Rating Laws - State-based laws which permit insurers to adopt new rates without the prior approval of the insurance department. Usually insurers submit their new rates with supporting statistical data.
First named insured – An insurance policy may have more than one party named as insured. In such cases, the first named insured attends to policy “housekeeping,” i.e., pays premium, initiates (or receive notice of) cancellation, or calls for interim changes in the contract. This is spelled out in commercial policies in the “common policy conditions.”
Floater - An inland marine form covering movable property wherever located within territorial limits.
Fraud - The intentional perversion of the truth in order to mislead someone into parting with something of value.
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General Liability Insurance - Insurance designed to protect business owners and operators from a wide variety of liability exposures. Exposures could include liability arising from accidents resulting from the insured’s premises or operations, products sold by the insured, operations completed by the insured, and contractual liability.
Gross Leverage – The sum of net leverage and ceded reinsurance leverage. This ratio measures a company’s gross exposure to pricing errors in its current book of business, to errors of estimating its liabilities, and exposure to its re-insurers.
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Hazard - A circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion.
Health Maintenance Organization (HMO) – Prepaid group health insurance plan that entitles members to services of participating physicians, hospitals and clinics. Emphasis is on preventative medicine, and members must use contracted health-care providers.
Hold harmless agreement – A contractual assumption by one party of the liability exposure of another. Lease agreements, for example, commonly require the tenant to hold the landlord harmless for bodily injury to property damage experienced by others on the premises.
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Independent agent - A “retailer” of insurance who, by contractual arrangement with a number of insurance companies, sells, and services property and liability insurance. The independent agent “owns” the policy information and expiration dates of his client’s coverage and thus controls renewals and their placement.
Independent Insurance Agents & Brokers of America (IIABA) – Formerly the Independent Insurance Agents of America (IIAA), this is a member organization of independent agents and brokers monitoring and affecting industry issues. Numerous state associations are affiliated with the IIABA.
Income Taxes – Incurred income taxes (including income taxes on capital gains) reported in each annual statement for that year.
Inflation guard endorsement – An endorsement attached to an insurance policy whereby the limits of liability on a piece of property are increased on a regular basis by a certain percentage in order to offset increasing building costs associated with inflation.
Insurable risk - The exposure to significant, measurable accidental loss from identifiable perils. The exposure, while not catastrophic, must be shared by a sufficient number of potential insureds so that the cost of loss for one can be measured and affordably shared throughout the market.
Insurance – A mechanism whereby risk of financial loss is transferred from individual, company, organization, or other entity to an insurance company.
Insurance Adjuster – A representative of the insurer who seeks to determine the extent of the insurer’s liability for loss when a claim is submitted. Independent insurance adjusters are hired by insurance companies on an “as needed” basis and might work for several insurance companies at the same time. Independent adjusters charge insurance companies both by the hour and by miles traveled. Public adjusters work for the insured in the settlement of claims and receive a percentage of the claim as their fee. A.M. Best’s Directory of Recommended Insurance Attorneys and Adjusters lists independent adjusters only.
Insurance Attorneys – An attorney who practices the law as it relates to insurance matters. Attorneys might be solo practitioners or work as part of a law firm. Insurance companies who retain attorneys to defend them against law suits might hire staff attorneys to work for them in-house or they might retain attorneys on an as-needed basis. A.M. Best’s Directory of Recommended Attorneys and Adjusters lists insurance defense attorneys who concentrate their practice in insurance defense such as coverage issues, bad faith, malpractice, products liability, and workers’ compensation.
Insurance Institute of America (IIA) - An organization which develops programs and conducts national examinations in general insurance, risk management, management, adjusting, underwriting, auditing and loss control management.
Insurance policy – The document containing the contract between the insured and the insurer which defines the right and duties of the contracting parties.
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Liability - Broadly, any legally enforceable obligation. The term is most commonly used in a pecuniary sense.
Liability Insurance – Insurance that pays and renders service on behalf of an insured for loss arising out of his responsibility, due to negligence, to others imposed by law or assumed by contract.
Licensed - Indicates the company is incorporated (or chartered) in another state but is a licensed (admitted) insurer for this state to write specific lines of business for which it qualifies.
Licensed for Reinsurance Only – Indicates the company is a licensed (admitted) insurer to write reinsurance on risks in this state.
Limits of Insurance – The greatest amount of insurance a policy will provide; the amount beyond which the insurer is no longer required to pay.
Liquidity - Liquidity is the ability of an individual or business to quickly convert assets into cash without incurring a considerable loss. There are two kinds of liquidity: quick and current. Quick liquidity refers to funds–cash, short-term investments, and government bonds–and possessions which can immediately be converted into cash in the case of an emergency. Current liquidity refers to current liquidity plus possessions such as real estate which cannot be immediately liquidated, but eventually can be sold and converted into cash. Quick liquidity is a subset of current liquidity. This reflects the financial stability of a company and thus their rating.
Lloyd’s - Generally refers to Lloyd’s of London, England, an institution within which individual underwriters accept or reject the risks offered to them. The Lloyd’s Corp. provides the support facility for their activities.
Lloyds Organizations - These organizations are voluntary unincorporated associations of individuals. Each individual assumes a specified portion of the liability under each policy issued. The underwriters operate through a common attorney-in-fact appointed for this purpose by the underwriters. The laws of most states contain some provisions governing the formation and operation of such organizations, but these laws don’t generally provide as strict supervision and control as the laws dealing with incorporated stock and mutual insurance companies.
Loss Adjustment Expenses – Expenses incurred to investigate and settle losses.
Loss and Loss-Adjustment Reserves to Policyholder Surplus Ratio – The higher the multiple of loss reserves to surplus, the more a company’s solvency is dependent upon having and maintaining reserve adequacy.
Losses and Loss-Adjustment Expenses – This represents the total reserves for unpaid losses and loss-adjustment expenses, including reserves for any incurred but not reported losses, and supplemental reserves established by the company. It is the total for all lines of business and all accident years.
Loss Control – All methods taken to reduce the frequency and/or severity of losses including exposure avoidance, loss prevention, loss reduction, segregation of exposure units and non-insurance transfer of risk. A combination of risk control techniques with risk financing techniques forms the nucleus of a risk management program. The use of appropriate insurance, avoidance of risk, loss control, risk retention, self insuring, and other techniques that minimize the risks of a business, individual, or organization.
Loss experience – What the loss history has been on a particular line or book of business.
Loss exposure - A set of circumstances presenting the possibility of loss, whether or not the loss actually occurs.
Loss Only Deductible – A loss only deductible provides first dollar defense costs. The deductible would only apply if there is a judgment or settlement made against a firm.
Loss Ratio - The ratio of incurred losses and loss-adjustment expenses to net premiums earned. This ratio measures the company’s underlying profitability, or loss experience, on its total book of business.
Loss Reserve - The estimated liability, as it would appear in an insurer’s financial statement, for unpaid insurance claims or losses that have occurred as of a given evaluation date. Usually includes losses incurred but not reported (IBNR), losses due but not yet paid, and amounts not yet due. For individual claims, the loss reserve is the estimate of what will ultimately be paid out on that claim.
Losses Incurred (Pure Losses) - Net paid losses during the current year plus the change in loss reserves since the prior year end.
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Medical Loss Ratio - Total health benefits divided by total premium.
Medical malpractice - Type of insurance protecting physicians, surgeons, nurses, and other medical practitioners against claims alleging failure to perform.
Member Month - Total number of health plan participants who are members for each month.
Minimum premium - An insurer’s lowest charge for an insurance policy.
Misrepresentation - Generally, misstatement of facts made on an application for insurance. May also be misstatement of coverage made by an agent to an insured.
Mono-line policy - An insurance policy covering one subject of insurance, as opposed to a combination of multi-line policy.
Mutual Insurance Companies - Companies with no capital stock, and owned by policyholders. The earnings of the company–over and above the payments of the losses, operating expenses and reserves–are the property of the policyholders. There are two types of mutual insurance companies. A non-assessable mutual charges a fixed premium and the policyholders cannot be assessed further. Legal reserves and surplus are maintained to provide payment of all claims. Assessable mutuals are companies that charge an initial fixed premium and, if that isn’t sufficient, might assess policyholders to meet losses in excess of the premiums that have been charged.
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Named insured - The party of parties specifically named as insured in the insurance contract. Others may have claim on the coverage of a policy by way of internal provisions, but any such right is by way of the agreement between the named insured and the insurance company.
Named Perils - A formal and specific listing of perils covered in a policy providing property insurance. A policy covering for damage by fire is said to cover for “the named peril” of fire.
National Association of Insurance Commissioners (NAIC) - Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and develop model laws for passage by state legislatures.
Net Income - The total after-tax earnings generated from operations and realized capital gains as reported in the company’s NAIC annual statement on page 4, line 16.
Net Investment Income - This item represents investment income earned during the year less investment expenses and depreciation on real estate. Investment expenses are the expenses related to generating investment income and capital gains but exclude income taxes.
Net Leverage - The sum of a company’s net premium written to policyholder surplus and net liabilities to policyholder surplus. This ratio measures the combination of a company’s net exposure to pricing errors in its current book of business and errors of estimation in its net liabilities after reinsurance, in relation to policyholder surplus.
Net Liabilities to Policyholder Surplus - Net liabilities expressed as a ratio to policyholder surplus. Net liabilities equal total liabilities less conditional reserves, plus encumbrances on real estate, less the smaller of receivables from or payable to affiliates. This ratio measures company’s exposures to errors of estimation in its loss reserves and all other liabilities. Loss-reserve leverage is generally the key component of net liability leverage. The higher the loss-reserve leverage the more critical a company’s solvency depends upon maintaining reserve adequacy.
Net Premium - The amount of premium minus the agent’s commission. Also, the premium necessary to cover only anticipated losses, before loading to cover other expenses.
Net Premiums Earned - The adjustment of net premiums written for the increase or decrease of the company’s liability for unearned premiums during the year. When an insurance company’s business increases from year to year, the earned premiums will usually be less than the written premiums. With the increased volume, the premiums are considered fully paid at the inception of the policy so that, at the end of a calendar period, the company must set up premiums representing the unexpired terms of the policies. On a decreasing volume, the reverse is true.
Net Premiums Written - Represents gross premium written, direct and reinsurance assumed, less reinsurance ceded.
Net Underwriting Income - Net premiums earned less incurred losses, loss-adjustment expenses, underwriting expenses incurred, and dividends to policyholders.
Nonstandard Auto (High Risk Auto or Substandard Auto) - Insurance for motorists who have poor driving records or have been canceled or refused insurance. The premium is much higher than standard auto due to the additional risks.
Net Premiums Written to Policyholder Surplus (IRIS) - This ratio measures a company’s net retained premiums written after reinsurance assumed and ceded, in relation to its surplus. This ratio measures the company’s exposure to pricing errors in its current book of business.
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Occurrence - An event that results in an insured loss. In some lines of business, such as liability, an occurrence is distinguished from accident in that the loss doesn’t have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected not intended by the insured.
Occurrence Policy - In Commercial General Liability insurance, a policy that pays for events that occur during its policy term, regardless of when a claim is filed. That is, an expired occurrence policy will pay a valid claim even if the claim is made years later, provided that the event occurred while the policy was in effect.
Operating Cash Flow - Measures the funds generated from insurance operations, which includes the change in cash and invested assets attributed to underwriting activities, net investment income and federal income taxes. This measure excludes stockholder dividends, capital contributions, unrealized capital gains/losses and various non-insurance related transactions with affiliates. This test measures a company’s ability to meet current obligations through the internal generation of funds from insurance operations. Negative balances might indicate unprofitable underwriting results or low yielding assets.
Operating Ratio (IRIS) - Combined ratio less the net investment income ratio (net investment income to net premiums earned). The operating ratio measures a company’s overall operational profitability from underwriting and investment activities. This ratio doesn’t reflect other operating income/expenses, capital gains or income taxes. An operating ratio of more than 100 indicates a company is unable to generate profits from its underwriting and investment activities.
Other Income/Expenses - This item represents miscellaneous sources of operating income or expenses that principally relate to premium finance income or charges for uncollectible premium and reinsurance business.
Overall Liquidity Ratio - Total admitted assets divided by total liabilities less conditional reserves. This ratio indicates a company’s ability to cover net liabilities with total assets. This ratio doesn’t address the quality and marketability of premium balances, affiliated investments and other un-invested assets.
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Peril - The cause of a possible loss.
Policy Limits – It important that policy limits are adequate to cover both the cost of Defense and Damages. In choosing a limit the insured must consider any number of factors including size of firm, areas of practice, claims history, case size, and any other circumstance that will help him determine the maximum loss the firm may suffer in a worse case situation. Of course, higher limits increase the policy premium. However, since few claims rise to the level of maximum possible loss the extra charge for higher limits is on a sliding scale and therefore affordable. Policy limits are available on both a Single Limit and on a Per Claim and Aggregate basis. The latter allows for multiple claims up to a per claim limit that the insured has determined adequate for any one claim, and is less expensive than choosing a single limit to cover multiple claims, where no one claim exceeds the per claim limit. In other words, a single limit of $3,000,000 would cost more than a per claim and aggregate limit of $1,000,000/$3,000,000 and would serve no better in the described example. One final thought in choosing an adequate limit is that multiple claims that result from a single or related group of incidents usually will be considered as one claim under most policies.
Personal Lines – Insurance for individuals and families, such as private-passenger auto and homeowners insurance.
Personal liability insurance - Insurance for individuals or members of a household offering protection against claims by third parties. (outsiders) alleging bodily injury or property damage due to negligence.
Policy - The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clause, riders, endorsements, and papers attached thereto and made a part thereof.
Policy period - means the period of time between the inception date and time, and the expiration date and time, each as shown in the Declarations, unless this Policy is earlier terminated, in which event such period of time shall end as of the date and time of such earlier termination.
Policyholder Dividend Ratio - The ratio of dividends to policyholders related to net premiums earned.
Policyholder Surplus - The sum of paid in capital, paid in and contributed surplus, and net earned surplus, including voluntary contingency reserves. It also is the difference between total admitted assets and total liabilities.
Predecessor firm – typically means a law firm that is named as such in the Declarations that has undergone dissolution and to whose financial assets and liabilities the Named Insured is the majority successor in interest and from which the Named Insured retained 50% or more of the lawyers.
Premium - The price of insurance protection for a specified risk for a specified period of time.
Premium Balances – Premiums and agents’ balances in course of collection; premiums, agents’ balances and installments booked but deferred and not yet due; bills receivable, taken for premiums and accrued retrospective premiums.
Premium Earned – The amount of the premium that as been paid for in advance that has been “earned” by virtue of the fact that time has passed without claim. A three-year policy that has been paid in advance and is one year old would have only partly earned the premium.
Premium to Surplus Ratio - This ratio is designed to measure the ability of the insurer to absorb above-average losses and the insurer’s financial strength. The ratio is computed by dividing net premiums written by surplus. An insurance company’s surplus is the amount by which assets exceed liabilities. The ratio is computed by dividing net premiums written by surplus. For example, a company with $2 in net premiums written for every $1 of surplus has a 2-to-1 premium to surplus ratio. The lower the ratio, the greater the company’s financial strength. State regulators have established a premium-to-surplus ratio of no higher than 3-to-1 as a guideline.
Premium Unearned - That part of the premium applicable to the unexpired part of the policy period.
Pretax Operating Income - Pretax operating earnings before any capital gains generated from underwriting, investment and other miscellaneous operating sources.
Pretax Return on Revenue - A measure of a company’s operating profitability and is calculated by dividing pretax operating earnings by net premiums earned.
Private-Passenger Auto Insurance Policyholder Risk Profile – This refers to the risk profile of auto insurance policyholders and can be divided into three categories: standard, nonstandard and preferred. In the eyes of an insurance company, it is the type of business (or the quality of driver) that the company has chosen to taken on.
Prior Acts Coverage - liability insurance coverage for claims arising from acts that occurred before the beginning of the policy period. Policies written on a claims made basis, such as MALPRACTICE LIABILITY INSURANCE and ERRORS AND OMISSIONS LIABILITY INSURANCE, cover only claims made during the policy period. Prior acts coverage is necessary for covering a claim made during a current policy period for an event that happened before a policy was in force.
Prior Acts Date - The Prior Acts date is also referred to as Retroactive Date. The date that defines the extent of coverage in time under claims-made liability policies. The prior acts date is usually the same date from which continuous coverage was first obtained by the current or predecessor firm. Claims resulting from occurrences prior to the policy’s stated retroactive date are not insured. Policies can contain a Prior Acts Date or be designated as having Full Prior Acts. The first year a firm is covered, their prior acts date will most likely be the date of policy inception. It is critical that coverage is maintained continuously to preserve a firms prior acts date and thus coverage of work performed back to that date. A gap in coverage will jeopardize a firms prior acts date. If a firm changes insurance carriers, it is important that the same prior acts date appears on the new policy. With the exception of some non-admitted carriers, most insurance companies will honor a firms prior acts date when switching carriers.
Products and completed operations liability - The liability exposure of the manufacturer whose malfunctioning products may cause injury or property damage or of the contractors whose failed structures or projects may do the same. Coverage of the exposure is a feature of the commercial general liability policy. The insurance does not in any way constitute a guarantee of either the insured’s product or work. Contrast with “premises and operations liability.”
Products-Completed Operations Hazard - Refers to bodily injury and property damage that occur somewhere other than the insured’s premises, and involve the insured’s products or work, subject to the limitations and parameters specified in the Commercial General Liability coverage forms.
Professional liability - A form of errors and omissions insurance, (sometimes called “malpractice” coverage of errors alleged against those in the healing and legal professions). Arbitrarily it seems, “error and omissions” is the term applied most often to insurance covering liability for mistakes in matters affecting property, i.e., coverage for “Insurance Agents E&O,” “Architects E&O while “professional liability” is used in reference to coverages such as “Druggists Professional Liability,” Physicians and Surgeons Professional Liability,” and “Lawyers Professional Liability.”
Proximate cause - That event which, in an unbroken sequence, results in direct physical loss under an insurance policy. For example, wind is the proximate cause of loss when a windstorm blows out a window that in turn topples a lit candle that sets fire to a structure and burns it down.
Property Damage - In the Commercial General Liability coverage forms, refers to physical damage to tangible property and to loss of use tangible property, whether or not physically damaged.
Pure risk - The only consideration is the possibility of loss. Contrast with “speculative risk.”
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Qualifying Event – An occurrence that triggers an insured’s protection.
Quick Assets - Assets that are quickly convertible into cash.
Quick Liquidity Ratio - Quick assets divided by net liabilities plus ceded reinsurance balances payable. Quick assets are defined as the sum of cash, unaffiliated short-term investments, unaffiliated bonds maturing within one year, government bonds maturing within five years, and 80% of unaffiliated common stocks. These assets can be quickly converted into cash in the case of an emergency.
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Reciprocal Insurance Exchange - An unincorporated groups of individuals, firms or corporations, commonly termed subscribers, who mutually insure one another, each separately assuming his or her share of each risk. Its chief administrator is an attorney-in-fact.
Reinsurance - In effect, insurance that an insurance company buys for its own protection. The risk of loss is spread so a disproportionately large loss under a single policy doesn’t fall on one company. Reinsurance enables an insurance company to expand its capacity; stabilize its underwriting results; finance its expanding volume; secure catastrophe protection against shock losses; withdraw from a line of business or a geographical area within a specified time period.
Reinsurance Ceded - The unit of insurance transferred to a re-insurer by a ceding company.
Reinsurance Recoverables to Policyholder Surplus - Measures a company’s dependence upon its re-insurers and the potential exposure to adjustments on such reinsurance. Its determined from the total ceded reinsurance recoverables due from non-U.S. affiliates for paid losses, unpaid losses, losses incurred but not reported (IBNR), unearned premiums and commissions less funds held from re-insurers expressed as a percent of policyholder surplus.
Renewal - The automatic re-establishment of in-force status effected by the payment of another premium.
Reserve - An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.
Retroactive date - The Retroactive Date is more commonly referred to as a Prior Acts Date. The date that defines the extent of coverage in time under claims-made liability policies. The prior acts date is usually the same date from which continuous coverage was first obtained by the current or predecessor firm. Claims resulting from occurrences prior to the policy’s stated retroactive date are not insured. Policies can contain a Prior Acts Date or be designated as having Full Prior Acts. The first year a firm is covered, their prior acts date will most likely be the date of policy inception. It is critical that coverage is maintained continuously to preserve a firms prior acts date and thus coverage of work performed back to that date. A gap in coverage will jeopardize a firms prior acts date. If a firm changes insurance carriers, it is important that the same prior acts date appears on the new policy. With the exception of some non-admitted carriers, most insurance companies will honor a firms prior acts date when switching carriers.
Return on Policyholder Surplus (Return on Equity) - The sum of after-tax net income and unrealized capital gains, to the mean of prior and current year-end policyholder surplus, expressed as a percent. This ratio measures a company’s overall after-tax profitability from underwriting and investment activity.
Risk Management - Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through practices such as avoiding the risk, retaining the risk, reducing the risk, or transferring the risk, usually by insurance.
Risk Retention Groups - Liability insurance companies owned by their policyholders. Membership is limited to people in the same business or activity, which exposes them to similar liability risks. The purpose is to assume and spread liability exposure to group members and to provide an alternative risk financing mechanism for liability. These entities are formed under the Liability Risk Retention Act of 1986. Under law, risk retention groups are precluded from writing certain coverages, most notably property lines and workers’ compensation. They predominately write medical malpractice, general liability, professional liability, products liability and excess liability coverages. They can be formed as a mutual or stock company, or a reciprocal.
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Schedule - List of items on a policy declaration, sometimes also showing descriptions and values.
Solvency – Having sufficient assets–capital, surplus, reserves–and being able to satisfy financial requirements–investments, annual reports, examinations–to be eligible to transact insurance business and meet liabilities.
Special form – In contrast to the named perils forms in property insurance, those forms that list specific perils for coverage, the special form contract covers simply risk of direct physical loss, relying on exclusions to delimit an define the protection intended.
Split limits – As in auto insurance, where rather than one liability amount applying on a per-accident basis, separate amounts apply to bodily injury and property damage liability.
Standard Auto - Auto insurance for average drivers with relatively few accidents during lifetime.
State of Domicile - The state in which the company is incorporated or chartered. The company also is licensed (admitted) under the state’s insurance statutes for those lines of business for which it qualifies.
Statutory Reserve - A reserve, either specific or general, required by law.
Stock Insurance Company - An incorporated insurer with capital contributed by stockholders, to whom earnings are distributed as dividends on their shares.
Stop Loss - Any provision in a policy designed to cut off an insurer’s losses at a given point.
Subrogation - The right of an insurer who has taken over another’s loss also to take over the other person’s right to pursue remedies against a third party.
Surplus - The amount by which assets exceed liabilities.
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Total Loss – A loss of sufficient size that it can be said no value is left. The complete destruction of the property. The term also is used to mean a loss requiring the maximum amount a policy will pay.
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Umbrella liability – A liability contract with high limits covering over top of primary liability coverages and, subject to deductible, covering exposures otherwise uninsured.
Unaffiliated Investments – These investments represent total unaffiliated investments as reported in the exhibit of admitted assets. It is cash, bonds, stocks, mortgages, real estate and accrued interest, excluding investment in affiliates and real estate properties occupied by the company.
Underwriter - The individual trained in evaluating risks and determining rates and coverages for them. Also, an insurer.
Underwriting - The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not quality.
Underwriting Expenses Incurred – Expenses, including net commissions, salaries and advertising costs, which are attributable to the production of net premiums written.
Underwriting Expense Ratio – This represents the percentage of a company’s net premiums written that went toward underwriting expenses, such as commissions to agents and brokers, state and municipal taxes, salaries, employee benefits and other operating costs. The ratio is computed by dividing underwriting expenses by net premiums written. The ratio is computed by dividing underwriting expenses by net premiums written. A company with an underwriting expense ratio of 31.3% is spending more than 31 cents of every dollar of net premiums written to pay underwriting costs. It should be noted that different lines of business have intrinsically differing expense ratios. For example, boiler and machinery insurance, which requires a corps of skilled inspectors, is a high expense ratio line. On the other hand, expense ratios are usually low on group health insurance.
Underwriting Guide – Details the underwriting practices of an insurance company and provides specific guidance as to how underwriters should analyze all of the various types of applicants they might encounter. Also called an underwriting manual, underwriting guidelines, or manual of underwriting policy.
Unearned Premiums – That part of the premium applicable to the unexpired part of the policy period.
Uninsurable risk – An uninsurable risk is one which is literally uninsurable because loss is certain rather than possible.
Universal Life Insurance – A combination flexible premium, adjustable life insurance policy.
Utilization - How much a covered group uses a particular health plan or program.
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Valuation - A calculation of the policy reserve in life insurance. Also, a mathematical analysis of the financial condition of a pension plan.
Valuation Reserve - A reserve against the contingency that the valuation of assets, particularly investments, might be higher than what can be actually realized or that a liability may turn out to be greater than the valuation placed on it.
Variable Life Insurance - A form of life insurance whose face value fluctuates depending upon the value of the dollar, securities or other equity products supporting the policy at the time payment is due.
Variable Universal Life Insurance – A combination of the features of variable life insurance and universal life insurance under the same contract. Benefits are variable based on the value of underlying equity investments, and premiums and benefits are adjustable at the option of the policyholder.
Vicarious liability – The condition arising where one person is responsible for the actions of another, as a parent is often held responsible for the vandalism damage a minor child does to a school.
Voluntary Reserve - An allocation of surplus not required by law. Insurers often accumulate such reserves to strengthen their financial structure.
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Waiver of subrogation – An insurer has the right of subrogation; however, it may waive that right through this method.
Whole Life Insurance – Life insurance which might be kept in force for a person’s whole life and which pays a benefit upon the person’s death, whenever that might be.
Workers Compensation – A form of insurance designed to protect the employees of a business should they become injured, or disabled while performing the duties of their work.
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Yield On Invested Assets (IRIS) – Annual net investment income after expenses, divided by the mean of cash and net invested assets. This ratio measures the average return on a company’s invested assets. This ratio is before capital gains/losses and income taxes.