Accident - An unexpected event or circumstance without deliberate intent.
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 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.
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.
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 self insurance, are also included.
Auto Insurance Policy - There are basically six different types of coverages. Some may be required by law. Others are optional. They are:
- Bodily injury liability, for injuries the policyholder causes to someone else.
- Medical payments or Personal Injury Protection (PIP) for treatment of injuries to the driver and passengers of the policyholder’s car.
- Property damage liability, for damage the policyholder causes to someone else’s property.
- Collision, for damage to the policyholder’s car from a collision.
- 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.
- 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.
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 property 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.
Book of Business - Total amount of insurance on an insurer's books at a particular point in time.
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.
Captives - Insurers that are created and wholly owned by one or more non-insurers, to provide owners with coverage. A form of self-insurance.
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.
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 muliple peril policy)
Commercial Multiple Peril Policy - Package policy that includes property, boiler and machinery, crime and general liability coverages.
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.
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.
Date of Issue - date when an insurance company issues a policy.
Declarations - policy statements regarding the applicant and property covered such as demographic and occupational information, property specifications and expected mileage per year.
Deductible - Portion of the insured loss (in dollars) paid by the policy holder.
Depreciation - The decrease in value of any property due to wear, tear, and/or time. Generally, depreciation is not an insurable loss.
Earned Premium - Portion of insured's prepaid premium allocated to the insurance company's loss experience, expenses, and profit year- to -date.
Employee Dishonesty Coverage - Covers direct losses and damage to businesses resulting from the dishonest acts of employees. (See Fidelity bond)
Endorsement - A written form attached to an insurance policy that alters the policy’s coverage, terms, or conditions. Sometimes called a rider.
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.
Exclusion - A provision in an insurance policy that eliminates coverage for certain risks, people, property classes, or locations.
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.
Federal Insurance Administration / FIA - Federal agency in charge of administering the National Flood Insurance Program. It does not regulate the insurance industry.
Fidelity Bond - A form of protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
Fire Insurance -Coverage protecting property against losses caused by a fire or lightning that is usually included in homeowners or commercial multiple peril policies.
Floater - Attached to a homeowners policy, a floater insures movable property, covering losses wherever they may occur. Among the items often insured with a floater are expensive jewelry, musical instruments and furs. It provides broader coverage than a regular homeowners policy for these items.
Flood Insurance - Coverage for flood damage is available from the federal government under the National Flood Insurance Program but is sold by licensed insurance agents. Flood coverage is excluded under homeowners policies and many commercial property policies. However, flood damage is covered under the comprehensive portion of an auto insurance policy. (See Adverse selection)
Fraud - Intentional lying or concealment by policyholders to obtain payment of an insurance claim that would otherwise not be paid, or lying or misrepresentation by the insurance company managers, employees, agents and brokers for financial gain.
Frequency - Number of times a loss occurs. One of the criteria used in calculating premium rates.
Hurricane Deductible - A percentage or dollar amount added to a homeowner’s insurance policy to limit an insurer’s exposure to loss from a hurricane. Higher deductibles are instituted in higher risk areas, such as coastal regions. Specific details, such as the intensity of the storm for the deductible to be triggered and the extent of the high risk area, vary from insurer to insurer and state to state.
Incurred But Not Reported Losses / IBNR - Losses that are not filed with the insurer or reinsurer until years after the policy is sold. Some liability claims may be filed long after the event that caused the injury to occur. Asbestos-related diseases, for example, do not show up until decades after the exposure. IBNR also refers to estimates made about claims already reported but where the full extent of the injury is not yet known, such as a workers compensation claim where the degree to which work-related injuries prevents a worker from earning what he or she earned before the injury unfolds over time. Insurance companies regularly adjust reserves for such losses as new information becomes available.
Incured Losses - Losses occurring within a fixed period, whether or not adjusted or paid during the same period.
Indemnify - Provide financial compensation for losses.
Independent Agent - Agent who is self-employed, is paid on commission, and represents several insurance companies.
Inland Marine Insurance - This broad type of coverage was developed for shipments that do not involve ocean transport. Covers articles in transit by all forms of land and air transportation as well as bridges, tunnels and other means of transportation and communication. Floaters that cover expensive personal items such as fine art and jewelry are included in this category.
Insurable Risk - Risks for which it is relatively easy to get insurance and that meet certain criteria. These include being definable, accidental in nature, and part of a group of similar risks large enough to make losses predictable. The insurance company also must be able to come up with a reasonable price for the insurance.
Insurance - A system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium.
Insurance Pool - A group of insurance companies that pool assets, enabling them to provide an amount of insurance substantially more than can be provided by individual companies to ensure large risks such as nuclear power stations. Pools may be formed voluntarily or mandated by the state to cover risks that can’t obtain coverage in the voluntary market such as coastal properties subject to hurricanes.
Investment Income - Income generated by the investment of assets. Insurers have two sources of income, underwriting (premiums less claims and expenses) and investment income. The latter can offset underwriting operations, which are frequently unprofitable.
Joint Underwriting Association - 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. They may be set up to provide auto and homeowners insurance and various commercial coverages, such as medical malpractice.
Liability Insurance - Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.
Line - Type or kind of insurance, such as personal lines.
Liqour Liability - Coverage for bodily injury or property damage caused by an intoxicated person who was served liquor by the policyholder.
Lloyd's of London - A marketplace where underwriting syndicates, or mini-insurers, gather to sell insurance policies and reinsurance. Each syndicate is managed by an underwriter who decides whether or not to accept the risk. The Lloyd’s market is a major player in the international reinsurance market as well as a primary market for marine insurance and large risks. Originally, Lloyd’s was a London coffee house in the 1600s patronized by shipowners who insured each other’s hulls and cargoes. As Lloyd’s developed, wealthy individuals, called “Names,” placed their personal assets behind insurance risks as a business venture. Increasingly since the 1990s, most of the capital comes from corporations.
Loss - A reduction in the quality or value of a property, or a legal liability.
Loss Adjustment Expenses - The sum insurers pay for investigating and settling insurance claims, including the cost of defending a lawsuit in court.
Loss Costs - The portion of an insurance rate used to cover claims and the costs of adjusting claims. Insurance companies typically determine their rates by estimating their future loss costs and adding a provision for expenses, profit, and contingencies.
Loss of Use - A provision in homeowners and renters insurance policies that reimburses policyholders for any extra living expenses due to having to live elsewhere while their home is being restored following a disaster.
Loss Reserves - The company’s best estimate of what it will pay for claims, which is periodically readjusted. They represent a liability on the insurer’s balance sheet.
Multiple Peril Policy - A package policy, such as a homeowners or business insurance policy, that provides coverage against several different perils. It also refers to the combination of property and liability coverage in one policy. In the early days of insurance, coverages for property damage and liability were purchased separately.
Named Peril - Peril specifically mentioned as covered in an insurance policy.
National Flood Insurance Program - Federal government-sponsored program under which flood insurance is sold to homeowners and businesses. (See Adverse selection, Flood insurance)
Negligence - Failure to act with the legally required degree of care for others, resulting in harm to them.
No-Fault - Auto insurance coverage that pays for each driver’s own injuries, regardless of who caused the accident. No-fault varies from state to state. It also refers to an auto liability insurance system that restricts lawsuits to serious cases. Such policies are designed to promote faster reimbursement and to reduce litigation.
Non-Admitted Insurer - Insurers licensed in some states, but not others. States where an insurer is not licensed call that insurer non-admitted. They sell coverage that is unavailable from licensed insurers within the state.
Notice of Loss - 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.
Occurrence Policy - Insurance that pays claims arising out of incidents that occur during the policy term, even if they are filed many years later.
Package Policy - A single insurance policy that combines several coverages previously sold separately. Examples include homeowners insurance and commercial multiple peril insurance.
Peril - A specific risk or cause of loss covered by an insurance policy, such as a fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the risks named in the policy in contrast to an all-risk policy, which covers all causes of loss except those specifically excluded.
Personal Articles Floater - A policy or an addition to a policy used to cover personal valuables, like jewelry or furs.
Personal Injury Protection Coverage / PIP - Portion of an auto insurance policy that covers the treatment of injuries to the driver and passengers of the policyholder’s car.
Personal Lines - Property/casualty insurance products that are designed for and bought by individuals, including homeowners and automobile policies.
Policy - A written contract for insurance between an insurance company and policyholder stating details of coverage.
Policyholder's Surplus - The amount of money remaining after an insurer’s liabilities are subtracted from its assets. It acts as a financial cushion above and beyond reserves, protecting policyholders against an unexpected or catastrophic situation.
Premium - The price of an insurance policy, typically charged annually or semiannually.
Premiums Written - 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.
Product Liability - A section of tort law that determines who may sue and who may be sued for damages when a defective product injures someone. No uniform federal laws guide manufacturer’s liability, but under strict liability, the injured party can hold the manufacturer responsible for damages without the need to prove negligence or fault.
Product Liability Insurance - Protects manufacturers’ and distributors’ exposure to lawsuits by people who have sustained bodily injury or property damage through the use of the product.
Professional Liability Insurance - Covers professionals for negligence and errors or omissions that injure their clients.
Proof of Loss - Documents showing the insurance company that a loss occurred.
Property/Casualty Insurance - Covers damage to or loss of policyholders’ property and legal liability for damages caused to other people or their property. Property/casualty insurance, which includes auto, homeowners and commercial insurance, is one segment of the insurance industry. The other sector is life/health. Outside the United States, property/casualty insurance is referred to as nonlife or general insurance.
Rate - The cost of a unit of insurance, usually per $1,000. Rates are based on historical loss experience for similar risks and may be regulated by state insurance offices.
Rate Regulation - The process by which states monitor insurance companies’ rate changes, done either through prior approval or open competition models.
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)
Renters Insurance - A form of insurance that covers a policyholder’s belongings against perils such as fire, theft, windstorm, hail, explosion, vandalism, riots, and others. It also provides personal liability coverage for damage the policyholder or dependents cause to third parties. It also provides additional living expenses, known as loss-of-use coverage, if a policyholder must move while his or her dwelling is repaired. It also can include coverage for property improvements. Possessions can be covered for their replacement cost or the actual cash value that includes depreciation.
Replacement Cost - Insurance that pays the dollar amount needed to replace damaged personal property or dwelling property without deducting for depreciation but limited by the maximum dollar amount shown on the declarations page of the policy.
Rider - An attachment to an insurance policy that alters the policy’s coverage or terms.
Risk - The chance of loss or the person or entity that is insured.
Risk Management - Management of the varied risks to which a business firm or association might be subject. It includes analyzing all exposures to gauge the likelihood of loss and choosing options to better manage or minimize loss. These options typically include reducing and eliminating the risk with safety measures, buying insurance, and self-insurance.
Salvage - Damaged property an insurer takes over to reduce its loss after paying a claim. Insurers receive salvage rights over property on which they have paid claims, such as badly-damaged cars. Insurers that paid claims on cargoes lost at sea now have the right to recover sunken treasures. Salvage charges are the costs associated with recovering that property.
Schedule - A list of individual items or groups of items that are covered under one policy or a listing of specific benefits, charges, credits, assets or other defined items.
Severity - Size of a loss. One of the criteria used in calculating premiums rates.
Sewer Back-Up Coverage - An optional part of homeowners insurance that covers sewers.
Subrogation - The legal process by which an insurance company, after paying a loss, seeks to recover the amount of the loss from another party who is legally liable for it.
Surety Bond - A contract guaranteeing the performance of a specific obligation. Simply put, it is a three-party agreement under which one party, the surety company, answers to a second party, the owner, creditor or “obligee,” for a third party’s debts, default or nonperformance. Contractors are often required to purchase surety bonds if they are working on public projects. The surety company becomes responsible for carrying out the work or paying for the loss up to the bond “penalty” if the contractor fails to perform.
Surplus - The remainder after an insurer’s liabilities are subtracted from its assets. The financial cushion that protects policyholders in case of unexpectedly high claims.
Surplus Lines - Property/casualty insurance coverage that isn’t available from insurers licensed in the state, called admitted companies, and must be purchased from a non-admitted carrier. Examples include risks of an unusual nature that require greater flexibility in policy terms and conditions than exist in standard forms or where the highest rates allowed by state regulators are considered inadequate by admitted companies. Laws governing surplus lines vary by state.
Third-Party Administrator - Outside group that performs clerical functions for an insurance company.
Tort - A legal term denoting a wrongful act resulting in injury or damage on which a civil court action, or legal proceeding, may be based.
Tort Law - The body of law governing negligence, intentional interference, and other wrongful acts for which civil action can be brought, except for breach of contract, which is covered by contract law.
Total Loss - The condition of an automobile or other property when damage is so extensive that repair costs would exceed the value of the vehicle or property.
Umbrella Policy - Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.
Underinsurance - The result of the policyholder’s failure to buy sufficient insurance. An underinsured policyholder may only receive part of the cost of replacing or repairing damaged items covered in the policy.
Underwriting - Examining, accepting, or rejecting insurance risks and classifying the ones that are accepted, in order to charge appropriate premiums for them.
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.
Uninsurable Risk - Risks for which it is difficult for someone to get insurance. (See Insurable risk)
Uninsured Motorists Coverage - Portion of an auto insurance policy that protects a policyholder from uninsured and hit-and-run drivers.
Vandalism - The malicious and often random destruction or spoilage of another person’s property.
Waiver - The surrender of a right or privilege. In life insurance, a provision that sets certain conditions, such as disablement, which allow coverage to remain in force without payment of premiums.
Water-Damage Insurance Coverage - Protection provided in most homeowners insurance policies against sudden and accidental water damage, from burst pipes for example. Does not cover damage from problems resulting from a lack of proper maintenance such as dripping air conditioners. Water damage from floods is covered under separate flood insurance policies issued by the federal government.
Workers Compensation - Insurance that pays for medical care and physical rehabilitation of injured workers and helps to replace lost wages while they are unable to work. State laws, which vary significantly, govern the amount of benefits paid and other compensation provisions.
Write - To insure, underwrite, or accept an application for insurance.