Part 4. Examining Process
Chapter 42. Insurance Industry
Section 6. Glossary
This chapter contains terms and definitions frequently used in the insurance industry.
Accident and health contracts. Contracts entered into by life insurance companies that are like indemnity contracts that restore the policyholder to where he or she was before an accident. These contracts fall into two broad categories: cancelable policies and noncancelable policies.
Accidental death benefit. An additional benefit included in, or added to, a life insurance policy providing for payment of an additional death benefit in event of death as a result of accident. Also called "double indemnity."
Accrual basis. Adjustment to income for uncollected items at beginning and end of a period. On disbursements, for unpaid items at beginning and end of a period.
Accrual of discount on bonds. Adjustment of the purchase price of bonds (bought at less than par value) to increase the value to par at maturity date. The adjustment is calculated either on a pro rata basis or so as to yield the effective rate of interest at which the purchase was made (scientific basis).
Acquisition costs. Expenses incurred in acquiring business, including commissions to agents and brokers and other acquisition, field supervision, and collection expenses. Usually also considered to include premium taxes.
Act of God. An event caused by the forces of nature.
Actual (cash) value. The sum of money that the insured property would have brought for cash, at the market price, at the time when, and place where, it was destroyed or damaged by the hazard covered. It is taken to be the actual loss suffered at the time of the loss and not property’s value at the time the policy was issued.
Actuary. The official of an insurance company who handles the mathematical work; a technical expert specially trained in the mathematics, theory, and practice of life and other kinds of insurance. His duties include calculations which involve rates of interest, rates of mortality, loading expenses, loss ratios, premium rates, reserves, dividends to policyholders, etc.
Additional interest. An entity in addition to the named insured, who, having an interest in the subject matter of the insurance, is entitled to protection under a policy, either by virtue of the wording of the basic policy or because the policy has been altered to protect such interest.
Additional living expenses clause. A provision for repaying the insured for living expenses incurred as a result of damage covered by the policy.
Additional reserves. Reserves held by life insurance companies in addition to the basic life insurance reserves. They are calculated after basic reserves and are listed as a separate reserve in the annual statement. Examples of additional reserves are: term conversions, immediate payment of death claims, standard reserves, and guarantee of insurability benefits.
Adjusted premium. A life insurance premium defined mathematically by the insurance laws of most states, and from which minimum cash surrender values are computed. The adjusted premium provides for payment of death claims in accordance with the statutory standards of interest and assumed mortality, plus an allowance for certain first-year expenses stated in the law.
Adjuster. One who represents the insurer in settling claims, usually a company employee as distinct from an independent professional working for a fee.
Admitted assets. The assets of an insurer, as shown on page 2 of the Annual Statement. In general, admitted assets of an insurance company will include the following types or classes of assets: cash; stock; bonds; collateral loans; mortgage loans; loans to policyholders; interest, dividends, and real estate income due and accrued; real estate owned; and premiums due.
Advance premiums. Prepaid premiums; premiums paid in advance of their due date. Where premiums are paid in advance of their due date, it is a frequent practice to allow a discount in accordance with a schedule of discount factors.
Adverse deviation. A company calculating the reserves in conformity with generally accepted accounting principles should develop its own factors based on assumptions that are reasonably conservative and that include provision for the risk of adverse (unfavorable) deviation from such assumptions (mortality, interests, withdrawals, and expenses). A provision for the risk of adverse deviation implies that appropriate degrees of conservatism have been considered in determining actuarial assumptions that are reasonable and realistic.
Adverse selection. The tendency for poorer risks (or less desirable insureds) to seek insurance, or to continue insurance, or to select options of settlement that are favorable to them, to a greater extent than do good risks.
Advisory schedule. A table of percentages to assist in arriving at the depreciated value of cars of certain age. This table usually is arbitrarily produced by a company and represents its experience in appraising cars of certain ages. It is used by underwriting departments in determining the insurable value of cars insured for property coverages on a stated amount basis, and for determining age groups for collision, actual value fire, theft, and tornado, and comprehensive coverages.
Age at issue. The age of the policyholder on the effective date of the policy. This is frequently the "age nearest birthday" on the effective date.
Age nearest birthday. The age, expressed as an integral number of years, of an insurance policyholder, which spreads over the period from six months prior to a birthday to six months after a birthday. For example, an individual is "age 35 nearest birth date" from the time he or she is 34 years and six months of age until the time he or she is 35 years and six months of age. Insurance premiums are usually based on the ages nearest birthday of the individuals affected.
Agent. A representative of an insurer who produces business. He or she may be an independent contractor or an employee. He or she may also be a policy writing (recording) agent. A general agent controls sub-agents and may act as a company branch office in many respects.
Agent, residence. A licensed agent who is a resident of the state by which he or she is licensed.
Agent, special field man. A salaried employee of an insurer who represents the company in dealing with agents.
Agents’ balances. Premium balances, less commissions payable thereon, due from agents and brokers.
Aggregate excess of loss. A stop loss agreement designed to prevent the primary company’s gross loss from exceeding a specific predetermined limit.
A treaty that would indemnify a company’s collective losses in excess of 70 percent loss ratio.
Aggregate limit. The total amount of money a company will pay under a liability policy for claims that arise.
Alien company. An insurance company incorporated or organized under the laws of a foreign country.
Alternative Minimum Tax (AMT). The AMT on modified taxable income plus tax preferences is paid if and to the extent it exceeds a taxpayer’s regular tax. The AMT is imposed to reduce the tax advantages derived from preferential treatment given to certain individuals and corporations that don’t pay tax on income derived from certain sources or enjoy special deductions.
Alternative minimum taxable income. The base of the alternative minimum tax. The calculation begins with regular taxable income reduced by income that qualified for the possessions tax credit, plus or minus adjustments as prescribed in determining the AMT, plus items of preference and less an applicable adjustment amount.
American agency system. The system of selling through agents compensated by commissions, the agents having the sole right to solicit insureds at expiration of their policies. (Ownership of renewals, so called.)
American experience table. This is the mortality table that life insurance companies in the United States have been using as the basis of calculations for policies issued prior to 1961. The American Experience Table is an ultimate table of mortality. The facts compiled to make up the table were based upon the histories of lives that had been passed by physical examination, at least five years before being taken into consideration.
Amortization of premiums on bonds. Adjustment of the purchase price of bonds (bought at more than par value) to decrease the value to par at maturity or call date.
Amortized basis. A method of valuing bonds by means of which the premium or the discount involved in the purchase of a bond is extinguished by periodically charging off a portion of the premium or crediting a portion of the discount so as to bring the value to par at maturity. Amortized values are computed by means of special formulae devised for the purpose.
Amount of risk. The difference between the amount of insurance and the amount of reserves held thereon.
Annual premium. The amount of premium that must be paid annually, normally as of the anniversary of the policy date, to meet the contractual requirements of the policy and keep it in full force.
Annuity. A contract by which the insurer in consideration of a stipulated payment (either in a lump sum or in a certain number of fixed installments) agrees to pay the annuitant(s), beginning at the present or future date or upon the happening of a contingency, a specified amount payable periodically for a stipulated period of time. An annuity may be payable for a limited term of years, or an indefinite or definite period dependent upon some contingency, such as during the remaining lifetime of the annuitant(s) or during a certain number of years dependent upon the survival of the annuitant(s).
Annuity certain. A contract which provides for annuity payments for a prescribed number of years, whether or not the annuitant lives or dies. If it pays for life after the certain period, it is called an "annuity certain and for life thereafter."
Annuity, variable. An annuity under which the amounts of the payments to be made are not specified in dollars but depend on the current market value of the securities in the annuity fund.
Appeal bond. A bond given in a case at law in which a judgment has been rendered, and the party against whom it has been rendered desires to take the case to another court. The bond is required of unsuccessful litigants who appeal judgements to higher courts. The bond guarantees payment of the judgement up to the limits of the bond, plus interest and costs, should the higher court sustain the verdict of the lower court. Companies do not file a bond for more than policy limits.
Application. Request for insurance submitted to the insurer by or on behalf of the insured. The application usually includes enough facts for the insurer to determine whether or not it wishes to accept the risk. In some lines of insurance the terms daily and application are synonymous.
Apportionment. When more than one insurance contract covers a loss, the determination of the extent to which each contract covers.
Appraisal clause. The clause in an insurance contract providing for an appraisal in case of dispute as to the amount of loss.
Appraised. Determination of the value of property or extent of damage, usually by imported experts.
Arbitration clause. A gentlemen’s agreement designed to resolve differences between the insurer and the reinsurer without litigation. It generally provides for the appointment of two arbitrators, each party having the privilege of selecting one, who in turn appoint an umpire who must be agreed on before arbitration proceedings begin. The wording of the clause may vary, but the general purpose is that difficulties shall be settled on an equitable rather than a strictly legal basis.
Argus charts. Summary figures from annual statements of all carriers.
Assessment. A levy that may be made on assessable policies by mutual and reciprocal insurance carriers in calling for additional premiums from policyholders or members in the event that the available funds are not sufficient to pay all outstanding losses and expenses or when the financial structure of the organization is impaired.
Assessment companies. Companies selling to groups with similar interest such as church denominations or professional groups. Some assessment companies also sell directly to individuals of the general public. Such companies may or may not collect premiums; however, if funds are not sufficient to pay claims, then assessments may be made against members.
Asset Valuation Reserve (AVR). The AVR is to address the credit-related (default) and equity risks of company’s assets (Securities, Real Estate and Mortgage Loans) by calculating maximum reserve targets and controlling the flow of the reserve from/into surplus.
Assets. All of the company’s wealth. In the Annual Statement, assets are divided into four categories: admitted assets; assets nonadmitted; ledger assets; and non-ledger assets. The State insurance departments permit only the admitted assets to be used in determining total assets available against the companies’ liabilities. However, for tax purposes, the term "assets" includes nonadmitted assets.
Assigned risk pools. Insurance programs established by various state insurance departments that require companies doing business in a state to accept risks that a company would not voluntarily write. Common examples are automobile and fire insurance programs.
Assignment. The transfer of interest under a policy from one entity to another. An assignment requires the consent of the company.
Assumption reinsurance. Reinsurance of the entire business, part of the business, or block of policies under an arrangement whereby the purchasing company becomes solely liable to the policyholders on the contracts transferred.
Assured or insured. The person whose life or property is insured. The party in whose favor a policy stands.
Attorney in fact. The appointee under a power of attorney who operates a company as in the case of a reciprocal form of insurance company.
Audit. A survey or examination of the insured’s books or other records to determine the premium due the carrier for protection furnished. Audits are most commonly made in connection with workers’ compensation, garage liability, and manufacturer’s and contractors’ liability insurance, when a premium is based on the insured’s payroll. Hence, the term "payroll audit" is commonly used. Also, "audit" is used in its accounting sense.
Audit, interim. An audit of a short-term period of less than a full year, usually a month, quarter, or half year.
Audited policy. A policy on which an audit of the insured’s books or records must be made in order to ascertain the premium due the carrier for protection furnished. The premium, usually based on the insured’s payroll, is determined from the audit.
Authorization. The amount of insurance that an insurer will accept from a broker; also the limit of authority for a claim adjuster in settling losses on his own initiative.
Authorized Company. A company authorized to do business in a state by the State insurance department.
Automatic coverage. Subject to contract terms, coverage of additional property or other risk by an existing contract without specific request by the insured.
Automatic premium loan. A procedure whereby the company, if previously requested to do so, will make automatic loans against the cash value of the policy in order to pay premiums that have not otherwise been paid by the end of the grace period.
Automatic reinsurance. A reinsurance procedure whereby the reinsurance company binds itself unconditionally to accept reinsurance for specified amounts in proportion to the amount retained as its own risk by the direct-writing company. This permits the direct-writing company to issue a policy at once if the amount of insurance is within its own retention plus automatic coverage.
Automatic treaty. Usually a pro rata treaty whereby the reinsurer is automatically under a liability, simultaneously with the ceding company, to accept a fixed share of each risk. Each party has a fixed obligation. The direct company is obligated to cede, and the reinsurer is obligated to accept.
Average mutual earnings rate. Determined each year by the Treasury Department, it is the percentage relationship between the aggregate gain or loss from operations for a particular or mutual life insurance company and the aggregate average equity base for that year of mutual life insurance companies.
Average rate. A rate used in fire insurance to determine the premium for a policy or policies covering more than one location or more than one type of property.
Bailee. A person to whom goods are entrusted or bailed.
Bailor. One who delivers goods to another in trust.
Balances charged off. Agent’s outstanding account balances charged off as uncollectible.
Balancing account. A net balance in most insurance companies’ general ledgers that reflects the combination of all nonledger accounts, nonadmitted assets, and unassigned surplus. This account must be analyzed each year to prepare a trial balance.
Basic premium. A term used to designate a premium computed solely on the basis of mortality and interest. To this basic premium the element of expense called loading is added to arrive at the gross premium. Synonymous with "net premium" .
Beneficiary. A person named in an insurance policy to receive all or part of the benefits provided by it on the death of the insured. The beneficiary can be the insured’s estate, or a creditor, or a corporation under certain circumstances, as well as an individual.
Benefit certificate. Contracts of insurance issued by assessment or fraternal insurance associations. The benefit certificate corresponds to the policy as written by stock or mutual legal reserve insurance companies.
Benefits. The indemnities or payments specified in the insurance contracts. For life policies, these may include death benefits, waiver of premiums in event of disability, payments of income because of permanent disability, and double indemnity.
Bests’. Books of summary data on insurance companies compiled from annual statements and showing premiums, losses, expenses, and ratios, plus financial standing; produced by Alfred M. Best Company.
Billing. A phrase used by some insurers to describe the process of typing up policy declarations in the policy writing department.
Binder. A preliminary, temporary agreement between the carrier and the insured to provide immediate insurance on the risk in accordance with the terms of the contemplated policy during the period from the time the application is received by the carrier or its agent until a policy is issued.
Blanket coverage, dealers. Insurance covering in total certain hazards of a garage enterprise. Usually used in connection with the insuring of garage-owned cars for fire, theft, tornado, and collision coverages.
Block of business. In the broad sense, a group of policies, as distinguished from a line of business. The term can be used in narrow sense to refer to a particular group of policies issued under the same plan in a particular year.
Boards, bureaus, commissions. Administrative bodies usually under state control, whose main function is to regulate the transaction of the business of insurance. This term also applies to authorities set up and founded by insurance carriers for the purpose of establishing rates and rules that, when fixed, must be followed by subscribing members.
Bodily injury liability. Responsibility arising from injury or death to another person.
Bond, bail. A bond guaranteeing appearance in court of the principal.
Bond, fidelity. Indemnifies an employer for loss sustained through dishonest acts of his bonded employees.
Bond, security. Bond, security.Indemnifies an insured for failure of a contractor to perform.
Bordereau. A memorandum containing summary information concerning documents that accompany it. It is used extensively in passing reinsurance from one company to another under a reinsurance agreement.
Border-line risk. A risk whose acceptability, from an underwriting standpoint, is questionable.
Broker. A licensed representative who places the insurance of his client with a company. The compensation for his services consists of commission paid to him by the insurance company. He is not an agent of the company and the commission he receives is usually lower than that of an agent who legally represents the company.
Building rate. A fire insurance term referring to insurance rates on the building rather than its contents.
Business activity test. One of the three tests a company must meet to determine if it will be taxed as a life insurance company. It requires that the company must be engaged in the business of issuing or reinsuring life insurance and annuity contracts or noncancelable contracts of health and accident insurance.
Business interruption insurance. Insurance that will protect the owner of a business from losses sustained during a period of suspended business caused by fire or other hazard. See Use and occupancy insurance.
Calendar-accident year basis. A compilation of losses incurred arising out of accidents occurring during a 12 month period with premiums earned during the same 12-month period.
Calendar-year basis. A compilation of experience based on transactions recorded during a given calendar year (period ending December 31).
Call price. An announced value for redeeming securities before maturity.
Cancellation. The termination of a policy before the expiration date stated in the policy. A policy may be canceled at the request of the insured, by the carrier, or by the agent.
Cancellation, flat. When a policy is canceled as of the effective date, it is said to be canceled flat.
Cancellation, pro rata. A cancellation on which the earned premium is calculated in the exact proportion that the elapsed period of the policy bears to the policy term. For example, an annual policy in force for six months would have a pro rata earned premium of 50 percent of the annual premium.
Cancellation, short rate. A cancellation on which the earned premium is more than the exact proportion that the elapsed period of the policy bears to the policy term. For example, an annual policy in force for six months would have a short rate earned premium of 60 percent of the annual premium. The short rate cancellation table often is printed on policy forms. When a policy is canceled at the request of the insured, the cancellation is made on a short rate basis.
Cancellation rewrite. The process of terminating a policy before the expiration date stated in the policy, and issuing a new policy to supersede the one terminated. The new policy usually is written for a period of one year to avoid a short rate premium charge. Most changes in the insuring agreement between the carrier and insured are made by an endorsement attached to the policy, but the cancellation rewrite method may be used for this purpose and also to extend the time of the insuring agreement. See Endorsement.
Canceled policies. Policies which are canceled by the insurance company before the incontestable clause goes into effect. Generally, if a company cancels a contract (policy), the agent must repay to the company the commission on the premium returned to the policyholder.
Captive insurance company. A corporation that insures the risk of its shareholders.
Carrier. The insurer; the party (insurance organization or company) to an insurance policy or contract that for a consideration (the premium) provides insurance protection to the insured in accordance with the provisions of the policy.
Carrier, nonparticipating. A carrier operating under a plan whereby it receives definite, fixed premiums for its policies, retaining any profits that may arise from the business, and bearing all losses and expenses involved. Generally, stock companies are nonparticipating carriers.
Carrier, participating. A carrier operating under a plan whereby the policyholders participate in the profits of operation. In general, mutual companies are participating carriers.
Cash value. The amount of cash that may be realized by an insured or annuitant holding a life insurance policy or annuity contract with the life insurance company on discontinuance and surrender of the policy or contract before its maturity.
Casualty insurance. Protection or indemnity paid in case of bodily injury or death or for loss of or damage to property excluding life, fire, and marine insurance losses.
Catastrophe cover. An excess-of-loss form of treaty against multiple losses arising from a catastrophic event as a conflagration, earthquake, or windstorm. Catastrophe loss generally refers to the whole loss of an insurance company arising out of a single catastrophic event.
Cede. To transfer liability in connection with a risk, or a portion of it, from the original insurer to a reinsurer.
Ceding company. The original or primary insurer who reinsures with another company who is called the reinsurer.
Certificate. A statement of coverage issued in connection with a group insurance contract. Each insured member of the group is issued a certificate certifying that a master or contract has been issued by the insurance company to cover the group. A summary of the terms of the policy applicable to an individual member is shown on the certificate.
Cession. The unit of insurance passed on to the reinsurer by the primary or ceding company. Frequently, under certain types of reinsurance treaties, each transaction is given a number called a cession number.
Civil authority clause. A policy clause under which the insured is protected against damage caused by firefighters, police officers, or other civil authorities in their efforts to check a fire.
Claim. A demand or notice of a right or alleged right of any party to recover from an insurance company on account of an alleged loss resulting from a contingency or cause covered by the policy; or a demand by a third party against an insured on account of loss, damage, or injury caused, or alleged to have been caused, by the insured and alleged to be covered by the insured’s policy.
Claim expenses. Include court costs, interest on awards and judgements, the company’s allocated expenses for investigation and adjustments, and allocated legal expenses paid by the company; ordinary overhead expenses of the company such as salaries, monthly or annual retainers, and other fixed expenses.
Claim or loss files. All data relating to each loss or claim are placed together in a folder or stapled together and are referred to as the loss or claim file.
Claimant. The party making a claim under an insurance policy. The claimant may be the insured. Under liability policies, the claimant is a third party.
Claims (losses). Events such as death, injury, destruction, or damage which occur in such a manner as to charge the insurer with a liability under the terms of a policy.
Claims-made medical malpractice insurance. In claims-made insurance, coverage is provided only for claims reported during the policy period. As a result, claims-made medical malpractice insurance has a much "shorter tail" than occurrence coverage.
Classification. (1) Classifying persons, property, or operations as a basis for tabulating statistical experience and determining premium rates. (2) The individual class of risk.
Clause. A provision in an insurance contract or endorsement to a contract.
Coding. The process of inserting numerical data representing policy information as statistical data.
Coinsurance. A term used to denote a plan of indemnity reinsurance wherein the reinsurance is based on the policy issued by the original insurer to the insured. The assuming company (reinsurer) assumes not only a mortality risk but also the nonforfeiture obligations including a portion of surrender values and policy loans, and an obligation to pay a proportionate part of all dividends declared by the original insurer on participating policies. Thus, the reinsurer receives a proportionate part of the gross premium collected by the original insurer and, if the coinsurance is with respect to an existing block of business, the ceding company (original insurer) will also transfer the assets which it holds with respect to the existing reserves to the assuming company.
Coinsurer. A carrier that shares the risks sustained under a policy of insurance.
COLI. Corporate Owned Life Insurance. See Substitution of insureds.
Collision. Insurance against loss to the insured’s own property caused by striking or being struck by an object or by upset.
Collusion. Cooperation between two or more persons to defraud a third party.
Combination form. An insurance policy that covers against several hazards or types of exposure under the terms, conditions, and insuring agreements of one insurance policy.
Commission. A payment, usually a percentage of premium, to an agent as remuneration for placing or renewing insurance coverage.
Commission, contingent. A commission, the amount of which is dependent on the profitability of the business written by an agent.
Commissioner’s reserve valuation method. A method of computing policy reserves to allow for some of the higher first-year expense on a policy. A lesser part of the first year’s premium paid by the insured is used for reserve purposes than in later years. The maximum difference between first-year and renewal premiums at any age is equal to the difference between a 19-paid life insurance policy issued at one age higher, and a one-year premium at the issue age. The difference in premiums (expense layouts) is gradually made up over the premium-paying period of the policy.
Commitment Fees. Fees received by an insurance company in payment for allocating funds to a borrower for use at a future date.
Compensation. Recompense. Also, shortened expression for workers’ compensation insurance.
Comprehensive coverage. That form of automobile insurance that covers any loss of, or damage to, the insured automobile except those caused by collision or upset and those caused by certain other stated exceptions, such as depreciation, freezing, wear and tear, and similar risks.
Comprehensive liability. A policy that covers, on a multiple rating basis, all liability except for specific exclusions.
Concurrent insurance. Coverage existing against the same hazard at the same time as other insurance; duplicate coverage.
Condition. A clause in an insurance contract that defines an event and its legal consequence under the contract.
Consequential loss. A loss not directly caused by damage to property but arising as a result of such damage.
Contents rate. The fire insurance rate applicable to the contents of a building as differentiated from the rate on the building itself.
Contingency reserve. Surplus that serves as a reserve to cover unexpected losses and to cover the shortfall if the company’s earned surplus in a particular year is not adequate to maintain the company’s previously announced dividend scale.
Contingent Commission. A commission paid to an agent which depends upon the profits the company has realized from the agency’s operations. A profit-sharing agreement.
Contingent liability. Responsibility for acts or omissions on the part of one party that may befall another due to unforeseen, conditional circumstances, or possibilities. (Usually called nonownership liability or owner’s risk.)
Continuity of coverage clause. A clause contained in a new fidelity bond that takes the place of another bond and agrees to pay losses that would be recoverable under the first bond except that the discovery period has expired.
Contractual liability. Liability of others assumed under written contract.
Contributory negligence. Lack of care on the part of the individual injured that helped to cause the accident.
Convention Form or Blank. The Annual Statement blank established by the National Association of Insurance Commissioners (NAIC) for reporting in detail the condition and activities of an insurance company.
Conversion. Wrongful use or disposition of property by a person who is in lawful possession of it.
Conversion (group insurance). A provision under a group life insurance contract that on termination of employment or termination of the contract, an employee is entitled (on application within a certain period) to be issued a regular form of permanent ordinary insurance in an amount not exceeding his group insurance without evidence of insurability. Also applicable to group health insurance.
Corporate form. Corresponding to corporation, e.g., any group of persons treated by the law as an individual or unity having rights or liabilities, or both, distinct from those of the persons composing it.
Countersignature. Signature of a representative validating an insurance contract.
Coverage. The extent of the insurance afforded or a type of insurance.
Credibility of loss experience. A volume of experience sufficient to justify belief in a given set of statistics.
Credit life insurance. Life insurance issued on the lives of borrowers to cover payment of loan balances in case of death. It is usually handled through a lending office and may be written as either group insurance or individual ordinary life insurance.
Curtate Reserve Factors. The traditional method of computing reserve factors based upon the following two assumptions:
(a) During the premium paying period annual premiums are paid in full at the beginning of the policy year.
(b) Death claims are paid at the end of the policy year in which death occurs.
Daily report. The term daily report is used to refer to policy copies furnished by agents or to rating or stamping bureaus; commonly called "daily" in this connection. Accounting — A report that furnishes a daily summary of the income and disbursements of the company and also describes the changes that take place in the departmental assets from day to day.
Days of grace (grace period). A period (usually 31 days) following the premium due date, during which a premium may be paid. The policy stays in force during this period of grace.
Dean analytic schedule. A system for analyzing relative fire hazards as to location, exposure, etc., used as a standard in some states in determining fire insurance rates.
Death Claim. In a life insurance company the death claim is simply a request for the amount due under the policy; also death loss, death benefit.
Death rate (mortality rate). A ratio of the number dying in a given period (usually one year) to the number of living at the beginning of the year. Usually the group involved is all of one age.
Declarations. Statements by the insured giving information about the risk insured on the basis of which the policy is issued and the premium determined.
Deductible clause. A clause in an insurance contract providing that the insurer will pay only the amount of any loss that exceeds a specified amount.
Deferred Annuity. An annuity contract that provides for the initiation of annuity payments at some future designated date in contrast to one in which payment begins immediately on purchase.
Deferred Group Annuity. An annuity contract which provides for the purchase each year of a paid-up deferred annuity for each covered person in the group, the aggregate of the paid-up annuities for each person to become payable at some deferred date (usually retirement).
Deferred Premium. The portion of the annual premiums unpaid at any year end; installment premiums payable monthly, quarterly or semi-annually which have not fallen due are included.
Deficiency Reserve. This reserve is that portion of the reserve on a particular contract by which the present value of the future net valuation premiums required for such contract exceeds the present value of the future actual premiums.
Deposit Administration (DA) contracts. A DA contract is a group annuity contract issued to an employer to fund retirement benefits for its employees. Under a typical contract, an employer deposits funds at interest with a life insurance company, and then makes withdrawals from the deposit fund to buy retirement annuities for retiring employees. The DA contract often contains permanent annuity purchase rate guarantees under which the life insurance company permanently guarantees that each $1,000 of fund value will be able to buy at least a certain amount of annual annuity benefits.
Deviation. Use of a premium other than a standard rate.
Direct Premiums. All premiums (less return premiums) arising from policies issued to afford primary (issuing company) insurance for a given hazard.
Direct writing carrier. An insurance carrier whose business is written by company employees as distinguished from an agency company whose business is written by insurance agents.
Disability. Incapacity because of accident or sickness. In connection with life insurance, special benefits are sometimes provided in the event the insured is totally and presumably permanently disabled.
Discount. An amount deducted from a bill for advance settlement. In connection with a life insurance company, the discount is usually based on compound interest.
Discounted premium. A premium paid in advance of its due date at a lower cost because of a deduction for interest on the advance payment.
Discovery period. The period allowed the insured after termination, under certain bond and policy provisions, to uncover a loss that occurred during the period covered by the contract.
Dividend. That part of unabsorbed premium or operating profits of an insurance company returned to policyholders as provided in the bylaws and as authorized by the board of directors. Payment to a shareholder out of surplus or earnings.
Domestic company. An insurance company incorporated or organized under the laws of the state in which it is doing business.
Double indemnity. An additional benefit included in, or added to, a life insurance policy providing for payment of an additional death benefit in the event of death as a result of accident. See also Accidental death benefit.
Draft. An order directing the payment of money subject to approval by the payor when presented for payment. Most often used for payment of insurance losses.
Drive other automobiles coverage. Insurance that protects the policyholder against loss while using automobiles other than those specifically designated in the policy.
Earned Premium. When a premium is paid in advance for a certain time, the company is said to "earn" the premium as the time advances. For example, a policy written for three years and paid in advance would be one third "earned" at the end of the first year of the policy term.
Effective date. The date and hour on which a policy or endorsement becomes effective; the inception date of the protection afforded by a policy contract.
Embezzlement. The fraudulent use of money or property of another that has been entrusted to one’s care.
Endorsement. A supplementary written agreement attached to a policy for the purpose of amending the contract. The terms of an endorsement supersede anything in the policy to the contrary. Sometimes referred to as "charge" endorsements or "no charge" endorsements depending on whether a premium is charged for the change. The term "rider" is also used.
Endowment or endowment insurance. A plan of insurance providing for payment of a definite sum either on the death of the insured during a specified period (the endowment period) or on the insured’s survival to the end of that period.
Equity Base. For a mutual life company, the sum of its capital and its surplus plus adjustments for items such as nonadmitted financial assets; the excess of statutory reserves over tax reserves; 50 percent of the amount of any provision for policyholder dividends payable in the following tax year; and such other amounts as mandatory securities valuation reserves, deficiency reserves, and any voluntary reserve.
Equity rating. All insureds with same relevant risks should be charged commensurately. This concept tempered by practical considerations, e.g., companies can only use a limited number of classifications without undue expense.
Errors and omissions clause. The clause in a reinsurance treaty that stipulates that in the event of inadvertent error or omission, the reinsurer shall not be prejudiced in the fulfillment of the agreement, provided that any error or omission shall be corrected as soon as discovered.
Examination. Audit of an insurer’s records, transaction, methods, and assets by a state insurance department.
Excess Interest. Interest credited to an insured’s life insurance contract in excess of the amount guaranteed by the terms of the contract.
Excess Interest. The difference between the minimum rate of interest contractually guaranteed on dividends or proceeds left with the company and the interest actually credited.
Excess limits. A term commonly used synonymously with increased limits.
Excess of loss treaty. This is a coverage of the whole or a specified proportion of loss over a deductible, which may be a specified figure or a computation. Excess of loss is the normal form of reinsurance of liability risks, but is also has special applications in all branches. It should never be confused with surplus, which in reinsurance always refers to a pro rata form of coverage.
Exclusion. A provision in an insurance contract stating a situation in which insurance is not afforded under the contract.
Exclusion clause. A provision in a policy excluding certain types of risk from coverage.
Expense constant. A flat amount sometimes imposed in workers’ compensation insurance if the estimated premium is less than a specified amount. Intended to pay the cost of issuing and servicing a small policy.
Expense ratio. The percentage of expenses to premiums. For company budgetary purposes, the term expense ratio refers to the ratio of expenses paid to premiums written. Other types of expense ratios are used, such as expenses paid to net premiums written, expenses incurred to premiums earned, expenses paid to premiums earned, etc.
Experience. This refers to the loss ratio status of a particular risk, or of a particular coverage, or of a particular carrier, etc. See Calendar-accident year basis, Calender-year basis, and Policy-year basis.
Experience rated refund. Any refund or credit based upon the experience of the contract or the group involved.
Expiration date. The date and hour as stated in the policy or endorsement on which the insurance policy ceases to be in force.
Expire. To "expire a policy" is to allow a policy to run until the expiration date and then retire from the risk by not renewing.
Exposure. The criterion used in measuring the extent of a hazard assumed by the carrier. From the statistical standpoint of rate-making for property and liability insurance, exposure is the product of the amount of insurance at risk and the policy period expressed in years.
Extended coverage endorsement. Provides additional coverage under fire insurance for wind, explosion, hail, riot, etc. There also is an additional extended coverage that adds forms of water damage.
Extra expense coverage. Protects against increased expenses in carrying on a business and necessitated by occurrence of a loss covered by the policy.
Face. The first or front page of a policy. The filing face is the outside of a policy. The face amount is also included on the front page.
Face sheet. The summary document recording loss data on a given claim.
Facultative Reinsurance. Optional or contingent reinsurance on the decision of the reinsurer as opposed to treaty reinsurance.
FAIR plans. An association authorized by state law and formed by insurance companies to provide a mechanism for providing insurance to those who are unable to obtain it elsewhere. FAIR plans exist in most states.
Fiduciary. Holding, held, or funded in trust; acting on behalf of another in trust.
Field. A term used to represent the area of contact with the public. Also, an area in a punch card, intended for the recording of one type of statistical information.
Finders Fee. Fees paid an individual for finding or establishing the contact that makes a financial transaction possible; fees paid to correspondents of an insurance company for securing mortgage loans, etc. A large borrower may also pay a finders fee to an individual that knows of an insurance company that is willing, able, and does lend funds to the borrower.
Financial Accounting Standards Board (FASB). The body that replaced the APB in 1973 as the organization with primary responsibility for the promulgation of generally accepted accounting practices (GAAP).
Financial responsibility law. A statute requiring a motorist, in the event of an accident arising out of the operation of a motor vehicle, which either results from an enumerated violation of law or in a judgment that is not paid as required by the state, to furnish evidence of ability to pay damages and usually to pay the original judgment as a condition for the subsequent operation of an automobile.
Fire coverages. Fire coverages include fire, theft, tornado, and comprehensive, as distinguished from casualty coverages such as bodily injury and property damage. Sometimes called physical damage coverages or property coverages. In a broader sense, fire coverages may include all lines written by a fire insurance company except inland marine insurance.
Fire department service clause. A clause that will reimburse the insured for fire department charges when such charges are made because of the location of the property.
First surplus reinsurance treaty. One of the oldest forms of treaty, and still the most common in fire reinsurance is based on the reinsurer sharing the gross lines of an insurance company on a pro rata basis, the proportion being varied automatically according to:
Different classes of risks
The net retentions that the insurance company keeps for its own account
By the provisions that have been developed, a company can retain for its own account as large a line as it can afford or desires on each risk, while automatically reinsuring any surplus frequently up to a large amount.
An automobile policy that provides coverage on a group of cars. Also used to deFleet.scribe a group of affiliated insurance companies.
Floater. An inland marine policy that covers property without regard to its location at time of loss.
Following the fortunes. The clause stipulating that once a risk has been ceded, whatever the ceding company may find necessary to do in good faith is binding on the reinsurer. The words "in good faith" are stressed, for this is the core of the matter.
Form. The insurance policy itself and any endorsements or riders that may be attached. In fire insurance, a statement attached to the policy describing the property covered and setting out the conditions applicable to the insurance on such property.
Form file. A file maintained by a supply department giving the history of each company form and used to accumulate suggestions from employees until forms come up for reprint.
Fraternal insurance. A system of cooperative protection or insurance furnished by a fraternal order to its members on a nonprofit basis.
Fraud. Deception, cunning, or artifice used to deceive or cheat. Proof of willful fraud voids a policy.
Fresh-start approach. Transitional rule in the 1984 Tax Reform Act reserve formula that precludes the recapture of previously deducted reserve increases by life insurance companies, regardless of their amount. A similar fresh-start rule was contained in the Tax Reform Act of 1986 for the discounted loss reserves of property and casualty insurance companies.
Fronting arrangement. A reinsurance contract in which business produced by an insurer not licensed in a particular state is written on another company’s policy form, with the intention of ceding the entire policy liability to the producing (acquiring) company.
Full preliminary term. A method of computing life insurance reserves when no part of the first year’s premium is used for accumulating the terminal reserve. The entire first premium (except for the one-year term costs of insurance) is available for expenses.
The difference between net investment income and interest required to maintaiGains or losses from investment earnings.n reserves. A change in the interest basis on which reserves are determined automatically results in a change in the indicated gain or loss from interest.
Gains or losses from lapse or surrender. Differences between reserves held on surrendered or lapsed policies and cash values paid or reserves required on other forms of insurance taken by the insured instead of payment of cash value.
Gains or losses from loading. Differences between expense loading contained in the premiums for the period and expenses for the period.
Gains or losses from mortality; annuities and supplementary contracts involving life contingencies. Differences between expected reserves released by death and actual reserves released by death during the period.
Gains or losses from mortality; ordinary life Differences between expected death benefits on the company’s reserve basis and death benefits incurred for the period, net of reserves released by death.
Garage liability insurance. A special policy written to cover auto sales rooms, used car lots, service stations, or repair garages for bodily injury and property damage with premiums based on payroll of the business.
General agent. An agency representative of an insurance company, often exclusive, in a specified territory. He may both sell insurance personally and appoint soliciting agents, or sub-agents, to sell for him. He receives an "overriding" commission on all insurance sold through his agency. He is an independent contractor and responsible for the training and remuneration of his sub-agents. He is not a "general agent" in the legal sense, since he does not have the right to perform all acts that his principal might perform.
General average. A term used to indicate losses resulting from voluntary sacrifices on the part of the master of a ship for the purpose of preserving the safety of a ship and the remainder of its cargo. Such losses must be borne proportionately by all owners of the ship and cargo.
Governing classification. The main operation of an employer, the one carrying the highest payroll. Used as the basis for determining workers’ compensation insurance rates.
Grace period. A period (usually 31 days) following the premium due date during which a premium may be paid. The policy stays in force during this period of grace.
Graded death benefit. A periodically increasing, or decreasing, amount of insurance in a policy. It occurs most frequently in juvenile insurance in which the ultimate amount of insurance protection may be reached gradually by increasing steps over a period of several years.
Gross Line. The amount of insurance the company has on risk including the amount it has ceded under a reinsurance agreement. Net lines plus reinsurance equal gross lines.
Gross loss expense, allocated. The aggregate expense of investigating and adjusting specific claims that are charged directly to the individual claim files with no deductions for credits or reinsurance.
Gross losses paid. The aggregate of loss payments without deductions for credits (subrogation, salvage, etc.) or reinsurance during a given period.
Gross premium. The premium charged an insured for an insurance policy. It includes a charge for expense as well as mortality. Distinct from a net premium, or an adjusted premium, which is supposed to include only provision for death claims and certain initial expenses.
Gross premium reserve. A reserve determined by subtracting the present value of future gross premiums from the present value of future expenses and benefits.
Group disability insurance. Provides benefits for a group of individuals to compensate for lost time due to sickness or injury. Sometimes also covers dependents.
Group life insurance. Life insurance issued (usually without medical examination) to a group of persons with related interests. It is usually issued to an employer covering his employees. A master policy is issued to the employer, and individual members of the group receive certificates as evidence of their insurance.
Group insurance. A plan under which a number of persons are insured under a single policy.
Group permanent insurance. A form of group insurance involving the use of level premium insurance (as opposed to yearly renewable term coverage).
Group Term Insurance. One-year renewable term life insurance issued under a group contract.
Guaranteed renewable policy. A health insurance policy that the insured has the right to continue in force by the timely payment of premiums that coincides approximately with the right reserved to the insurer to make changes in premium rates by class.
Guaranty. A security or pledge evidenced by a promise by one party to pay a debt or perform an obligation contracted by another in the event the original obligor fails to pay or perform as contracted.
Guaranty fund. A surplus reserve fund created and required in certain states, derived from assessments against solvent insurance companies, to absorb losses of claimants against insolvent insurers.
Hazard. (1) A condition, operation, activity, material, or combination of these that creates or increases probability of loss. (2) Chance of occurrence of an event.
Hazard, moral. Hazard arising from personal characteristics such as habits, methods of management, financial standing, mental condition, or integrity.
Hazard, physical. Hazard arising from the physical characteristics of animate or inanimate objects.
Hired card policy. An automobile policy used to cover cars hired by an insured from someone else for use in the insured’s business.
Home Office. The principal place of business of the company; the head office.
Home office copy. The home office copy of the policy that forms the office records of insurance written.
Hull insurance. Insurance against loss of or damage to a ship or airplane.
In Force. Business "in force" is business which has not been canceled or has not yet expired. "Premiums in force" are the original premiums paid for on all "business in force" as distinguished from "Unearned Premiums."
In Kind. Indemnity by replacing lost or destroyed property with other property of the same type and equal value.
Income disability benefit. A feature added to some life insurance policies providing for a monthly income during disability in the event the insured does become totally and permanently disabled.
Income insurance. Insurance that provides funds to replace salary loss due to illness. Also known as "Disability Income Insurance."
Incontestable clause. A provision in a life insurance or accident and health policy that the insurance company cannot contest the policy, except for nonpayment of premiums, after the policy has been in force for a stated period (usually one or two years) from the date of issue.
Incurred But Not Reported (IBNR). A phrase referring to losses that have occurred but have not been reported to the insurer or reinsurer.
Incurred Losses. Losses are incurred when they happen. The total of all such losses (whether paid or not) make up this figure as it appears on the company operating statements. This figure is one used frequently for various periods as well as in the annual statement. It would take much work to keep track of losses both by date of occurrence and payment. The figure is arrived at by subtracting from the period’s paid losses those which were on the books unpaid at the beginning of the period and adding those which are on the books unpaid at the end of the current period.
Incurred loss ratio. This is calculated by applying incurred losses to the earned premium to determine the percentage of losses.
Indemnity. The remuneration paid by the carrier to the insured for loss or damage covered under the insured’s contract; the benefit of insurance.
Indemnity Reinsurance. An agreement between two or more insurance companies under which the reinsuring companies agree to accept and to indemnify the issuing company for all or part of the risk of loss under policies specified in the agreement. The ceding company retains its liability to and its contractual relationship with the insured. Administration of the claim is retained by the ceding company.
Indemnity release. A release in cases involving minors that requires signatures of the parents of the minor. Sometimes used in the same sense as release. See Release.
Independent contractor. One who agrees to perform services or supply commodities under a contract. In carrying out his contract he is not under the control of, nor an employee of, the party with whom he contracts.
Industrial Life Insurance. One of the major classes of life insurance, generally sold in amounts of less than $1,000 by agents who service their insureds on so-called debits. Premiums are collected weekly or monthly at the home or workplace of the insured.
Initial Option. A settlement option whereby the proceeds of the life insurance or endowment policy are paid in periodic installments rather than as a lump sum.
Initial Premium. Certain policies provide that the actual premium paid shall be determined only at expiration or after certain information has been developed. A premium is charged at the start. This is the "initial" or "deposit" premium and is subsequently readjusted.
Initial Reserve. The fund on hand at the beginning of the policy year just after the premium has been received is called the initial reserve. In mutual life insurance the initial reserve plays an important part in the calculation of dividends paid to policyholders. For example, the initial reserve of the ninth year is equal to the terminal reserve of the eighth year plus the net premium payable at the beginning of the ninth year. See Terminal Reserve, Mean Reserve.
Insolvency clause. The clause that holds the reinsurer liable for its pro rata share of any loss (or losses) assumed under the treaty, even though the primary company has become insolvent.
Inspection report. A confidential report prepared for a life or health insurance company on a risk, setting out the moral and physical hazards that may or may not be present. Inspection service is usually bought from companies that specialize in that field. Used for classifying individuals as standard, substandard or uninsurable.
Installment Premiums. All policies in ordinary life are based on annual premium payments in advance. However, installment premiums may be made monthly, quarterly, or semi annually at a slight additional charge.
Insurable interest. An interest in relation to, or liability with respect to, the subject matter of the insurance, which is of such a nature that damage to the subject matter or injury or damage caused by the subject matter would result in pecuniary loss to the person concerned.
Insurable value. The stated value in the insurance contract. It can be the market value, the declared value, or the replacement value.
Insurance. The making of a legal and enforceable contract between one party (called the insurer or underwriter) with another (called the insured). In consideration of a sum of money (called the premium) paid by the insured, whereby the insurer agrees to pay an agreed amount of money to the insured or beneficiary if and when the insured suffers some loss described in the insurance contract (which is usually called a policy). In addition, insurance must combine a large number of separate, independent exposure units (insureds) having similar common risks into an interrelated group. It is a social device for reducing risk by combining a sufficient number of exposure units to make the individual losses collectively predictable, and the predictable loss is then shared proportionately by all those in the combination. Thus, the definition implies both that the risk is transferred and that the risk is distributed in that the losses are shared. See Helvering v. LeGierse, 312 U.S. 531 (1941); Rev. Rul. 77–316, 1977–2 C.B. 53.
Insurance company test. One of the three tests a company must meet to determine if it will be taxed as an insurance company. It requires that a company meet the statutory definition of an "insurance company." To meet this definition, more than half of a company’s business activity must be related to the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. The definition is based on all of the relevant facts and circumstances, such as the number of employees in various business activities, the amount of space allocated to the various business activities, and the net income derived from the various business activities.
Insurance reserves. Liabilities under contracts with policyholders, which an insurance company must set aside for the fulfillment of benefits payable under those contracts.
Insuring agreement. That part of an insurance policy that outlines the major intent of the coverage.
Intangible assets at purchase. The excess of the purchase price over the value assigned to the tangible assets.
Interest Maintenance Reserve (IMR). The IMR is to capture the realized capital gains and (losses) which result from changes in the overall level of interest rates and amortize them into income over the approximate remaining life of the investment sold.
Interinsurers. A group of persons who agree to share each other’s losses; also known as "Reciprocal Insurers."
Intermediary. A reinsurance broker who negotiates contracts of reinsurance on behalf of the reinsured with the reinsurer.
Inure. To serve to the benefit of a person.
Investment expenses. All expenses incurred wholly or partially in connection with the investing of funds and the obtaining of investment income.
Investment yield. The investment earnings of a life insurance company after certain tax adjustments have been made and investment expenses have been deducted (Life Insurance Company Income Tax Act of 1959).
Invitee. A person who is on another’s premises by invitation, either expressed or implied.
Irregular premiums. Premiums paid on other than the regular annual, semi-annual, or quarterly due dates measured from the policy issue date. Irregular premiums are for the purpose of fixing premium due dates at times when it is more convenient for the insured to make payment and are the contractual dates of the policy.
Irrevocable beneficiary. A beneficiary for whom another may not be substituted without the beneficiary’s express consent.
Issue age. The age of the policyholder on the effective date of the policy. This is frequently the "age nearest birthday" on the effective date.
Issue date. This is the date when a policy is written and executed in the home office of the insurance company. If a binding receipt is issued, policy coverage may date from a time in advance of the execution date.
Lapse rate. The rate at which insurance policies terminate through failure of the insureds to continue making premium payments.
Lapsed policy. A policy terminated because of nonpayment of premiums.
Larceny. Feloniously and unlawfully taking the property of another against their will or without their consent, with the intention of defrauding and depriving them of its use.
Ledger assets. Book value of investments, bank deposits, and other tangible items; also certain intangible items such as balances, uncollected premiums, or recoverable paid losses. Such assets are recorded on the company’s general ledger.
Legal liability. The liability imposed by law for negligence (carelessness) that results in injuries or death to persons or damage to someone else’s property. Does not include criminal liability, liability for intentional torts, or liability for breach of contract.
Legal reserve company. An advanced premium company that maintains loss reserves, unearned premiums, and other miscellaneous reserves as prescribed by the laws of the states. Practically all companies are legal reserve companies.
Level Premium. Under this plan in life insurance the amount of the consideration is the same (level) for all the years of the assured’s life during which the premiums are to be paid. The premium remains the same from year to year, and in general is more than the actual cost of protection in the earlier years of the policy and less than actual cost in the later years. The excess paid in the earlier years builds up the reserve.
Liabilities, ledger. Liabilities recorded on the company’s general ledger.
Liabilities, nonledger. Liabilities not recorded on the company general ledger but available from other basic records or sources. Usually include accruals or provisions for unearned premiums, unpaid losses, loss expenses, contingent commissions, taxes, other expenses, dividends declared and unpaid, statutory loss reserves, and unauthorized reinsurance.
Liability insurance. Insurance protecting the insured against financial loss arising out of legal liability imposed on the insured in connection with bodily injuries (or death) suffered, or alleged to have been suffered, by others, or damage caused to property other than property owned by or in the custody of the insured, or the business operations of the insured.
Life annuity. An actual sum (frequently payable in monthly installments) payable during the continued lifetime of an individual.
Life expectancy. The average number of years of life remaining for persons of a particular age according to a particular mortality table.
Life insurance. A contract insuring payment of an amount of money to a named beneficiary on the death of the person insured. Consideration for the contract is the payment of premiums by or on behalf of the insured.
Limited payment life insurance. A plan of insurance for the whole of life, but for which the premiums are payable for only a specified number of years or until the death of the insured, whichever occurs first.
Limits, excess. Any limits as stated in the policy or endorsement that are greater than standard limits. These are based on manual increased limits tables. See Limits, standard.
Limits, policy or limit of liability. The restriction of the liability assumed by the carrier under the policy to a specified amount or amounts.
Limits, standard. This term applies to bodily injury and property damage lines. For example, a policy written with standard bodily injury limits could restrict the liability of the carrier to an amount not exceeding $5,000 (called the "lower limit" ) for injuries to one person, and subject to such limit per person, to an amount not exceeding $10,000 (called the "upper limit" ) for any one accident involving two or more persons. A policy written with standard property damage limits could restrict the liability of the carrier to an amount of $5,000 (in the case of automobile insurance) for each accident resulting in damage to property. The rates in the rating manuals usually are based on standard limits, and these manuals contain tables for use in determining rates and premiums for increased limits. The limits may vary by company. Also called "Basic Limits of Liabilities."
Line of business. Type of insurance; i.e., fire, workers’ compensation, malpractice, etc.
Line limit. The maximum amount of risk acceptable and, sometimes, the company’s net retention on reinsured business.
Line Sheet. (More fully, table of line limits.) The schedule that a company keeps for guidance showing the top lines that can be written inclusive of reinsurance on different classes of risk.
Loading. Loading is that portion of the gross premium necessary to cover the expenses of acquiring and servicing the insurance policy; it refers to both the expenses and profit elements in the gross premium. In other terms, loading is the difference between the gross premium and the net premium.
Loan. As applied to life insurance, this means a loan paid by an insurance company to the policyholder on the security of the cash value of the policy. The policyholder does not have to repay the loan until the policy matures or until the loan and any outstanding interest equals the cash value.
Long-Term Care (LTC) products. Like whole life and noncancelable or guaranteed renewable accident and health insurance products, LTC products have been designed with level premiums so as to accumulate amounts in the early policy years (when the cost of coverage is relatively low) to pay for benefits in the later policy years (when the cost of coverage is extremely high). The "excess" premiums in the early years are maintained in an "active lives reserve," which is held in addition to the unearned premiums reserve.
Loss. The liability incurred, or the damages suffered, or alleged to have been suffered, by the claimant. The extent of the liability or loss is the basis for the amount that the claimant seeks to recover from the carrier. Such terms as "losses incurred" and "losses paid" refer to the aggregate amount of the losses incurred or paid.
Loss constant A flat amount included in the premium for a risk too small for experience rating to be applied. Customary in worker’s compensation insurance and included in the minimum premium for each classification.
Loss conversion factor. Under a retrospective rating plan, an amount added to actual losses to provide for the expenses of an insurance company in handling claims.
Loss expense. The cost of investigation and adjustment of claims, as distinguished from the amount of a claimant’s recovery from the insurance carrier under the policy. Unallocated loss expenses are included in office overhead. Allocated loss expense is for expenses incurred outside the organization. Also called "loss adjustment expense."
Loss expense, allocated. The aggregate net expenses of investigating and adjusting specific claims that are charged directly to the individual claim files. The chief item may be the charges made by independent adjusters.
Loss expense, unallocated. General expenses of investigation and adjustment of claims that are of such nature that they cannot be allocated to a specific claim file. The chief items are adjusters’ expenses and a percentage of certain underwriting expenses.
Loss payable clause. That clause in an insurance policy that designates to whom the loss is payable (the mortgagee).
Loss ratio. The percentage of losses to premiums.
Loss ratio, incurred basis. The percentage of the losses incurred to the premiums earned during a given period.
Loss ratio, paid basis. The percentage of the losses paid to the premiums written during a given period.
Loss reserve. An estimate of the amount an insurer expects to pay for losses it has incurred, both reported and unreported.
Losses incurred. The total losses sustained whether paid or unpaid.
Losses incurred, calendar-accident year basis. Losses that take place during a given calendar year.
Losses incurred, calendar-year basis. Losses paid during the year, plus losses outstanding at the end of the year, minus losses outstanding at the beginning of the year.
Losses incurred, policy-year basis. The sum of losses paid and outstanding losses under policies issued effective in a given calendar year with losses computed to the expiration of all such policies. Thus, two full years make up a policy year.
Losses outstanding. The estimated total amount yet to be paid to settle all open reported claims as of a given date. This term refers to the total amount of losses outstanding as recorded on a case basis. This figure does not include any provision for incurred but not reported losses or for any Schedule P liability. Consequently, it is important not to confuse losses outstanding with "total loss liability" or "reserve for losses" , each of which includes incurred but not reported losses and Schedule P liability.
Losses paid. The aggregate of loss payments less deductions for all credits, except that no deduction is made for reinsurance recoveries, during a given period.
Major medical. Coverage for serious or expensive medical costs or hospitalization.
Manual rate. A book of rates, rules, classifications, or instructions on insurance, intended as a guide or reference work for writing insurance.
Marine, inland. Insurance to cover property in process of transportation within a country.
Marine, ocean. Insurance to cover property in process of transportation on shipboard. Differs from most insurance in that it is all risk and based on intent even though not specifically insured against.
Master policy. One covering the interests of a group of persons to whom certificates of insurance are issued as evidence of their coverage under the policy.
Maturity. The time when payment under a life insurance or endowment policy becomes due. A life insurance policy matures on the death of the insured. An endowment policy matures on the death of the insured or at the end of a specified period of time, whichever occurs first.
Mean Reserve. In life insurance practices, the average of the initial reserve and the terminal reserve for the current policy year is called the mean reserve. The significance of the mean reserve is that it is used to establish the total liabilities in force at the end of the financial year.
Medical payments, automobile. An agreement by an insurer to pay up to a specified limit, for medical, surgical, hospital, and funeral expenses, regardless of liability of the insured.
Merit rating. A system for measuring the difference of an individual risk from some standard used in determining the premium.
Mid-Terminal Reserve. A reserve based on interpolation between two terminal reserves as follows: One half (Beginning of year terminal reserves + end of year terminal reserve) plus additional unearned premium reserved for portion of the current year net premium beyond December 31.
Minimum premium. The lowest monetary consideration for which a policy will be issued. In some cases this is also the amount retained by the company in case of cancellation by the insured.
Misdelivery. A term sometimes used to describe a form of product liability insurance that is especially designed for wholesale and retail distributors of gasoline, kerosene, fuel, oil, grease, lubricating oil, and automobile accessories. In addition to providing the customary coverage for liability arising out of the possession, consumption, handling, or use away from the insured’s premises of products sold or handled by the assured, it also covers liability arising out of mistakes made in delivering the product.
Modified Coinsurance. The plan is the same as the coinsurance plan, except the ceding company retains the assets with respect to all the policies reinsured and also establishes and retains the total reserves on the policies: the assuming company (reinsurer) is paid the gross investment income on the assets retained by the ceding company. Under this arrangement, periodic settlements are made between the two companies for premiums collected and for death benefits, surrenders, dividends, etc., at the end of the year, and the reinsurer is charged by the ceding company for its proportionate part of the increase in reserves on the reinsured policies. This modification removes one of the major disadvantages of strict coinsurance in that the original insurer’s assets are not diminished.
Modified Preliminary Term Plan. An unrestricted use of the full Preliminary Term Plan is not permitted in most States. The extra amount made available for the first year expense under the full preliminary term plan is limited or modified. In some cases, the full Preliminary Term is adopted so far as ordinary life policies are concerned. Under an ordinary life policy, no reserve is required at the end of the first year and the expenses are the same as under the full Preliminary Term Plan. In the case of other types of policies, the amount that is permissible to expend is less than under the full plan. A reserve is required at the end of the first year although this reserve is lower than the sum required under the net level plan.
Modified preliminary term reserve. A policy reserve computed to allow for some of the higher first-year expense on a policy. A lesser part of the first year’s premium paid by the insured is used for reserve purposes than in later years. There are various methods for arriving at the difference between first-year and renewal net premiums. The Illinois standard method and the commissioner’s reserve valuation method (CRVM) are both modified preliminary term valuation methods.
Monthly income disability benefit. A feature added to some life insurance policies providing for a monthly income during disability in the event the insured has become totally and permanently disabled.
Morbidity. The state of being diseased, mentally or physically, or being physically impaired.
Morbidity Table. A statistical table used by actuaries in determining the incidence of illMorbidity Table.nesses and accidents and the longevity of the disability resulting therefrom. Used in computing policy premiums and reserves.
Mortality Table. A mortality table is the instrument used to measure the probabilities of life and death; an actuarial table.
Mortality Cost. The assumed mortality cost (cost of insurance) for any year is the contribution necessary from each policy to meet the death benefits anticipated during that year. It may be calculated by multiplying the net amount at risk at the beginning of the policy year by the death rate at the age attained by the insured at the beginning of the policy year.
Mortality ratio. The ratio of actual death benefits of the period to expected death benefits.
Mortgage protection insurance. Insurance that decreases in amount periodically (usually yearly). It may either expire completely after a term of years or remain level thereafter at a reduced amount. The decreases in amount follow the principal-reduction pattern of a monthly reducing mortgage loan, and the insurance is primarily intended to pay off the unpaid balance of such a loan in the event of the death of the insured.
Mortgage servicing agent. An agent servicing mortgage loans for the mortgagee at a prescribed rate under a contractual agreement.
Mutual benefit associations. Companies operating on the cooperative or assessment plan to pay individual losses.
Mutual company. A company without stockholders or capital stock. All risks and all profits are the property of the policyholders.
Named insured. A policyholder, the person to whom the policy is issued; any person or corporation, or any member thereof, specifically mentioned as insured in a policy, as distinguished from others who, though unnamed, are protected under some circumstances. The most common application of this principle is in connection with the "omnibus clause" in automobile liability policies.
National Association of Insurance Commissioners (NAIC). An association of state insurance commissioners for the purpose of exchange of information and development of uniformity of regulatory practices among the several states through drafting model legislation and regulations. The NAIC has no official power to enforce compliance with any of it recommendations.
Negligence. Failure to act with the legally required degree of care for others. May be contributory, imputed, or comparative, depending on circumstances. The basis for liability insurance.
Net amount at risk. It is the difference between the face amount of the life insurance contract and the reserve.
Net investment income. Life insurance company income after deducting investment expenses fairly charged to investment income and after deducting a portion of investment income that is applicable to the policyholder reserve. Another name for net investment income is "free" investment income.
Net level reserve. A policy reserve computed by a method that makes no allowance for higher first-year expense. A uniform part of each year’s premium paid by the insured is used for reserve purposes.
Net loss expense. The aggregate expenses, with deductions for all credits including reinsurance, of investigating and adjusting claims.
Net losses. The aggregate of loss payments less all deductions for all credits including deductions for reinsurance recoveries during a given period.
Net Premium. The premium, which with other similar premiums, in the aggregate improved at interest, will be exactly enough to pay all claims under certain specific assumptions as to mortality rates and interest yields. It does not provide for any expense of administration, nor for any contingencies not contemplated in the basic mortality and interest assumptions.
Net rate. A final rate after all discounts have been allowed.
New business. Policies written in response to applications for insurance, as distinguished from renewal and cancellation rewrite policies.
Ninety-day items. Uncollected premiums over 90 days old and considered nonadmitted assets.
Nonadmitted asset. Asset of an insurance company which by statute the company is not permitted to include in its NAIC Annual Statement. Such assets include office furniture and equipment and accounts over 90 days past due.
Noncancelable Accident and Health Policy. A noncancelable accident and health policy is one in which there is provision to the effect that the insured may renew his/her policy at the end of each policy year, and the company does not have the right to cancel the policy.
Nonforfeiture Provisions. Part of insurance contract which defines the equity to which the policy owner is entitled if the policy is terminated by an event other than death.
Nonforfeiture Values (Options). The three types consists of (1) cash surrender values, (2) extended term insurance, and (3) reduced paid-up insurance.
Nonledger Assets. Assets resulting from investments through excess of market (or amortized) values over book values, and interest and other income due or accrued on such investments. Such assets are not recorded on the company’s general ledger, but are available from supplementary ledger records or other sources.
Nonliquidating liquidations. Nonliquidating liquidations permit a parent life insurance company to liquidate a life insurance subsidiary on a tax-free basis, while preserving the subsidiary’s valuable insurance charter and licenses within the corporate shell. The value of the charter and licenses can then be realized through sale of the shell. One consequence of a tax-free liquidation is the carryover of corporate tax attributes including, for life insurance companies, reserves and the balance in the shareholders and policyholders surplus account. See also Shell insurance companies.
Nonparticipating Insurance. A nonparticipating contract is one with a fixed premium rate guaranteed throughout the term of the policy. There is no offer of dividends or refunds to the policyholder in such an agreement. Opposite of "participating insurance."
Nonvalued form. A contract of insurance on the insured’s property that does not guarantee to pay any specified sum in the event of loss, but only the actual value of the insured property at the time of the loss or a proportion thereof, with or without a maximum limit of liability. Examples are "stated amount" and "actual value."
Occupational rating. The classification of an occupation in regard to the extra hazard to life involved in the occupation. Many hazardous occupations require extra premiums for life insurance.
Occurrence coverage medical malpractice insurance. If a malpractice act occurred during the policy period, it is covered, even if the claim was not reported until years later.
Office, branch. This term is used by some companies to designate an office extending only claim service. It may also mean a separate complete office, autonomous or otherwise. Sometimes called "district office."
Omnibus coverage. A now obsolete clause in standard automobile insurance contracts extending coverage to certain others in addition to the named insured under certain expressed conditions. The present-day term is "definition of insured" clause.
Optional settlement. An alternative method of payment of the proceeds of an insurance or annuity policy, chosen by the insured or his beneficiary instead of the basic method of payment provided in the policy. Usually a settlement option envisages annuity or installment payments even if the basic method of payment provides for a lump-sum settlement. The actuarial present value of the option at the date of settlement is the same as the value of the basic method of payment.
Package policies. Policies like homeowner’s, jewelers block, and other "all risk" policies.
Paid-up additions. An amount of paid-up insurance (in addition to the face amount of the policy) bought with a policy dividend.
Paid-up insurance. Insurance on which all required premiums have been paid. The term is also frequently applied to mean the reduced paid-up nonforfeiture option.
Paid-up option. A form of insurance available as a nonforfeiture option. It provides for continuation of the original insurance plan, but for a reduced amount.
Participating insurance. Where the policyholder shares in the so-called dividends or the profits of the company, the insurance is said to be participating.
Payroll deduction insurance. Individual insurance (as distinguished from group insurance) issued to employees of a common employer. Premiums are collected from the employer, who in turn deducts them from the employees’ salaries.
Penalties. On bonds, the amount of insurance.
Perils. The technical meaning is reserved to denote the particular forms of misfortune that can strike, such as fire, windstorm, collision, hail, bodily injury, loss of profits, etc.
Pilferage. Petty theft.
Policy. The printed document issued to the insured by the company that contains the terms of the insurance contract.
Policy date. A date specified in the policy as the date from which premium payment dates are reckoned, the date from which the incontestable clause and suicide clause time limits are measured, and the date from which "policy years" for nonforfeiture option purposes are measured. The policy date is frequently called the "date of issue" of the policy and is usually the date of execution, unless a binding receipt was issued and the policy was dated before execution.
Policy dividends. Payments made to insured by the company at the end of a policy year which result in reducing the net insurance cost to the policyholder. These dividend procedures are common practice in mutual companies and also in some stock companies that issue policies on a so-called "participating basis."
Policy loans. Monies loaned insured individuals who have pledged the value of their policies as collateral for the loan.
Policy period. The period of time between the effective and expiration dates of a policy.
Policy reserve strengthening. The voluntary transfer of amounts from surplus to policy reserves to provide for future policy benefits on more conservative assumptions. Such a transfer may be due to the use of a lower interest assumption or a different experience table coupled with the assumption of the same or a lower rate of interest in the valuation of the respective benefit contracts than was employed in the respective valuation of the previous year end.
Policy year. Designated or identified by the calendar year in which the policy becomes effective. The policy year is a special accounting unit, unique to the insurance business, corresponding somewhat to the cost accounting unit, such as a particular job, order, or contract, used in manufacturing and contracting. This method is used for developing exact loss costs and loss ratios, as only by this statistical method can losses under a selected group of policies be related to the exposure and premiums for such policies.
Policy-year basis. A method of compiling experience on policies issued during a given calendar year. The experience of a given policy year—1991, for example—is a complete record of all transactions on policies issued effective during the 12 months of the calendar year 1991. Because annual policies issued between January 1 and December 31 of any year expire between January 1 and December 31 of the following year, and annual policy issued in any given policy year will extend over a portion of two calendar years. See Losses incurred—policy year basis.
Policyholder. The legal owner of a policy.
Preliminary term reserve. A policy reserve computed to allow for some of the higher first-year expense on a policy. A lesser portion of the first year’s premium paid by the insured is used for reserve purposes than in later years. There are various methods for arriving at the difference between first year and renewal net premiums.
Premium. The consideration of money the insurer charges for the assumption of the hazard or risk of liability.
Premium, additional. The amount due the carrier by the assured by reason of (1) a change endorsement resulting in an increase in the original premium, or (2) an audit disclosing the actual earned premium as being greater than the estimated premiums. In the case of change endorsements, the additional premium represents the excess of the new premium over the premium stated in the policy. On audits, the additional premium represents the excess of the earned premium over the estimated premium.
Premium, deposit. The amount paid to the carrier by the insured at the inception of the policy. On policies issued on an annual audit basis, the deposit premium equals the estimated premium; on policies issued on an interim-audit basis, the deposit premium is a fixed percentage of the estimated annual premium, depending on whether the policy is to be audited monthly, quarterly, or semiannually.
Premium, earned. The amount charged the insured by the carrier for the insurance provided during the time policies are in force. A premium is not fully earned until after termination of the policy period, or any designated portion thereof.
Premium, estimated. The estimated total annual premium. On policies in which the premium is based on payroll, the estimated premium is calculated by applying the proper rates to the estimated payroll for the policy period. On audited fleet policies, the estimated or advance premium is calculated by applying the proper premium reduction discount to the full manual rates for all automobiles owned at the inception of the policy.
Premium in-force. See In Force.
Premium loan. A policy loan made for the purpose of paying premiums.
Premium Notes. Notes receivable for amounts due and payable on premiums in-force. Premium notes may or may not represent unconditional obligations to pay.
Premium, original. The original premium recorded, or the latest premium in case of later endorsement, controlled statistically for the purpose of keeping accurate premiums in-force records.
Premium Paid in Advance. See Advance Premiums.
Premium Payor Reserve. A reserve established for the waiver of premiums on the policy of a minor child when the parent is disabled or deceased.
Premium, present. The premium stated in the policy as of any particular date. This expression is used particularly in connection with endorsements.
Premium, return. The amount due the insured by the carrier by reason of (1) cancellation of the policy, (2) a change endorsement resulting in a reduction in the original premium, or (3) an audit disclosing the actual earned premium as being less than the estimated premium. On change endorsements, the return premium represents the excess of the premium stated in the policy over the new premium. In the case of cancellations, the return premium represents the excess of the premium stated in the policy over the earned premium. On audits, the return premium represents the excess of the estimated premium over the earned premium.
Premium tax. A tax imposed by a state on an insurance company and assessed as a percentage of premiums paid to the company by policyholders residing in the state.
Premium, yearly. The premium for a full year’s protection. This expression is used particularly in connection with charge endorsements.
Premiums, gross. The aggregate of all the premiums, including additional premiums, written in the policies or renewals issued during a given period without any deductions whatever.
Premiums, net. Gross premiums minus premiums on policies canceled flat, all return premiums, and premiums on reinsurance, ceded and assumed, during any given period.
Premiums, outstanding. The total amount of all unpaid premiums due the carrier from the policyholder.
Premiums, unearned. Unearned premiums include premium money received by carriers that actually has not been earned; i.e., premium money for insurance yet to be provided under outstanding policies that have a period of time to run until expiration. The earned portion of a policy premium as of any particular date represents the amount required to compensate the carrier on a pro rata basis for the insurance already provided during the elapsed portion of the policy period; the unearned portion represents the amount required to compensate the carrier on a pro rata basis for the insurance yet to be provided during the remaining portion of the policy period.
Premiums Written. The premiums on all policies which a company has issued in some period of time as opposed to "earned premiums."
Prevailing commissioner’s standard tables for mortality and morbidity. The most recent tables prescribed by the NAIC and permitted by at least 26 states at the time an insurance contract is issued. Companies are given three full years after a particular set of tables becomes prevailing before it is mandatory to use these tables in computing reserves.
Prevailing state assumed interest rate. The assumed rate of interest used in computing life insurance reserves for insurance or annuity contracts that is the highest permitted under the laws of 26 states.
Primary beneficiary. A beneficiary who is the first person entitled to benefits on the occurrence of the event for which a beneficiary was designated. As distinguished from a "contingent beneficiary."
Principal sum. The amount specified in a health and accident policy to be paid in the event of certain losses. See Benefits.
Product liability insurance. Protection against claims arising out of the consumption, handling or use of a product away from the premises where sold.
Prohibitive risk. An applicant or policyholder whose characteristics, credit, or claim experience prohibit insuring him.
Proof of loss. A formal written statement of a claim for payment of loss, with supporting data.
Property damage insurance. Coverage for liability due to losses inflicted on the property of others.
Property insurance. Insurance written to cover the loss, by damage or theft, of specified objects of value owned, possessed, or held by the insured. Sometimes called physical damage in the case of automobile insurance.
Prospective reserve. A policy reserve computed as the excess of the present value of future benefits provided by the policy over the present value of future premium payments.
Protection. The existence of fire fighting facilities in the area in which the insured property is located.
Protective liability insurance. Covers secondary liability arising out of the acts of independent contractors.
Purchaser insurance. Insurance, usually added by a rider, covering the applicant for, or owner of, a policy when such applicant or owner is different from the insured. Purchaser insurance normally provides for waiver of any premiums falling due on the basic policy after the death or disability of the applicant or owner during a specified period after the policy date. Purchaser insurance is most frequently issued in connection with juvenile insurance.
Pure endowment. A contract under which a specified sum is payable if the insured survives a specified period. If the insured dies in the meantime, nothing is payable. This is not a true life insurance contract.
Pure Premiums. In casualty insurance, the portion of the premium rate calculated to enable the insurer to pay losses and, in some cases allocated claim expenses.
Quota share reinsurance. The basic form of participating treaty whereby the reinsurer accepts a stated percentage of each and every risk within a defined category of business on a pro rata basis. The word quota means a definite share. Participation in each risk is fixed and certain.
Quotation. The rate at which an insurance company indicates its willingness to assume certain liabilities under an insurance policy.
Rate. The price of insurance for one year per unit of exposure, distinguished from the premium. Just as commodity prices are quoted in terms of cost per pound, per dozen, per quart, etc., insurance prices or rates are quoted in terms of cost per unit, depending on the kind of coverage. In workers’ compensation and in manufacturers’ and contractors’ liability insurance, the unit is $100 of payroll; in burglary insurance, the unit is $1,000 of insurance; in automobile liability insurance, the unit of exposure is one motor vehicle of a particular classification; in product insurance, the unit is per product, or per $10,000 of sales, etc. From the standpoint of rate making, manual insurance rates are made up of two parts—the pure premium and the expense loading.
Rate, adjusted. A rate arrived at by means of the application of a special rating formula to a manual rate, for a risk large enough to warrant variations from the average risk.
Rate reduction. A term frequently used in group insurance by nonparticipating companies to describe what corresponds to the dividend paid by mutual companies. A rate reduction is a reduction in premium and it is frequently made retroactive either in the form of a cash refund or a credit available for application against future premiums. A retroactive rate reduction is, thus, very similar to a dividend.
Rating. A classification of insurance risks according to their estimated departure from normal mortality experience.
Rating bureaus. Organizations that ascertain, determine, and sometimes fix and regulate insurance rates. See Boards, bureaus, commissions.
Rating, experience. A form of merit rating based on the loss record, and the premiums produced by a risk during a given period. Experience rates are determined through the use of a formula. If the experience of the specified risk(s) is "better" than the average of risks in the same classification, the risk develops an "experience credit" or reduction percentage factor that, when applied, results in an adjusted rate less than the manual rate. If the experience is worse than the average, the risk develops an "experience debit," which results in an adjusted rate higher than the manual rate.
Rating, retrospective. A method of rating that adjusts the final premium of a risk in accordance with the experience of that risk that took place during the term of the policy.
Rating schedule. A form of merit rating based principally on physical conditions existing in a risk, especially with respect to safety standards. This may take the form of driving hazards, in the case of garage liability insurance; it is also used in elevator liability insurance, in which credits from manual rates are allowed for approved elevator door interlocking devices, etc. Schedule rating concerns the condition of the hazards of the individual risk, and the computation of an adjusted rate according to whether the risk is more or less hazardous than the average of its classification.
Real estate expense. Expenses paid, such as taxes, maintenance, etc., in connection with real estate assets of the company.
Rebating. An illegal practice that consists of granting to an insured, as an inducement to accept a policy, a part of the commission paid to the agent by the company.
Reciprocal Insurers. Same as interinsurers.
Redating. Reissue of a policy to change the policy date. This happens most frequently in connection with reinstatement of a lapsed policy in which the policy date is advanced to decrease the premium arrears.
Reduced paid-up insurance. A form of insurance available as a nonforfeiture option. It provides for a continuation of the original insurance plan, but for a reduced amount, and without further premium payments.
Reinstatement. A restoration of a lapsed policy to an active status. All policies contain a provision stating the conditions under which reinstatement will be allowed.
Reinsurance, indemnity. Reinsurance is an insurance agreement or contract under which one insurer, called the ceding company, is indemnified against loss by another insurer, called the reinsurer, arising out of an insurance policy written by the original insurer.
Reinsurance Assumed. See definition for "assumption reinsurance" .
Reinsurance ceded. An arrangement whereby the original insurer (reinsured) remains liable to the policyholder, whether all or only a portion of the risk has been transferred to the reinsurer. Such term includes indemnity reinsurance transactions but does not include assumption reinsurance transactions.
Reinsurance, portfolio. A block of business reinsured.
Reinsurance premium. That premium paid by the ceding company to the reinsurer in consideration for liability assumed by the reinsurer. On a pro rata type of treaty, said premium is a pro rata share of the ceding company’s gross premium less a ceding commission. On excess of loss treaties, the premium is a percentage of the ceding company’s gross net premium income for the class of business being reinsured. It is usually calculated annually, and is not subject to a ceding commission.
Reinsurance treaties. Reinsurance treaties are contracts between insurance companies, whereby risks of insurance are shared on terms as set forth in the contract.
Reinsurance treaty, automatic. An agreement between insurance companies, about the same as under Reinsurance Treaties explained above, except the risks are automatically reinsured, subject to the conditions specified in the reinsurance contract.
Reinsurance recoverable. Sums recoverable from reinsurance companies on account of claims on policies that were reinsured.
Release. A signed document accepting settlement for a loss.
Renewal policy-renewal. An insurance policy, effective as of the expiration date of the previous policy that, in effect, extends the expired contract by continuing the insurance in force for a new policy period.
Renewal premiums. In life insurance all premiums paid after the first year are called renewal premiums.
Rent or rental value insurance. Insurance that reimburses an owner of a building for loss of income as a landlord or, if he occupies the building, for loss of such comparable value.
Reporting form policies. Policies that are similar to audited policies but are based on inventory rather than payroll.
Reserve. That amount, which together with future premiums, and interest will be sufficient to meet the company’s obligations under its policy contracts, and for various contingencies, such as loss from investments, catastrophe claims, commission liability, claim liability, expense liability, and unearned premium liability. Technically, a reserve is the liability set up by an insurer for these purposes. The assets in relation to the reserves are the assets the insurer has set aside to satisfy that liability.
Reserve basis. A mathematical formula or method for arriving at the amount of a policy reserve. This term is generally applied to distinguish between the expense differentials of first-year and renewal net premiums.
Reserve for nondeduction of deferred fractional premiums. An additional reserve liability to compensate for regular reserve under provisions on policies when due premiums would be netted against the face value of a policy in benefit payment. This provision is normally estimated by rough approximation and is generally immaterial to the financial statements.
Resisted Losses. All claims reported to the company under an insurance contract in which the companies denies some or all liability.
Retention. The amount of insurance risk that a company is willing to carry for its own account. Any insurance issued in excess of the retention is reinsured. In group insurance, this term is used to define the percentage of premium collected that the company will retain for expense and contingencies.
Retroactive restoration. Reinstatement of a policy or bond to its original face value after payment of a loss, to take care of prior losses that may be discovered later.
Retrospective Refund. A refund of part of the advance or deposit premium upon adjustment to the final premium based upon a retrospective rating.
Retrocession. The process whereby a reinsurance company (the reinsurer) in turn cedes all or a portion of what it has accepted for reinsurance from the direct writing company to another reinsurer. The second reinsurer reinsures the first reinsurer.
Retrospective Reserve. One method of calculating the reserve in life insurance is to take the difference between the premium collected in the past and the claims to the policyholder already paid. Such a calculation will show any surplus of the premiums on hand, which is the valuation of the reserve retrospectively. A distinction should be made between a retrospective reserve and a prospective reserve. The chief difference is that the retrospective reserve receives the accumulation of the premium backward, whereas the prospective reserve is the viewpoint of looking forward to requirements in the future.
Rider. A printed page or slip attached to a policy and modifying the terms of the policy. The modification may amount to an addition of new benefits, and elimination of certain benefits, or modification of existing terms of the policy.
Risk. The hazard, or chance of loss, on any particular item of insurance. The term "risk" usually is used in a general way to designate the entire subject matter of insurance covered under a policy or upon which an application for insurance has been received. Risk is also sometimes used designate a policyholder.
Salvage. Sum recovered on account of liquidation of the damaged property of the insured policyholder—as in the scrap value of a demolished automobile.
Schedule. Portion of exhibits in an insurance company annual statement.
Schedule policy. A policy that requires the attachment of a separate schedule or list to describe the subject matter of the insurance properly.
Second surplus. A form of treaty required by companies engaged in business requiring large policies, e.g., industrial risks, providing for the lines that are too large to be embraced in a first surplus treaty. It follows on the plan of first surplus but obviously provides only a much diminished spread of risks to the reinsurers.
Select and ultimate mortality. The mortality of insured individuals who have been recently checked by an insurance company and issued standard insurance is lower in general than that of individuals who are of the same age but were issued insurance many years ago. The mortality experience of recently insured individuals is called "select" experience; the mortality experience of individuals insured many years ago is called "ultimate" experience.
Select mortality. The mortality experience of individuals who have been recently checked and approved for insurance on a standard basis. See Select and ultimate mortality, for comparison.
Separate accounts. Separate accounts required by the state to reflect the assets and liabilities attributable to certain contracts such as variable annuities, pension funds and others.
Settlement dividend. A special or extra dividend payable at the time of termination of a policy by maturity, death, or surrender. Usually a minimum number of premium payments are required for a special dividend on surrender. See also Surrender dividend.
Settlement option. An alternative method of payment of the proceeds of an insurance or annuity policy, chosen by the insured or his beneficiary instead of the basic method of payment provided in the policy. Usually, a settlement option envisages annuity or installment payments, even if the basic method of payment provided for a lump-sum settlement. The actuarial present value of the option at the date of settlement is the same as the value of the basic method of payment.
Shell insurance companies. A shell insurance company is generally a company whose only assets are its insurance licenses and minimum assets necessary to maintain those licenses.
Short-term policy. A policy written for a period of less than one year.
Single premium. The single, one-time premium needed to provide the insurance benefits in a policy.
Special rating. The application of rates that are different from those produced by the average experience of a given carrier. In the case of companies writing at manual rates, special rating is the application of other than manual rates to a given risk.
"Split" annuities. Under a typical split annuity arrangement, an individual simultaneously buys an immediate annuity for a term certain and a deferred annuity for a single premium. The premium is divided between the immediate and deferred annuities so that, at current interest rates, the deferred annuity’s accumulation value at the end of the immediate annuity’s term certain will approximately equal the total original premium. The "split" annuities were a popular insurance product from the mid-to-late 1980s.
Split policy year. A special statistical fiscal period that is a modification of the policy year. In the case of annual business, the policies assigned to a given policy year extending over two calendar years are assigned to that year as a policy year. Since the aggregate of policies assigned to a given policy year extends over two calendar years, the policy year statistics with reference to losses can be split into two divisions, depending on the year in which the accident takes place. This segregation on policy year loss statistics between the two calendar years is known as the split policy year method of analysis.
Spread loss reinsurance treaty. Pays the excess over a given figure on single losses, and logically requires a sufficient number of losses exceeding the given figure to enable the excess amounts to average out over the years. Five years is the usual period, with the premium adjustable within fixed minimum and maximum limits according to the company’s experience.
Standard industrial mortality table. A listing, by age, of the probable death rates assumed to apply to a group of "industrial," or wage earning, insureds based on the experience of the Metropolitan Life Insurance Company from 1896 to 1905. The table was required by insurance law or regulation as a base of minimum premiums and reserves for industrial insurance in most states from 1905 to the 1940s when it was replaced by the Commissioners 1941 Standard Industrial Mortality Table.
Standard nonforfeiture law. A standard law, enacted in most states in the late 1940s, defining the minimum basis for cash surrender and nonforfeiture values in life insurance policies.
Standard provisions. Certain states require that insurance policies contain certain standard provisions. The laws do not necessarily specify the exact wording of the provisions.
Standard valuation law. A standard law, enacted in most states in the late 1940s, defining the minimum basis for policy reserves for life insurance.
Statement of Reserve Calculation Method. Pertains to information provided State Insurance Department by life insurance companies as to specific plan containing reserve method calculation, table, interest rate, cash surrender values etc. Copies of statements are retained on file by companies.
State fund, competitive. An insurance organization created by the act of the legislature of a state to write insurance (generally workers’ compensation), as required by the law of that state, in competition with private carriers.
State fund, monopolistic. An insurance organization created by the act of the legislature of a state, in which persons are required to carry insurance (generally workers’ compensation) unless provision is made for self-insurance. Such a fund is operated by the state to the exclusion of private carriers.
Stipulated premium life insurance. Life insurance issued by a stipulated premium company, which is a "hybrid organization possessing some of the characteristics of a legal reserve company and some of an assessment association." Minimum premiums are usually "stipulated" by law. Stipulated premium companies in many Midwestern states are stock companies, and they issue regular old line policies but, presumably, still may have the right to assess their policyholders.
Stock insurance company. A carrier owned by shareholders whose ownership is evidenced by shares of stock. Shareholders control the company and participate in any surplus remaining from the premium and investment income after the insurance losses and costs of doing business have been paid.
Stock life insurance. Life insurance provided by a life insurance company owned and controlled by shareholders who share in the surplus earnings. The company generally issues non-participating life insurance, but some stock companies issue participating insurance.
Stop loss reinsurance treaty. Insurance in which the reinsurer becomes liable for all, or an agreed upon portion, of losses in excess of a specified amount.
Subrogation. The substitution of one (the insurance company) for another (the insured) as a creditor or claimant so that the new creditor or claimant succeeds to the former’s right.
Substandard insurance. Insurance of persons who do not meet the standards set for insurance at regular rates. Substandard insurance may be issued for physical, moral, or mental reasons, or because of occupation, residence, etc.
Substitution of insured. Some corporate owned life insurance (COLI) products issued in recent years have included a substitution-of-insureds provision granting the corporate owner the option to change the insured. Under this option, if Employee A ceases employment with the corporation and Employee B is hired to replace Employee A, the corporate employer can substitute Employee B for Employee A as the individual insured under the policy. Typically, benefits and premiums under the policy do not change. Thus, an employer can insure a position (for example, chief financial officer) rather than the particular individual holding that position. When a new policy is issued, it is generally a tax-free exchange.
Suicide clause. A provision in a life insurance policy that the risk of death by suicide (sane or insane) is excluded during the first one or two years after the date of issue. In event of suicide within this period, there is a refund of premiums paid.
Supplementary agreement. An agreement by a life insurance company to retain the lump sum payable under an insurance policy and to make payments in accordance with a chosen settlement option.
Supplementary contract. Same as "supplementary agreement."
Surplus debenture. Generally an unsecured interest-bearing note carried as an equity contribution (normally made by shareholders or affiliates) to prevent a surplus deficiency by the borrowing company. The debenture is normally worded to require repayment only from future earnings of the company and this repayment generally requires the approval of the state insurance commissioner. For statutory purposes, the company can charge unassigned surplus directly for interest; however, the preferred treatment is to charge the statements of operations for such interest.
Surplus to policyholders. The total of capital, if any, and unassigned (surplus) funds, including voluntary and general reserve funds, and special reserve funds not in the nature of liabilities; the amount beyond liabilities available to meet obligations to policyholders.
Surrender. To cease paying insurance premiums and to accept some form of nonforfeiture option. Usually the policy is physically surrendered to the insurance company either for cash or in exchange for an extended or paid-up policy.
Surrender charge. A deduction from the policy reserve made by the insurance company computing a cash surrender value.
Surrender dividend. A special or extra dividend payable at the time of termination of a policy by surrender for cash, provided premiums under the policy have been paid for a specified minimum number of years. See also Settlement dividend.
Surrender value. Usually defined the same as "cash value." The term is sometimes used loosely to cover any nonforfeiture option.
Surrendered cost. A policyholder’s net cash outlay with respect to a surrendered policy. It is equal to the sum of all premiums paid, reduced by the sum of all dividends received and further reduced by the cash value of the policy at date of surrender.
Suspension. A temporary discontinuance of insurance.
Tabular cost of insurance. The contribution that must be made by each of those insured in order to make up the full amount of the death claims payable in any year. The word "tabular" means this cost is calculated using the same mortality table and interest rates as used in calculating net premiums and reserves.
Target risk. (1) A large risk that attracts unusually keen competition among insurers, agents, or brokers. (2) A large hazardous risk on which insurance is difficult to place.
Tentative Life Insurance Company Taxable Income (tentative LICTI). LICTI without regard to the small life insurance company deduction.
Term. The period of time for which an insurance policy is issued.
Term insurance. A policy of life insurance that covers policyholders for a fixed period.
Terminal reserve. Terminal reserve may be defined as that sum which, with additions from all future premium receipts plus investment income, will pay all future maturities under the policy. The reserve at the end of the policy year, and in the sum sufficient with the net premiums coming due, necessary to provide mortality charges and mature the policy according to its terms, all computed upon a table of mortality adopted and the rate of interest assumed.
Termination dividend. A special or extra dividend payable at the time of termination of a policy by maturity, death, or surrender. Usually a minimum number of premium payments are required for a special dividend on surrender. See also Settlement dividend and Surrender dividend.
Test audit. Audits made by or under the supervision of various state compensation rating bureaus or other regulatory bodies for the purpose of checking the correctness and accuracy of payroll audits made by insurance companies.
Third party (under a liability insurance policy). A person, not a party to the insurance contract, who has an alleged or actual right of action for injury or damage against the person insured under the policy.
Total and permanent disability. Total disability that is presumed to be permanent in character. Frequently, total disability is presumed to be permanent (for the purposes of beginning benefits) if it has persisted, and been total, for some specified period of time, such as three months or six months.
Total loss. Loss entailing the payment of the face amount of an insurance contract.
Transaction. Operations involving premiums and losses each separately identified on punch cards for statistical and accounting purposes.
Treaty. The name given to a type of business contract, whereby reinsures undertake to follow the unknown fortunes of an insurance company on the basis of the utmost good faith. Many reinsurance treaties are not cancelable within any 12-month period. For different forms, see Catastrophe cover, Excess of loss, First surplus reinsurance treaty, Quota share reinsurance, Second surplus, and Spread loss reinsurance treaty.
Twisting. Inducing an insured to discontinue insurance with one insurer and replace it with insurance with another insurer. Frowned upon under the American Agency System.
Unauthorized company. A company not licensed to do business in a State.
Unauthorized insurance. Insurance in a company not licensed by the country or State in which the risk is located.
Uncollected and deferred premiums. In the Annual Statement under non-ledger assets appears the item "net uncollected and deferred premiums." The net deferred premiums arise because of the practice of permitting policyholders to pay premiums in installments, instead of yearly as is assumed on the reserve calculation. Because of the grace period, as well as bookkeeping work, some premiums payable during the last few months of the calendar year may not be reported as paid. In reality, however, such premiums are in the process of payment and the policies are still in force.
Underlying. In respect to excess of loss reinsurance coverages, refers to that amount of risk reinsured in terms of possible primary or first-loss, which is deductible before the insurance or reinsurance comes into action.
Underwrite. Used rather loosely to denote the entire process of insuring. More specifically the analysis of all business, the acceptance and retention of profitable business.
Underwriter. There are three accepted uses of this term: (1) An individual or company who insures risk, (2) an agent who solicits insurance and, (3) a home office employee who determines whether applicants are suitable risks for insurance.
Underwriting expenses. All operating expenses of an insurance carrier, except real estate and investment expense, adjusting expense, balances charged off, dividends, etc.
Underwriting profit. Money earned by an insurance company in its underwriting operation as distinguished from money earned in the investment of assets.
Unearned premium. That portion of the premium on a policy or group of policies which applies to the time that the policy still has to run. The company "earns" its premium as the policy term goes on. The rest is unearned. See Unearned Premium Reserve.
Unearned Premium Reserve. lnsurance premiums are payable in advance. A company, however, "earns" the premium only as fast as time elapses. The Unearned Premium Reserve is the sum of all unearned premiums of all unexpired policies that the company has on its books.
Uninsured motorist coverage. Also called "family protection coverage." Provides protection to the insured in case of accident with another automobile, the owner of which does not carry insurance.
Unpaid Loss Expense. This item of expense is the insurance company’s estimate of the amounts that will be expended on expense necessary to liquidate the reserve set up for unpaid losses.
Unreported claim. A situation in which the insured has died or become disabled so that payment under the terms of an insurance policy will be demanded from the company, but in which the company has not yet received notice of the claim. Insurance companies set up estimated reserves for unreported claims.
Use and occupancy insurance. Protection against losses, including loss of net profits and such fixed charges and expenses during enforced disruption of manufacturing and business operations caused by fire or other contingencies insured against. (See Business interruption insurance.)
Valuation. A determination of the value of either assets or liabilities. The term is usually applied to a determination of a life insurance company’s reserve liability.
Valued policy. A contract of insurance on the insured’s property that guarantees to pay a specified sum in the event of loss any time during the life of the policy.
Variable annuity. An annuity in which the dollar amount of the periodic payments is based on the earnings and asset value of the investment portfolio underlying this class of annuities; variable annuities will pay a monthly amount which will fluctuate according to investment results (of either the company issuing the contract or a particular segregated asset account). This then differs from an ordinary or fixed dollar annuity under which the amount of the annuity benefits is guaranteed irrespective of the company’s actual investment earnings.
Variable life insurance. A form of life insurance contract under which the benefits, payable upon death or surrender, and/or the premiums vary with the investment performance of the assets derived from the sale of those contracts.
Vested commissions. A common provision of agents’ contracts provides for a vesting of renewal commissions at specified rates. Ten percent of renewal premiums for two years and two percent thereafter for ten years on an ordinary life policy would not be uncommon, whether or not the agent remains with the company or insurer. In evaluating the realizability of agent’s balances, this provision must be considered.
Waiver of Premium. A provision or rider agreeing to waive (forego) premium payment during a period of disability of the insured.
War clause. A provision in, or attached to, a life insurance policy limiting or excluding the extra risk inherent in war. Sometimes the exclusion applies only to members of the armed forces; sometimes it applies to all civilians as well. Sometimes it excludes death while war is going on; sometimes it excludes death only as a result of war.
Warranty. A clause in an insurance contract presenting a condition relating to the degree of hazard, noncompliance with which invalidates the contract.
Whole life insurance. A plan of insurance for the whole of life, payable at death. It includes ordinary life insurance with premiums payable for life, or limited payment life on which premiums are limited to a specified number of years.
Wholesale insurance A plan of insurance almost identical with regular group insurance, except that it applies to small groups that ordinarily would not be eligible under regular minimum-size requirements for true group insurance. The chief differences lies in the insurance company’s privilege to decline applicants who appear uninsurable.
Yearly renewable term insurance. Term insurance for consecutive one-year periods at increasing rates. The right to renew the insurance at the end of each year, without providing evidence of insurability, is contained in the contract. The premium rate is increased at each renewal as the age of the insured increases. The most common uses for yearly renewable term are in group insurance and reinsurance, though some individual policies are sold on this basis.
Yield. The work "yield" is used several ways in life insurance. Of considerable importance is the interest yield on investments or the yield on different types of investments.