Insurance Terms

Insurance can be a confusing investment.  Here are some of the more common terms used in Insurance.


ACT OF GOD – An unpreventable accident or event that is the result
of natural causes; for example, floods, earthquakes, or lightning.

ANTISELECTION – The tendency of individuals who believe they have a greater
than average likelihood of loss to seek insurance protection to a greater extent
than do those who believe they have an average or a less than average likelihood
of loss.

ANNUITY – contract sold by insurance companies that pays a monthly
(or quarterly, semiannual, or annual) income benefit for the life of a person
(annuitant), for the lives of two or more persons, or for a specified period of

APPRAISAL – A survey by a claims representative or claims
appraiser estimating the amount of damage to property and the cost to repair or
the determination of a complete loss.

ASSESSED VALUE – The monetary worth of real or personal property
as a basis for its taxation. This value, established by a governmental agency,
is rarely used by insurers as a means to determine indemnification.

ASSET RISK – a measure of an asset’s default of principal or
interest or fluctuation in market value as a result of changes in the

theoretical capital amount and surplus that is should maintain.

AVALANCHE  A slippage of built-up snow down an incline
possibly mixed with ice, rock, and soil or plant life in what is called a debris
avalanche.  Avalanches are a major danger in the mountains during the winter as
a large one can run for miles, and can create massive destruction of the lowered
forest and anything else in its path.


BCEGS  Building Code Effectiveness Grading
Schedule. A classification of communities by the Insurance Services Office based
on how well they have implemented and enforced building codes in their

BENEFICIARY – The person or party named by the owner of a life
insurance policy to receive the policy benefit.

BINDER – temporary insurance contract providing coverage until a
permanent policy is issued.

BROAD FORM INSURANCE – Coverage for numerous perils.


CALENDAR YEAR – Earned premiums and loss transactions occurring
with the calendar year beginning Jan. 1, irrespective of the contractual dates
of the policies to which the transactions relate and regardless of the dates of
the accidents.

CALENDAR/ACCIDENT YEAR – The accumulation of loss data on all
accidents with the date of occurrence falling within a given calendar year. The
earned premium is the same as in calendar year.

CASH VALUE – The savings element of a permanent life insurance
policy, which represents the policy owner’s interest in the policy.

CATACLYSM  Any great upheaval that causes sudden and
violent changes, as an earthquake, war, great flood, etc. (New

CATASTROPHIC RISK  The risk of a large loss by
reason of the occurrence of a peril to which a very large number of insured are
subject. (Gloss.)

CATASTROPHIC LOSS- Damage resulting from a catastrophe.

CATEX  An exchange through which insurers trade
“standardized catastrophe units.”

CLAIM – A formal request for payment related to an event or situation that is
covered under an in-force insurance policy.

COINSURANCE CLAUSE – A clause requiring the insured to maintain
insurance on the property at least equal to a stipulated percentage of its value
in order to collect partial losses in full.

COMMERCIAL LINES – insurance coverages for businesses, commercial
institutions, and professional organizations.

CONCENTRATION FACTOR – all companies are subject to an asset
concentration factor that reflects the additional risk of high concentrations in
single exposures

CONSUMER PRICE INDEX – An index of consumer prices based on the
typical market basket of goods and services consumed by all urban consumers
during a base period.

CONTINGENT BENEFICIARY – The party designated to receive proceeds
of a life insurance policy following the insured’s death if the primary
beneficiary predeceased the insured. 

CONVERTIBLE TERM INSURANCE POLICY – A term life insurance policy that gives
the policy owner the right to convert the policy to a permanent plan of

CORRECTIVE ORDER – an order issued by the commissioner specifying corrective
actions that the commissioner has determined are required.

CREDIT LIFE INSURANCE – insurance issued to a creditor (lender) to cover the
life of a debtor (borrower) for an outstanding loan.

CREDIT RISK – a measure of the default risk on amounts that is due from
policyholders, reinsures or creditors.


DECLINED RISK – A proposed insured who is considered to present a
risk that is too great for an insurer to cover.

DEGREE OF CARE – minimum of care owed by one party for the
physical safety of another.

DIRECT WRITTEN PREMIUM – The total premiums received by a property
and liability insurance company without any adjustments for the ceding of any
portion of these premiums to the reinsures.

DIRECT INCURRED LOSS – The property loss in which the insured
peril is the proximate cause of damage or destruction.

DISASTER  A natural or man-made event that
negatively affects life, property, livelihood or industry often resulting in
permanent changes to human societies, ecosystems and the environment.

DROUGHT  A drought is a long lasting weather
pattern consisting of dry conditions with very little or no precipitation. 
During this period, food and water supplies can run low, and other conditions,
such as famine, can result.  Droughts can last for several years and
particularly damaging in areas where residents depend on agriculture for


EARNED EXPOSURES – The portion of the total amount of exposure
(risk) corresponding to the coverage provided during a given time period.

EARNED PREMIUMS – The portion of the total premium amount
corresponding to the coverage provided during a given time period.

EARTHQUAKE  A sudden shift or movement in the
tectonic plate in the Earth’s crust.  On the surface, this is manifested by a
moving and shaking of the ground, and can be massively damaging to poorly built

EVIDENCE OF INSURABILITY – Proof that a person is an insurable risk.

EXCLUSIONS, HOMEOWNERS INSURANCE – Part of an insurance contract
that excludes coverage of certain perils, persons, property or locations.

EXPERIENCE RATING – A method of calculating group insurance
premium rates by which the insurer considers the particular group’s prior claims
and expense experience. 


FACE AMOUNT – The amount of the death benefit payable under a life
insurance policy.

FEMA – Federal Emergency Management Agency – A former independent agency that
became part of the new Department of Homeland Security in March 2003 – is tasked
with responding to, planning for, recovering from and mitigating against

FLOODPLAIN  A land area adjacent to a river,
stream, lake, estuary or other water body that is subject to flooding.  These
areas, if left undisturbed, act to store excess floodwater.

FRIENDLY FIRE – Fire intentionally set in a fireplace, stove,
furnace or other containment that has not spread beyond it.

FREE LOOK PROVISION – An individual life insurance and annuity provision that
gives the policy owner a stated time, usually 10 days after the policy is
delivered, in which to cancel the policy and receive a full refund on the
initial premium payment. 


GENERAL LIABILITY INSURANCE – coverage for an insured when negligent acts
and/or omissions result in bodily injury and/or property damage on the premises
of a business, when someone is injured as the result of using the product
manufactured or distributed by a business, or when someone is injured in the
general operation of a business.

GRACE PERIOD – A specified length of time within which a renewal premium that
is due may be paid without penalty.

GROSS NEGLIGENCE – reckless action without regard to life, limb, and/or


HAZARD – circumstance that increases the likelihood or probable
severity of a loss.

HURRICANE – A hurricane is a low pressure cyclonic storm system
which forms over the oceans.  It is caused by evaporated water which comes off
of the ocean and becomes a storm.  The Coriolis Effect causes the storms to
spin, and a hurricane is declared when this spinning mass of storms attains a
wind speed greater than 74mph.


INSURANCE TO VALUE – The amount of insurance written on property
is approximately equal to its value. An insured most always wants to insure all
property to value.

INCONTESTABILITY PROVISION – An insurance and annuity provision that limits
the time within which the insurer has the right to avoid the contract on the
ground of material misrepresentation in the application for the policy. 

INCURRED BUT NOT REPORTED LOSSES (IBNR) – insured losses that have occurred
but have not been reported to a primary insurance company.

INCURRED CLAIMS – The total number of claims associated with insured
events/situations occurring during a given time period.

INCURRED LOSSES – The total dollar amount of losses associated with insured
events/situations occurring during a given time period. A portion of incurred
claims and losses represent insurers’ estimates of the final costs of pending
claims that are still open during the reporting period, as well as estimates of
losses associated with claims that have yet to be reported.

IRREVOCABLE BENEFICIARY – A life insurance policy beneficiary who has a
vested interest in the policy proceeds even during the insured’s lifetime
because the policy owner has the right to change the beneficiary designation
only after obtaining the beneficiary’s consent.

interest an insurance policy owner has in the risk that is insured.  The owner
of a life insurance policy has an insurable interest in the insured when the
policy owner is likely to benefit if the insured continues to live and is likely
to suffer some loss or detriment if the insured dies. 




LANDSLIDE  A disaster closely related to an
avalanche, but instead of occurring with snow, it occurs involving actual
elements of the ground, including rocks, trees, parts of houses, and anything
else which may happen to be swept in.

LIABILITY INSURANCE – Insurance coverage that offers protection
against claims alleging that a property owner’s negligence or inappropriate
action resulted in bodily injury or property damage to another party.

operates under the supervision of a state insurance commissioner to protect
policy owners, insured’s, beneficiaries, and specified others against losses
that result from the financial impairment or insolvency of a life insurer that
operates in the state.

LIMNIC ERUPTION  A sudden release of asphyxiating or
inflammable gas from a lake. 

LONG TAIL LIABILITY – one where an injury or other harm takes time to become
known and a claim may be separated from the circumstances that caused it by as
many as 25 years or more.

LOSS – The dollar amount associated with a claim.

LOSS ADJUSTMENT EXPENSE – cost involved in an insurance company’s adjustment
of losses under a policy.

LOSS OF USE INSURANCE – Compensation for loss caused because the
policyholder has lost the use of his property.

LOSS PAYABLE CLAUSE – A policy condition that enables an insured
to direct the company to pay any loss that may be due to a third party.

LOSS RATIO – relationship of incurred losses plus loss adjustment
expense to earned premiums.


MATERIAL MISREPRESENTATION – A misrepresentation that would effect
the insurance company’s evaluation of a proposed insured. 

MEDIATION – situation in which parties agree to take part in a
structured settlement negotiation through the guidance of a neutral expert. By
participating in this process, the parties do not agree that they will actually
settle and the mediator does not have the authority to impose such a

MORTALITY TABLES – Charts that show the death rates an insurer may
reasonably anticipate among a particular group of insured lives at certain

MORTGAGE INSURANCE – A contract that insures the lender against
loss caused by a mortgagor’s default on a government mortgage or conventional

MORTGAGEE CLAUSE – A clause in an insurance policy that makes a
claim jointly payable to the policyholder and the party that holds a mortgage on
the property.

MUDSLIDE  A mudslide is a slippage of mud
because of poor drainage of rainfall through soil.  An underlying cause is often
deforestation or lack of vegetation.

MULTI PERIL INSURANCE – Personal and business property insurance
that combines in one policy several types of property insurance covering
numerous perils.


NAMED PERIL POLICY – The insurance contract under which covered
perils are listed. Benefits for a covered loss are paid to the policy-owner. If
an unlisted peril strikes, no benefits are paid.

NATURAL AND PROBABLE CONSEQUENCES – Consequences from a given act
that a reasonable person could foresee.

NEGATIVE TREND – with respect to a life and/or health insurer,
negative trend over a period of time, as determined in accordance with the
“Trend Test Calculation” included in the RBC instructions

NEGLIGENCE – failure to act within the legally required degree of
care for others, resulting in harm to them.

flood insurance coverage and floodplain management administered under the Act
and applicable Federal regulations promulgated in Title 44 of the Code of
Federal Regulations, Subchapter B.



OFF-BALANCE SHEET RISK – a measure of risk due to excessive rates of growth,
contingent liabilities or other items not reflected on the balance sheet.

100 YEAR FLOOD  A flooding condition which has a one
percent chance of occurring each year.  The 100-year flood level is used as the
base planning level for floodplain management in the National Flood Insurance

ORIGINAL AGE CONVERSION – A conversion of a term life insurance policy to a
permanent plan of insurance at a premium rate, based on the insured’s age when
the original term policy was purchased. 


PERMANENT LIFE INSURANCE – Life insurance that provides coverage throughout
the insured’s lifetime and also provides a savings element.

POLICY ANNIVERSARY – As a general rule, the date on which coverage under an
insurance policy became effective. 

POLICYHOLDER SURPLUS – excess of an insurance company’s assets above its
legal obligations to meet the benefits (liabilities) payable to its
policyholders. Also, the net worth in an insurance company adjusted for the
overstatement of liabilities.

POLICY RIDER – An amendment to an insurance policy that becomes part of the
insurance contract and either expands or limits the benefits payable under the

POOLING – method by which each member of an insurance pool shares in each and
every risk written by the other members of the pool.

PREFERRED RISK – A proposed insured who presents a significantly less than
average likelihood of loss and who is charged a lower than standard premium

PREMIUM – The dollar amount paid for an insurance policy.

PRIMARY INSURANCE – first layer property or liability coverage carried by the
insured that provides benefits up to the limits of a policy, regardless of other
insurance policies in effect.



REINSURANCE – form of insurance that insurance companies buy for
their own protection, “a sharing of insurance.” An insurer (the reinsured)
reduces its possible maximum loss on either an individual risk or a large number
of risks by giving (ceding) a portion of liability to another insurance company

REINSURER – insurance company that assumes all or part of an
Insurance or Reinsurance policy written by a primary insurance company.

REPLACEMENT COST – The cost of replacing property without a
reduction for depreciation. By this method of determining value, damages for a
claim would be the amount needed to replace the property using new

RESIDUAL MARKET – Consists of insurance consumers unable to obtain
coverage in the voluntary market.

RETENTION LIMIT – A specified maximum amount of insurance that a life insurer
is willing to carry at its own risk on any one life without transferring some of
the risk to a reinsurer.

RISK – uncertainty of a financial loss; term used to designate an insured or
a peril insured against.

RISK BASED CAPITAL (RBC) – the amount of required capital that the insurance
company must maintain based on the inherent risks in the insurer’s
RBC INSTRUCTIONS – the RBC Report including risked based
capital instruction adopted by the NAIC, as such RBC Instructions may be amended
by the NAIC from time to time in accordance with procedures adopted by the

RBC RATIO – measurement of the amount of capital (assets minus
liabilities) an insurance company has as a basis of support for the degree of
risk associated with it s company operations and investments.  This ratio
identifies the companies that are inadequately capitalized by dividing the
company’s by the minimum amount of capital that the regulatory authorities feel
is necessary to support the insurance operations. 

RBC STATISTIC – ratio of
authorized control level risked based capital of an insurance company to its
total adjusted capital.  This statistic determines regulatory action taken by
the state’s insurance commissioner


SAFFIR SIMPSON SCALE – A 1-5 rating based on a hurricane’s present
intensity. This is used to give an estimate of the potential property damage and
flooding expected along the coast from a hurricane landfall. Wind speed is the
determining factor in the scale.

SCHEDULED PROPERTY – Listing specific personal property for a
stated insured value. This is usually considered for valuable items that are
subject to limited coverage.

SINK HOLE – A sinkhole is a localized depression in the surface topography,
usually caused by the collapse of a subterranean structure, such as a cave. Although rare,
large sinkholes that develop suddenly in populated areas can lead to the
collapse of buildings and other structures.

STORM SURGE – A storm surge
is an onshore rush of water associated with a low pressure weather system,
typically a tropical cyclone.  Storm surge is caused primarily by high winds
pushing on the ocean’s surface.  The wind causes the water to pile up higher
than the ordinary sea level.  Storm surges are particularly damaging when they
occur at the time of high tide, combing the effects of the surge and the tide.

SOLAR FLARE – A solar flare is a violent explosion in the Sun‘s atmosphere with an energy
equivalent to tens of millions of hydrogen bombs. Solar
flares take place in the solar corona and chromosphere, heating the
gas to tens of millions of kelvins and accelerating electrons, protons and
heavier ions to near the speed of light. They produce electromagnetic radiation
across the spectrum at all wavelengths from long-wave radio signals to the
shortest wavelength gamma rays. Solar flare emissions are a danger to orbiting
satellites, manned space missions, communications systems, and power grid

contract in which the underlying assets of the synthetic contract are owed by
the plan itself rather than the insurance company as is the case with the GIC. 
This ownership rights is of particular importance if there is a concern about
the long term financial soundness of an insurance company.  The synthetic plan
segregates the plan’s assets from the assets of the insurance company.

SUBROGATION – The circumstance where an insurance company takes
the place of an insured in bringing a liability suit against a third party who
caused injury to the insured.

SUBSIDENCE – Movement of the land on which property is situated. A
structure built on a hillside may slide down the hill due to earth movement
caused by heavy rains.


TENANTS INSURANCE – Coverage for the contents of renter’s home or
apartment and for liability. Tenant policies are similar to homeowners
insurance, except that they do not cover the structure.

Total Adjusted Capital – commonly refers to an insurance company’s
capital base under Standard & Poor’s capital adequacy model. It includes
shareholders’ funds and adjustments on equity, asset values and reserves.


UMBRELLA POLICY – Umbrella coverage is insurance coverage that
extends the terms of a regular insurance policy once coverage limits for the
regular policy have been reached. Specifically, umbrella coverage is for people
who want protection against a large jury award that is not covered in their
standard policy.

UNDERWRITING – The process of identifying and classifying the
degree of risk represented by a proposed insured.

UNDERWRITING RISK – a measure of the risk that arises from
under-estimating the liabilities from business already written or inadequately
pricing current or prospective business. 

UNFRIENDLY FIRE – A fire that escapes from its normal contained
area. For example, fire in the fireplace leaps onto the sofa.


VOLUNTARY MARKET – Consists of insurance consumers that insurers
select to be provided coverage, using underwriting guidelines that are not
unfairly discriminatory. The voluntary market is also called the normal or
regular market.


WRITTEN EXPOSURE – The total number of exposures of all policies
issued during a given time period.

WRITTEN PREMIUMS – The total premiums generated from all policies
written by an insurance company within a given period of time