Insurance Terminology
The following is a list of common Insurance Terms:
Actuary – A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics. While sometimes the term is used loosely, the title Actuary really belongs to those who meet the requirements of one of the Actuarial Societies, the Casualty Actuarial Society (CAS), for Property and Casualty Insurance, or the Society of Actuaries (SOA), for Life and Health Insurance. To qualify for membership in these associations, the individual must pass a number of extremely difficult technical mathematical examinations. Because of the rigorous requirements for membership, Actuaries, are very much in demand in the insurance industry and command very high salaries.
Adjuster – Usually a representative of the insurer who seeks to determine the extent of the insurer’s liability for loss when a claim is submitted. There are also independent adjusters who will work on the behalf of the insured party to negotiate a settlement with the insurer.
Agent – An individual who represents or acts as the agent of an insurance company in selling and servicing insurance policies.
There are two kinds of agents:
- Independent agent represents at least two insurance companies and (at least in theory) services clients by searching the market for the most advantageous price for the most coverage. The agent’s commission is a percentage of each premium paid and includes a fee for servicing the insured’s policy.
- Direct or career agent represents only one company and sells only its policies. This agent is paid on a commission basis in much the same manner as the independent agent.
Broker – An insurance professional who works on behalf of a client (the insured) to find insurance for that client. A broker differs from an agent in that the agent works on behalf of the insurance company and is compensated by the company. Brokers are compensated primarily based on fees they charge the client, although some brokers may also collect some compensation from insurers.
In theory, a broker is supposed to work with the client to identify and understand their insurance needs, then to survey the marketplace to find the best combination of coverage and price for their client.
Captive Agent – Representative of a single insurer or group of insurers who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights on a sale. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as employee benefits such as pensions, life insurance, health insurance, training and credit unions.
Casualty – Liability or loss resulting from an accident.
Casualty Insurance – That type of insurance that is concerned with losses caused by injuries to persons and the legal liability imposed upon the insured for such injury. It also includes liability for damage to property of others. It also includes such diverse forms of coverage as plate glass, insurance against crime, such as robbery, burglary and forgery, boiler and machinery insurance and Aviation insurance.
Also Known As: liability property damage
Chartered Property and Casualty Underwriter (CPCU) – A professional designation earned after the successful completion of 10 national examinations given by the American Institute for CPCU . The CPCU covers such areas of expertise as insurance, risk management, economics, finance, management, accounting, and law. Three years of work experience also are required in the insurance business or a related area.
Claim – A demand made by the insured, or the insured’s beneficiary, for payment of the benefits as provided by the policy.
Combined Ratio – The sum of the losses paid out or reserved, expenses other than claims, and policyholder dividend ratios not reflecting investment income or income taxes, divided by the premiums earned.
This ratio measures the company’s overall underwriting profitability. A combined ratio of less than 100 indicates an underwriting profit. For example, a combined ratio of 98 would mean that the insurance company made a 2% profit on its underwriting operations (not counting any money made from investment income).
Also Known As: Combined Operating Ratio CR COR
Commercial Lines – Insurance for businesses, professionals and commercial establishments as opposed to insurance for individuals, personal autos and homes which is referred to as Personal Lines
Coverage – The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed
Directors and Officers Liability – D&O Coverage protects directors and officers of a company from damages arising out of lawsuits alleging that the person performed a “wrongful act” which damaged the company. Wrongful acts can include such things as misstatement of financial reports, misuse of company funds, failure to honor employment contract and many more.
Direct Writer – An insurer whose distribution mechanism is selling directly to the insured over the telephone or the Internet. This term can also be used to refer to insurers who distribute through captive agents
Earned Premium – The amount of the premium that has been “earned” by virtue of the passage of time. For example, an insurer would earn $100 every month on a policy that has a premium amount of $1,200.00 and is written for a 12-month period. If a policy cancels before the end of its term, the insurance company will only earn the proportional amount of the total premium.
Expense Ratio – The ratio of underwriting expenses (including commissions) to net premiums written. This ratio reflect how efficient the company is. A high expense ratio indicates high administrative and sales costs relative to premium.
Also Known As: expenses
Full Tort – Does not limit your right to sue. This “full-tort” option is not eligible for a reduced premium.
General Liability Coverage – Insurance designed to protect business owners and operators from a wide variety of liability exposures. Exposures could include liability arising from accidents resulting from the insured’s premises or operations, products sold by the insured, operations completed by the insured, and contractual liability.
Hazard – Something that increases the likelihood or probable severity of a loss. For example, the storing of gasoline in a home basement is a hazard that increases the probability of an fire.
IBNR – A loss reserve that is established on the insurer’s books to account for losses that have already occurred but have not yet been reported to the company or directly recorded on its books.
Also Known As: Incurred But Not Reported
Impaired – An insurer is said to be impaired when it is in financial difficulty to the point where its ability to meet financial obligations or regulatory requirements is in question.
Independent Insurance Agents & Brokers of America – Formerly the Independent Insurance Agents of America (IIAA), this is a trade organization of independent agents and brokers which monitors and lobbies on behalf of its members. They also offer substantial training for agents and insurance professionals. Numerous state associations are affiliated with the IIABA.
Insurance Institute of America (IIA) – An organization which develops programs and conducts national examinations in general insurance, risk management, management, adjusting, underwriting, auditing and loss control management, including the CPCU designation.
Also Known As: AICPCU
ISO – Originally the Insurance Services Office, now ISO Properties, ISO is a leading source of information about risk. They supply data, analytics, and decision-support services for professionals in many fields, including insurance, finance, real estate, health services, government, and human resources. Our products help customers measure, manage, and reduce risk. One of the services ISO provides to the industry is the development of policy contract forms. While most large insurers use their own contract forms, the ISO form is still viewed as the “standard” against which all other contracts are measured.
Liability – Any legally enforceable obligation. The term is most commonly used to refer to a dollar amount of the legal obligation.
Liability Insurance – Insurance that pays and renders service (such as legal defense) on behalf of an insured for loss arising out of his responsibility, due to negligence, to others imposed by law or assumed by contract.
Also Known As: Liability Coverage
Licensed – For an insurance company – Indicates the company is incorporated in another state but is a licensed (admitted) insurer for this state to write specific lines of business for which it qualifies.
Limited Tort – Limits your right to sue for pain and suffering, except in cases of serious injury. This “limited-tort” options qualifies you for a reduction in your premium.
Limits of Liability – The maximum the insurer will pay regardless of the number of insureds, claims or persons or organizations making a claim. Sometimes limits are on an aggregate or blanket basis, this provides for more flexibility and overall better coverage. Other policies have split limits where there are separate limits for each claimant and an overall limit per loss.
Loss Adjustment Expenses – Expenses incurred to investigate and settle claims. It includes adjusters salaries, for staff adjusters, legal fees, and administrative costs that are specific to settling claims.
Also Known As: LAE
Loss Control – All methods taken to reduce the frequency and/or severity of losses including reducing or avoiding exposure, loss prevention and loss reduction. A combination of risk control techniques with risk financing techniques forms the nucleus of a risk management program. The use of appropriate insurance, avoidance of risk, loss control, risk retention, self insuring, and other techniques that minimize the risks of a business, individual, or organization.
Losses Incurred – The sum of losses paid plus the net change in loss reserves for the period being evaluated.
Also Known As: Incurred Loses
Loss Ratio – The ratio of incurred losses and loss-adjustment expenses to net earned premium. This ratio measures the company’s underlying claims results, or loss experience, on its total book of business. The loss ratio added to the expense ratio creates the combined ratio which is a reflection of the overall profitability of the company’s underwriting.
Loss Reserve – The estimated liability, as it would appear in an insurer’s financial statement, for unpaid insurance claims or losses that have occurred as of a given evaluation date. Usually includes losses incurred but not reported (IBNR), losses due but not yet paid, and amounts not yet due. For individual claims, the loss reserve is the estimate of what will ultimately be paid out on that claim.
Mutual Company – Companies with no capital stock, and owned by policyholders. The earnings of the company–over and above the payments of the losses, operating expenses and reserves–are the property of the policyholders. There are two types of mutual insurance companies. A nonassessable mutual charges a fixed premium and the policyholders cannot be assessed further. Legal reserves and surplus are maintained to provide payment of all claims. Assessable mutuals are companies that charge an initial fixed premium and, if that isn’t sufficient, might assess policyholders to meet losses in excess of the premiums that have been charged. Some of the largest insurance companies in the country, e.g. State Farm, are mutual companies.
National Association of Insurance Commissioners – (NAIC) Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and develop model laws for passage by state legislatures.
Also Known As: NAIC
Peril – A Peril is a cause of loss. This is often confused with Hazard another common insurance term. To explain the difference, let’s suppose you are doing some painting and have paint and paint thinner temporarily stored at your office. The paint and thinner are a hazard since they increase the likelihood of a loss. If there were a loss, however, fire is the peril for which you would need insurance.
Personal Lines – Insurance for individuals and families, such as private-passenger auto and homeowners insurance. Compare to Commercial Lines
Professional Liability Insurance Coverage Also Known As: Errors and Omissions Coverage – Covers a professional from liability resulting from errors or omissions in the performance of his or her professional duties. In general this coverage is required by those involved in professional service businesses like accounting, law, insurance and real estate.
