Insurance Term Glossary

A | B | C | D | E | F | G | H | I | L | M | N | P | Q | R | S | T | U | V

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Active Participant
Person whose absence from a planned event would trigger a benefit if the event needs to be canceled or postponed.

Accidental Death Benefit
In a life insurance policy, benefit in addition to the death benefit paid to the beneficiary, should death occur due to an accident. There can be certain exclusions as well as time and age limits.

Accident
Definition: An incident at a specific time and place in which a loss occurs.

Examples: At 3:00 p.m., in front of the shopping center, a car backed into another car. Both parties examined their vehicles and there was no damage, therefore no accident was reported because a loss did not occur.

Acceleration Clause
The part of a contract that says when a loan may be declared due and payable.


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Binder
Definition: Immediate insurance coverage that can be in oral or written form. Usually provides temporary coverage for a specified time until a formal policy is accepted or denied.

Examples: Until Joe’s credit and past insurance history could be researched, his agent gave him a binder for 10 days. The binder gave Joe all the same coverage’s and rights as he would have with a regular insurance policy, but would automatically cease after the 10 days.

Best’s Capital Adequacy Relativity (BCAR)
This percentage measures a company’s relative capital strength compared to its industry peer composite. A company’s BCAR, which is an important component in determining the appropriateness of its rating, is calculated by dividing a company’s capital adequacy ratio by the capital adequacy ratio of the median of its industry peer composite using Best’s proprietary capital mode. Capital adequacy ratios are calculated as the net required capital necessary to support components of underwriting, asset, and credit risks in relation to economic surplus.

Benefit Period
In health insurance, the number of days for which benefits are paid to the named insured and his or her dependents. For example, the number of days that benefits are calculated for a calendar year consist of the days beginning on Jan. 1 and ending on Dec. 31 of each year.

Balance Sheet
An accounting term referring to a listing of a company’s assets, liabilities and surplus as of a specific date.


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Case Management
A system of coordinating medical services to treat a patient, improve care and reduce cost. A case manager coordinates health care delivery for patients.

Captive Agent
Representative of a single insurer or fleet of insurers who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights on a sale. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as an extensive list of employee benefits such as pensions, life insurance, health insurance, and credit unions.

Capitalization or Leverage
Measures the exposure of a company’s surplus to various operating and financial practices. A highly leveraged, or poorly capitalized, company can show a high return on surplus, but might be exposed to a high risk of instability.

Capital
Equity of shareholders of a stock insurance company. The company’s capital and surplus are measured by the difference between its assets minus its liabilities. This value protects the interests of the company’s policyowners in the event it develops financial problems; the policyowners’ benefits are thus protected by the insurance company’s capital. Shareholders’ interest is second to that of policyowners.


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Direct Premiums Written
The aggregate amount of recorded originated premiums, other than reinsurance, written during the year, whether collected or not, at the close of the year, plus retrospective audit premium collections, after deducting all return premiums.

Development to Policyholder Surplus (IRIS)
The ratio measures reserve deficiency or redundancy in relation to policyholder surplus. This ratio reflects the degree to which year-end surplus was either overstated (+) or understated (-) in each of the past several years, if original reserves had been restated to reflect subsequent development through year end.

Developed to Net Premiums Earned
The ratio of developed premiums through the year to net premiums earned. If premium growth was relatively steady, and the mix of business by line didn’t materially change, this ratio measures whether or not a company’s loss reserves are keeping pace with premium growth.

Deductible
Amount of loss that the insured pays before the insurance kicks in.

Death Benefit
The limit of insurance or the amount of benefit that will be paid in the event of the death of a covered person.


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Encumbrance
A claim on property, such as a mortgage, a lien for work and materials, or a right of dower. The interest of the property owner is reduced by the amount of the encumbrance.

Employers Liability Insurance
Coverage against common law liability of an employer for accidents to employees, as distinguished from liability imposed by a workers’ compensation law.

Elimination Period
The time which must pass after filing a claim before policyholder can collect insurance benefits. Also known as “waiting period.”

Earned Premium
The amount of the premium that as been paid for in advance that has been “earned” by virtue of the fact that time has passed without claim. A three-year policy that has been paid in advance and is one year old would have only partly earned the premium.


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Future Purchase Option
Life and health insurance provisions that guarantee the insured the right to buy additional coverage without proving insurability. Also known as “guaranteed insurability option.”

Floater
A separate policy available to cover the value of goods beyond the coverage of a standard renters insurance policy including movable property such as jewellery or sports equipment.

Financing Entity
Provides money for purchases.

File-and-Use Rating Laws
State-based laws which permit insurers to adopt new rates without the prior approval of the insurance department. Usually insurers submit their new rates with supporting statistical data.


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Grace Period
The length of time (usually 31 days) after a premium is due and unpaid during which the policy, including all riders, remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time. In Universal Life policies, it typically provides for coverage to remain in force for 60 days following the date cash value becomes insufficient to support the payment of monthly insurance costs.

General Account
All premiums are paid into an insurer’s general account. Thus, buyers are subject to credit-risk exposure to the insurance company, which is low but not zero.


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Health Reimbursement Arrangement
Owners of high-deductible health plans who are not qualified for a health savings account can use an HRA.

Health Maintenance Organization (HMO)
Prepaid group health insurance plan that entitles members to services of participating physicians, hospitals and clinics. Emphasis is on preventative medicine, and members must use contracted health-care providers.

Hazardous Activity
Bungee jumping, scuba diving, horse riding and other activities not generally covered by standard insurance policies. For insurers that do provide cover for such activities, it is unlikely they will cover liability and personal accident, which should be provided by the company hosting the activity.

Hazard
A circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion.


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Independent Insurance Agents & Brokers of America (IIABA)
Formerly the Independent Insurance Agents of America (IIAA), this is a member organization of independent agents and brokers monitoring and affecting industry issues. Numerous state associations are affiliated with the IIABA.

Indemnity
Restoration to the victim of a loss by payment, repair or replacement.

Income Taxes
Incurred income taxes (including income taxes on capital gains) reported in each annual statement for that year.

Impaired Insurer
An insurer which is in financial difficulty to the point where its ability to meet financial obligations or regulatory requirements is in question.


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Liability
Broadly, any legally enforceable obligation. The term is most commonly used in a pecuniary sense.

Leverage or Capitalization
Measures the exposure of a company’s surplus to various operating and financial practices. A highly leveraged, or poorly capitalized, company can show a high return on surplus, but might be exposed to a high risk of instability.

Least Expensive Alternative Treatment
The amount an insurance company will pay based on its determination of cost for a particular procedure.

Lapse Ratio
The ratio of the number of life insurance policies that lapsed within a given period to the number in force at the beginning of that period.

Laddering
Purchasing bond investments that mature at different time intervals.


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Mortgage Insurance Policy
In life and health insurance, a policy covering a mortgagor with benefits intended to pay off the balance due on a mortgage upon the insured’s death, or to meet the payments due on a mortgage in case of the insured’s death or disability.

Mortality and Expense Risk Fees
A charge that covers such annuity contract guarantees as death benefits.

Member Month
Total number of health plan participants who are members for each month.

Medical Loss Ratio
Total health benefits divided by total premium.


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Net Investment Income
This item represents investment income earned during the year less investment expenses and depreciation on real estate. Investment expenses are the expenses related to generating investment income and capital gains but exclude income taxes.

Net Income
The total after-tax earnings generated from operations and realized capital gains as reported in the company’s NAIC annual statement on page 4, line 16.

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.

Named Perils
Perils specifically covered on insured property.


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Protected Cell Company (PCC)
A PCC is a single legal entity that operates segregated accounts, or cells, each of which is legally protected from the liabilities of the company’s other accounts. An individual client’s account is insulated from the gains and losses of other accounts, such that the PCC sponsor and each client are protected against liquidation activities by creditors in the event of insolvency of another client.

Private-Passenger Auto Insurance Policyholder Risk Profile
This refers to the risk profile of auto insurance policyholders and can be divided into three categories: standard, nonstandard and preferred. In the eyes of an insurance company, it is the type of business (or the quality of driver) that the company has chosen to taken on.

Premium to Surplus Ratio
This ratio is designed to measure the ability of the insurer to absorb above-average losses and the insurer’s financial strength. The ratio is computed by dividing net premiums written by surplus. An insurance company’s surplus is the amount by which assets exceed liabilities. The ratio is computed by dividing net premiums written by surplus. For example, a company with $2 in net premiums written for every $1 of surplus has a 2-to-1 premium to surplus ratio. The lower the ratio, the greater the company’s financial strength. State regulators have established a premium-to-surplus ratio of no higher than 3-to-1 as a guideline.

Preferred Provider Organization
Network of medical providers who charge on a fee-for-service basis, but are paid on a negotiated, discounted fee schedule.

Pre-Existing Condition
A coverage limitation included in many health policies which states that certain physical or mental conditions, either previously diagnosed or which would normally be expected to require treatment prior to issue, will not be covered under the new policy for a specified period of time.

Policyholder Dividend Ratio
The ratio of dividends to policyholders related to net premiums earned.

Policy or Sales Illustration
Material used by an agent and insurer to show how a policy may perform under a variety of conditions and over a number of years.

Point-of-Service Plan
Health insurance policy that allows the employee to choose between in-network and out-of-network care each time medical treatment is needed.

Personal Injury Protection
Pays basic expenses for an insured and his or her family in states with no-fault auto insurance. No-fault laws generally require drivers to carry both liability insurance and personal injury protection coverage to pay for basic needs of the insured, such as medical expenses, in the event of an accident.


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Qualified Versus Non-Qualified Policies
Qualified plans are those employee benefit plans that meet Internal Revenue Service requirements as stated in IRS Code Section 401a. When a plan is approved, contributions made by the employer are tax deductible expenses.


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Return on Policyholder Surplus (Return on Equity)
The sum of after-tax net income and unrealized capital gains, to the mean of prior and current year-end policyholder surplus, expressed as a percent. This ratio measures a company’s overall after-tax profitability from underwriting and investment activity.

Reinsurance Recoverables to Policyholder Surplus
Measures a company’s dependence upon its reinsurers and the potential exposure to adjustments on such reinsurance. Its determined from the total ceded reinsurance recoverables due from non-U.S. affiliates for paid losses, unpaid losses, losses incurred but not reported (IBNR), unearned premiums and commissions less funds held from reinsurers expressed as a percent of policyholder surplus.

Reciprocal Insurance Exchange
An unincorporated groups of individuals, firms or corporations, commonly termed subscribers, who mutually insure one another, each separately assuming his or her share of each risk. Its chief administrator is an attorney-in-fact.


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Stock Insurance Company
An incorporated insurer with capital contributed by stockholders, to whom earnings are distributed as dividends on their shares.


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Total Annual Loan Cost
The projected annual average cost of a reverse mortgage including all itemized costs.

Total Admitted Assets
This item is the sum of all admitted assets, and are valued in accordance with state laws and regulations, as reported by the company in its financial statements filed with state insurance regulatory authorities. This item is reported net as to encumbrances on real estate (the amount of any encumbrances on real estate is deducted from the value of the real estate) and net as to amounts recoverable from reinsurers (which are deducted from the corresponding liabilities for unpaid losses and unearned premiums).


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Usual, Customary and Reasonable Fees
An amount customarily charged for or covered for similar services and supplies which are medically necessary, recommended by a doctor or required for treatment.

Underwriting Expenses Incurred
Expenses, including net commissions, salaries and advertising costs, which are attributable to the production of net premiums written.

Underwriting Expense Ratio
This represents the percentage of a company’s net premiums written that went toward underwriting expenses, such as commissions to agents and brokers, state and municipal taxes, salaries, employee benefits and other operating costs. The ratio is computed by dividing underwriting expenses by net premiums written. The ratio is computed by dividing underwriting expenses by net premiums written. A company with an underwriting expense ratio of 31.3% is spending more than 31 cents of every dollar of net premiums written to pay underwriting costs. It should be noted that different lines of business have intrinsically differing expense ratios. For example, boiler and machinery insurance, which requires a corps of skilled inspectors, is a high expense ratio line. On the other hand, expense ratios are usually low on group health insurance.


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Viatical Settlement Provider
Someone who serves as a sales agent, but does not actually purchase policies.

Variable Universal Life Insurance
A combination of the features of variable life insurance and universal life insurance under the same contract. Benefits are variable based on the value of underlying equity investments, and premiums and benefits are adjustable at the option of the policyholder.