Glossary.

Definitions of the terms most often used to describe the operations of the insurance industry

Actuary: Specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics. (Outside the United States, this person generally is referred to as a mathematician.)

Adjuster: A representative of the insurer who seeks to determine the extent of the insurer's liability for loss when a claim is submitted.

Admitted Assets: Stocks, bonds and real estate investments taken into consideration when regulators assess the solvency of an insurance company.

Agent: Individual who sells and services insurance policies either as an "independent" agent representing two or more insurance companies or as a "captive" or "career" agent officially representing one company.

Aggregate Limit: Indicates the amount of coverage the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents might occur.

Annuity: Contract that provides a stipulated income, at regular intervals, for a specified period or the contract holder's lifetime.

Asset/Liability Management: Process of matching the characteristics and duration of the liabilities associated with in-force contracts to the characteristics and duration of assets used to fund these liabilities.

Best's Capital Adequacy Ratio (BCAR): Identifies the appropriate level of risk-adjusted capital required to support a company's asset and liability structure, while at the same time identifying where there is excess capital that can be better used in the organization. An important tool in A.M. Best's rating process.

Broker: Insurance salesperson licensed as an agent and broker representing numerous insurers and whose function is to search the marketplace for insurance coverage on behalf of the client.

Business Net Retention: Represents the percentage of a company's gross writings that are retained for its own account. Gross writings are the sum of direct writings and assumed writings. This measure excludes affiliated writings.

Capital and Surplus: Sum remaining after liabilities are deducted from all assets. Essentially, this is an insurer's statutory net worth. Capital and surplus provides financial protection to policyholders in the event that a company suffers unexpected losses.

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.

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 right of refusal on a sale.

Cash Flow Underwriting: Strategy of attracting large volumes of business through low or below-cost pricing with the intention of making up the deficits through investments in higher-yielding assets. Used more frequently when interest rates are high and/or stock returns are strong.

Casualty Coverage: Insurance that is concerned primarily with the legal liability for losses caused by injury to persons or damage to the property of others. Coverage includes automobile, workers' compensation, employers' liability, general liability, plate glass, theft and personal liability.

Catastrophic Losses: Losses that go beyond or deviate significantly from actuarially derived expected losses.

Cede: Means by which an insurer transfers some of its risk to a reinsurer.

Claims Costs: Costs incurred by an insurance company for adjusting, settling and servicing claims. Included in these costs are claims and indemnity payments, adjuster fees, legal fees and expert fees.

Co-insurance: Provision in an insurance policy, usually optional, under which the policyholder, for a reduced rate, agrees to maintain insurance equal to a specified percentage of the value of the property covered. Policyholders who fail to maintain the minimum amount of coverage specified, assume a proportionate share of the loss.

Combined Ratio after Policyholder Dividends: This ratio measures the company's overall underwriting profitability. A combined ratio of less than 100 indicates the company has reported an underwriting profit.

Commercial Lines: Insurance for businesses, organizations, institutions, government agencies or other commercial establishments.

Conditional Reserves: Represents the aggregate of various reserves, which are treated as liabilities. Such reserves include unauthorized reinsurance, excess of statutory loss reserves over statement reserves, dividends to policy-holders undeclared, and other similar reserves established voluntarily or in compliance with statutory regulations.

Demutualization: Conversion of a mutual company to another form of ownership, typically to stock.

Direct Writer: Insurer that sells directly to the public through its own licensed employees, the mail, the Internet or other means of interacting directly with the public, without using career or independent agents.

Disintermediation: Withdrawal of funds by contract holders and policyholders in order to invest in higher-yielding investments.

Domiciled Company: Insurer incorporated or chartered within a particular, specified state or jurisdiction as its principal legal residence. Also known as a domestic company. The company also is licensed (admitted) under the domicile's insurance statutes for the lines of business for which it qualifies.

Expense Ratio: Ratio of underwriting expenses (including commissions) to net premiums written. This ratio measures the company's operational efficiency in underwriting its book of business.

File-and-Use Rating Laws: State laws that let insurers adopt new rates without prior approval from the insurance department. Usually insurers submit their new rates with supporting statistical data.

Financially Impaired Company (FIC): Insurer that has had an official action taken against it by regulators in the state where it is domiciled. State actions include anything that restricts the company's freedom to conduct business normally, even though the company technically might not be insolvent. Companies in voluntary dissolution that are not under financial duress are not counted as FICs.

Funding Agreements: Nonqualified annuities or annuity-like instruments that generate cash flows to service the debt on short-term or medium-term notes, usually global or European.

GAAP (Generally Accepted Accounting Principles) Accounting: The common set of accounting principles, standards and procedures.

Guaranteed Investment Contract (GIG): Investment contract offered by life insurers, usually to institutional investors, that guarantees a fixed interest payment and repayment of principal and interest on the funds deposited with the insurer for a specific period of time. Frequently used by qualified pension plan administrators and municipalities to fund debt.

Guaranty Fund: State-operated fund derived from assessments against solvent insurance companies that is used to pay losses to insolvent companies' claimants.

Hard Market: Phase in the property/casualty underwriting cycle where insurance premium rates are increasing faster than the loss cost trends.

Health Maintenance Organization (HMO): Managed health-care plan that provides medical care to its members through a network of participating health-care providers.

In Force: Amount of insurance coverage or the face amount of the policies that an insurer has underwritten.

Lapse: Discontinuation of the terms of an insurance policy for nonpayment of premium.

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.

Liquidity: The ability to quickly convert assets into cash without incurring a considerable loss. Quick and current are two types of liquidity.

Lloyd's of London: Institution in the United Kingdom within which individual underwriters accept or reject the risks offered to them.

Lloyds Organizations: U.S. organizations that are patterned after, but not related to, Lloyd's of London. They are voluntary, unincorporated associations of individuals. Each individual assumes a specified portion of the liability under each policy issued. Many Lloyds organizations are sponsored by major insurance companies.

Long-Tail Lines: Colloquialism describing an insurance coverage that has a lengthy period between the occurrence and final settlement of a claim. Types of long-tail insurance lines are long-term care, medical malpractice, products liability, professional liability and workers' compensation.

Loss-Adjustment Expenses: Expenses incurred to investigate and settle losses.

Loss and Loss-Adjustment Reserves to Policyholder Surplus Ratio: The higher the multiple of loss reserves to surplus, the more a company's solvency is dependent upon having and maintaining reserve adequacy.

Loss Control: Measures to reduce the frequency and/or severity of losses including exposure avoidance, loss prevention, loss reduction, segregation of exposure units and noninsurance transfer of risk.

Loss Ratio: The ratio of incurred losses and loss-adjustment expenses to net premiums earned. This ratio measures the company's underlying profitability, or loss experience, on its total book of business.

Loss Reserves: Liability established to pay anticipated claims costs and expenses associated with settling claims, including a provision for incurred but not reported losses.

Losses and Loss-Adjustment Expenses: This represents the total reserves for unpaid losses and loss-adjustment expenses, including reserves for any incurred but not reported losses, and supplemental reserves established by the company. It is the total for all lines of business and all accident years.

Morbidity Risk: Extent of exposure to claims from illnesses or injuries sustained by policyholders.

Mortality Risk: Extent of exposure to claims from deaths sustained by policyholders.

Mutual Insurance Company: Insurance company that is owned by its policyholders and issues no capital stock.

Occurrence: An event that results in an insured loss. In some lines of business, such as liability, an occurrence is distinguished from accident in that the loss doesn't have to be sudden and unexpected and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected nor intended by the insured.

Operating Income: Revenues generated internally from insurance operations. Measure of an insurer's performance in underwriting and investment activities.

Ordinary Life: Segment of the life insurance industry that includes whole life, term life, universal life and variable life products and is separate from group life, credit life and industrial life insurance.

Persistency: Measure of the average percentage of insurance policies that remain in force on an insurer's books for the policy period or term of coverage.

Personal Lines: Insurance for individuals, particularly homeowners and personal auto insurance.

Policy: The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clauses, riders, endorsements and papers attached thereto and made a part thereof.

Policy Loans: Loans made by a life insurer from its general funds to policyholders, at an interest rate stipulated in the policy, where the cash value of the policy serves as security for the loan. Any amount of the loan remaining is subtracted from the benefit at the insured's death or from the cash-value accumulation if the policy is surrendered.

Policyholder Surplus (PHS): Sum remaining after all liabilities are deducted from assets. Essentially, this is an insurer's statutory net worth. Surplus, in addition to loss reserves, provides financial protection to policyholders in the event that a company suffers an unexpected or catastrophic loss.

Preferred-Provider Organization: A health-care plan entitling members to choose physicians, hospitals and clinics either within the network or out of network, without referrals and within certain limits.

Premium: Sum paid for insurance coverage.

Premiums, Direct Written: Amount of premium actually paid by the policyholder.

Premiums, Net Earned: Portion of a premium that has been earned by the insurance company, based on the expired portion of the policy period.

Premiums, Net Written: Premium income retained by the insurance company, direct or after reinsurance transactions.

Premiums, Unearned: Portion of the premium that an insurer has collected but not earned because the policy period has not expired.

Property Coverage: Insurance that provides financial protection against losses or damage to real personal property caused by specific perils, such as fire, windstorm, hail, explosion, riot, aircraft, motor vehicles, vandalism, malicious mischief, civil commotion and smoke.

Qualifying Event: An occurrence that triggers an insured's protection.

Reciprocal Exchange: Unincorporated association organized to write insurance for its members. Each member is liable for his or her proportionate share of total liabilities, but may be assessed for additional funds if needed.

Reinsurance: Insurance that an insurer buys to spread some of its risk of loss on the policies it has underwritten. Reinsurance enables an insurer to underwrite more insurance, stabilize its underwriting results and secure catastrophe protection against shock losses.

Retrocede: Means by which a reinsurer transfers some of its risks to another reinsurer.

Risk-Based Capital (RBC) Standards: Early warning tool for insurer insolvency developed by the National Association of Insurance Commissioners and used by state insurance departments. RBC standards allow regulators to impose corrective action while the company's resources are still available.

Risk Management: Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through practices such as avoiding the risk, retaining the risk, reducing the risk or transferring the risk, usually by insurance.

Risk Retention Group (RRG): Association-sponsored company formed by an affinity group to provide liability insurance to the group's members as provided under the Liability Risk Retention Act of 1986.

Run-on-the-Bank: Rush by policyholders or other contract holders to cash in their insurance policies or other contracts, such as annuities or funding agreements, very often causing a liquidity strain or more serious financial impairment at an insurance company. This situation typically arises from diminished customer confidence in the company.

Short-Tail Lines: Colloquialism describing an insurance coverage that has a brief period between the occurrence and payment of a claim. Types of short-tail insurance lines are homeowners and automobile physical damage.

Soft Market: Phase in the underwriting cycle where insurance premiums are decreasing and underwriting criteria are more lax, typically due to intense competition.

Solvency: Having sufficient assets--capital, surplus, reserves--and being able to satisfy financial requirements--investments, annual reports, examinations--to be eligible to transact insurance business and meet liabilities.

Statutory Accounting: Accounting practices and principles required of insurers reporting to insurance regulatory authorities.

Statutory Reserve: A reserve, either specific or general, required by law.

Stock Insurer: Insurance company that issues capital stock and is owned by its stockholders, in contrast to a mutual company owned by its policyholders in proportion to the number and size of the policies owned.

Stop Loss: Any provision in a policy designed to cut off an insurer's losses at a given point.

Subrogation: The right of an insurer that has taken over another's loss also to take over the other person's right to pursue remedies against a third party.

Surrender: Return for cancellation of a life insurance or annuity policy to an insurer for its cash value or other nonforfeiture values.

Term Life Insurance: Life insurance that covers the insured for the limited period of time that the policy is in force. No cash value buildup accrues to the term of coverage.

Tort: A private wrong, independent of contract and committed against an individual, that gives rise to a legal liability and is adjudicated in a civil court.

Underwriter: The individual trained in evaluating risks and determining rates and coverages for them. Also, an insurer.

Underwriting: Process of selecting risks for insurance and determining what amount of premium and under what terms the insurance company will accept the risk.

Underwriting Income: Income from the business of insurance--underwriting--not including the insurer's investments. Profits, if any, after claims are paid and underwriting expenses are subtracted from policy premiums.

Unearned Premiums: Portion of the premium that an insurer has collected but not earned because the policy period has not expired.

Universal Life Insurance: Flexible-premium life insurance policy under which the policyholder may vary the timing or amount of premium payments or change the death benefit from time to time. Cash values are credited interest by the insurer at rates that vary based on the indices in the policy, but with a guaranteed floor crediting interest rate.

Valuation: A calculation of the policy reserve in life insurance. Also, a mathematical analysis of the financial condition of a pension plan.

Valuation Reserve: A reserve against the contingency that the valuation of assets, particularly investments, might be higher than what can be actually realized or that a liability may turn out to be greater than the valuation placed on it.

Variable Life Insurance: Life insurance for which the policyholder carries the investment risk, but which provides a minimum guaranteed death benefit. Actual benefits may fluctuate, depending on the market value of the investments behind the policy.

Viatical Settlements: The purchase of a terminally ill person's life insurance policy for a certain percentage of the policy's face value.

Whole Life Insurance: Life insurance that is payable to a beneficiary at the death of the insured. Premiums are paid for a specified number of years or for life. Cash value builds up over the term of coverage at a fixed interest rate.