GLOSSARY OF INSURANCE TERMS

 

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Accident Year

The year in which an accident occurred.

 

Actuary

A person who uses complex mathematical methods, usually with the aid of computers, to analyze loss data and other statistics and develop systems for determining future premiums.

 

Agent Balances

Premium balances, less commissions payable thereon, due from agents and brokers.

 

Assumed Premium

Premiums accepted by an insurance company in exchange for accepting all or part of insurance on a risk or exposure.

 

Betterment

If the settlement of a Claim results in the insured being in a better financial position than he was before the loss occurred, the extent of the improvement to his position is known as ‘betterment’ and he would be expected to contribute towards the Claims settlement.

 

Ceded Premiums

Premiums paid to an assuming company in exchange for that company accepting all or part of insurance on a risk or exposure.

 

Claim

A demand for payment of a policy benefit because of the occurrence of an insured event, such as the death or disability of the insured, the maturity of an endowment, the incurrence of hospital or medical bills, the destruction or damage of property, and related deaths or injuries; defects in, liens on, or challenges to the title to real estate, or the occurrence of a surety loss.

 

Claim Adjuster

Someone who performs the field work involved in settling a claim, including investigating, appraising and negotiating a claim.

 

Claim Draft

Essentially the same as a check written on the insurance company’s checking account. Drafts are used to pay claims and may be written by a claims representative or by a producer with draft authority.

 

Claim Frequency

The relative incidence of claims in relation to an exposure base.

 

Claim Severity

The relative magnitude of the dollar amount of claims.

 

Combined Ratio

The sum of both the loss ratio and expense ratio used to measure underwriting performance.

 

Commissions

Compensation paid by an insurance company to agents or brokers for placing insurance coverage with the company, usually determined as percentages of the premiums.

 

Deferred Policy Acquisition Cost

Under GAAP accounting, the unamortized portion of those policy acquisition expenses that vary with, and are primarily related to, the acquisition of new and renewal insurance contracts and coverages.

 

Direct Premium

The dollar amount charged when a policyholder contracts for insurance coverage before reinsurance has been ceded and/or assumed.

 

Earned Premium

Pro rata portions of premiums applicable to the expired period of a policy.

 

Effective Date

The date when insurance coverage under a policy begins.

 

Endorsement

Documentary evidence of a change in an existing policy that may result in a change in premium, return premium, or no premium adjustment.

 

Funds held by a company under reinsurance treaty

An account used to record a liability from a deposit from a reinsurer or the withholding of a portion of the premiums due as a guarantee that a reinsurer will meet its loss and other obligations.

 

Generally Accepted Accounting Principles (GAAP)

A method of reporting financial results of an insurer in accordance with the going-concern basis used by other businesses. GAAP is promulgated by the AICPA (American Institute of Certified Public Accountants) and the FASB (Financial Accounting Standards Board). GAAP assigns income and disbursements to the proper period, as distinguished from the more conservative requirements of statutory accounting.

 

Gross Premium

Direct premiums plus assumed premiums.

 

Hard Market

That part of the insurance sales cycle in which competitive pricing is at a minimum as companies charge the premiums necessary to meet their underwriting losses in order to avoid insolvency and boost capacity; usually associated with a sharp decline in capacity.

 

Insured

The person whose life, property, or exposure to liability is insured.

 

Insurer

The entity providing coverage to the insured.

 

Loss Adjustment Expenses

Expenses incurred in the course of investigating and settling claims. Loss-adjustment expenses include any legal and adjusters’ fees and the costs of paying claims and all related expenses.

 

Loss Adjustment Expense Ratio

Expression in terms of a ratio of the relationship of loss adjustment expenses to earned premium.

 

Losses

Generally refers to (1) the amount of reduction in the value of an insured's property caused by an insured peril, (2) the amount sought through an insured's claim, or (3) the amount paid on behalf of an insured under an insurance contract.

 

Loss ratio

Expression in terms of a ratio of the relationship of losses to earned premium.

 

Loss Reserves

A term used in statutory accounting for the liability for unpaid losses.

 

National Association of Insurance Commissioners (NAIC)

An association of the Insurance Commissioners of various states in the United States.

 

Net Premiums

Direct premiums written plus assumed premiums less ceded premiums.

 

Nonstandard Auto Coverage

Nonstandard auto insurance provides coverage to drivers who, due to their driving record, age or vehicle type, represent higher than normal risks and pay higher rates for comparable coverage.

 

Policyholder Dividends

Payments made or credits extended to the insured by the company, usually at the end of a policy year that result in reducing the net insurance cost to the policyholder. Such dividends may be paid in cash to the insureds or applied by the insureds as reductions of the premiums due for the next policy year.

 

Policy Acquisition Costs

Costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts. Also referred to as underwriting expenses.

 

Policy Year

The year during which a policy is effective.

 

Premium Receivable

Premium balances, less commissions payable thereon, due from agents and brokers and insureds.

 

Reinsurance

A transaction in which a reinsurer (assuming enterprise), for a consideration (premium), assumes all or part of a risk undertaken originally by another insurer (ceding enterprise). However, the legal rights of the insured are not affected by the reinsurance transaction, and the insurance enterprise issuing the insurance contract remains liable to the insured for payment of policy benefits.

 

Return on Equity

Indicator of profitability. Determined by dividing Net income for the past 12 months by common stockholder Equity. Result is shown as a percentage. Investors use ROE as a measure of how a Company is using its money.

 

Risk

Uncertainty of financial loss; used to designate an insured or a peril insured against.

 

Soft Market

That part of the insurance sales cycle in which competition is at a maximum as insurance companies use their excess capacity to sell more policies at lower prices.

 

Statutory Accounting Principles (SAP)

Those principles required by the NAIC and by state law, which must be followed by insurance companies in submitting their financial statements to the NAIC and state insurance departments. Such principles differ from generally accepted accounting principles (GAAP) in some important respects, e.g., SAP requires that expense must be recorded immediately and cannot be deferred to track with premiums as they are earned and take into revenue.

 

Surplus

An accounting term used to refer to the statutory capital and surplus (equity accounts) on the statutory balance sheet of an insurer or reinsurer. It consists of the company’s outstanding stock plus retained earnings (“unassigned funds”) plus any contributed capital.

 

Underwriter

1) a company that receives the premiums and accepts responsibility for the fulfillment of the policy contract; 2) the company employee who decides whether or not the company should assume a particular risk; 3) the agent who sells the policy.

 

Underwriting Expenses

Costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts. Also referred to as policy acquisition costs.

 

Underwriting Ratio

On a statutory basis, it is an expression in terms of a ratio of the relationship of underwriting expenses to net written premiums. On a GAAP basis, it is an expression in terms of a ratio of the relationship of underwriting expenses to net earned premiums.

 

Underwriting Profit / Loss

The profit derived from insurance exclusive of that derived from investments. Underwriting profit or loss is typically premiums earned minus incurred losses, loss adjustment expenses and underwriting expenses.

 

Unearned Premium

The pro rata portion of the premiums in force applicable to the unexpired period of the policy term.