This page provides a glossary of insurance terms and definitions that are commonly used in the insurance business. New terms will be added to the glossary over time.
The definitions in this glossary are developed by the NAIC Research staff based on various insurance reference sources available to the Research Department. These definitions represent a common or general use of the term. Some words and/or phrases may be defined differently by other entities, or used in a context such that the definition shown may not be applicable.
A
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 time.
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 market.
AUTHORIZED CONTROL LEVEL RISKED BASED CAPITAL – insurance company’s 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.
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B
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 community.
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.
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C
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 World)
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 insurance.
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.
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D
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 survival.
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E
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 structures.
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.
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F
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 disasters
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.
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G
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 – A specified length of time within which a renewal premium that is due may be paidwhen someone is injured in the general operation of a business.
GRACE PERIOD without penalty.
GROSS NEGLIGENCE – reckless action without regard to life, limb, and/or property.
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H
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.
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I
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.
INSURABLE INTEREST – The 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.
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L
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.
LIFE AND HEALTH GUARANTEE ASSOCIATION – An organization that 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.
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M
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 settlement.
MORTALITY TABLES – Charts that show the death rates an insurer may reasonably anticipate among a particular group of insured lives at certain ages.
MORTGAGE INSURANCE - A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage.
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.
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N
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.
NFIP-NATIONAL FLOOD INSURANCE PROGRAM (NFIP) - The program of 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.
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O
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 Program.
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.
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P
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 contract.
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 rate.
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.
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R
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).
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 materials.
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 operations
.
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 NAIC.
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
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S
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 systems.
SYNTHETIC GUARANTEED INVESTMENT CONTRACT – modified guaranteed investment 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.
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T
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.
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U
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.
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V
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.
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W
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.
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Z
