Insurance Basic Terms

Loss Runs

Information used to compare insurance rates and premiums, provided by insurer to insured.

Risk

Uncertainty or chance of loss.

Pure Risk

Risks that have no possibility of gain and can be insured, such as fire, wind, and hail.

Speculative Risk

Risks that may result in a gain and cannot be insured, such as gambling.

Peril

Specific cause of a loss.

Hazard

A condition that makes a loss more likely to occur.

Moral Hazard

Active actions that increase risk, such as arson.

Morale Hazard

Passive or indifferent behaviors that increase risk, such as leaving a candle lit.

Physical Hazard

A physical condition that increases the likelihood of loss.

Transfer (Risk Management)

The act of purchasing insurance to cover losses.

Avoidance (Risk Management)

Choosing not to participate in activities that may result in a loss.

Reduction (Risk Management)

Taking measures to reduce risk, such as wearing a helmet while biking.

Retention (Risk Management)

Maintaining responsibility for loss and paying for losses, also known as deductibles.

Loss Control

Efforts to reduce the likelihood of risk.

Syndicates

Groups of companies or underwriters that join together to insure high-valued properties or high-hazard exposures.

Ideally Insurable Conditions

Conditions that make insurance feasible, such as calculable losses and affordable premiums.

Law of Large Numbers

The principle that as the number of similar units increases, the predictability of losses increases.

Adverse Selection

The tendency for people who are more likely to file claims to seek insurance, driving up costs.

Reinsurance

Insurance that insurers buy for their own risks.

Treaty Reinsurance

A type of reinsurance agreement covering a portion of the ceding company's risks.

Facultative Reinsurance

A reinsurance agreement for a single risk between the ceding company and reinsurer.

Residual Markets

Last resort markets that cover risks when most insurers will not.

Stock Insurance Company

An insurer owned by stockholders.

Mutual Insurance Company

An insurer owned by policy holders.

Fraternal Insurers

Organizations offering insurance primarily as a social benefit.

Reciprocal Insurance Company

An unincorporated group sharing risk, managed by an attorney-in-fact.

Risk Retention Group

A self-managed group assuming risks with similar liability exposures.

Risk Purchasing Group

A group that does not assume liability but buys insurance to cover risks.

Self-Funding Groups

Groups that assume all liability themselves.

Insurer Domicile - Domestic

An insurer organized under state law.

Insurer Domicile - Foreign

An insurer not organized under state law.

Insurer Domicile - Alien

An insurer organized under laws outside of the U.S.

Admitted Insurer

An insurer authorized to transact business in a state.

Excess and Surplus Insurance

Insurance options available when standard markets will not cover a risk.

Actuarial Department

Department that gathers statistical data to determine insurance rates.

Claims Department

Department that manages insurance claims.

Underwriting

The process of selecting which insureds to provide coverage for and setting premium rates.

Rate (Insurance)

The dollar amount charged for a particular unit of insurance.

Loss Reserve

An estimate of amounts an insurer will pay for claims.

Judgement Method (Rating)

A rating method based on an underwriter's experience and judgement.

Manual Rating

A rating system based on predetermined rates contained in a manual.

Merit Rating

A rating system that includes applicant-specific factors in addition to base rates.

Loss Cost Rating

A method using provided rates plus expense and profit projections.

Tabular Method (Rating)

A life insurance reserving method using mortality tables for rate calculations.

Rate Approval - File and Use

Rates must be submitted to the government before usage.

Rate Approval - Use and File

Rates can be changed immediately but must be filed in a set time.

Rate Approval - Prior Approval

Requires prior approval from the Department of Insurance for rate changes.

Loss Ratio

A measure of profitability calculated by dividing paid claims by total premiums.

Expense Ratios

Measure of the operating expenses of an insurance company.

Combined Ratio

A measure of the profitability of an insurance company determined by losses plus expenses.

Loss Reserves

Estimates of future claim payments owed.

Statutory Reserves

Funds required to ensure insurers can meet policyholder claims.

Independent Agent

An agent working independently who owns their own client book.

Exclusive Agent

An agent affiliated with one insurance company, not owning the book.

Insurance Broker

An intermediary who earns commission for placing clients with insurers.

Direct Response Marketing

Insurance marketing without agents using direct means like mail or internet.

Law of Agency

Defines the relationship between the principal (insurer) and agent (producer).

Fiduciary Duty

The responsibility of agents to handle client funds in trust.

Premium Offsets

Refund amounts due to insured must offset future premiums.

Agent’s Authority - Express

Authority explicitly stated in a contract.

Agent’s Authority - Implied

Authority not explicitly stated but needed for incidental duties.

Agent’s Authority - Apparent

Authority that is assumed when an insurer does not intervene.

Agent’s Responsibility

To serve the best interest of both the insurer and the client.

Lost Policy Release

A form releasing the insurer from liability for a policy.

Public Adjuster

A negotiator who represents policyholders in claims negotiations.

Transacting Insurance

The process of soliciting, negotiating, and executing insurance contracts.

Insurance Regulation

Regulation at the state level to prevent overregulation.

NAIC

The National Association of Insurance Commissioners, a standard-setting organization.

ISO

Insurance Services Office, providing data and tools for insurers.

ACORD

Association for Cooperative Operations Research and Development, developing industry standards.