Chapter 15: Insurance Companies Vocabulary Flashcards

A comprehensive set of vocabulary flashcards based on lecture notes regarding Life and Property-Casualty Insurance companies, including regulatory bodies, financial ratios, and policy types.

Insurance underwriter

An individual who assesses the risk of an applicant for coverage to determine whether to accept or reject the risk.

Insurance brokers

Intermediaries who sell insurance contracts to customers.

Life insurance

Policies that provide protection against untimely death, illness, and retirement.

Property-casualty (P&C) insurance

Policies that protect against personal injury and liability resulting from accidents, theft, fire, and other catastrophes.

Annuity contracts

Savings contracts that involve the liquidation of funds saved over a period of time, often considered the reverse of life insurance.

Adverse selection problem

The tendency for customers who apply for insurance policies to be those most in need of coverage, such as individuals with chronic health problems.

Actuaries

Professionals who reduce the risks of underwriting by analyzing mortality, disability, morbidity, and fertility, and applying time value of money concepts.

Ordinary life insurance

Life insurance policies marketed on an individual basis, usually in units of $1,000$.

Term life insurance

Pure life insurance with no savings element where the beneficiary receives a payout only if the insured dies during the coverage period.

Whole life insurance

Insurance that protects an individual over an entire lifetime without an expiration date and allows policyholders to borrow against the cash value.

Endowment life insurance

A policy that combines term insurance with a savings element, paying the face value to the policyholder if they are alive at the contract's expiration.

Variable life insurance

A policy where fixed premium payments are invested in mutual funds of stocks, bonds, and money market instruments.

Universal life insurance

A policy with no expiration where premiums can vary and are invested in mutual funds, with death benefits determined by investment returns.

Group life insurance

A single policy covering a large number of insured persons, typically issued to corporate employers.

Contributory (Group Life)

A group insurance arrangement requiring both the employer and employee to share the cost of the insurance.

Noncontributory (Group Life)

An arrangement where the employer pays the entire cost of the employee's insurance.

Credit life insurance

Insurance that protects lenders against a borrower's death prior to the repayment of a debt contract, such as a mortgage.

Policy reserves

Balance sheet liabilities for life insurers representing the expected future payouts to policyholders, which accounted for approximately $76.9\%$ of total liabilities in $2018$.

Capital and surplus reserve fund

A fund held by life insurers to meet unexpected future losses; in $2018$, this totaled approximately $6\%$ of total liabilities and capital.

McCarran-Ferguson Act of 1945

A federal law that confirmed the primacy of state regulation over federal regulation for insurance companies.

National Association of Insurance Commissioners (NAIC)

An organization that develops the coordinated examination system used by state insurance commissions to supervise and examine insurance companies.

Federal Insurance Office (FIO)

An office created by the Wall Street Reform and Consumer Protection Act of $2010$ to monitor the insurance industry and identify regulatory gaps.

Financial Stability Oversight Council (FSOC)

A council charged with identifying financial institutions that present a systemic risk to the economy and subjecting them to greater regulation.

Property insurance

Insurance coverage related to the loss of real and personal property.

Casualty (Liability) insurance

Insurance that offers protection against legal liability exposures.

Homeowners multiple peril (MP) insurance

Insurance protecting against multiple risks of damage to personal dwellings and property, as well as liability for injury to others.

Loss reserves

Funds set aside by P&C insurers to meet expected losses from underwriting activities.

Loss adjustment expenses (LAE)

The expected administrative and related costs of adjusting or settling insurance claims.

Unearned premiums

A P&C liability representing premiums received for which coverage has not yet been provided because time has not yet passed.

Underwriting risk

The risk that premiums generated on a policy line are insufficient to cover claims and administrative expenses.

Reinsurance

Insurance specifically for insurance companies to help manage risk on their balance sheets.

Loss ratio

A measure of losses incurred to premiums earned; a ratio less than $100\%$ indicates premiums covered the losses.

Expense ratio

Calculated as expenses incurred (before federal income taxes) divided by premiums written.

Combined ratio

A measure of overall profitability for a line, calculated as the loss ratio plus the expense ratio and dividends; in $2018$, it was $99.3\%$.

Investment yield

Calculated as net investment income divided by premiums earned.

Operating ratio

A measure of overall profitability calculated as the combined ratio minus the investment yield.

Underwriting cycle

The historical pattern of fluctuating profit levels in the property-casualty insurance industry.