terms for FIL 250 course
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| Direct loss | Financial loss that results from (is caused by) an insured peril
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| Diversifiable / particular risk (as opposed to Non-diversifiable / fundamental / market risk) | A risk that affects only individuals and not an entire community (where a fundamental risk is one that affects an entire community or large numbers of persons or groups within the economy)
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| Enterprise risk | A term that encompasses all major risks faced by a business, including pure risks, speculative risks, strategic risks, and operational risks
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| Enterprise risk management | A comprehensive program that considers an organization’s pure risks, speculative risks, strategic risks, and operational risks
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| Financial risk | A risk that is faced because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money
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| Hazard | A condition that creates or increases the chance of loss
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| Moral hazard | Dishonesty or character defects in an individual that increases the chance of loss
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| Attitudinal hazard / morale hazard | Carelessness or indifference to a loss because of the existence of insurance
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| Physical hazard | A physical condition that increases the chance of loss
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| Legal hazard | Characteristics of the legal system or regulatory environment that increase the frequency or severity of losses
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| Indirect loss | Financial loss occurring as the result of some other loss (also called consequential loss)
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| Liability risk | Holding an individual responsible (legally and financially) for something that was done which results in bodily injury or property damage to someone else
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| Loss control | Risk management activities that reduce both the frequency and severity of losses for an organization
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| Loss exposure | Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
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| Objective probability (as opposed to Subjective probability) | The long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions. (Subjective probability is an individual’s personal estimate of the chance of loss.)
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| Objective risk (as opposed to Subjective risk) | Relative variation of actual loss from expected loss, which varies inversely with the square root of the number of cases under observation. (Subjective risk is uncertainty based on one’s state of mind.)
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| Peril | A cause or source of loss
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| Personal risks | Risks of financial loss that directly affect an individual (including premature death, poor health, unemployment, and insufficient income during retirement)
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| Property risk | The possibility of having property damaged or lost from numerous causes
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| Pure risk (as opposed to Speculative risk) | A situation in which there are only the possibilities of loss or no loss. (Speculative risk is a situation in which either profit or loss are clear possibilities)
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| Risk | Uncertainty concerning the occurrence of a loss
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| Adverse selection | The tendency of persons with a higher-than-average chance of loss to seek insurance at average rates which, if not controlled by underwriting, results in higher-than-expected loss levels
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| Casualty insurance | A field of insurance that covers whatever is not covered by fire, marine, and life insurance (including auto, liability, burglary and theft, workers compensation, glass, and health insurances)
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| Commercial lines insurance | Property and casualty coverage for businesses, non-profit organizations, and government agencies
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| Commercial general liability (CGL) | A policy drafted by the Insurance Services Office (ISO) containing two coverage forms: an occurrence form and a claims-made form
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| Inland marine insurance | Transportation insurance that provides protection for goods shipped on land, including imports, exports, domestic shipments, means of transportation, personal property, floater risks, and commercial property floater risks
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| Ocean marine insurance | Insurance that provides protection for all types of oceangoing vessels and their cargo as well as legal liability of owners and shippers
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| (expense) loading | The amount that must be added to the pure premium for expenses, profit, and a margin for contingencies
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| Fortuitous loss | An unforeseen and unexpected loss that occurs as a result of chance
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| Indemnification | Compensation to the victim of a loss, in whole or part, by payment, repair, or replacement
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| Insurance | Pooling of fortuitous losses by the transfer of risks to insurers who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risks
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| Law of large numbers | As the number of exposure units increases, the actual loss will more closely approach the expected loss
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| Liability insurance | Coverage for the insured’s legal liability arising out of property damage or bodily injury to others
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| Pooling | Spreading of losses incurred by the few over an entire group of insureds, so that in the process, average loss is substituted for actual loss
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| Requirements of an (ideal) insurable risk | (i) A large number of exposure units
(ii) Accidental and unintentional loss
(iii) Determinable and measurable loss
(iv) Not catastrophic
(v) The chance of a loss must be calculable
(vi) The premium must be economically feasible
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| Risk transfer | Occurs when a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured
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| Social insurance | A government insurance program with certain characteristics that distinguishes it from other government programs: often compulsory, funded by taxes, weighted in favor of lower-income groups, and designed to achieve certain social goals
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| Umbrella insurance | Personal umbrella liability insurance covers against a catastrophic loss from a lawsuit or judgment
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| Captive insurer | Insurance company owned and established by a parent firm in order to insure its loss exposures while reducing premium costs, providing easier access to a reinsurer, and perhaps easing tax burdens
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| Association or group captive | An insurer owned by several parents
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| Pure captive / single parent captive | An insurer owned by only one parent, such as a corporation
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| Risk retention group | A group captive that can write any type of liability coverage except employer liability, workers compensation, and personal lines
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| Avoidance | A situation where a certain loss exposure is never acquired, or an existing loss exposure is abandoned
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| Cost of risk | A risk management tool that measures certain costs, including premiums paid, retained losses, outside risk management services, financial guarantees, internal administrative costs, taxes, fees and certain other expenses
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| Deductible | A provision by which a specified amount is subtracted from the total loss payment that would otherwise be paid
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| Loss frequency | The probable number of losses that may occur during a given period of time
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| Loss severity | The probable size of the losses that may occur
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| Risk control | Risk management techniques that reduce the frequency and severity of losses, such as avoidance, loss prevention, and an automatic sprinkler system
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| Loss prevention | Measures that reduce the frequency of a particular loss
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| Loss reduction | Measures that reduce the severity of a loss after it has occurred
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| Risk financing | Risk management techniques that provide for the funding of losses after they occur, such as retention, non-insurance transfers, and commercial insurance
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| Non-insurance transfer | Methods, other than insurance, by which a pure risk and its potential loss can be transferred to another party, for example, contracts, leases, and hold-harmless agreements
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| Hold-harmless clause | Clause by which one party agrees to release the other from all legal liability, such as a retailer who agrees to release the manufacturer from legal liability if a product injures someone
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| Retention / assumption | Method by which a firm retains all or part of the losses resulting from a given loss exposure: it is most often used when no other method is available, the worst possible loss is not serious, and losses are highly predictable
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| Self-insurance | Retention program in which the employer self-funds or pays part or all of its losses
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| Maximum possible loss | The amount of the worst loss that could happen to a firm during its lifetime
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| Probable maximum loss | The amount of the worst loss that is likely to happen to a firm during its lifetime
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| Risk management | Systematic process for the identification and evaluation of loss exposures faced by an organization or individual, and for the selection and implementation of the most appropriate techniques for treating such exposures
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| Risk management policy statement | Statement outlining the risk management objectives of the firm, as well as company policy with respect to treatment of loss exposures
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| Mutual insurer | Insurance company owned by the policy owners, who elect the board of directors. The board appoints managing executives, and the company may pay a dividend or give a rate reduction in advance to insureds.
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| Advance premium mutual | Mutual insurer that does not issue assessable policies but charges premiums expected to be sufficient to pay all claims and expenses
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| Assessment mutual | Mutual insurer that has the right to assess policy owners for losses and expenses
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| Agent | Someone who legally represents the insurer, has the authority to act on the insurer’s behalf, and can bind the principal by expressed authority, by implied authority, and by apparent authority
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| Broker | Someone who legally represents the insured, accepting applications for insurance that are not in force until the company accepts the business
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| Agency building system | Marketing system in life insurance by which an insurer builds its own agency force by recruiting, financing, training, and supervising new agents
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| General agency system | System in which the general agent is an independent businessperson who represents only one insurer, is in charge of a territory, and is responsible for hiring, training, and motivating new agents
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| Managerial system | System where branch offices are established in various areas and the branch manager is an employee of the company with the responsibility of hiring and training new agents
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| Demutualization | The conversion of a mutual insurer into a stock insurer
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| Direct response system | A method where insurance is sold without the services of an agent; potential customers are solicited by media advertisements
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| Fraternal insurer | Mutual insurer that provides life and health insurance to members of a social organization
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| Independent agency system | A system in which the agent is an independent businessperson representing several insurers. The agency owns the expirations or renewal rights to the business, and the agent is compensated by commissions that vary by line of insurance
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| Lloyd’s of London | World’s leading insurance market that provides services and physical facilities for its members to write specialized lines of insurance
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| Non-admitted insurer | Insurer used only when insurance cannot be obtained from an admitted insurer
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| Reciprocal exchange | Unincorporated mutual insuring organization in which insurance is exchanged among members and which is managed by an attorney-in-fact
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| Stock insurer | An insurance corporation owned by stockholders
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| Non-building agency system | System by which an insurer sells its products through established agents who are already engaged in selling life insurance
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| Personal producing general agent | An above-average salesperson with a proven sales record who is hired primarily to sell life insurance under a contract that provides both direct and overriding commissions
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| Surplus line broker | Specialized broker licensed to place business with a non-admitted insurer
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| Actuary | A highly skilled mathematician who is involved in all phases of insurance company operations, including planning, pricing, and research.
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| Ratemaking | Process by which insurance pricing or premium rates are determined for an insurance company
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| Reinsurance | An agreement by which the primary insurer that initially writes the insurance transfers to another insurer (called the reinsurer) part or all of the potential losses associated with such insurance
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| Ceding company (primary insurer) | Insurer that writes the policy initially and later shifts part or all of the coverage to a reinsurer
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| Retention limit | Amount of insurance retained by a ceding company for its own account in a reinsurance operation
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| Excess of loss reinsurance | Plan where the insurer does not participate in the loss until the actual loss exceeds a certain amount
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| Facultative reinsurance (as opposed to treaty reinsurance) | An optional case-by-case method of reinsurance used when the ceding company receives an application for insurance that exceeds its retention limit
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| Quota share treaty | The ceding insurer and the reinsurer agree to share premiums and losses based on some proportion
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| Surplus share treaty | The reinsurer agrees to accept insurance in excess of the ceding insurer’s retention limit, up to some maximum amount
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| Claims adjustor | Person who settles claims: an agent, company adjustor, independent adjustor, adjustment bureau, or public adjustor
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| Independent adjustor | Claims adjustor who offers services to insurance companies and is compensated by a fee
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| Public adjustor | Claims adjustor who represents the insured and is paid a fee based on the amount of the claim settlement; often employed in cases where the insured and insurer cannot resolve a dispute over a claim, or in a complex loss situation
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| Medical Information Bureau (MIB) | Bureau whose purpose is to supply underwriting information in life insurance to member companies, which report any health impairments of an applicant for insurance
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| Production department | Department where the sales and marketing activities of insurers takes place
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| Securitization of risk | The transfer of an insurable risk to the capital markets through the creation of a financial instrument, such as a catastrophe bond, futures contract, options contract, or other financial instrument
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| Catastrophe bonds | Corporate bonds that permit the issuer of the bond to skip or defer scheduled payments of principal or interest if a catastrophic loss occurs
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| Underwriting | The selection and classification of applicants for insurance through a clearly stated company policy consistent with company objectives
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| Avoidance | A method of handling risk by not allowing the conditions that present the potential for risk to exist
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| Chance of loss | The probability that a (loss) event will occur
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| balance sheet | a summary statement of a company’s assets, liabilities, and difference between assets and liabilities (owners’ equity)
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| income and expense statement | summarizes revenues received and expenses paid over a specified period of time
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| loss reserve | Amount set aside for claims reported and adjusted but not yet paid, claims reported and filed, but not yet adjusted, and claims incurred but not yet reported to the insurer
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| case reserves | loss reserves that are established for each individual claim when it is reported
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| loss ratio method (reserves) | establishes aggregate loss reserves for a specific coverage line where a formula based on the expected loss ratio is used to estimate the loss reserve
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| IBNR (incurred but not reported) | reserve that must be established for claims that have already occurred but have not yet been reported to the insured
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| Ratemaking | Process by which insurance pricing or premium rates are determined
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| loss ratio method of rating | A rating system by which the actual loss ratio is compared with the expected loss ratio, and the rate is adjusted accordingly
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| loading | the amount that must be added to the pure premium for expenses, profit, and a margin for contingencies
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| manual class rating | Rate-making method in which similar insureds are placed in the same underwriting class and each is charged the same rate
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| experience rating | Method of rating group life and health insurance plans that uses the loss experience of the group to determine the premiums to be charged
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| credibility factor | refers to a statistical reliability of the data, this factor (a value ranging from 0.0 to 1.0) increases as the number of claims increases
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| pure premium | the portion of the insurance rate needed to pay losand loss-adjustment expenses
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| pure premium method | A rating system where the pure premium is determined by dividing the dollar amount of incurred losses and loss-adjustment expenses by the number of exposure units
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| gross rate/premium | The sum of the pure premium and a loading element
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| judgment rating | Rate-making method by which each exposure is individually evaluated and the rate is determined largely by the underwriter’s judgement
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| merit rating | Rate-making method in which class rates are adjusted up or down based on individual loss experience
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| retrospective rating | Type of merit-rating method in which the insured’s loss experience during the current policy period determines the actual premium paid for that period
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| schedule rating | Type of merit-rating method in which each exposure is individually rated and given a basis rate that is then modified by debits or credits for undesirable or desirable features
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| loss ratio | the ratio of incurred losses and loss-adjusted expenses to earned premiums
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| combined ratio | sum of the loss ratio and expense ratio
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| expense ratio | That proportion of the gross rate available for expenses and profit. The ratio of expenses incurred to premiums written
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| investment income ratio | compares net income to earned premiums
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| operating ratio | the combined ratio minus the investment income ratio
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| earned vs. written premium | premiums earned during the accounting period as contrasted with premiums written, earned premiums represent the portion of written premiums recognized as income for the portion of the policy period that has elapsed
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| loss adjustment expenses | costs incurred in settling reserved claims
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| policyholder surplus | difference between an insurance company’s assets and its liabilities
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| unearned premium reserve | liability reserve that represents the unearned part of gross premiums on all outstanding policies at the time of valuation
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| admitted assets | those assets an insurer can show on its balance sheet in determining its financial condition
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| alien insurer | Company chartered by a foreign country meeting certain licensing requirements
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| domestic insurer | Company domiciled and licensed in the state in which it does business
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| foreign insurer | Company chartered by one state but licensed to do business in another
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| credit based insurance scoring | A score based on an individual’s credit record and other factors that is highly predictive of future claims costs; insureds with low insurance scores generally file more claims than insureds with better credit and higher insurance scores
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| file and use | Law for regulating insurance rates under which companies are required only to file the rates with the state insurance department before putting them into effect
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| use and file | Law where insurers can put into effect immediately any insurance rate changes, but the rates must be filed with regulatory authorities within a certain period after first being used
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| open competition | Law for regulating insurance rates under which insurers are not required to file rates at all with the state insurance department but may be required to furnish rate schedules and supporting data to state officials
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| guaranty funds | provide for the payment of unpaid claims of insolvent property and casualty insurers
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| Paul v. Virginia | Established the rights of states, and not the federal government, to regulate insurance, ruling that insurance was not interstate commerce
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| South-Eastern Underwriters Association case | 1944 ruling that overturned Paul v. Virginia, finding that insurance was interstate commerce when conducted across state lines and was subject to federal regulation
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| McCarran-Ferguson Act | 1945 law stating that continued regulation of the insurance industry by the states is in the public interest and that federal anti-trust laws apply to insurance only to the extent that the industry is not regulated by state law
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| Financial Modernization Act (Gramm-Leach-Bliley) | states that insurers, banks, and investment firms are no longer prevented from competing in other financial markets not in their ‘core’ area of operations
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| NAIC (National Association of Insurance Companies) | a group founded in 1871 that meets periodically to discuss industry problems and draft model laws in various areas and recommends adoption of these proposals by state legislators
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| Rebating | a practice, illegal in virtually all states, of giving a premium reduction or some other financial advantage to an individual as an inducement to purchase the policy
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| Twisting | illegal practice of inducing a policyowner to drop an existing policy in one company and take out a new policy in another through misrepresentation or incomplete information
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| risk-based capital (RBC) | Under NAIC standards, insurers are required to have a certain amount of capital that is based on the riskiness of their investments and operations
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| Own risk and solvency assessment (ORSA) | a set of processes constituting a tool for decision-making and strategic analysis. It aims to assess, in a continuous and prospective way, the overall solvency needs related to the specific risk profile of the insurance company.
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| actual cash value | Value of property at the time of its damage or loss, determined by subtracting depreciation of the item from its replacement cost
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| adhesion | the insured must accept the entire contract with all of its terms and conditions
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| aleatory contract | One in which the values exchanged may not be equal, but depend on an uncertain event
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| commutative contract | One in which the values exchanged by both parties are theoretically equal
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| binder | authorization of coverage by an agent given before the company has formally approved a policy, which provides evidence that the insurance is in force
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| broad evidence rule | the determination of actual cash value should include all relevant factors an expert would use in determining the value of the property
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| concealment | deliberate failure of an applicant for insurance to reveal a material fact to the insurer
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| conditional contract | an insurance contract with provisions that qualify or place limits on the insurer’s promise to perform
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| conditional premium receipt | when, in life insurance, this receipt is given to the applicant at the time of application when the applicant has paid a first premium and the contract later becomes effective as of the date of application
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| representations | statements made by an applicant for insurance, for example, occupation, state of health, and family history
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| warranty | statement of fact or a promise made by the insured which is part of the insurance contract and which must be true if the insurer is to be liable under the contract
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| material misrepresentation | when an insurer knows the facts would lead to a policy not being issued and misrepresents those facts
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| personal contract and assignment | when the contract is between the insured and insurer and normally cannot be assigned to another party without the insurer’s consent
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| principles of: indemnification | compensation to the victim of a loss, in whole or in part, by payment, repair, or replacement
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| insurable interest | states that the insured must be in a position to lose financially if a covered loss occurs
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| utmost good faith | A higher degree of honesty is imposed on both parties to an insurance contract than what is imposed on parties to other contracts
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| subrogation | substitution of the insurer in place of the insured for the purpose of claiming indemnity from a negligent third party for a loss covered by insurance
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| unilateral contract | one where only one party makes a legally enforceable promise
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| bilateral contract | one where both parties make a legally enforceable promise
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| valued policy | Policy that pays the face amount of insurance regardless of actual cash value if a total loss occurs
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| valued policy laws | Laws requiring payment to an insured of the face amount of insurance if a total loss to real property occurs from a peril specified in the law, even though the policy may state that only actual cash value will be paid
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| declarations page | contains statements in an insurance contract that provide information about the property to be insured and used for underwriting and rating purposes
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| insuring agreement | that part of an insurance contract that states the promise of the insurer
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| conditions | provisions inserted in an insurance contract that qualify or place limits on the insurer’s promise to perform
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| exclusions | provisions in an insurance contract that list perils, losses, and property excluded from coverage
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| endorsements/riders | written provisions that add to, delete or modify the provisions in the original contract
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| deductibles | provisions by which a specified amount is subtracted from the total loss payment that would otherwise be paid
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| straight deductible | one where the insured must pay a certain number of dollars of loss before the insurer is required to make a payment
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| aggregate/calendar year deductible | one in which all covered losses during a year are added together and the insurer pays only when the aggregate deductible amount is exceeded
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| corridor | major medical plan deductible that integrates a basic plan with a supplemental group major medical expense policy
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| elimination period | period during which benefits are not paid, also a period of time that must elapse before disability benefits are payable
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| coinsurance | requires the insured to maintain insurance on the property at a stated percentage of its actual cash value or its replacement cost.
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| all risks/open peril policy | coverage by an insurance contract that promises to cover all losses except those specifically excluded in the policy
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| named perils policy | coverage by an insurance contract that promises to pay only for those losses cause by specified perils listed in the policy
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| pro rata liability | Each company insuring the same interest in a property is liable according to the proportion that its insurance bears to the total amount of insurance on that property
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| contribution by equal shares | requires each company to share equally in a loss until the share of each insurer equals the lowest limit of liability under any policy or until the full amount of the loss is paid
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| primary vs. excess | type of other-insurance provision that requires a primary insurer to pay first in the event of a loss, then when the policy limits under the primary policy are exhausted, the
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| excess insurer pays coordination of benefits | provision in a group medical expense plan that prevents over-insurance and duplication of benefits when one person is covered under more than one group plan
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| named insured | The person or persons named in the declarations section of the policy, as opposed to someone who may have an interest in the policy but is not named as an insured
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| large loss principle | intended to cover large losses that can financially ruin an individual and exclude smaller losses that can be budgeted out of the person’s income
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| balance sheet | a summary statement of a company’s assets, liabilities, and difference between assets and liabilities (owners’ equity)
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| income and expense statement | summarizes revenues received and expenses paid over a specified period of time
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| loss reserve | Amount set aside for claims reported and adjusted but not yet paid, claims reported and filed, but not yet adjusted, and claims incurred but not yet reported to the insurer
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| case reserves | loss reserves that are established for each individual claim when it is reported
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| loss ratio method (reserves) | establishes aggregate loss reserves for a specific coverage line where a formula based on the expected loss ratio is used to estimate the loss reserve
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| IBNR (incurred but not reported) | reserve that must be established for claims that have already occurred but have not yet been reported to the insured
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| Ratemaking | Process by which insurance pricing or premium rates are determined
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| loss ratio method of rating | A rating system by which the actual loss ratio is compared with the expected loss ratio, and the rate is adjusted accordingly
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| loading | the amount that must be added to the pure premium for expenses, profit, and a margin for contingencies
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| manual class rating | Rate-making method in which similar insureds are placed in the same underwriting class and each is charged the same rate
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| experience rating | Method of rating group life and health insurance plans that uses the loss experience of the group to determine the premiums to be charged
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| credibility factor | refers to a statistical reliability of the data, this factor (a value ranging from 0.0 to 1.0) increases as the number of claims increases
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| pure premium | the portion of the insurance rate needed to pay losand loss-adjustment expenses
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| pure premium method | A rating system where the pure premium is determined by dividing the dollar amount of incurred losses and loss-adjustment expenses by the number of exposure units
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| gross rate/premium | The sum of the pure premium and a loading element
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| judgment rating | Rate-making method by which each exposure is individually evaluated and the rate is determined largely by the underwriter’s judgement
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| merit rating | Rate-making method in which class rates are adjusted up or down based on individual loss experience
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| retrospective rating | Type of merit-rating method in which the insured’s loss experience during the current policy period determines the actual premium paid for that period
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| schedule rating | Type of merit-rating method in which each exposure is individually rated and given a basis rate that is then modified by debits or credits for undesirable or desirable features
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| loss ratio | the ratio of incurred losses and loss-adjusted expenses to earned premiums
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| combined ratio | sum of the loss ratio and expense ratio
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| expense ratio | That proportion of the gross rate available for expenses and profit. The ratio of expenses incurred to premiums written
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| investment income ratio | compares net income to earned premiums
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| operating ratio | the combined ratio minus the investment income ratio
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| earned vs. written premium | premiums earned during the accounting period as contrasted with premiums written, earned premiums represent the portion of written premiums recognized as income for the portion of the policy period that has elapsed
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| loss adjustment expenses | costs incurred in settling reserved claims
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| policyholder surplus | difference between an insurance company’s assets and its liabilities
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| unearned premium reserve | liability reserve that represents the unearned part of gross premiums on all outstanding policies at the time of valuation
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