Glossary of Insurance and Risk Management Terms

Copyrighted material excerpted from The National Alliance Research Academy's Essentials Series.


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401(k) Plan – An employer-sponsored defined contribution retirement plan that provides certain tax benefits to both employees and employers.


A


Abandonment – The giving up of property by the insured to the insurance company in order to collect the value of the property rather than restoring or repairing the property.

Absolute Assignment – The transfer of ownership of a life insurance policy to another person or entity. The assignee becomes the new policy owner.

Absolute Liability – Responsibility without regard to fault or negligence.

Accelerated Death Benefit – Payment of a portion of a death benefit to the insured prior to the insured’s death if the insured is diagnosed as terminally ill.

Accident – An unplanned event, definite as to time and place, that results in injury or damage to a person or property.

Accidental Death Benefit – A benefit that typically equals the face value of the contract or principal sum, paid in addition to the face amount of a life insurance policy if the insured dies as the result of an accident.

Accounting – Process to help quantify an organization’s assets, liabilities, stakeholder equities, and cash flows at a point in time.

Accounting Rate of Return (ARR) – In financial management, the measurement of the percentage return of average annual cash flows on initial investment.

Accounting System – Organized set of accounting methods, procedures, and controls to collect, record, classify, and present accurate and timely financial data for use in management decision-making.

Accounts Receivable – Money owed to the insured by the insured’s clients.

Accumulation Phase – The period during which deposits are made and investment earnings accrue between purchase of a deferred annuity and the distribution of funds.

Accumulation Value – During the accumulation period of a deferred annuity, the amount paid for the annuity, plus interest earned, less the amount of any withdrawals and fees.

Acquisition – One organization takes over another organization and is established as the new owner with the ownership interests continuing unchanged.

Act of God (Act of Nature) – An event produced by a physical cause of nature, and not within human control or intervention.

Active Retention – Planned acceptance of losses to be financed internally through the use of deductibles on insurance policies, loss sensitive insurance plans, and deliberate non-insurance. See Passive Retention for the opposite approach.

Activities of Daily Living (“ADL”) – The ability to perform such activities as bathing, dressing, toileting, maintaining continence, transferring, and eating.

Actual Cash Value – Replacement cost less an allowance for insurance depreciation or obsolescence.

Actuarial Services – Provide information for risk financing from the calculation of future payouts of uncertain estimates.

Actuary – An individual who calculates premium rates, reserves, dividends, and other important statistics.

Acute Care – Care requiring constant monitoring and designed to treat or cure an illness, injury, or condition.

ACV – Replacement cost minus depreciation.

Admitted Assets – Assets whose value is included in the annual statement of an insurance company to insurance regulators; include cash and short-term deposits readily convertible into cash, letter of credit capital and investments according to the type of asset permitted by the domicile.

Admitted Company or Admitted Insurer – An insurance company authorized to do business in a state by the state's insurance department, including being subject to the department’s regulations regarding financial security, policy terms, and rating. See Non-Admitted Insurer, Foreign Insurer, Alien Insurer .

Admitted Insurance Company – An insurance company that is authorized and licensed to do business in a state.

Adult Day Care Center – A facility that provides long-term care services to adults during the day.

Adverse Selection – Individuals with poor health who are more apt to apply for or continue insurance than those with average or better-than-average health.

Agency – 1) legal: a relationship, express or implied, wherein one party (principal) delegates authority to another person (agent or proxy) to undertake certain activities for the principal. The agent’s limit of authority and discretionary power depends upon the agreement between the parties; 2) insurance: an office where insurance is sold. It may be directed towards property and liability insurance or life and health insurance, or both. Also, it might be an independent organization or a company subsidiary group. The insurance agent has authority to act on behalf of the principal (the insurance company) according to the agency contract.

Agency Captive – A captive owned by an insurance agency or agencies formed for the purpose of insuring the risks of agency clients or to participate with an insurance company.

Agent – 1) legal: a person granted authority and discretion to act on behalf of another person; 2) a representative of one or more companies, who solicits, completes applications, collects initial premiums, issues binders and/or conditional receipts, delivers policies, and services insurance contracts. As a rule, the agent’s earnings are dependent on premium commissions. Agents are licensed and regulated by the states where they conduct business and are limited by the terms of their company appointment agreements.

Aggregate Excess of Loss (Stop Loss or Loss Ratio) – The reinsurer pays when the ceding company’s aggregate net losses exceed a predetermined amount or proportion of premium income. For example, reinsurance covers 90% of losses in excess of a 70% loss ratio.

Aggregate Limit – The maximum amount of protection for all losses occurring under an insurance policy or funding arrangement during the specified term of the contract (usually one year).

Aggregate Loss Contracts – Similar to LPT’s in how they treat existing losses and the development of premium. However, unlike an LPT, a retrospective aggregate loss contract addresses gaps in past insurance and insurance layers.

Aleatory Contract – A contract in which there is an unequal exchange between parties because the element of chance is involved in performance under the contract.

Alien Insurer – Insurer domiciled outside the jurisdiction of the U.S. and permitted to do business in the U.S. when they provide a specified trust agreement and some sort of financial guarantee that they will not abscond with the premiums and leave unpaid losses. These financial guarantees often take the form of restricted deposits in banks that are part of the Federal Reserve System.

Allocated Loss Adjustment Expense (ALAE) – An expense directly assigned to or arises from a particular claim; examples of ALAE include court fees and outside legal counsel. Also known as allocated loss expense.

Allocated Loss Expense – See Allocated Loss Adjustment Expense.

Alternative Dispute Resolution – Method for resolving legal disputes other than full litigation through formal trial. Three types – Mediation, arbitration, mini-trials or summary jury trials (SJT).

Alternative Risk Financing Facilities – Any risk financing mechanism that does not involve a commercial insurance company, e.g., captive insurers, risk retention group, pools, and individual self-insurance.

Amortization – An accounting concept; expensing (short-term) or capitalizing (long-term) of intermediate term costs (development costs); writing off the value of an intangible asset over its useful life; the periodic reduction in a long-term debt. Also, used to describe the periodic reduction in the book value of a fixed asset through depreciation.

Amount Subject – Total value at risk at a single location regardless of protective measures limited only be adequate separation between structures.

Annuitant – The individual on whose life the annuity is based and normally the person who receives the annuity payment.

Annuitization – The period when annuity benefits are paid.

Annuitize – The beginning of a series of payments from an annuity. This term also refers to the settlement (payout) of life insurance policy proceeds under a contract’s annuity options.

Annuity – Payment of a benefit where an individual receives a regular stream of income for life or for a specified number of years.

Annuity Surrender Charge – A fee charged by the insurer for a partial or full withdrawal of funds made during a specified period.

Any Occupation – The insured is unable to perform the material and substantial duties of his or her own occupation and is not at work in any occupation.

Apparent Authority – Authority an agent appears to have to a reasonable person.

Application – The statement of information given when a person applies for insurance. The insurer underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company’s guidelines. Applications are attached to and made a part of most contracts.

Application Program Interface (API) – Enables machines to interact with cloud software in the same way the user interface facilitates interaction between humans and computers.

Appointment – Providers are selected or appointed to represent the organization for all insurance coverages or for a specific purpose; an insurance procurement provider selection method.

Asset – Anything of commercial value, including real or personal, tangible or intangible property.

Asset Purchase – Buyer purchases specified assets and specified liabilities of the seller. The buyer does not acquire the entire entity.

Assignment – The transfer of all or part of a policy owner’s legal rights under the policy contract to another person or entity.

Assisted Living Facility – A residential licensed facility that provides 24-hour care sufficient to assist clients who need long-term care.

Association Captive – A captive formed by a trade association to insure the risks of its member organizations who are involved in the same or similar industries.

Assumption of Risk – When one knowingly and voluntarily exposes themselves to a known danger.

Attending Physician Statements – Used when an application or medical examiner’s report regarding a life or health insurance applicant reveals conditions or situations, past or present, about which more information is desired. Because of physician-patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to others, such as insurer underwriters.

Auditor’s Opinion Letter – An accounting concept, a report on the auditor’s opinion of the correctness of the information and the freedom from material misstatements.

Auto – A land motor vehicle, trailer, or semi-trailer designed for use on public roads, but does not include “mobile equipment."

Automatic Insureds – Persons who are granted insured status because they fit into a category or class of persons described in the policy provisions.

Avoidance – A risk control technique which totally eliminates an exposure to avoid the chance of a loss; avoidance eliminates both positive and negative outcomes.


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B


Backdating – A procedure for making the effective date of a policy earlier than the application date. Backdating is often used to make the age at issue lower than it actually was in order to get a lower premium. State laws often limit this backdate period to six months.

Bail Out Provision – An annuity contract clause that enables the owner of the contract to withdraw the invested money without surrender penalties if the annual interest rate drops below a certain predetermined minimum rate.

Bailee – Person or organization that has possession of the property of others, usually for storage, repair, or servicing. A dry cleaning operation is a common example of a bailee.

Bailment – Situation in which property of one has been entrusted to another. A bailment can be for the benefit of either party or both. The degree of care owed by the bailee to the bailor differs according to who has the benefit of the bailment.

Bailor – Person or organization that owns property that has been entrusted to another. The owner of a suit who has entrusted it to a dry cleaning operation for cleaning is a bailor.

Balance Sheet – An accounting concept, a measurement of the assets and equities (liabilities and owners’ equity) in an organization as of a specific point in time.

Ballast Value (B Value) – In computing workers compensation experience modifications, a specific value taken from a rating manual table used to limit the effect of a single severe accident on the modification factor. The B Value has the effect of dampening swings in the experience modification factor.

Basic Medical Policy – Provides limited benefits for hospital services, supplies and some physician expenses.

Basic Premium – In retrospectively rated plans, usually a percentage of the standard premium, often determined by multiplying the standard premium by a basic premium factor. It provides for insurance carrier expenses including loss control and commission, profit, contingencies, and an adjustment for limiting the retro premium between the minimum and the maximum retrospective premiums.

Basic Premium Factor – In retrospectively rated plans, a factor based on the Table of Expense Ratios, the Table of Insurance Charges, and the individual loss limitation if selected.

Basic Rate – Manual rate that is adjusted to compensate for varying exposure to risk.

Benchmarking – The process of comparing an organization’s business processes and performance measures to another organization’s processes and performance measures to provide a “snapshot” of the organization’s performance and where it is relative to another standard.

Beneficiary – An individual who is eligible to receive or is receiving benefits under an insurance policy. See also Irrevocable Beneficiary, Primary Beneficiary, Secondary Beneficiary, and Contingent Beneficiary.

Benefit Level Adjustment Factor – Factors calculated for each state by the National Council on Compensation Insurance (or other workers compensation rating agencies) representing the impact of regulatory changes on workers’ compensation costs. Benefit level adjustment factors are used to trend historical losses to current benefit levels.

Benefit Period – The maximum length of time benefits are paid.

Benefit-Cost Ratio – Discounted values of the cash inflows divided by the net investment. Used to compare the net present value (NPV) of various projects, particularly when funds are limited or when the projects require differing investment commitments.

Binding Authority – Authority that is granted to the insurance agent as outlined in the company’s agent contract.

Bodily Injury – Bodily harm, sickness, or disease, including death that results from the harm, sickness, or disease.

Bond – Contract that guarantees the performance of a contract, as in surety bonding, or protects against the dishonesty of employees, an in fidelity bonding. Unlike many contracts and all insurance contracts that have two parties, a surety bond has three parties: the surety (the guarantor), the principal or obligor, (the one to whom the obligation is owed), and the obligee (the party who owes the obligation).

Book Value – Historical cost less accumulated depreciation as recorded on the organization’s accounting records.

Bottom-up Pricing – Commonly known as loss rating; losses are trended to ultimate values for a pre-set number of years; units of exposure are trended for those same years and the total ultimate loss is divided by the total number of exposures to create the loss rate per exposure unit; the loss rate is grossed up to include various expense components, e.g., company underwriting expenses, brokerage commissions, loss control expenses, claims handling expenses, taxes, surcharges or assessments.

Breach – Failure to live up to the conditions or warranties contained in a contract.

Broad or Bulk IBNR – Additional development on known claims or the increase in reserve value as the claim is investigated and settled.

Broker – An individual who acts or aids in the negotiation of insurance contracts, in placing risks, or in soliciting or effecting contracts, as the agent of the applicant/buyer and not as the agent of the insurance company.

Budgeted Losses – Planned retention based upon the portion of expected losses the organization is willing and able to retain.

Burglary – The taking of property from within a premises by a person unlawfully entering or breaking out of a premises as evidenced by marks of forcible entry or exit.

Business – Includes trade, profession, or occupation.

Business Decision – As related to the Business Judgment Rule, action must be taken in making business decisions. Not taking action is protected if it results from a conscious decision not to act.

Business Ethics – Knowing what is right or wrong in the workplace and then doing what is right; fundamental ground rules of our work lives; the process of instilling into a company’s workforce a sense of how to responsibly conduct business. See Ethics.

Business Income – Net income (net profit or loss before income tax) that would be earned and continuing normal operating expenses (including payroll).

Business Judgment Rule – Single most powerful defense available to a director or officer and recognizes that not all decisions of the directors or officers will benefit the organization or its stakeholders. In order to be available, the following five elements must be satisfied: business decision, disinterestedness, due care, good faith, and no abuse of discretion.

Business Overhead Expense Coverage – Insurance coverage that enables a business to remain open while the key person or business owner is disabled and unable to work.

Buy-Sell Agreement – An arrangement for the orderly disposition or transfer of a business interest that spells out what events specifically trigger the disposition of the business interest and often include the business owner’s death, disability or retirement.


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C


Cancellable Policy – A policy, typically disability insurance or long-term care insurance, that can be cancelled at any time, or at a specified time, by the insurer.

Cancellation – The termination of the insurance policy by either party.

Captive Expenses – Include management and acquisition expenses, domicile expenses such as annual licensing fees, actuarial expense, letter of credit expense, and other expenses not related to losses.

Captive Insurer – A closely held insurance company whose insurance business is supplied by and controlled by its owners and in which the insureds are the beneficiaries (adapted from “Captive Insurance Company Reports”). As such, it is a separate legal entity from its organizers subject to insurance regulation by the appropriate regulatory body or bodies.

Captive Pool – Group of individually owned captives that combine to reinsure one another; risk sharing among captives. See Pooling.

Case Management – A team that carefully reviews and monitors the entire treatment process when unusually high expenses are projected or incurred for a condition.

Case Reserve – Amount the claims adjuster puts on an individual claim that has not yet been paid; there is no provision for development and IBNR (incurred but not reported). Also known as claim reserve.

Cash Discounting – Used to prepare cost-benefit analyses to determine the present value (or today’s value) of a future cash flow and/or determine the future value (or tomorrow’s value) of today’s cash flow.

Cash Flow – Measure of cash flowing through an organization arising from operations, financing, and investing activities.

Cash Flow Plan – Insurance plans or retention plans that allow the insured, rather than an insurance carrier, to derive benefits from holding unused funds, either in the form of unpaid loss reserves or deferred premiums.

Cash Value (Cash Surrender Value) – The amount of cash due an insured who surrenders a Cash Value Life Insurance policy.

Casualty Actuarial Society (CAS) – Professional society for actuaries in areas of insurance work other than life insurance. This society grants the designation of Associate and Fellow of the Casualty Actuarial Society (ACAS and FCAS).

Causality – In statistics, the relationship between one variable and another variable where the second variable is a direct consequence of the first.

Cede – To transfer to a reinsurer all or part of the risk.

Ceding Commission – Commission paid by the reinsurer to the primary insurer for the placement of the reinsurance. It is analogous to the commission paid to the producer of primary insurance.

Ceding Company – Direct or primary insurer that contracts with a re­insurer to share all or a certain portion of the losses it has assumed under insurance contracts in return for a stated premium.

Central Limit Theorem – In statistics, the theorem states that with an appropriately large sample, commonly values >30, that sample’s average can be treated as if it were drawn from a normal distribution.

Certificate of Coverage – A document that contains contract provisions of the policy.

Cession ‑ transaction that transfers liability from the ceding company to the reinsurer.

Children’s Health Insurance Program of 1997 (“CHIP”), as amended by the Children’s Health Insurance Program Reauthorization Act of 2009 (“CHIPRA”) – A federal regulation that is an extension of Medicaid that provides comprehensive benefits to children whose parents earn too much money to qualify for Medicaid, yet cannot afford to buy private insurance.

Civil Law – Protects the interests of individuals.

Claim – A demand or obligation for payment as a result of a loss.

Claim Reserve – See Loss Reserve.

Claims Management – Prompt resolution of an organization’s losses subject to insurance or an active retention program including claims by other entities to whom it may be legally or ethically bound.

Claims Run – See Loss Report.

Closed-Panel HMO Model – The most restrictive HMO structure requiring insureds to receive benefits exclusively from contracted providers and facilities.

Coefficient of Determination – In statistics, the coefficient of determination, or r2, ranges between 0 and 1, and describes the strength of the regression relationship, or how well the regression line fits the data. The closer to 1, the stronger the relationship.

Coinsurance – A rating and underwriting concept that is designed to encourage an insured to purchase an amount of insurance nearly equal or equal to the full value of the property being insured.

Collapse – The caving in or giving way of a building or structure.

Collateral – Property, usually in the form of funds or personal property, pledged to secure a debt or a loan; risk management definition of collateral – Property, usually in the form of funds or liquid personal property, pledged to an insurance carrier to secure a payment of losses under a loss sensitive risk financing arrangement.

Collateral Assignment – Assignment of a life insurance policy or its value as security for a loan. In the event of death of the assignor (owner/insured), the creditor (assignee) would receive proceeds or values only to the extent of its interest.

Combination Allocation Method – Each unit is assigned costs in a layered allocation model or a blended model that balances a mix of exposure-based and experience-based allocations based on relative percentages of exposures or experience.

Combined Ratio – A ratio that combines the company’s loss ratio and the company’s expense ratio.

Common Law – Body of law consisting of prior precedents or rulings by judges and juries as to the facts of a case. These rulings form codes of conduct that apply to situations involving tort or contract law. Sometimes, common law is referred to as stare decisis, “let the decision stand” or res judicata, “the matter has been decided.”

Common Stock – Share or shares of ownership in a corporation with rights to vote on management and corporate policy but not preferred over other classes of stock in regard to the payment of dividends or distribution of assets. Dividends are not guaranteed, but common stock is usually the only class of stock with voting rights. See Preferred Stock.

Communication – Process of exchanging information using a shared set of symbols and a means of transmission; can range from very informal to very formal and from interpersonal to impersonal.

Commutation – A provision that disburses the experience account back to the insured according to the original account

Commutation Right – The right of a beneficiary to receive in a single lump-sum the remaining payments under an installment option selected for the settlement of the proceeds of a life insurance policy.

Comparative Negligence – A defense based on a statutory modification of contributory negligence in which both parties are negligent and damages are apportioned between them according to their comparative degrees of negligence.

Compensatory Damages – Money awarded in a civil lawsuit to make an injured person whole, including recompense for damaged property, lost wages or profits, pain, bereavement, medical expenses, etc.

Competent Party – Under contract law, a party having legal capacity to enter into a contract, e.g., of legal age, mental capacity to understand the contract, and absent of duress.

Compounding – When an investor’s asset generates earnings and those earnings are reinvested back in the asset.

Comprehensive Major Medical Policy – Combines basic coverage and major medical coverage into one comprehensive policy that provides benefits for most medical expenses. Comprehensive Major Medical policies represent the majority of employer-sponsored plans and are commonly chosen by purchasers of individual policies because they provide the insured with the greatest level of benefits. PPACA requires all policies to include preventive care. Examples of covered expenses may also include: inpatient and outpatient hospital care, surgical expenses, physician office expenses, therapy (speech, physical, or occupational), chiropractic care, durable medical equipment, mental health services and prescription drug coverage.

Concealment – The intentional deceit of a person or organization by failing to disclose complete and correct information.

Conceptual Bidding – Providers are invited to present general proposals, ideas, or concepts for handling the insurance coverages and services without specific pricing of any coverage or service; the selected provider has complete access to the entire insurance market.

Conditional Contract – An insurance contract in which the insurer’s promise is conditioned upon (dependent upon) certain things occurring or being done.

Conditional Receipt – A form normally required to be signed by an agent and given to a prospective life insurance policy insured/owner at the time a new application is completed.

Confidence Interval – In statistics, set of numbers believed to include an unknown population parameter.

Conflict of Interest – Situation that places one between the duty to the employer and the employee’s own self-interest; including a situation that has the appearance of a conflict of interest even though an actual conflict does not exist.

Consequential (Indirect) Loss – A loss or damage that results from an insured’s inability to use his/her property because of direct loss to the property of others.

Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) – A federal regulation that requires employers with 20 or more employees in a prior year to allow employees and their covered dependents who lose employer-sponsored health benefits the right to elect to continue the group benefits for limited periods of time.

Consumer-Driven Healthcare (“CDHC”) – Originated in the late 1990s with the intention of increasing healthcare consumer awareness of the rising cost of healthcare by developing mechanisms that require consumers to be more actively involved in decisions that impact the associated health-related and financial consequences of those decisions.

Contestability Period – The time period during which the insurer is not obligated to pay a claim (usually two years, but depending on state law) because of material misrepresentations found in the application or in information obtained by the insurer. A policy becomes “incontestable” when the contestability period is over. Courts refer to this as a “time limit on certain defenses.”

Contestable Clause – A provision in an insurance policy setting forth the conditions and the period of time during which an insurer may contest or void a policy.

Contingent Beneficiary – The person who receives death benefits when a primary beneficiary does not survive the insured.

Contract Law –body of law that governs the performance of a promise. An enforceable contract must have the following four characteristics: competent parties, agreement or assent, legal consideration (exchange of values), and legal purpose.

Contractual Liability – Liability of another party assumed under a contract or agreement, either expressed or implied, as opposed to liability incurred directly, as in tort.

Contractual Risk Transfer – Assumption or limiting exposures of certain liabilities relating to another party. See Non-Insurance Risk Transfer.

Contribution by Equal Shares – When a Liability Insurance policy says it and another company will pay a share of the loss equally until either the loss is paid or the Liability Insurance policy has paid its limits.

Contributory Negligence - when a person or organization adds in any way to his/her own injury and is barred from recovery.

Contributory Plan – A group health plan structured so the employer and employee share in the cost of the plan.

Controlling – The actions a risk manager takes to assess, regulate, and monitor work-in-progress and completed work; an element of the managerial process

Convertibility – The right of a policy owner to exchange an existing policy for another insurance policy offered by the same insurer.

Coordination of Benefits – Provision found in group health policies, specifying how benefits will be paid when more than one insurer covers an insured.

Copayment – A flat fee the insured pays each time covered services are provided or prescription drugs are purchased and is paid directly to providers, facilities or prescription drug dispensing entities.

COPE – A term referring to a structure’s construction, occupancy, protection and exposure.

Corporation – A legal entity considered to be a separate tax and legal entity having an existence that is separate and distinct from its owners.

Correlation – Relationship of two or more variables; correlation does not imply causality.

Correlation Coefficient – In statistics, a measure of the strength of a linear relationship between two variables ranging from -1 to +1. When the correlation coefficient r = 0, there is no relationship; when r is positive, the variables move together; when r is negative, the variables move in opposite directions. The closer to the extreme values, the stronger the relationship.

Cost Containment – Also known as managed care, provides appropriate and adequate medical care consistent with an insured’s healthcare needs, while avoiding unnecessary medical services and related expenses.

Cost of Capital – Cost associated with various sources of financing to the organization and used to determine which alternative applications of funds are cost effective and should be undertaken.

Cost of Goods Sold – 1) labor, material, and overhead expenses including inventory shrinkage; 2) the purchasing or production costs and expenses, both direct and indirect, of the merchandise sold during a certain period. These expenses include raw materials, direct and indirect labor costs, plant costs (such as depreciation), electricity, water, and shipping costs.

Cost Sharing – Where insureds pay part of health insurance costs through deductibles, copayments, and coinsurance.

Cost-of-Living Rider – Policy wording change or form designed to adjust policy benefits in relation to the change in the economic climate. The majority of such riders are tied to changes in the Consumer Price Index (“CPI”). The amount of insurance may be automatically increased, without evidence of insurability, at predetermined periods, up to a maximum amount.

Coverage Ratios – Measure the ability of the organization to meet interest requirements.

Covered Expenses – All medical services covered by an insurance policy. Some health insurance plans will have a list of medical services they do not cover.

Credibility – In statistics, relative confidence (statistical reliability) associated with a given body of data (e.g., loss experience for an individual division) and expressed as a number between zero (0%) and 1.0 (100%) with 1.0 representing “full credibility.”

Credit Risk – A risk faced by finite risk insurers when paid losses exceed the premium payments made by the insured, either during the policy term or once the term has expired’ the longer the term, the greater the credit risk.

Criminal Law – Body of law that protects the interests of society.

Crisis – Any critical incident that involves death, serious injury, or threat to people; damage to environment, animals, property and/or data; disruption of operations; threat to the ability to carry out organizational mission and goals; and/or, threat to the financial welfare and image of the organization.

Crisis Management – Act or process of managing a crisis to prevent the occurrence of a catastrophic loss, if possible, and reduce the impact of catastrophic losses to the organization.

Critical Illness Supplemental Policy – Pays an up-front, lump-sum benefit on a tax-free basis when an insured receives a diagnosis of a critical illness or condition listed on the policy and satisfies the survival period.

Cross Section Analysis – An analysis that compares the organization’s performance with that of other organizations or divisions.

Current Assets – Cash or other assets that will be (or could be) converted into cash or consumed within an organization's normal operating or accounting cycle (usually the next twelve months).

Current Liabilities – Liabilities that are expected to be paid within one year; short-term obligations.

Current Ratio – A liquidity ratio that measures the organization’s ability to pay bills over the short term; current assets divided by current liabilities.

Custodial Care – In health or LTC insurance, the care that is needed for personal needs such as eating, dressing, and bathing, which can be provided by an individual with non-medical skills.


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D


Damages – A sum of money that compensates an injured party (an individual or organization).

DART Rate – A Bureau of Labor Statistics measure of injury and illness cases involving days away, restricted duties, or transfer to other duties during a return-to-work phase. The statistic is expressed as the number of DART cases per 100 full-time workers, divided by the number of employee hours worked.

Death Benefit – The dollar amount of coverage that is paid to the designated beneficiary(s) of a policy upon the insured’s death.

Debt Ratios – Financial ratios measuring the ability of an organization to repay its creditors over the long term. Also a measure of the degree of leverage, or the use of fixed cost financing (e.g., long-term debt and preferred stock) in the capitalization of the organization.

Debt to Equity Ratio – Measure of the relationship of debt to equity; total debt divided by stockholders’ equity.

Decreasing Term Life Insurance – Provides a death benefit that declines throughout the term of the contract, reaching zero at the end of the term.

Deductible – The amount of loss under an insurance policy, which an insured must pay before the insurance company will pay its portion of the loss.

Deductible Plan – A loss sensitive insurance plan in which the insured agrees to reimburse the insurer for a specified amount for each claim.

Deferred Compensation – A plan that allows selected individuals to defer receipt of current income in favor of a delayed benefit, in accordance with a written agreement with his or her employer.

Defined Benefit (“DB”) Plan – A plan that traditionally provides lifetime monthly annuity payments to a retiree, typically determined by a formula based on an employee’s personalized factors such as compensation, age at retirement, or length of service.

Defined Contribution (“DC”) Plan – A plan that allows participants and plan sponsors (optional) to contribute to a participant’s retirement account within the plan, but does not guarantee a specific benefit at retirement.

Depletion – An accounting concept; the reduction in inventory and a charge against income for the use of natural resources, e.g., oil, coal, forest growth.

Deposit Premium – The basic premium plus the full amount of the premium tax loading on the standard premium plus an escrow amount to provide for the initial payment of claims.

Depreciation – 1) an accounting concept, generally for tax management, that allows for the setting aside of funds to replace assets as they wear out by providing an expense to reduce income; 2) in insurance, a reduction in the settlement of a property claim to recognize wear and tear or obsolescence.

Development Factor – Factor designed to correct errors when estimating the reserves for known but unsettled losses and to make an allowance for incurred but not reported (IBNR) losses. See also Loss Development Factor.

Direct Loss – A loss or damage as a direct result of a covered peril or cause of loss.

Direct Mail (Direct Response) System – The writing/selling of insurance by mail or phone.

Direct Writing System – A system where the direct writer producer is an employee of the insurer and not an independent contractor.

Directors and Officers Liability – Liability resulting from a director or officer of an organization committing a negligent act or omission, misstatement or misleading statement.

Disability – A physical or mental incapacity.

Disability Benefit – The benefit payable under a disability income policy or a disability provision of some other policy, such as a life insurance contract.

Disability Income Insurance – Provides a portion of income lost as the result of a total or partial disability.

Disappearance – When an insured once had the money and/or “securities," and now does not know where they are.

Discount Rate – The organization’s average cost of capital, or its weighted cost of capital, commonly referred to as the WACC.

Discount Ratio (D-ratio) – Factor used in the workers compensation experience modification plan to separate the expected total losses into primary and excess losses. A D-ratio is the normal ratio of primary expected losses to the total expected losses, and varies by state and by classification code.

Discounted Losses – Liability estimates that have been reduced to reflect the potential to earn investment on funds set aside to pay losses which have occurred but not yet been paid.

Disinterestedness – As related to the Business Judgment Rule, a decision must be made in an independent and disinterested manner without expecting personal financial benefit unless the decision results in a benefit to the organization and all of its stakeholders.

Dividend Plan – A dividend plan is a guaranteed cost plan with a dividend option.

Dividends – Distributions to shareholders of a corporation’s earnings. Dividends can also be distributed to policy owners of participating insurance policies that are usually issued by mutual insurance companies. Insurance company dividends are considered a return of excess premium and are therefore non-income taxable. In either case, dividends are not guaranteed.

Doctrine of Reasonable Expectations – During a dispute being decided by the courts, the courts ask what a reasonable person would expect in a particular situation.

Domestic Insurance Company – One that is domiciled in a particular state, admitted or permitted to operate in their state of domicile and are closely regulated in that state with respect to their financial condition and possibly with respect to what policy language or forms they use and what rates they charge, although there has been a trend in commercial consumerism that has loosened some of the traditional strictures on rates and forms in recent decades.

Domestic Insuror – An insurance company that is incorporated in, domiciled in, and organized under the laws of a state.

Domicile – Legal and regulatory jurisdiction under which an insurance company chooses to be formed and operate.

Double-Declining Balance Depreciation – An accelerated depreciation method used for tax management purposes.

Due Care – As related to the Business Judgment Rule, a decision must be made based on reasonable and relevant information.

Due Diligence – Actions taken to investigate documents and records of a business and/or person prior to examination of a proposed action before it is undertaken, executing a contract or entering into a business transaction; to assess the health and viability of a business or entity; and/or to perform an investigation of a business, situation, activity or person to assist with effective decision-making. Steps include identification, review and analysis, reporting and post-transaction.

Duration of Benefits – The length of time long-term care insurance will pay maximum daily benefits.


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E


Earned Premium – Amount of the premium that has been “used up” during the term of a policy; for example, if a one-year policy has been in effect six months, half of the total premium has been earned.

Earned Surplus – Cumulative net income.

Earnings per Share (EPS) – After-tax net income divided by number of common shares of stock outstanding.

Economic Risk – A general class of risk; risks arising from operations, economy, financial marketplace or entrepreneurial activities.

Economic Value – Future stream of income assigned to the property.

Effective Date – The date an insurance policy goes into effect, sometimes referred to as the policy date.

Eligibility Requirements – Requirements imposed for an individual to have eligibility for coverage.

Elimination Period – The length of time an insured must be disabled under a disability income and long-term policy before receiving benefits.

Emerging Risk – New exposures to loss for which a risk treatment has not been implemented; existing exposures to loss that are evolving, difficult to quantify and may have a major financial impact on the organization.

Empirical Rule – In statistics, the rule that nearly all values lie within 3 standard deviations of the mean for a normal distribution.

Employee – A person in the service of another under a contract of hire, who acts under the direction and control of the person who hired him/her.

Employee Benefit Plan – Any plan, fund, or program established or maintained for the purpose of providing employee benefits to its participants or beneficiaries (ERISA).

Employee of an Insurance Company – An agent of the company in a limited agency capacity.

Employee Participation – A percentage of eligible employee participation required before an insurer will write an employer-sponsored group plan.

Employee Pension Benefit Plan – Any plan that provides retirement benefits to employees or defers income for employees to periods after termination of employment

Employee Retirement Income Security Act of 1974 (“ERISA”) – A federal regulation enacted to protect participants and their beneficiaries. ERISA contains provisions that stand on their own and also added or amended provisions of the IRC. ERISA sets minimum standards that a plan must meet in order to receive favorable tax treatment. ERISA preempts a large part of state laws and provides an enforcement mechanism, mainly through the Employee Benefits Security Administration (“EBSA”), a division of the US Department of Labor (“DOL”). ERISA does not apply to state and local government plans, public school teachers and administrators, most church plans and plans covering federal government employees.

Employee Welfare Benefit Plan – Any plan that provides medical care or benefits for sickness, accident, disability, death, unemployment, vacation, training, day care, scholarships, or prepaid legal services, or any other plan as described in the Labor Management Relations Act.

Employer Contribution – The amount of premium an employer pays for employees and their dependents under the employer-sponsored group plan.

Endorsement – Used by an insurer to clarify or make revisions to particular provisions of a policy. Also called “riders.”

Endowment Life Insurance Contract – A type of permanent life insurance where the cash value will be equal to the originally chosen face amount/death benefit at a predetermined future date.

Enterprise Risk Management (ERM) – A systemic process of identifying, analyzing, assessing, and responding to all risks, regardless of the source, that affects the achievement of an organization’s strategic and financial objectives positively or negatively. (CRM definition).

Entity Purchase – Buyer purchases all ownership interests of the entity.

Equity Indexed Life Insurance – A form of whole life, universal, or variable life insurance with the cash value account tied to a stock index, most commonly the Standard & Poor’s 500 Index (“S&P 500 Index”).

Ergonomics – 1) the applied science of equipment and workplace design intended to maximize productivity by reducing operator fatigue and discomfort; 2) fitting the work environment to the person rather than expecting the person to adapt to the physical work environment.

Estate Tax – A tax payable to the federal government due to the death of an individual. It is a transfer tax based on the value of owned assets of the deceased.

Estimated Premium – Amount of premium charged at the time a policy is issued. The estimated premium based on estimated exposures times the negotiated premium rate. This amount may be subject to adjustment during the policy term in case of changes in coverage or additional underwriting information.

Estoppel – The removal of a right or claimed position by acting in a manner that is inconsistent with that right or position.

Ethical – Pertaining to standards of right conduct or practice arising out of ethics.

Ethics – Moral principles of a group or individual as developed over time and with life experiences. See Business Ethics.

Evidence of Insurability – A statement of information and proof of health condition for underwriting of an insurance policy.

Ex gratia Payment – “from favor”, a payment to a claimant without regard to legal liability.

Excess Insurance – Insurance protection for limits above those contained in a primary policy or above a self-insured retention. Excess insurance usually does not include a duty to provide a defense, and typically does not provide any loss control or claims services.

Excess of Loss Reinsurance (non-proportional) – An agreement to share specified losses. The reinsurer indemnifies the primary insurer for the amount of loss in excess of a specified retention. The retention amount can be stated as either a dollar amount or a percentage amount. The reinsurer does not participate in losses until a loss exceeds the amount retained by the primary insurers.

Excess per Occurrence – The reinsurer pays only when the aggregate loss from any one occurrence exceeds the predetermined retention of the ceding company. The primary use of excess per occurrence is to protect the insurer from a widespread catastrophic loss. For example, $750,000 excess of an aggregate of $250,000 in claims arising from any one occurrence.

Excess Premium – Premium that is not a part of a loss sensitive rating formula. In a retrospective rating plan, the excess premium usually purchases the excess insurance (over the selected loss limits, not to be confused with insurance in excess of primary coverage or a self-insured retention). The excess premium is a guaranteed cost premium and not adjustable based on losses. In a retrospective rating premium plan, the excess premium is not subject to the retrospective rating formula. See also Non-Subject Premium, a related concept.

Excess Reinsurance – A form of Treaty reinsurance, where no insurance is ceded, only the losses are ceded.

Exclusions From Coverage – Exclusions vary from one policy to another and limit or eliminate the insurer’s exposure to certain types of losses that are catastrophic in nature, beyond the scope of the specific policy, or are uninsurable by the very nature of the loss.

Exclusive Agency System – A system made up of agents who represent only one insurance company or a group of companies under common ownership or control.

Exclusive Provider Organization (“EPO”) System – A network of medical care providers structured in a similar manner to a PPO but have many of the requirements of an HMO.

Exculpatory Agreement or Clause – Pre-event exoneration of the fault of one party that results in any loss or specified loss to another.

Expected Loss Costs – Initial estimate of losses for a given policy period.

Expected Loss Rate (ELR) – When computing workers compensation experience modifications, the factor taken from actuarial tables used to calculate total expected losses for the specific classification given the audited exposures.

Expected Losses – Projection of the frequency and/or severity of losses based on loss history, probability distributions, and statistics; the expected loss projection is commonly called a “loss pic” or “loss pick.”

Expected Mortality – The expected incidence of death within a given group during a given period of time, as shown in a mortality table developed by actuaries.

Expense Constant – Expense factor (usually expressed as a dollar amount) added to the premium charged for a class of policies that would otherwise produce insufficient premium to cover the cost of issuing and servicing them.

Expense Ratio – Ratio of underwriting expenses for a given period divided by the earned premium for that period.

Experience Account – An account held by an insurer funded through the initial premium and subsequent premium deposits, if any.

Experience Modifier – Factor developed by measuring the difference between the insured’s actual past experience and the expected experience of the class. The factor may be either a debit or credit (greater than or less than 1.0). When applied to the manual premium, the experience modification produces a premium that is more representative of the actual loss experience of an insured.

Experience Rating – Describes any plan that uses the past loss experience and exposure levels of the individual risk as a basis of determining premiums.

Experience-Based Allocation Method – Each unit is assigned costs on an equitable basis based on the loss experience each unit presents.

Experienced Mortality – The mortality that actually occurs to a group of insureds in contrast to expected mortality.

Exposure – A situation, practice or condition that may lead to an adverse financial consequence; an activity or resource; people and assets.

Exposure-Based Allocation Method – Each unit is assigned costs on an equitable basis based on the exposures each unit presents.

Express (Actual) Authority – Authority expressly given by the insurer, either orally or in writing.

Extended Death Benefit – A group policy provision that pays a life benefit when (1) the insured is totally and continuously disabled at the time the policy owner stops paying premium until the insured’s death, and (2) if the insured dies within one year of the date the premium payments stopped, or prior to age 65.

External Financing – Using other funds other than the organization’s funds for the financing of losses, e.g. insurance, borrowing and contractual transfer.


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F


Face Amount – The amount of coverage provided by a life insurance policy, also referred to as coverage amount or death benefit.

Facultative (or Specific) Reinsurance – A form of reinsurance using offer and acceptance of individual risks, in which under a contract of reinsurance, the reinsurer retains the faculty to accept or reject each risk offered by the ceding company.

Facultative Reinsurance – Each exposure that the ceding company wishes to reinsure is offered to the reinsurer as a single transaction. The reinsurer underwrites every loss exposure individually upon its submission from a ceding company. The reinsurer is not obligated to accept any or each submission. Each transaction is individually negotiated with respect to terms, conditions, and pricing.

Family and Medical Leave Act of 1993 (“FMLA”) – A federal regulation that provides employees who have been employed at least 12 months and have worked at least 1,250 hours within that 12 month period up to 12 weeks of unpaid, job-protected leave per year, while maintaining the employees group health benefits during the leave.

Family Member – A person related to the insured by blood, marriage, or adoption who is a resident of the insured’s household.

Fiduciary – 1) under common law, liability imposed upon a party who stands in a special relationship of trust with another party for a breach of that trust; 2) under the Employee Retirement Income Security Act of 1974 (ERISA), liability imposed upon any person who exercises any discretionary authority or control with respect to the management or administration of an employee benefit plan or its assets.

Finance – Process of managing an organization’s assets, liabilities, and cash flows to maximize shareholder (or stakeholder) wealth.

Financial Risks – Risks related to an organization’s financial activities resulting in upside and downside outcomes.

Finite Risk Insurance – Used by primary insurance companies and large self-insurers; the accepted term used to describe a spectrum of loss financing concepts that combine internal and external risk financing and involves traditional insurers in a non-traditional manner. Also referred to as “financial insurance.”

First In, First Out (FIFO) – An accounting method used to value inventory and the cost of goods sold. Sales are considered to be made against the earliest-purchased or produced merchandise or inventory. Total inventory cost shown on the income statement is based on the cost of the earliest items removed from inventory.

First to Die – Insurance policy on two lives, with a death benefit to be paid to the surviving insured upon the death of one of the insureds (also called joint-life).

Fixed Assets – Assets with an expected life in excess of one year.

Fixed Benefit – A benefit, the dollar amount of which does not vary.

Fixed Cost – Costs that do not vary with the level of output, especially fixed financial costs such as interest, lease payments, and sinking fund payments.

Fixed-Amount Installments – Fixed, periodic benefit payments are made until the principal and interest are exhausted.

Fixed-Period Installments – Benefits are guaranteed to be paid in equal installments for a specified period of time.

Fixed-Term Life Insurance – Insurance that pays out a death benefit when the life insured dies during the term of the policy.

Flexible Premium Variable Life – A whole life contract and a security vehicle that features flexible premium payments, non-guaranteed cash values and either a minimum guaranteed death benefit or no guaranteed death benefit. Policy values are dependent on the performance of a separate account.

Force Majeure – In the law of insurance, a superior or irresistible force. Also common to construction contracts to protect parties in the event that a part of the contract cannot be performed due to causes that are outside the control of the parties and could not be avoided by the exercise of due care. Also referred to as “Act of God” or “vis major.

Foreign Insurer – Insurer domiciled outside a state that operates in that state under a certificate of authority granted by that state’s insurance department. A foreign insurer may elect to be subject to the same regulations as an admitted insurer or to operate outside that regulation as a non-admitted insurer. Also known as a surplus lines insurer.

Fortuitous Event – Event subject to chance without the implication of suddenness.

Frame Construction – Material used to construct the building.

Fraud – An intentional manipulation of the truth, and the act of getting someone to rely on that manipulation of the truth, which results in the person’s detriment.

Free Look – A period of time (usually 10, 20 or 30 days) during which a policy owner may examine a newly issued policy of life and surrender it in exchange for a full refund of premium if not satisfied for any reason.

Frequency – The number of losses occurring in a given time period.

Fronting – Use of one insurance company, usually a domestic, admitted carrier, to issue policies on behalf of the captive.

Fully Insured Plan – A plan where the policyholder (individual or employer) pays a defined premium to an insurer and does not share in the risk associated with actual claims.

Fully Self-Insured – Used by larger organizations to assume management of all exposures; useful when losses for both frequency and severity are very predictable and often used in lieu of deductible plans to retain higher levels of risk from general liability, product liability and professional liability exposures.

Fully Self-Insured Plan – Employer retains 100% of the cost of claims. Because there is no reinsurance protection most employers choose a partially self-funded financial arrangement.

Functional Replacement Cost – Cost to repair or replace damaged or destroyed property with materials that are functionally the equivalent of the damaged or destroyed property.

Funded Reserves – The setting aside of sufficient sums of money to meet future liabilities.

Future Value – Value in the future of a payment or payments made in the present.

General Damages – An award based on a measure of intangible damages inferred from the Special Damages and other facts and circumstances (e.g., pain and suffering).


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G


General Partnership – A partnership in which each general partner may act on behalf of the partnership and is personally liable for the partnership’s obligations.

Generally Accepted Accounting Principles (GAAP) – Principles in financial accounting that serve to assure consistency in financial reporting. GAAP is a type of self-regulation in that members of the financial accounting profession have agreed that these principles will govern their accounting techniques and interpretations.

Good Faith – As related to the Business Judgment Rule, a decision must be made with an honest belief that the decision is in the best interest of the organization, not simply to preserve his or her position or benefits.

Goodwill – 1) in accounting, the difference between the market price paid for an asset an organization and its book value; 2) in common usage, customer relationship or public opinion.

Government Accounting – Non-commercial accounting system that features accounts for budgets, encumbrances and restricted use assets. Also called “fund accounting.”

Grace Period – A prescribed period, usually 30 to 31 days after the premium due date, during which an insurance contract stays in force and the overdue premium may be paid.

Graded Death Benefits – Death benefits that, in the early years of the contract for an otherwise uninsurable individual, are less than the face amount of the policy, but increase with the passage of time.

Graded Premium – A modified life insurance policy for which the initial premium is low, and then increases in steps over a period of time (usually five years), after which it becomes a level premium.

Gross Premium – The premium for participating life insurance. If an insured elects to use his dividends to pay premiums, the gross premium becomes the net premium when dividends are subtracted from it.

Gross Profit – Sales revenue less cost of goods sold.

Gross Profit Margin as a Percentage of Sales – Gross profit divided by sales.

Gross Written Premium – The annual premium showing on the policies, collected on a gross basis. For a captive, GWP is the annual pay-in of premium by the organization(s).

Group Captive – Owned by multiple, unrelated organizations who are the policyholders; owners may be either homogeneous or heterogeneous.

Group Model HMO – A single multispecialty medical group contracted with an HMO to provide care to the HMO’s insureds.

Group Purchasing Arrangement – Any of a wide array of arrangements in which two or more small employers purchase health insurance collectively, often through a common intermediary who acts on their collective behalf. Such arrangements may go by many different names, including cooperatives, alliances, or business groups on health. They differ from one another along a number of dimensions, including governance, functions, and status under federal and state laws. While some are entirely private enterprises, others are set up or chartered by states. Some centralize more of the purchasing functions, such as risk pooling, price negotiation, choice of health plans offered to employees, and various administrative tasks. Depending on their functions, these groups may be subject to different state and/or federal rules. For example, they may be regulated as Multiple Employer Welfare Arrangements (“MEWAs”).

Guaranteed Convertible – Insurer guarantees to convert into a different type of policy at the request of the policy owner.

Guaranteed Cost Plan – An insurance plan for which a fixed premium for the policy term, subject to audit, is paid by the insured regardless of the number and amount of losses that occur during the policy term.

Guaranteed Insurability Rider – Sometimes called Guaranteed Purchase Option, an option that allows an insured or owner to buy additional coverage at certain times even though he or she may have become uninsurable due to a critical or even terminal illness.

Guaranteed Rates – Guarantees the premium rates will not change during the entire term of the policy.

Guaranteed Renewable – Guarantees an insurance policy will continue in force, provided the policy premiums are paid on time.


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H


Hazard – A condition or circumstance that may give rise to a loss from a given peril; physical, moral, or morale characteristics that make the likelihood of a loss from a given peril greater.

Hazard Risks – Risks covered by insurance resulting in downside outcomes only.

Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) – A federal regulation that provides rights and protections for employees and their covered dependents in group health plans that limit exclusions for pre-existing conditions; prohibit discrimination against employees and dependents based on their health status; and allow a special opportunity to enroll in a new plan to individuals in certain circumstances. HIPAA may also allow individuals to purchase individual coverage if no group health plan coverage is available or have exhausted COBRA or other continuation coverage.

Health Maintenance Organization (“HMO”) System – Provides a comprehensive benefits package including physician visits, laboratory services, hospitalization and surgery, and focuses on preventive care, early diagnosis and outpatient treatment. An HMO is generally considered the most restrictive type of managed care.

Health Reimbursement Account (“HRA”) – An account owned, maintained and funded by the employer to pay Qualified Medical Expenses for employees.

Health Savings Account (“HSA”) – A tax-saving plan for individuals and employees participating in High Deductible Health Plans to save and pay for Qualified Medical Expenses. HSA funds may also be used as an additional retirement savings mechanism.

Healthcare Flexible Spending Account System (“FSA”) – A healthcare reimbursement account that allows employees to set aside money through payroll deductions on a pre-tax basis to pay for anticipated eligible medical expenses, for the employee and his or her dependents which are not reimbursed or paid from any other source.

High Deductible Health Plan (“HDHP”) – A plan that requires employees to bear a greater financial burden in their healthcare by requiring a larger amount of expenses be paid by the consumer, through higher deductibles, yet still provides coverage for large and unexpected claims.

Historical Cost – Original purchase price.

Hold Harmless Agreement – Affirmative assumption of the financial consequences for liabilities of another through a contract. See Indemnification Agreement.

Home Healthcare – Medical care provided by trained personnel in the patient’s home for patients who do not need the more extensive treatment provided by a hospital, skilled nursing facility, or extended care facility, or for patients who are not capable of going to a medical facility for outpatient care. This care can also include non-medical services, such as housekeeping, shopping, laundry, money management, and meal preparation.

Hospice – A program or facility that provides care to the terminally ill.

Hurdle Rate – Minimum accepted rate of return from a project.


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I


Implementation – Implementing the desired actions and risk management plans; an element of the risk administration step of the Risk Management Process.

Implied Authority – Authority of the agent, which is not specifically expressed or communicated, but which is consistent with the agent fully exercising the express authority granted by the insurer.

Incident –an event that disrupts normal activities and may become a loss, claim or business interruption.

Incidents of Ownership – Various rights a policy owner may exercise under the policy contract. Some of the incidents of ownership would be the rights to (1) cash in the policy, (2) receive a loan on the cash value of the policy, and (3) change the beneficiary.

Income Policy – A life insurance contract that provides income on a monthly basis, as opposed to a policy that pays proceeds in a lump sum.

Income Statement – A report of the organization’s financial performance for a stated time period.

Income Tax Expense – Tax treatment depends upon type of captive, premium volume, and investment income.

Incontestable Clause – A clause in a policy stating that after a policy has been in effect for a given length of time (generally one or two years), the insurer shall not be able to contest the statements contained in the application.

Increased Limit Factors – Ratio applied to losses at one retention level (e.g. $1,000,000 per occurrence) to determine expected losses at another retention level (e.g., $5,000,000).

Incurred But Not Reported (IBNR) – Represents the liability for unpaid claims not reflected in the case reserve estimates for individual losses. The two components to IBNR reserves are pure IBNR and broad or bulk IBNR; pure IBNR are those claims that have occurred but have not yet been reported as of the evaluation date; and, broad or bulk IBNR is the additional development on known claims or the increase in reserve value as the claim are investigated and settled.

Incurred Expense – Expenses not yet paid. Can also include paid expenses in some accounting systems.

Incurred Loss Ratio – Portion of an earned premium dollar that is spent on incurred losses.

Incurred Losses – 1) the total amount of paid claims and loss reserves associated with a particular period of time (usually a policy year). Generally, incurred losses are the actual losses paid and outstanding, interest on judgments, expenses incurred to obtain third-party recoveries, and allocated loss adjustment expenses; 2) paid claims, case reserves, and IBNR reserves until ultimate incurred claims are reached, at which time there is no remaining IBNR.

Indemnification Agreement – See Hold-Harmless Agreement.

Indemnify – To make compensation to an entity for incurred hurt, loss, or damage; restore to original position.

Indemnitee – The party that is relieved of liability assumed by the indemnitor.

Indemnitor – The party that assumes the liability inherent in a situation.

Indemnity – Restoring an injured party to the financial position they enjoyed prior to a loss; reimbursing an injured party suffering loss for the amount of the loss.

Indemnity Plan – Also known as fee-for-service plans, provide a specified payment for medical services rendered regardless of the actual charges.

Independent Adjuster – Organization or a person hired by an insurer and paid a fee for settling claims.

Independent Agency System – Involves self-employed parties who enter into contracts with usually more than one insurer to represent the insurers in dealings with the public.

Independent Contractor – Individual or entity that agrees to perform specific work for another but is not subject to direction or management by the person who contracted for the services, and is therefore not considered an employee.

Independent Practice Association Model – Physicians that retain their individual practices and separate offices but belong to a legal entity for contracting purposes with HMOs.

Indexed Contracts – Contracts where the policy owner can share in a percentage of the growth of an indexed investment (a mutual fund tied to the Standard & Poor’s index is an example), sometimes known as equity-indexed contracts. The principal or benefit is guaranteed and, in many cases, a minimum interest is guaranteed.

Indexed Ultimate Total Loss – Incurred losses that have been developed (trended) and indexed (adjusted) for inflation.

Indicated Retro Premium – Amount of premium calculated for any one period using the retrospective rating formula.

Individual Health Insurance – Health insurance that is typically purchased by individuals who are self-employed, unemployed or work for a company that does not offer employee health benefits.

Individual Retirement Arrangement (“IRA”) – A self-directed, tax-deferred retirement investment account established by employed workers who earn a salary, wage, or self-employment income. An individual may establish an IRA account with a bank, mutual fund, insurer, or another trustee. Deposits for traditional IRAs are usually tax deductible and the investment earnings in the account are not taxable until the investor withdraws the funds. Different rules apply depending on the type of IRA account.

Inflation Index Factor – Premium loading to provide for future increases in claims costs and loss payments resulting from inflation.

Inflation Protection – A feature that increases the amount of an insurance benefit by a fixed percentage automatically every year, to adjust for inflation.

Injunction – Requirement to refrain from doing an act.

Insurability – General acceptability by an insurer of an applicant for insurance, based on underwriting review, which may include items such as the applicant’s current health status, medical history, and driving record, among others.

Insurable Interest – The existence of potential financial loss on the part of the policy owner and/or beneficiary in the event of the death of the insured. The policy owner and any beneficiaries must have an insurable interest when applying for a life policy.

Insurance – A technique or business of transferring the risk of an individual or organization to another by means of a contract.

Insurance Agent – A person authorized by an insurer to solicit applications, collect premiums, and write policies on behalf of the insurer.

Insurance Carrier – Insurance company.

Insured – Person(s) protected under an insurance contract.

Insurer – Insurance company that assumes risks for insureds and performs other insurance-related operations, such as loss control and claims settlements.

Intellectual Property – Property that has a value and lacks a physical existence, such as industrial property consisting of inventions, designs, or trademarks, or copyrights, such as artistic works.

Intentional Act – When an individual commits an act with the intent of causing injury, damages, or a private violation of another person’s rights.

Internal Financing – Using the organization’s funds for the financing of losses, e.g. deductibles, planned retentions, uninsured losses (planned or unplanned).

Internal Rate of Return (IRR) – The calculation of an “unknown” discount rate that makes the PV of future cash inflows exactly equal to the net investment at time zero; only the project with the highest rate of return is acceptable; the IRR must exceed the cost of capital to the organization.

Internet – A global system of interconnected computer networks using a standard Internet protocol to access data and information available on the World Wide Web (www); a network of networks; a network of networks that consists of millions of private, public, academic, business, and government networks from local to global scope that are linked by a broad array of electronic, wireless and optical networking technologies.

Investment Income – Investment returns on invested funds (loss reserves, capital, and retained earnings).

Irrevocable Beneficiary – A beneficiary that cannot be changed without the beneficiary’s consent.

Issue Date – The date an insurance policy is issued. This may also be the effective date of the policy coverage.


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J


Joint and Several Liability – 1) legal doctrine applying in some states that allows an injured person to sue and recover the full amount from any one or more of several wrongdoers at his option, regardless of that wrongdoer’s degree of negligence; 2) in pooling, a legal doctrine making all members of a group or pool jointly liable for group responsibilities and each member individually responsible for total liabilities of the group or pool.

Joint Venture – Association of two or more individuals or organizations who engage in a specific or limited business transaction; a partnership between separate business organizations.

Joint-Life and Survivorship Annuity – An annuity that provides income to two or more people and continues in force as long as any one of them survives.

Joint-Life Annuity – An annuity policy that pays a benefit that continues throughout the joint lifetime of two people, but terminates at the first death.

Joint-Life Insurance – Insurance written on two or more persons with benefits usually payable only at the first death (also called first to die contracts).

Joisted Masonry Construction – Exterior walls of masonry material (adobe, brick, concrete, gypsum block, hollow concrete block, stone, tile, or similar materials) with combustible floor and roof.

Judgement Rate – A rate that is applied solely to individual insureds by the insurance company.

Juridical Risk – A general class of risk; risks arising from a jury or judge’s decision or from court or jury attitudes.


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K


Kurtosis – In probability theory and statistics, a statistic that measures the degree of peakedness in a distribution. Also known as a measure of the volatility of volatility, a description of the distribution of data around the mean.


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L


Lapse – The termination of an insurance policy, usually due to non-payment of premium.

Last In, First Out (LIFO) – An accounting method used to value inventory and the cost of goods sold. Sales are considered to be made using the latest-purchased or produced merchandise or inventory. The total inventory cost shown on the income statement is based on the most recent cost of the earliest items removed from inventory.

Law of Large Numbers – In probability and statistics, the larger the number of units independently exposed to loss, the more accurate the ability to predict loss results arising from those exposure units.

Layering – Building an insurance program in steps, utilizing the excess-of-loss approach, whereby one insurer writes in excess of lower limits accepted by other insurers.

Leading – The behavior from a risk manager to cause people to take action; an element of the managerial process.

Legal Risk – A general class of risk; risks inherent in compliance or arising from statutory liability.

Level Death Benefit Option – In universal life insurance, an option that provides a level death benefit similar to a whole life policy. This option may also apply in some term life policies.

Level Premium Insurance – Insurance where the premium remains the same throughout the life of the contract.

Level-Term Insurance – The face value remains the same from the effective date until the expiration date.

Leverage – Use of external fixed cost sources of capital for the organization, e.g., long-term debt and preferred stock.

Liability – Legally enforceable obligation.

Life Expectancy – As shown in the mortality or annuity table used as a reference, the average number of years remaining for a person of a given age to live.

Life Expectancy Term Insurance – Provides protection for a person’s “expectation of life.” This becomes the term of the policy, as opposed to the ordinary term policies that are for a given number of years or to a stated age, such as 65.

Life Income – A settlement option under which a life insurance policy pays equal installments as long as the beneficiary lives, even if the principal has been exhausted.

Life Insurance (Generic) – A contractual system of risk sharing under which contributions are accumulated and redistributed to meet the economic consequences of the uncertain duration of life.

Lifetime (Unlimited) Benefit – Benefits continue for the lifetime of the insured.

Lifetime Maximum – The maximum amount the insurer would pay in benefits for an insured during the insured’s lifetime while covered under the policy.

Limit of Liability Clause – Pre-event limitation of the amount, type, or method of calculation of damages available by one or both parties to an agreement. See Liquidated Damages Clause.

Limitations – Health insurance plans that contain certain limitations that impose internal limits or “caps” on specific types of medical care.

Limited Liability Company – A business organization possessing the pass-through tax nature of a partnership while creating a separate legal entity similar to a corporation.

Limited Partnership – A partnership in which the general partner is the managing partner who operates the business and the limited partners are not involved in the day-to-day operation of the business and cannot bind the partnership to agreements.

Limited Payment Life – A life insurance contract with premiums paid for an indicated number of years.

Liquidated Damages Clause – See Limit of Liability Clause.

Liquidity – Ability of an organization to convert assets into cash quickly with little or no loss, such as selling or factoring accounts receivable and selling marketable securities.

Liquidity Ratios – Financial ratios that measure the organization’s ability to pay bills over the short term. Includes the current ratio, quick ratio, and net working capital.

Living Benefits Rider – A rider attached to a life insurance policy that allows for the payment of a percentage of the death benefit to the insured if terminally ill.

Lloyd’s of London – An association of private underwriters, each of whom underwrites (backs) insurance contracts on a basis of personal liability.

Loan Value – A term that refers to the amount of money an insured can borrow using the cash value of his or her life insurance policy as security.

Local Area Network (LAN) – A network of computers interconnected with one another within a limited area.

Long-Term Care – A blanket term for a wide range of services designed to meet medical, personal, and social needs in a variety of settings and locations.

Long-Term Care Coordinator or Care Manager – Plans and coordinates long-term care and assists individuals with the details of housing, home care services, socialization programs, and financial and legal planning and execution.

Long-Term Care Daily Benefit Amount – An amount that will be available under a long-term care policy taking into consideration the expected daily cost of a chosen care facility at a future date.

Long-Term Care Maximum Benefit Period – The maximum amount of time, expressed in years, that the insured will receive long-term care benefits.

Long-Term Debt – Funds borrowed from external sources; least expensive source of capital.

Long-Term Liabilities – Liabilities that are expected to be paid after one year, such as long-term debt, mortgages or deferred income tax liability.

Loss –a reduction in value.

Loss Control – See Risk Control.

Loss Conversion Factor – In retrospective rating, a factor used to cover claim adjustment expenses and the cost of the insurer’s or third-party claim administrator’s services.

Loss Data Analysis – Application of various methods of analyzing loss data to identify and understand the potential impact those losses may have on the organization’s risk management program and the total cost of risk.

Loss Development – Difference between the original loss frequency and/or severity as originally reported to an insurer and its subsequent evaluation at a later date or at the time of its final disposal; how losses will ultimately pay out over time because of the nature of the losses.

Loss Development Factor (LDF) – Ratios applied to a current valuation of losses to determine an estimate of ultimate incurred losses. These factors are calculated by comparing the period-to-period changes in values of loss reserves, under the assumption that current losses will be paid according to the same pattern as prior losses at similar states of development. Loss development factors are frequently calculated separately for incurred losses, paid losses, and claims counts.

Loss Forecasting – Predicting future losses through an analysis of past losses.

Loss Limit – Used in retrospective rating formulas, the maximum amount of any one loss included in the retrospective rating plan. In effect, this lessens the impact of a severe loss on the retro premium and reduces variability of the loss sensitive retro premium.

Loss Portfolio Transfers (LPT) – Portfolio of previously incurred losses that is transferred for a premium; addresses known losses.

Loss Rating – Rating technique that establishes the prospective rate based upon historical losses that will be applied to an exposure base to compute the premium.

Loss Ratio – Proportionate relationship of incurred losses to earned premiums expressed as a percentage.

Loss Report – Listing of reported claims providing such information as the date of occurrence, type of claim, amount paid and amount reserved for each as of the report’s valuation date. Also known as loss run.

Loss Reserve – Estimation of the liability for unpaid claims that have occurred as of a given date, including the IBNR claims, claims due but not yet paid, and amounts not yet due.

Loss Retention – See Retention.

Loss Run – See Loss Report.

Loss Trending – Adjusting historical losses to account for inflationary trends so that the ultimate value is more current or meaningful. Loss trend factors are multiplied by actual historical losses to trend losses.

Loss Triangulation – Study of changes, the relationship of one period to a previous period. The process involves graphs in which the data is displayed in an inverted right triangle, hence, the term “triangulation.” The purposes are as follows: 1) captures changes in ultimate value resulting from natural claim development, 2) reflects changes in losses after initial reserve is established (new information), 3) reflects growth in losses due to IBNR claims, and 4) determines loss payment pattern over time.

Lump Sum – Benefits paid to the beneficiary all at once rather than in installment payments.


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Major Medical Policy – Provides greater benefits for services such as in-patient and out-patient hospital care, intensive care, physician charges and other medical services.

Managed Care Plan – A partnership between insurers and providers through contracts to provide care at discounted costs for benefits defined in the policy.

Managed Indemnity Plan – Incorporates basic utilization programs such as case management, pre-certification and recertification of certain services into a traditional indemnity plan.

Managerial Accounting – An internal accounting system that provides accurate and timely financial information for use by managers to make short-term and day-by-day financial decisions.

Managerial Process – Planning, organizing, leading and controlling the resources of people, funds, materials, and time to protect the organization’s assets and positively affect the organization’s performance.

Managing General Agent (MGA) – A person or firm who has an independent business that performs for one or more insurers some or all of the functions typically attributable to a regional or branch office of the insurer.

Manual Rates – Rates as promulgated by a rating bureau before application of any credits, discounts, surcharges or deviations. Such rates are referred to as “manual rates” because they traditionally were published in a rating manual.

Market Ratios – Measures of the value of a corporation’s common stock in the financial market.

Market Value – The value of property (either real or personal) as determined by the amount of money people would pay for the property, knowing all the relevant facts.

Market/Book Ratio – Measure of the market price of a share of common stock divided by its book value per share.

Marketable Securities – Highly liquid securities that have a low but positive yield, normally publicly traded stocks and bonds.

Masonry Noncombustible Construction – Exterior walls of masonry material (adobe, brick, concrete, gypsum block, hollow concrete block, stone, tile, or similar materials) with floor and roof of metal or other noncombustible materials.

Mass Marketing – An attempt by insurance companies to provide some forms of insurance in a more economical fashion.

Maturity – The date cash value equals the face value of a whole life or endowment policy and becomes payable to the policy owner.

Maturity Value – The amount paid under a whole life insurance contract if the insured reaches the age of the mortality table on which the contract was based. If the policy is an endowment contract, it is the cash value amount at the end of the endowment period.

Maximum Possible Loss – Worst possible loss that could occur.

Maximum Premium – Maximum that can be charged under a retro plan regardless of the losses; maximum paid by the insured under a retro plan.

Maximum Probable Loss – See Probable Maximum Loss.

Maximum Retrospective Premium Factor – In retrospective rating, a factor established by agreement between the insured and the insurer to determine the maximum premium. Excess loss premiums may be included in the maximum or in addition to the maximum, depending upon the terms of the agreement.

Mean – Sum of all observations divided by the number of observations; the average. Also known as the arithmetic mean.

Measure of Central Tendency – In statistics, a statistic that defines the center of a distribution, such as the arithmetic mean or average, the median, or the mode.

Measure of Dispersion – In statistics, a statistic that describes the spread of values about the mean of a distribution, such as range, variance, and standard deviation.

Median – Midpoint of the observations ranked in order of value; half the observations lie below and half above; the middle value. Also known as the 50th percentile.

Medicaid – A jointly funded federal and state program that provides hospital expense, medical expense coverage, and in some cases long-term-care-type coverage to the low-income population and certain aged and disabled individuals.

Medical Information Bureau (“MIB”) – A data pooling organization that maintains information on individuals who have applied for insurance with life and health insurance companies that subscribe to the bureau.

Medical Savings Account (“MSA”) – A trust created exclusively for paying qualified medical expenses of the account holder. Allowable contributions are tax-deductible and growth is tax-free if the account is used as intended. Health Savings Accounts (“HSAs”) replaced MSAs in 2004.

Medicare – A federal government medical insurance plan for individuals age 65 and older or disabled.

Medicare Supplement Insurance – Also known as Medigap, individual health insurance coverage designed to bridge coverage gaps in Medicare.

Mental Health Parity Act of 1996 (“MHPA”), as amended by the Mental Health Parity and Addiction Equity Act of 2008 (“MHPAE”) – A federal regulation that requires employers to provide coverage for the diagnosis and treatment of mental illness and substance abuse under the same terms and conditions applied to other medical conditions, including equal lifetime and annual maximum benefits for medical and mental health benefits. The Patient Protection and Affordable Care Act (“PPACA”) eliminated lifetime maximum benefits in 2010 and will eliminate annual maximum benefits in 2014.

Merger – Two or more organizations that create a new entity, agree to move forward as one and issue the appropriate ownership interests (common stock, memberships, partnerships, etc.)

Mini-Med Policy – Provides a lower level of benefits with a lower premium.

Minimum Life Insurance Premium – Also known as minimum continuation premium, the premium that is lower than the target premium. It is used in universal life policies to skip premiums or pay lower premiums. Two constraints are placed on the minimum premium amount: that it is above the insurer’s cost to process the payment and that there is enough cash value in the policy to pay mortality and expense charges.

Minimum Premium – In retrospective rating, the minimum amount of premium to be paid by the insured, determined by multiplying the minimum retrospective premium factor by the standard premium.

Minimum Premium Plan (“MPP”) – A self-insured health plan that includes a maximum dollar amount that an employer must pay for claims.

Minimum Retrospective Premium Factor – In retrospective rating, a factor established by agreement between the insured and the insurance carrier to determine the minimum premium.

Mini-Tail – Automatic 60- day extended reporting period allowing for the making of claims after expiration of a “claims made” liability policy.

Misrepresentations – A misstatement of facts regarding the subject of insurance (the item being insured).

Mitigation of Damages – Legal concept that imposes a duty on an injured party to exercise reasonable diligence and ordinary care in attempting to minimize damages after injury or loss. Sometimes referred to as the “Doctrine of Avoidable Consequences.”

Mixed Model HMO – Also known as a hybrid HMO, are closed-panel HMOs that expanded their market by offering an open model product on a regional or national level while still providing a regional or local closed model product.

Mode – Observation that occurs most often in the sample; the highest frequency.

Modified Accelerated Cost Recovery System (MACRS) – Depreciation by IRS schedule according to the type of asset; each MACRS class has a predetermined schedule used to determine the percentage of the asset’s cost to be written off each year.

Monitoring – Examining and evaluating the results of risk management actions and plans; an element of the Risk Administration step of the Risk Management Process.

Moral Hazard – Proclivity to cause a loss to effect an insurance recovery, e.g., arson.

Morale Hazard – Indifference to loss, such as poor housekeeping or maintenance.

Morbidity – The measure of the probability of expected sickness or injury within a given group.

Mortality – The measure of the probability of dying at a certain age. Mortality rates usually reflect the actual experience of an insurer with its insureds, adjusted for expected future changes.

Mutual Company – An incorporated insurance company owned by its policyholders.


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National Council on Compensation Insurance (NCCI) – Association of insurers selling workers compensation coverage that operates as a rating organization. NCCI collects statistics, develops rates and policy forms, and makes state filing for its members. The NCCI operates in most states.

Negligence – Failure to exercise a degree of care which a reasonably prudent person would exercise under the same circumstances. The following four elements must be proven to establish negligence: a duty owed, a breach of that duty, causation, and damages resulting from the injury.

Net Book Value – Value of an organization’s assets as carried on the balance sheet in accordance with applicable accounting system principals. Under financial accounting (GAAP), the historic or original acquisition costs less accumulated accounting depreciation.

Net Ceded Premium – Premium deposited in the captive. From the perspective of the fronting company, it is ceded reinsurance. From the captive’s perspective, it is assumed reinsurance.

Net Income – Operating income less interest expense and taxes; amount that can be distributed to an organization's owners or kept as retained earnings.

Net Income Margin as a Percentage of Sales – Net income divided by sales.

Net Present Value (NPV) – The measurement of the PV of future cash inflows compared to the net investment of a project.

Net Present Value Cost-Benefit Analysis – In financial management, the evaluation of a project or option by determining if the PV of expected inflows exceeds the PV of expected outflows.

Net Profit Margin – Measure of the amount of profit within sales; net income divided by sales.

Net Underwriting Income – Sum of underwriting profit (loss) and investment income from underwriting.

Net Working Capital – Measure of ability of an organization to quickly meet its current obligations; current assets less current liabilities.

Net Worth – Total value of all assets minus all liabilities.

Network Model HMO – Multiple groups of medical providers contracted with an HMO to provide services to HMO insureds.

Newborns’ and Mothers’ Health Protection Act of 1996 (“NMHPA”) – A federal regulation that requires group and individual plans that offer maternity benefits to provide coverage for a hospital stay following a normal delivery for no less than 48 hours for both the mother and newborn child. This limit is extended to 96 hours following a cesarean section birth.

No Abuse of Discretion – A director or officer is protected against honest errors in judgment that can be justified by a rationale or that are not egregious on their face.

Noise – Anything that distorts a message by interfering with the communication process.

No-Load Policy – A policy sold directly to consumers from the insurer, thus minimizing sales expenses.

Non-Admitted Asset – Assets of an insurer that are not permitted by the state insurance department or other regulatory authority to be taken into account when determining an insurer's financial condition. Non-admitted assets are typically illiquid assets, such as furniture, fixtures, agents' past-due debit balances, uncollectible reinsurance, receivables, and securities whose value is questionable.

Non-Admitted Insurer – Insurer authorized to operate in a state under a certificate of authority but not being subject to that state’s financial, form, and rate regulations.

Non-Cancelable – An insurance policy that the insured has the right to keep in force by paying the premium for a period (stated in the contract). The company cannot increase the premium nor change any policy provision.

Noncombustible Construction – Exterior walls, floor, and supports made of metal, asbestos, gypsum, or other noncombustible materials.

Non-Concurrency – A term used to describe a situation where there are two or more insurance policies not written with the same coverage, or effective dates.

Non-Contributory Plan – A group health plan that has no cost sharing – The employer pays the full cost of an eligible employee’s coverage under the plan.

Non-Economic Loss – Defined as pain, suffering, and other non-monetary losses.

Non-Forfeiture Benefit Options – Provision that ensures the insured cannot lose the equity of a whole life insurance policy. A policy owner can select from three options under the provision: cash surrender value, extended term insurance, and paid-up insurance. If none is elected, a clause in the policy will stipulate the option that automatically goes into effect, usually extended term insurance.

Non-Insurance Risk Transfer – Transfer of risk from one party to another party other than an insurance contract. This risk management technique usually involves risk transfers by way of hold harmless or indemnity provisions in contracts and is also called “contractual risk transfer.”

Non-Ledger Assets – Assets that are not entered onto the balance sheet.

Non-Qualified Self-Insurance Plans – Often combine general liability, automobile liability, workers compensation (with fronting carriers) and other miscellaneous lines with no per occurrence stop loss or loss limitation; works well when both frequency and severity of losses are very predictable.

Non-Renewal – The action by the insurance company to terminate insurance coverage at the expiration date or anniversary date of the policy.

Non-Subject Premium – A premium that is not a part of a loss sensitive rating formula. For example, in a retro plan, the non-subject premium usually purchases the excess coverage for losses in excess of the loss limit (not to be confused with excess coverage for losses in excess of the primary coverage limits or the retention).

Non-Waiver Agreement – In claims management, a bilateral agreement between an insurer and a claimant that permits the continued processing of the claim while preserving the insurer’s rights to deny coverage. Once all coverage issues are resolved, the insured must be notified immediately.

Normal Distribution – In statistics, a distribution in which the mean, median, and mode are the same; it has the same value at the high point of the graph. Also referred to as a “bell curve.”

Notes to the Financial Statement – An accounting concept, the explanation of how specific transactions have been treated; the rules by which the financial statements are drawn.

Nuisance Value – Amount that an insurer will pay to settle a claim that may not be valid or may be of lesser value so as to avoid expensive litigation or the risk of an adverse judicial result or damage to an organization’s reputation. It may also consist of compensation for injured feelings as distinct from financial loss or physical suffering. Also known as a solatium payment.

Nursing Home – A licensed facility that provides 24-hour-a-day nursing care to assist individuals who need long-term care.


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Obligee – Person, firm, or corporation protected by a surety bond; the party to whom the principal under the bond is obligated.

Obligor – Under a surety bond, the party who owes the obligation to the obligee.

Occupancy – The occupants or operations in the building.

Occupying – Means in, upon, getting in, on, out, or off.

Occurrence – An accident with the limitation of time removed; an “accident” that is extended over a period of time rather than a single observable happening.

Off-Shore Insurer – An insurer domiciled outside the US. By definition, all off-shore insurance companies are alien, in spite of ultimate ownership by a US corporation.

Open Enrollment Period – A period when eligible individuals can choose to enter or make changes to in a plan.

Open-Panel HMO Model – Insurers contract with individual or groups of physicians to provide services to the HMO insureds. Open-panel providers and facilities may also contract with other HMOs and insurers.

Operating Income – Gross profit less operating expenses.

Operating Income as a Percentage of Sales – Operating income divided by sales.

Operational Risks – Risks related to processes and management resulting in upside and downside outcomes.

Organizing – The actions a risk manager takes to arrange and relate work to be done so that it can be performed most effectively by others.

Outlier – In statistics, an extreme value, or a value numerically distant from the rest of the data.

Out-of-Pocket Maximum – A stop loss provision that defines the maximum dollar amount an insured must pay in out-of-pocket expenses during the year. Once an insured reaches the out-of-pocket maximum the insurer pays 100% of all future eligible expenses for the remainder of the year.

Outstanding Losses – On a loss run, the amount calculated by subtracting paid losses from incurred losses and representing the remaining liability to be paid on a loss or group of losses.

Own Occupation – The specific regular occupation in which an individual is engaged at the time he or she becomes disabled.

Owner – The individual or entity controlling all rights, benefits, and privileges of a life insurance contract. This may or may not be the insured. Ownership may be assigned or transferred by written request of the current owner.

Owner’s Equity – Value of the organization’s assets less liabilities; includes capital, surplus and accumulated retained earnings.


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Paid Loss Retrospective Rating Plan – Retrospectively rating insurance plan that uses only paid losses to determine the retrospective premiums due at each adjustment. A paid loss retrospective rating plan allows the insured to hold loss reserves until they are paid out in claims and gain the cash flow advantage.

Paid Losses – Amount actually paid in losses during a specified period of time, not including estimates of amounts (i.e., reserves) that will be paid in the future for losses occurring in the specified period.

Paid-in Capital – Capital acquired by a corporation from sources other than business operations or the sale of bonds. The most common sources are the sale of the corporation’s own common and preferred stock. The amount of paid-in capital becomes part of the stockholder’s equity shown in a balance sheet.

Paid-in Excess – Original cost of a newly issued share of common stock less its stated par value. Insurance company common stock (and commercial bank stock) often has a cost per share that includes an additional contribution to surplus that provides a safety cushion for early periods of operation to create a conservative balance sheet.

Paid-Up Life Insurance Policy – A policy that has no further premium payments due, but under which the insurance coverage (life benefit) remains in effect.

Pareto Principle – In business management, the observation that 80% of effects come from 20% of the causes. Also known as Pareto Efficiency or the 80/20 Rule.

Parole Evidence – Legal concept describing oral or verbal evidence. In contract law, parole evidence relates to the inadmissibility of oral representations that would otherwise alter or defeat the provisions of a written contract. Also referred to as “extraneous evidence.”

Partial Disability – When an insured is working, but is unable to perform one or more of the major duties of his or her occupation, therefore limiting his or her ability to earn the full income he or she received prior to disability.

Partially Self-Insured Plan – Employer retains a portion of claim risks by paying incurred claims up to an amount determined in the contract. Employers typically purchase a reinsurance policy (also known as stop-loss coverage) that limits claims exposure up to an amount for each employee covered by the plan as well as an aggregate amount for combined employee claims.

Participating Life Insurance Policy – A policy that pays dividends if the board of directors authorizes such payments.

Party-in-Interest Transaction – Any transaction involving any fiduciary, counsel, or employee of a plan; plan service provider, or anyone with a stated interest in or relationship with a party-in-interest.

Passive Retention – Unplanned acceptance of losses because of failure to identify risk, failure to act, or forgetting to act.

Patient Protection and Affordable Care Act (“PPACA”) – Also known as Healthcare Reform. Enacted by the federal government on March 23, 2010 to ensure consumer rights and protection for healthcare.

Payback – In financial management, the measurement of the length of time needed to recoup the cost of a capital investment.

Payout Profile – Schedule illustrating the percentage of loss dollars actually paid in settlement of claims over time.

Peril – A cause of loss.

Period Certain – A payout of a fixed dollar amount that remains the same throughout the specified annuitization period.

Periodic Inventory Accounting System – An accounting of goods sold and their corresponding costs performed at specified points during the accounting period; the most common method.

Permanent Life Insurance – A policy that offers lifetime protection by combining a cash value with death benefits.

Perpetual Inventory Accounting System – A record is made of every sale and continuous costs of each item sold are transferred from inventory asset to the cost of goods sold expense on an ongoing basis.

Personal Property – All tangible property not classified as real property. See Real Property.

Physical Risk– A general class of risk; risks arising from property, people or information.

Physician Hospital Organization (“PHO”) System – A group of physicians or hospitals that form alliances to help providers attain market share, improve bargaining power, reduce administrative costs and sell their services to managed care organizations or directly to employers.

Plaintiff – Party bringing a lawsuit against another.

Planning – The process a risk manager takes to predetermine a course of action; an element of the managerial process.

Point-of-Service Plans (“POS”) System – A hybrid of HMO and PPO plans.

Policy Limits – The maximum dollar amount an insurance policy will pay for a covered loss.

Policy Loan – A loan from the insurer to the policy owner, secured by the policy’s cash value.

Policy Owner – The owner of an insurance policy. The policy owner can be different from the insured.

Policy Period – The period of time for which the insurance policy provides coverage.

Policy Territory – The geographical area in which accidents, occurrences, or events must happen to have coverage under the insurance policy.

Political Risk – A general class of risk; risks arising from changes in the law, governmental reinterpretations or changes in government policy.

Pooling – A self-insurance strategy used by two or more organizations that desire to share risks with each other. The organizations are not individually capable of self-insuring. Pooling arrangements are normally regulated by state laws and are known by different names in different states.

Population – In statistics, the entire group of observations. See Sample.

Pre-Admission Certification – A healthcare provider’s authorization, or pre-admission certification, for an insured’s non-emergency hospital admission and certain covered benefits prior to an insured receiving the care.

Pre-Admission Review (“PAR”) – Requirement that an insured must notify the insurer prior to an elective inpatient hospital admission after an emergency admission.

Pre-Existing Condition Limitation – Excludes coverage for conditions the policy defines as pre-existing. Under PPACA, beginning September 23, 2010, group health plans may not exclude insureds under age 19 based on pre-existing conditions. All pre-existing condition exclusions must be removed beginning in 2014.

Preferred Provider Organization (“PPO”) System – Insureds have the option of obtaining service within the PPO network (in-network) or with providers that are not contracted with the PPO (out-of-network). PCPs are not required to be gatekeepers; insureds may obtain services without referrals from in-network or out-of-network providers.

Preferred Stock – Type of stock issued by a corporation that has ownership privileges with respect to payment of dividends and distribution of assets greater than those of common stock owners but no voting rights. The dividend is expressed as a percentage of the stated par value much like interest but is not tax deductible to the organization.

Premium – A payment a policy owner makes to secure insurance coverage, paid all at once as a lump sum or as regular payments.

Premium Discount – 1) a discount allowed on premiums paid in advance of one year based on projected interest to be earned; 2) a discount allowed on certain workers compensation and comprehensive liability policies to allow for the fact that larger premium policies do not require the same percentage of the premium for basic insurer expenses such as policy writing. The discount percentage increases with the size of the premium.

Premium Equivalent – Used in self-insured health plans, the cost per covered employee, or the amount the employer would expect to reflect the cost of claims paid, administrative costs, and stop-loss premiums.

Present Value – Value today of a future payment or payments, discounted at the appropriate discount rate.

Presumptive Disability – In a disability income policy, a percentage of disability that will be considered without a waiting period if the insured suffers the total and complete loss of a specific body part, body functions, or senses. Examples include speech, hearing in both ears, sight in both eyes, use of one hand and one foot, use of both hands, sight in one eye, and use of one hand or foot.

Price/earnings Ratio (P/E ratio) – Measure of the market price of a share of common stock to its earnings; market price of a common share divided by earnings per share.

Primary Actual Losses – When computing workers compensation experience modifications, the actual loss amount (each loss equal to or less than $5,000) is included in the calculation at its full value. Each loss over $5,000 is limited to a primary loss value of $5,000, with the excess over $5,000 applied at a lesser rate.

Primary Beneficiary – The person or entity named on the policy who has the first right to receive life insurance policy death benefits.

Primary Care Physician (“PCP”) – Also known as a gatekeeper, authorizes and refers the insured to specialists and other healthcare providers.

Principal – The entity whose performance is being guaranteed in a surety bond.

Private Law – The organizational charter and its by-laws control what the executives can and cannot do. Violations of these “laws” are ultra vires acts, or acts beyond the powers of the organization.

Pro Rata Reinsurance (Proportional) – An agreement to share insurance. The reinsurer gets an agreed percentage of the original premium, less a ceding commission, and pays the same percentage of all losses covered by the reinsurance contract. Typically, there is no occurrence limit under a pro rata reinsurance agreement, so the reinsurer has a catastrophe exposure.

Probability – Chance of something occurring within a stated time period, ranging from 0 (impossibility) to 1 (certainty).

Probable Maximum Loss (PML) – An estimate developed for property insurance underwriters that represents the worst amount of loss that is likely to happen, as opposed to the worst possible result that could happen. A PML estimate includes adverse conditions, such as the impairment or failure of a sprinkler system, a delayed fire alarm, insufficient water supply or delayed firefighting response, if such conditions seem reasonable.

Probate – A court-supervised process by which a will is determined to be the deceased’s final statement regarding the disposition of his or her property distributed.

Profitability ratios – Measure of the returns on various bases.

Promissory Estoppel – Legal concept holding that a false statement will be treated as a promise when the listener relied upon the false statement to his/her detriment. The maker of the false statement is barred (estopped) from denying the statement. Also known as equitable estoppel or detrimental reliance.

Property Damage – Physical damage to, destruction of, or loss of use of property.

Pro-rata Reinsurance – A form of reinsurance where the treaty is set up on the understanding that a certain part of every exposure will be shared on an agreed amount.

Prospective Contracts – Covers losses that have not yet occurred, that may never occur and those losses that occur after the effective date of the contract.

Protected Cell Company (PCC) – A type of rent-a-captive which is permitted by legislation to legally separate the assets and liabilities of insureds as opposed to contractual separation or no separation. Also known as a segregated portfolio company.

Protection – As related to property, the safeguards, equipment and measures provided by the building owner or occupant to minimize hazards.

Public Adjuster – An independent adjuster who represents policyholders in the adjustment of their losses with insurers for a fee.

Punitive Damages – Damages in excess of those required to compensate the plaintiff for the wrong done. Punitive damages, also called exemplary damages, are imposed to punish the defendant because of the particularly wanton or willful character of the wrongdoing.

Pure Loss Ratio – Ratio of the losses incurred in a given period to the earned premium for that period.

Pure Risk – Chance of loss or no loss; no chance of gain.


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Qualified Medical Expenses (“QME”) – Defined by the IRS and include expenses for the diagnosis, cure, mitigation, treatment or prevention of disease, obtained from medical providers and facilities, and must alleviate or prevent a physical or mental condition. QMEs also include premiums paid for medical and long-term care insurance, transportation expenses to obtain care and long-term care expenses not covered by an insurance policy.

Qualified Plan – Concerning the income taxation of contributions, plans that cannot discriminate and must comply with specific IRS codes and regulations. Contributions are deductible from income taxes in the year they are made. Conversely, non-qualified plans can discriminate, do not need to be filed with the IRS, and contributions are not tax-deductible. Some plans will only be qualified (401K and Medical Saving Accounts), some only non-qualified (deferred compensation), and some can be either, depending on how they are set up (Individual Retirement Accounts and annuities).

Qualified Self-Insurance – An insurance plan subject to state regulation, such as self-insured workers compensation plans or self-insured automobile liability plans, in which regulatory oversight is needed to ensure statutory financial responsibility, is assured.

Qualitative Analysis – The “what” analysis; identification and assessment of loss exposures that cannot be easily measured by traditional statistical or financial methods; helps management understand the potential impact on the organization’s ultimate risks and performance.

Quantitative Analysis – The “how much” analysis; attempts to accurately measure risks by using acceptable traditional methodologies to calculate relative numerical values.

Quick Ratio – A liquidity ratio that measures the organizations ability to pay bills over the short term; the remainder of current assets less inventory divided by current liabilities.

Quid pro quo – Latin for “this for that,” or “one thing for another.” In contract law, it refers to the legal consideration of values required by both parties as a requirement to establish a valid contract. In insurance, it is the exchange of the premium for a promise to pay a covered loss.

Quota Share Reinsurance – The primary insurer or ceding company cedes (sells) a portion of every exposure it insures within a class or classes subject to the treaty. Both premium and losses are shared according to a stated percentage of the amount of insurance written.


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Range –the difference between the largest and smallest values.

Rate Class – The manner in which a life insurance premium is determined, based upon the individual’s health condition, occupation, hobbies and other factors specific to that persons situation and lifestyle.

Real Property – Land and most things attached to the land, such as buildings and vegetation.

Reciprocal – A group of individuals or organizations, called subscribers, who join together into an association for the purpose of insuring one another.

Recurring Disability – A repetitive sickness or injury that is a continuation of a prior covered sickness or injury.

Recusal – Act of abstaining from a discussion or decision because of a conflict of interest or the appearance of a conflict of interest.

Reduction (Loss Control) – The use of any one method or a combination of methods to reduce loss frequency or loss severity.

Reformation – Changing a contract to reflect true intentions.

Regression – In statistics, a technique of modeling the relationship between variables by fitting a line to a scatter of dots.

Reinstatement – Restoration of a lapsed life insurance policy to its original status.

Reinsurance – The acceptance by one or more insurers of a portion of the risk underwritten by another insurer that holds a contract for the entire coverage.

Reinsurance Ceded – Portion of the risk that the primary or original insurer transfers to the reinsurer.

Reinsurer – Insurer who accepts all or a portion of the liabilities of the ceding or primary company.

Renewable Term Life Insurance – A policy the insured can renew without presenting evidence of insurability. Also known as guaranteed renewable.

Rent-a-Captive – A licensed offshore insurer owned by an outside organization, e.g., a broker, reinsurer, insurance company, or other business enterprise, which makes its services available to other organizations for a fee. The “renting” is accomplished through the purchase of a specific series of preferred shares of stock in the insurer or participation in a profit-sharing arrangement.

Replacement Cost – The cost to replace damaged property with like kind and quality without taking into account depreciation.

Request for Proposal (RFP) – Providers are “invited” or requested to provide a proposal for insurance coverages; typically, the providers are assigned markets from which they will obtain proposals and open bidding is on a “first come, first quoted” system in which markets are not assigned.

Required Rate of Return – Rate of return required from an investment to compensate for the level of risk involved.

Res judicata – “the matter has been decided,” a legal concept of common law stating that the prior decisions of judges and juries have determined the outcome. See Stare decisis.

Reservation of Rights – In claims administration, a letter sent by an insurer to a claimant to preserve the insurer’s right to deny a claim following their investigation by identifying all policy provisions that are at issue. The reservation of rights letter avoids waiver or estoppel arguments.

Reserve – Amount of money earmarked for a specific purpose.

Residual Disability – After a period of total disability, the insured is able to return to work. However, the insured is unable to do one or more important duties, cannot do usual duties at the same rate as before the illness or injury, or cannot work as long as before the illness or injury.

Residual Income – A provision in a disability income policy that provides for benefits to be paid when the insured can do some, but not all, of his or her normal duties.

Residual Market Load (RML) – Separate charge intended to subsidize an assigned risk or involuntary market.

Respite Care – Usually associated with a long-term care situation, and normally occurs when a family member of the patient who is providing a majority of the care needs a break or rest from caring for the patient. Another caregiver will “spell” the family member for a period of time, such as 1 or 2 weeks per year.

Retained Earnings – Internal funds retained from net income and not distributed to holders of common stock.

Retention – Acceptance or assumption of the risk of loss, which means any loss is paid out of pocket.

Retention Level – Amount of loss that is self-insured. It is usually expressed on a per occurrence basis and is sometimes referred to as the self-insured retention (SIR).

Retention-Transfer Diagram – Graphic depiction of an organization’s financial ability and risk appetite.

Retro Adjustment – Amount of additional premium or return premium for each successive period determined by comparing the current period’s indicated retro premium to the preceding period’s retro premium (either the deposit premium after audit or the indicated retro premium for subsequent periods).

Retrocession – Transaction that transfers liability from the reinsurer to another insurer, perhaps even back to the primary insurer, in whole or in part.

Retrospective Contracts – Are directed to the past and contemplative of post-loss situations. Two types – Loss portfolio transfers and aggregate loss contracts.

Retrospective Rating – Rating plan that adjusts the premium, subject to a certain minimum and usually a maximum, periodically to reflect the actual loss experience of the insured. Retrospective rating combines actual losses with graded expenses to produce a premium that more accurately reflects the current experience of the insured. An adjustment is performed periodically following policy expiration to recognize the fluctuation in losses.

Return of Premium Rider – A rider that can be attached to many life, health, disability and LTC policies (for an extra charge), that will return all or part of the total paid premium to the owner. This rider is generally “triggered” if the owner chooses to terminate the policy and no benefits have been paid (i.e., no claims).

Return on Assets (ROA) – Measure of the return on assets; net income divided by total assets.

Return on Equity (ROE) – Measure of the return on equity; net income divided by stockholders’ equity.

Return on Investment (ROI) – A highly flexible ratio measuring the financial benefits of an investment activity to its costs.

Revocable Beneficiary – A status in which a life policy can be changed without the consent of the beneficiary. The owner of the policy can change any part of the policy at any time, without the permission of or notification to the benefiting party.

Rider – A provision that an insurer attaches to a policy to expand or restrict the benefits of the policy.

Risk – Uncertainty that may be either positive or negative arising from a given set of circumstances. Common definitions also include: 1) chance or probability of loss, 2) uncertainty concerning loss, 3) possibility of a variation of outcomes from a given set of circumstances, and 4) difference between expected losses and actual losses.

Risk Administration – Implementation and monitoring of the Risk Management Process; a step of the Risk Management Process.

Risk Analysis – The assessment of the potential impact of various exposures on an organization; a step of the Risk Management Process.

Risk Appetite – The organization’s willingness to accept or tolerate risk.

Risk Control – Any conscious action or inaction to minimize at the optimal cost, the probability, frequency, severity, or unpredictability of loss; a step of the Risk Management Process.

Risk Duplication – The use of back-ups for critical systems or operations; a risk control technique in which the goal is to reduce overall severity

Risk Financing – The acquisition of internal and external funds to pay losses at the most favorable cost; a step of the Risk Management Process.

Risk Identification – Process of identifying and examining exposures of an organization; the first and most important step of the risk management process.

Risk Management – Process of managing uncertainty of exposures that affect an organization’s assets and financial statements using five steps: identification, analysis, control, financing and administration.

Risk Management Information System (RMIS) – Information system that supports the user in identifying, measuring and managing risks in the organization or other organizations.

Risk Management Mission Statement – States the purpose and overall goal of the risk management program and guides the actions and decision-making of the risk manager.

Risk Management Policy Statement – Defines the policy for managing risks and the relevance to the organization’s strategic plan, goals, and objectives; clarifies risk management goals and direction; outlines the fundamental guidelines of the risk management function; focuses on fundamentals and addresses ideas that may not otherwise be presented to the organization; forces senior management to actively consider an organization’s risk tolerance to increase the value of the risk management program; clearly specifies responsibility and authority, opens up lines of communication, and minimizes duplication of efforts.

Risk Management Standard Operating Procedures Manual – Reaffirms and communicates senior management’s support for the risk management program to all employees with a brief statement; defines scope, responsibilities and authority of risk manager and others associated with the risk management program; establishes expected levels of performance and cooperation; familiarizes personnel with procedures to effectively manage risks and exposures; provides a convenient reference or “how to” guide.

Risk Management Stewardship Report – Provides an overview of risk management programs on a periodic basis to identify successes and opportunities for improvement.

Risk Mapping – Visual analytical tool utilized to communicate key risks; it presents the risks with the highest impact and probability; can range from simple to complex depending upon the organization’s needs and capabilities.

Risk Prevention – An action taken to break the sequence of events that leads to a loss or that makes the event less likely; the goal of this risk control technique is to reduce the frequency of types of claims that cannot be eliminated.

Risk Profiling – Measurement of expected losses for a finite period of time based on historical data including but not limited to, total losses, number of losses, average loss size and timing of payment.

Risk Purchasing Group – Group formed in compliance with the Risk Retention Act for the purpose of negotiating for and purchasing insurance from a commercial insurer.

Risk Quantification – Actual forecasting of loss frequency and severity to determine allocation decisions.

Risk Reduction – A risk control technique in which the goal is to reduce the severity or financial impact from losses that are not prevented.

Risk Retention – Conscious acceptance of losses that the organization or company will finance using only internal funds. See Retention.

Risk Retention Group – A special type of group captive whose business is limited to liability coverage for owners/insureds. Formed under the Federal Liability Risk Retention Act of 1986, these specialized captives are domiciled in and regulated by one state and permitted by federal law to operate in all other states without being required to meet those multiple states’ regulations.

Risk Segregation – An isolation of an exposure from other exposures, perils, or hazards; a risk control technique in which the goal is to reduce overall severity.

Risk Separation – The spread of exposures or activities over several locations; a risk control technique in which the goal is to reduce overall severity.

Risk Transfer – Risk control technique that attempts to reduce or prevent loss by transferring some or all of the risk to another organization, either through a physical transfer of an operational function or exposure or through a non-insurance contract of some or all of the liabilities arising from that operational function or exposure.

Risk Volatility – Difference between an anticipated result (loss) and the standard deviation.

Risk-Taking Ability – An organization’s financial capacity for assuming risk.

Robbery – The unlawful taking of property from a person by actual violence or threat of violence.

Roth IRA – A retirement savings account that allows an individual to deposit after-tax funds (not tax-deductible) up to specified annual contribution limits.


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Salvage – Damaged or recovered stolen property taken over by the insurance company.

Sample – In statistics, a subset of a larger group having the same characteristics of the group.

Savings Clause – See Severability Clause.

Second to Die – A type of life insurance policy that insures two lives, also referred to as a survivorship policy, where the death benefit is payable at the second death.

Secondary Beneficiary – A person designated by the policy owner to receive policy proceeds if the primary beneficiary is deceased at the time benefits become payable. Also known as a contingent beneficiary.

Securities Exchange Commission (SEC) – The federal agency charged with the responsibility of regulating the securities industry and enforcing federal securities regulation.

Segregated Portfolio Company – See Protected Cell Company.

Self-Dealing Transaction – Any transaction using plan assets for personal gain, transactions on behalf of persons whose interests are adverse to the plan, and personal.

Self-Insurance – An insurance plan in which an organization makes a conscious decision to not purchase insurance and pay certain claim amounts using 100% internal funding. Self-insured organizations will usually purchase “excess” insurance to pay claim amounts in excess of the desired retention amount.

Self-Insured Retention – Dollar amount specified in an insurance policy that must be paid by the insured before the insurance policy will respond to a loss; often used in lieu of deductible plans to retain higher levels of risk from general liability, product liability and professional liability exposures.

Separability Clause – See Severability Clause.

Serious Injury – An injury resulting in death, serious impairment of body function, or permanent serious disfigurement.

Settlement Options – The choices available for the payment of death benefits. The owner can select a settlement option before the insured’s death and the beneficiary has no choice but to accept the option on death. If there is no option selected before the death of an insured, the beneficiary has the option to select the method of benefit payment.

Severability Clause – Contract provision that rescues the balance of a contract if one or more parts are held to be invalid or unenforceable. Also referred to as “savings clause” or “separability clause.”

Severity – The dollar amount of a given loss or the aggregate dollar amount of all losses for a given period.

Shared Care – A long-term care plan that allows the insured to purchase an additional Daily Benefit that either spouse may use.

Sharing – A method of handling risk that involves the potential loss exposure being distributed among a number of persons.

Short-Term Medical Policy – A temporary policy to bridge gaps in coverage during times of transition such as coverage loss due to life or job changes, employment as a seasonal worker or retired but not yet eligible for Medicare.

Simplified Employee Pension (“SEP”) – An individual retirement account for a self-employed person or a small company.

Single Parent Captive – A type of captive that insures or reinsures the risks of its owner.

Single Premium Life Insurance – Requires one lump-sum, up-front premium and is often guaranteed to remain paid-up throughout the insured’s lifetime.

Sinkhole Collapse – Damage caused by the sudden sinking or collapsing of land into an underground empty space typically caused by water on limestone or dolomite.

Skewed Distribution – In statistics, an asymmetrical distribution in which the mass of the distribution is concentrated on one side or the other.

Skewness – In statistics, the measure of the degree of asymmetry of a distribution.

Skilled Nursing Facility (“SNF”) – A facility with a professionally trained staff that provides medical treatment, continuous nursing, rehabilitation, and various other health and social services to patients who are not in an acute phase of illness, but who require skilled care on an inpatient basis in lieu of hospital inpatient services.

Social Risk – A general class of risk; risks arising from public relations, loss of reputation, damage to brand, cultural issues, social direction or social media.

Sole Proprietorship – A business organization in which a sole proprietor is entitled to all profits, and will bear all losses, generated by the business and free of the regulatory reporting required of other business organizations.

Solicitor – A person who is hired and authorized by the insurance agent to solicit applications of insurance.

Special Damages – The measurable dollar amounts of an actual loss.

Specific Disease Supplemental Policy – Also known as dread disease insurance, it covers some expenses associated with narrowly-defined illnesses listed on the policy, most commonly available for cancer, heart attack and stroke.

Speculative Risk – Chance of loss or gain; often referred to as a “business risk.”

Staff Model HMO – The most restrictive type of HMO where insureds select his or her primary care physician within the model but the HMO may close a particular physician’s practice when that physician has a full caseload of patients.

Standard Deviation – In statistics, the square root of the variance.

Standard Premium – Premium that is determined on the basis of authorized rates, any experience modification rating, applicable loss constants and minimum premiums; specifically excludes premium discounts and expense constants.

Stare decisis – “Let the decision stand,” a legal concept of common law stating that the prior decisions of judges and juries have determined the outcome. See Res judicata.

Stated Amount – A method of fixing the maximum amount payable in an insurance policy.

Statement of Cash Flows –a report summarizing the effects of cash on the operating, investing, and financial activities of an organization for a specific period of time.

Statement of Profit and Loss – See Income Statement.

Statute of Frauds – Legal concept that holds no suit or action shall be maintained on certain classes of contracts or engagements unless there is a note or memorandum in writing, signed by the parties, describing the performance of obligations of the parties. This concept began with a 1677 English law that has been adopted in modified form in virtually every state in the U.S.

Statute of Limitations – Any statute that prescribes the time limit in which a legal action must be brought.

Statutory Accounting Principles (SAP) – Those principles required by statute that must be followed by a regulated financial organization, such as an insurance company or bank when submitting its financial statement to the state or federal regulatory authority. Such principles differ from Generally Accepted Accounting Principles (GAAP) in some important respects, particularly in the admissibility or inclusion of certain assets and in the matching of income and expenses.

Statutory Law – Enactments of legislative and administrative bodies.

Stock Company – An incorporated insurance company owned by its stockholders.

Stockholder Equity – Net worth, retained earnings or total assets less total liabilities; sum of the book value of common stock less treasury stock, preferred stock, and additional paid-in capital.

Stop-Loss Coverage – A form of reinsurance for self-insured employers that limits the amount the employers will have to pay for each person’s healthcare or for the total expenses of the employer.

Straight-Line Depreciation – Most commonly used method; annual depreciation = historical cost less estimated salvage value divided by years of estimated useful life.

Strategic Risks – Risks related to an organization’s strategic plan and its mission resulting in upside or downside outcomes; most likely cause of failure of organizations.

Strict Liability – Liability directed by law (statute or common law) without regard to the intention of the offender’s actions. Strict liability shifts the burden of proof; it creates a rebuttable presumption that the defendant must overcome. Strict liability is also called no-fault liability or absolute liability. Strict liability is often applied in inherently dangerous activities or in the manufacturing of products.

Strict Tort Liability – Holds sellers, distributors, and manufacturers of products responsible for defective or unduly hazardous products.

Structured Settlement – Settlement in which the plaintiff agrees to accept a stream of payments, in whole or in part, in lieu of a lump sum. Annuities are usually used as the funding mechanism.

Subject Premium – In retrospective rating plans, the portion of the premium applied to the retrospective rating formula. It is generally used to help calculate the basic premium, both before and after audit calculations.

Subrogation – The legal right of one who has paid another’s obligation to collect from the party originally owing the obligation, e.g., the insurer’s right to recover from another the amount that the insurer paid to its insured for a covered loss. Equitable subrogation is based on the common law right to recover; contractual subrogation is based on a written document that authorizes a right to recover.

Substantial Performance – Legal doctrine that protects the party to a contract who makes an honest endeavor in good faith to perform his/her part of the contract with the results of his/her endeavor being beneficial and retained by another party to the contract, from having the party who received such benefit avoiding performance. The equitable doctrine of substantial performance protects a party from forfeiture under the contract for technical inadvertence or trivial variations or omissions in performance.

Suicide Clause – A life insurance policy provision that states if the insured dies by suicide within a certain period of time from the date of issue (usually one or two years), the amount payable to the beneficiary will be limited to the total premiums paid minus any policy loans or outstanding premiums.

Surety – Promisor under a bond; the party that promises to fulfill the obligation of the bonded party or principal; a surety company.

Surplus Lines Insurer – See Foreign Insurer.

Surplus Share– The primary insurer or ceding company cedes to the reinsurer a pro rata share of risks, but the reinsurer only pays its percentage of losses when the amount exceeds a net retention described in the treaty, thus falling into the “surplus” area.

Surrender Benefit – An annuity contract that allows the owner to surrender the contract if income payments have not yet started. Upon surrender, the contract terminates and the surrender benefit is equal to the contract value less surrender charge, if applicable.

Surrender Charge – A fee charged when an owner surrenders the policy for the policy’s cash value.

Survivorship Clause – A life insurance provision stating that the beneficiary must survive the owner of the policy by a set amount of time in order to receive the benefits.


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Tail Factor – When calculating loss development factors from historical data, a factor that recognizes that at some point, older data becomes unavailable or is no longer relevant due to changing circumstances; used to develop losses from the oldest available valuation period to their ultimate value.

Target Premium – A suggested premium used in universal life policies that does not guarantee there will be adequate funds to maintain the policy to any time, including end of life, but gives an indication of what will be needed, under conservative estimates, to maintain the policy.

Tax Multiplier – In retrospective rating plans, a factor applied to an insurance premium to cover licenses, fees, assessments, and premium taxes the insurance carrier must pay on the collected premium. It may also include an amount to subsidize residual market mechanisms or assigned risk markets.

Tax-Deferred Growth – Growth in the value of a plan or account that is not taxed until the dollars are withdrawn at the applicable tax rate at that time.

Term Life Insurance – A type of life insurance that provides coverage for a predetermined amount of time.

Theft – Any act of stealing.

Third Party Administrator (“TPA”) – An individual or company hired by an employer to process claims, pay providers, and manage other functions related to the operation of a plan.

Time Interest Earned (TIE) – A financial ratio that measures how much of the interest obligation of an organization is covered by net income; a measure of default risk; earnings before interest and taxes divided by total interest paid.

Time Series Analysis – An analysis that identifies trends over time.

Time Value of Money – The value of money over a given amount of time considering a given amount of interest.

Tolerance Corridor – Marginal retention beyond budgeted retention that the organization may also choose to retain.

Top-Down Pricing – Commonly known as manual rating or scheduled rating; an experience modification factor, scheduled credits or debits, premium discounts and/or deductible credits are applied to a base rate to achieve a net rate which is applied to the estimated exposure base to calculate the policy premium.

Tort – Private or civil wrong, other than a breach of contract, for which the courts will provide a remedy in the form of an action for damages.

Total Cost of Risk (TCOR) – Sum of all quantified costs and expenses associated with the risk management function of an organization. TCOR includes insurance costs, retained losses, risk management departmental costs, outside services fees, and quantified indirect costs.

Total Cost of Risk Allocation System – The process that identifies and attributes the total cost of risk among the various business, operating, or accounting units within an organization.

Total Incurred Losses – Incurred losses that have not been developed nor indexed for inflation.

Total Loss Ratio – Ratio of the losses incurred and the ALAE for those losses in a given period to the earned premium during the period.

Transfer – A technique involving one party transferring the uncertainty of loss to another party or parties.

Transportation Cause of Loss – Includes loss or damage arising from collision, derailment, or overturn of a vehicle, stranding or sinking of vessel, or collapse of bridges, piers, or docks.

Treaty –a form of reinsurance in which a contract of reinsurance automatically establishes the terms for reinsuring a class or classes of business.

Treaty Reinsurance – The ceding company agrees to cede certain classes of business to a reinsurer. The reinsurer agrees to accept all business qualifying under the reinsurance treaty (the contract). Under the reinsurance treaty, the ceding company is assured that all of its risk falling within the terms of the treaty will be reinsured.

Trend Factor – Used to adjust past loss experience to the current cost levels, generally taking into account inflation and other similar forces.

Trust – An obligation that binds a person (trustee) to deal with property in a particular way for the benefit of another person or class of persons (of which he himself may be a member) whose interests are protected by the equitable jurisdiction of the courts. A trust is a disposition of property to a person (trustee) or persons jointly (trustees) in whom the legal title then vests in the confidence that the benefits will be applied to the advantage of one or more other persons (beneficiaries) or some other object permitted by law.

Two-Tier Annuities – A fixed annuity in which the interest rate credited to the annuity varies depending on the distribution option chosen by the owner.


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Ultimate Losses – Total losses that will have been paid when all claims have reached final settlement.

Ultimate Total Loss – Incurred losses that have been developed.

Unallocated Loss Adjustment Expense (ULAE) – Salaries, overhead, and other related adjustment expenses not specifically allocated or charged to a particular claim. Certain insurance carriers apply a nominal flat charge to each claim reported to represent a portion of ULAE, but the amount is small relative to most types of ALAE.

Underwriting – The process of selecting a risk and assigning a proper rating classification (to calculate the correct premium) in a manner that the insured obtains coverage and the insurance company obtains a profit.

Underwriting Expenses – Expected losses, allocated loss adjustment expenses, captive expenses and any miscellaneous costs borne by the captive.

Underwriting Profit (Loss) – Net ceded premium less total underwriting expenses.

Unearned Premium – Amount of premium remaining after deducting the earned premium from written premium; the portion of a premium representing the unexpired part of the policy period.

Unfunded Reserves – Reserves with no or insufficient funds to meet future liabilities.

Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”) – A federal regulation that requires employers to meet certain requirements for employees who are involved in the uniformed services. The rights cover: COBRA, medical, dental, healthcare flexible spending accounts, life insurance and accidental death and disability, long-term care and retirement. A covered employee who takes a leave for service in the uniformed services may continue these benefits until up to 24 months from the date on which the employee’s leave for uniformed service began.

Units of Production – Depreciation charged per unit of production – Historical cost less estimated salvage value divided by number of units to be produced.

Universal Life Insurance – A type of permanent life insurance policy that gives the policy owner the flexibility to change the face amount as well as the payments, has cash value that varies based on the investment return of the insurer, and allows premium deposits to change at the whim of the payor.

Unoccupancy – Describes a building that may contain furnishings and/or personal property, but it does not have people occupying it.

Usual, Customary, and Reasonable Charges – A practice using survey information that identifies charges by geographic area, specific medical service Current Procedural Terminology (“CPT”) code, and medical cost trends.

Utilization Review – The process of reviewing the appropriateness and quality of care provided to patients. Utilization review may take place before, during, or after the services are rendered.

Utmost Good Faith – A contract is considered to be a contract of “utmost good faith” when the parties to the contract rely heavily on the honesty and integrity of each other.


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Vacancy – Defined in the commercial property form as not enough business personal property to conduct normal operations. In a rather broad sense, it means no contents.

Valuation Date – Cut-off date for adjustments made to paid claims and reserve estimates in a loss report.

Valued Policy – Declares the amount that will be paid in the case of a total loss of the property.

Variable Annuity – An annuity with investments in separate accounts directed by the owner, such as growth, high-yield, or small cap mutual funds, etc.

Variable Life Insurance – A whole life insurance policy where the assets are invested in mutual funds or similar equity securities. Cash value accumulation over time will depend solely on the performance of the separate account funds.

Variance – In statistics, the modified average of the squares of the deviation of each value from the arithmetic mean of those values. The “modified average” refers to dividing the sum of the squared deviations by n-1 (n being the number of data items) rather than by n, a statistical modification used when dealing with samples rather than populations.

Vesting – A term that describes the process by which a participant earns ownership rights of a benefit funded by an employer. When fully vested, a participant has full access to the benefits.

Viatical – A general term referring to transactions in the viatical settlement marketplace. A viatical settlement is the proceeds from the sale of a life insurance policy to a third party by a terminally ill individual.

Voluntary Regulations – Rules created by professional, trade, and other organizations to internally govern their members.


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Waiver – The voluntary giving up of a known right.

Waiver of Premium – An insurance policy rider that allows a policy owner to stop making premium payments if the insured suffers a disability. Premium payments will be waived until the disability ends.

Warranty – A statement that promises or guarantees that something is absolutely true or will be true in the future.

Weighted average – An accounting method used to value inventory and the cost of goods sold. This method applies the costs of individual items as items are sold throughout the accounting period.

Weighted Average Cost of Capital (WACC) – A computation of the cost of capital from the organization’s current mix of capital sources Capital consists of long-term debt, preferred stock, common stock, and retained earnings (or issued common stock).

Weighting Value – In workers compensation experience modifications, a percentage value taken from the same actuarial tables used above to determine the percentage of excess losses to be used in the calculations.

Whole Life Insurance – A type of permanent life insurance that is characterized by guarantees such as fixed death benefit, guaranteed cash value, and fixed premiums.

Wide Area Network – A telecommunication network that covers a broad area.

Women’s Health and Cancer Rights Act of 1998 (“WHCRA”) – A federal regulation that includes protections for individuals who elect breast reconstruction in connection with a mastectomy. Group and individual health plans that cover medical and surgical benefits with respect to mastectomies must also cover certain post-mastectomy benefits, including reconstructive surgery and the treatment of complications (such as lymphedema).

Working Layer – An area of excess reinsurance in which loss frequency is expected.

Work-in-Progress – Inventory that is in the process of being manufactured or worked upon.

Written Premium – Total premiums on all policies written by an insurer during a specified period of time, regardless of the portions that have been earned.


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