Definitions of Common Terms
A
AD&D Policy (Accidental Death and Dismemberment): A policy that provides coverage in case of the insured's accidental death or dismemberment, which includes the loss, or loss of use, of body parts or functions (e.g., limbs, speech, eyesight, and hearing). The policy pays benefits to the insured or their beneficiaries in the event of an accident that results in these specific outcomes. The amount paid depends on the nature of the injury. For example, the policy may pay a higher benefit for more severe or multiple injuries, and a lower benefit for less severe injuries.
Actual Cash Value (ACV): A method of valuing insured property, which is calculated by taking the replacement cost of the property, minus depreciation. In insurance, it represents the amount equal to the replacement cost minus depreciation of a damaged or stolen property at the time of the loss. It is the actual value for which the property could be sold, which is often less than what it would cost to replace it.
Actuary: A professional who analyzes financial consequences of risk, using mathematics, statistics, and financial theory to study uncertain future events.
Adjuster: A person who investigates claims and recommends settlement options based on estimates of damage and insurance policies held.
Adverse Selection: A situation in the insurance industry where individuals who perceive a higher risk of loss are more likely to purchase insurance, or to purchase more insurance, than those who perceive a lower risk. This imbalance can lead to a disproportion of high-risk policyholders in the insurer's pool, which can increase the insurer's costs and premiums.
Aggregate Limit: The maximum amount an insurer will pay for covered losses during a policy period.
B
Beneficiary: A person or entity designated to receive benefits from an insurance policy or retirement plan.
Broker: An individual or firm that acts as an intermediary between a buyer and an insurer, usually compensated by a commission.
C
Captive Insurance Company: A type of corporate "self-insurance" where a parent group or groups create a licensed insurance company to provide coverage for itself. The main purpose of a captive insurer is to insure the risks of its owners or participants. Captives are a form of alternative risk transfer and are used by many large corporations to finance their own risks, particularly when commercial insurance is either too expensive or does not meet their specific risk-exposure needs. They can provide cost savings, increased control over insurance policies, risk management, and claims, and can offer tax benefits.
Cash Value: The amount due to the policyholder upon surrender of the insurance or annuity product
Claim: A formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event.
Coinsurance: A provision in an insurance policy that states the amount, as a percentage, to be shared between the insurer and insured for a claim.
Commercial Lines: Insurance products for businesses, covering risks like property damage, liability, and employee-related risks.
D
Deductible: The amount of money a policyholder must pay out-of-pocket before the insurance company pays a claim.
Disability Insurance: A type of insurance that provides income in the event a worker is unable to perform their work and earn money due to a disability.
E
Employee Benefits: Non-wage compensations provided to employees in addition to their normal wages or salaries, like health insurance, life insurance, retirement benefits.
Exclusions: Specific conditions or circumstances for which the policy will not provide benefits.
Experience Modification Rating (EMR): A metric used in the insurance industry, particularly in workers' compensation insurance, to gauge both past cost of injuries and future chances of risk. The EMR represents a comparison of a company's workers' compensation claims history to other businesses of similar size and type. An EMR of 1.0 is considered the industry average. If a company has an EMR greater than 1.0, it is considered to have a higher than average risk of future claims, resulting in higher insurance premiums. Conversely, an EMR less than 1.0 indicates a lower risk and can lead to lower premiums. This rating is used by insurance companies to adjust premiums accordingly, providing a financial incentive for companies to maintain a safer workplace.
F
Fidelity Bond: A form of business insurance that offers an employer protection against losses caused by its employees' fraudulent acts.
Fiduciary Liability: Liability of fiduciaries for improper management of a company's employee benefit plan.
G
General Liability Insurance: Coverage that protects against claims alleging a business’s negligence led to bodily injury or property damage to others.
Group Health Insurance: Health insurance that covers a group of people, usually employees of a company or members of an organization.
H
Health Savings Account (HSA): A tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP).
I
Indemnity: A principle of insurance which aims to return the insured to the same financial position after a loss as they were in before the loss occurred.
Insurance Premium: The amount of money an individual or business pays for an insurance policy.
Insured: The person or entity covered by an insurance policy.
K
Key Person Insurance: A life insurance policy on a key employee, partner, or proprietor on whom the success of a business depends.
L
Liability Insurance: Insurance that provides protection against claims resulting from injuries and damage to people and/or property.
Loss Control: Activities to reduce the likelihood or potential severity of losses.
M
Malpractice Insurance: A type of professional liability insurance purchased by healthcare professionals to cover the cost of being sued for malpractice.
Managed Care: Health insurance plans that contract with health care providers and medical facilities to provide care for members at reduced costs.
N
Named Perils: Specific risks named in an insurance policy as covered.
O
Occurrence Policy: An insurance policy that covers claims made for injuries suffered during the life of the policy, even if the claim is filed after the policy is canceled.
P
Policyholder: The person or entity owning an insurance policy.
R
Reinsurance: The practice of insurers transferring portions of risk portfolios to other parties to reduce the likelihood of paying a large obligation.
Risk Management: The identification, assessment, and prioritization of risks followed by coordinated application of resources to minimize, control, and monitor the impact of unfortunate events.
S
Self-Insured: A situation where a company or individual does not take out any third-party insurance, instead relying on its own financial resources to cover losses.
Stop-Loss Insurance: A type of insurance policy used by employers who self-fund their employee health benefit plans but do not want to assume 100% of the liability for losses arising from the plans. Stop-loss insurance provides protection against catastrophic or unpredictable losses. It is purchased by the employer and kicks in when the cost of claims exceeds a certain predetermined level, known as the attachment point.
Subrogation Clause: The section of insurance policies giving an insurer the right to take legal action against a third party responsible for a loss to an insured for which a claim has been paid.
Surety Bond: A contract between three parties — principal, surety, and oblige — ensuring the principal will perform contractual obligations to the obligee.
Surplus Line Insurance: Also known as "excess lines insurance," surplus line insurance refers to insurance coverage that is provided by insurers not licensed in the state where the risk is located but legally able to provide insurance on a "non-admitted" basis. Surplus lines are often used for risks that are too high for regular insurance companies, such as unusual or very high-risk businesses.
U
Umbrella Insurance: Extra liability insurance coverage that goes beyond the limits of the insured's home, auto, or watercraft insurance.
Underwriting: The process by which insurers assess the risks associated with insuring a person or entity and decide the terms and cost of the insurance coverage. In underwriting, insurance companies evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. This assessment can involve a variety of factors, including but not limited to personal information, health records, occupational hazards, financial status, and in the case of property insurance, the condition of the property.
W
Workers' Compensation: Insurance that covers an employer's liability for injuries, disability or death to persons in their employment, without regard to fault, as prescribed by state or federal workers' compensation laws and other statutes.