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EARLY WARNING SYSTEM |
A system of measuring
insurers’ financial stability set up by
insurance industry regulators. An example is the
Insurance Regulatory Information System (IRIS),
which uses financial ratios to identify insurers
in need of regulatory attention.
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EARNED PREMIUM |
The portion of premium
that applies to the expired part of the policy
period. Insurance premiums are payable in
advance but the insurance company does not fully
earn them until the policy period expires.
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EARTHQUAKE INSURANCE |
Covers a building and its
contents, but includes a large percentage
deductible on each. A special policy or
endorsement exists because earthquakes are not
covered by standard homeowners or most business
policies.
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ECONOMIC LOSS |
Total financial loss
resulting from the death or disability of a wage
earner, or from the destruction of property.
Includes the loss of earnings, medical expenses,
funeral expenses, the cost of restoring or
replacing property, and legal expenses. It does
not include noneconomic losses, such as pain
caused by an injury.
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ELECTRONIC COMMERCE /
E-COMMERCE |
The sale of products such
as insurance over the Internet.
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ELIMINATION PERIOD |
A kind of deductible or
waiting period usually found in disability
policies. It is counted in days from the
beginning of the illness or injury.
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EMPLOYEE DISHONESTY
COVERAGE |
Covers direct losses and
damage to businesses resulting from the
dishonest acts of employees. (See
FIDELITY BOND)
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EMPLOYEE RETIREMENT
INCOME SECURITY ACT / ERISA |
Federal legislation that
protects employees by establishing minimum
standards for private pension and welfare plans.
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EMPLOYER’S LIABILITY |
Part B of the workers
compensation policy that provides coverage for
lawsuits filed by injured employees who, under
certain circumstances, can sue under common law.
(See
EXCLUSIVE REMEDY)
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EMPLOYMENT PRACTICES
LIABILITY COVERAGE |
Liability insurance for
employers that covers wrongful termination,
discrimination, or sexual harassment toward the
insured’s employees or former employees.
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ENDORSEMENT |
A written form attached to
an insurance policy that alters the policy’s
coverage, terms, or conditions. Sometimes called
a rider.
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ENVIRONMENTAL
IMPAIRMENT LIABILITY COVERAGE |
A form of insurance
designed to cover losses and liabilities arising
from damage to property caused by pollution.
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EQUITY |
In investments, the
ownership interest of shareholders. In a
corporation, stocks as opposed to bonds.
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EQUITY INDEXED ANNUITY |
Non-traditional fixed
annuity. The specified rate of interest
guarantees a fixed minimum rate of interest like
traditional fixed annuities. At the same time,
additional interest may be credited to policy
values based upon positive changes, if any, in
an established index such as the S&P 500. The
amount of additional interest depends upon the
particular design of the policy. They are sold
by licensed insurance agents and regulated by
state insurance departments.
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ERRORS AND OMISSIONS
COVERAGE / E&O |
A professional liability
policy covering the policyholder for negligent
acts and omissions that may harm his or her
clients.
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ESCROW ACCOUNT |
Funds that a lender
collects to pay monthly premiums in mortgage and
homeowners insurance, and sometimes to pay
property taxes.
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EXCESS AND SURPLUS
LINES |
Property/casualty coverage
that isn’t available from insurers licensed by
the state (called admitted insurers) and must be
purchased from a non-admitted carrier.
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EXCESS OF LOSS
REINSURANCE |
A contract between an
insurer and a reinsurer, whereby the insurer
agrees to pay a specified portion of a claim and
the reinsurer to pay all or a part of the claim
above that amount.
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EXCLUSION |
A provision in an
insurance policy that eliminates coverage for
certain risks, people, property classes, or
locations.
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EXCLUSIVE AGENT |
A captive agent, or a
person who represents only one insurance company
and is restricted by agreement from submitting
business to any other company unless it is first
rejected by the agent’s company. (See
Captive agent)
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EXCLUSIVE REMEDY |
Part of the social
contract that forms the basis for workers
compensation statutes under which employers are
responsible for work-related injury and disease,
regardless of whether is was the employee’s
fault and in return the injured employee gives
up the right to sue when the employer’s
negligence causes the harm.
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EXPENSE RATIO |
Percentage of each premium
dollar that goes to insurers’ expenses including
overhead, marketing, and commissions.
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EXPERIENCE |
Record of losses.
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EXPOSURE |
Possibility of loss.
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EXTENDED COVERAGE |
An endorsement added to an
insurance policy, or clause within a policy,
that provides additional coverage for risks
other than those in a basic policy.
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EXTENDED REPLACEMENT
COST COVERAGE |
Pays a certain amount
above the policy limit to replace a damaged
home, generally 120 percent or 125 percent.
Similar to a guaranteed replacement cost policy,
which has no percentage limits. Most homeowner
policy limits track inflation in building costs.
Guaranteed and extended replacement cost
policies are designed to protect the
policyholder after a major disaster when the
high demand for building contractors and
materials can push up the normal cost of
reconstruction. (See
Guaranteed replacement cost coverage)
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A form of variable annuity
contract where the contract holder pays no sales up
front or surrender charges. Owners can claim full
liquidity at any time.
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CAPACITY |
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The supply of insurance available
to meet demand. Capacity depends on the industry’s
financial ability to accept risk. For an individual
insurer, the maximum amount of risk it can underwrite
based on its financial condition. The adequacy of an
insurer’s capital relative to its exposure to loss is an
important measure of solvency.
A property/casualty insurer must maintain a certain
level of capital and policyholder surplus to underwrite
risks. This capital is known as capacity. When the
industry is hit by high losses, such as after the World
Trade Center terrorist attack, capacity is diminished.
It can be restored by increases in net income, favorable
investment returns, reinsuring more risk and or raising
additional capital. When there is excess capacity,
usually because of a high return on investments,
premiums tend to decline as insurers compete for market
share. As premiums decline, underwriting losses are
likely to grow, reducing capacity and causing insurers
to raise rates and tighten conditions and limits in an
effort to increase profitability. Policyholder surplus
is sometimes used as a measure of capacity.
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CAPITAL |
Shareholder’s equity (for
publicly-traded insurance companies) and retained
earnings (for mutual insurance companies). There is no
general measure of capital adequacy for
property/casualty insurers. Capital adequacy is linked
to the riskiness of an insurer’s business. A company
underwriting medical device manufacturers needs a larger
cushion of capital than a company writing Main Street
business, for example. (See
Risk-based capital;
Surplus;
Solvency)
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CAPITAL MARKETS |
The markets in which equities and
debt are traded. (See
Securitization of insurance risk)
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CAPTIVE AGENT |
A person who represents only one
insurance company and is restricted by agreement from
submitting business to any other company, unless it is
first rejected by the agent’s captive company. (See
Exclusive agent)
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CAPTIVES |
Insurers that are created and
wholly-owned by one or more non-insurers, to provide
owners with coverage. A form of self-insurance.
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CAR YEAR |
Equal to 365 days of insured
coverage for a single vehicle. It is the standard
measurement for automobile insurance.
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CASE MANAGEMENT |
A system of coordinating medical
services to treat a patient, improve care, and reduce
cost. A case manager coordinates health care delivery
for patients.
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CATASTROPHE |
Term used for statistical
recording purposes to refer to a single incident or a
series of closely related incidents causing severe
insured property losses totaling more than a given
amount, currently $25 million.
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CATASTROPHE BONDS |
Risk-based securities that pay
high interest rates and provide insurance companies with
a form of reinsurance to pay losses from a catastrophe
such as those caused by a major hurricane. They allow
insurance risk to be sold to institutional investors in
the form of bonds, thus spreading the risk. (See
Securitization of insurance risk)
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CATASTROPHE DEDUCTIBLE |
A percentage or dollar amount that
a homeowner must pay before the insurance policy kicks
in when a major natural disaster occurs. These large
deductibles limit an insurer’s potential losses in such
cases, allowing it to insure more property. A property
insurer may not be able to buy reinsurance to protect
its own bottom line unless it keeps its potential
maximum losses under a certain level.
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CATASTROPHE FACTOR |
Probability of catastrophic loss,
based on the total number of catastrophes in a state
over a 40-year period.
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CATASTROPHE MODEL |
Using computers, a method to mesh
long-term disaster information with current demographic,
building and other data to determine the potential cost
of natural disasters and other catastrophic losses for a
given geographic area.
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CATASTROPHE REINSURANCE |
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Reinsurance (insurance for
insurers) for catastrophic losses. The insurance
industry is able to absorb the multibillion dollar
losses caused by natural and man-made disasters such as
hurricanes, earthquakes and terrorist attacks because
losses are spread among thousands of companies including
catastrophe reinsurers who operate on a global basis.
Insurers’ ability and willingness to sell insurance
fluctuates with the availability and cost of catastrophe
reinsurance.
After major disasters, such as Hurricane Andrew and
the World Trade Center terrorist attack, the
availability of catastrophe reinsurance becomes
extremely limited. Claims deplete reinsurers’ capital
and, as a result, companies are more selective in the
type and amount of risks they assume. In addition, with
available supply limited, prices for reinsurance rise.
This contributes to an overall increase in prices for
property insurance.
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CELL PHONE INSURANCE |
Separate insurance provided to
cover cell phones for damage or theft. Policies are
often sold with the cell phones themselves.
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CHARTERED FINANCIAL CONSULTANT
/ ChFC |
A professional designation given
by The American College to financial services
professionals who complete courses in financial
planning.
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CHARTERED LIFE UNDERWRITER /
CLU |
A professional designation by The
American College for those who pass business
examinations on insurance, investments, and taxation,
and have life insurance planning experience.
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CHARTERED PROPERTY/CASUALTY
UNDERWRITER / CPCU |
A professional designation given
by the American Institute for Property and Liability
Underwriters. National examinations and three years of
work experience are required.
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CLAIMS-MADE POLICY |
A form of insurance that pays
claims presented to the insurer during the term of the
policy or within a specific term after its expiration.
It limits liability insurers’ exposure to unknown future
liabilities.
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COBRA |
Short for Consolidated Omnibus
Budget Reconciliation Act. A federal law under which
group health plans sponsored by employers with 20 or
more employees must offer continuation of coverage to
employees who leave their jobs and their dependents. The
employee must pay the entire premium. Coverage can be
extended up to 18 months. Surviving dependents can
receive longer coverage.
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COINSURANCE |
In property insurance, requires
the policyholder to carry insurance equal to a specified
percentage of the value of property to receive full
payment on a loss. For health insurance, it is a
percentage of each claim above the deductible paid by
the policyholder. For a 20 percent health insurance
coinsurance clause, the policyholder pays for the
deductible plus 20 percent of his covered losses. After
paying 80 percent of losses up to a specified ceiling,
the insurer starts paying 100 percent of losses.
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COLLATERAL |
Property that is offered to secure
a loan or other credit and that becomes subject to
seizure on default. (Also called security.)
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COLLATERAL SOURCE RULE |
Bars the introduction of
information that indicates a person has been compensated
or reimbursed by a source other than the defendant in
civil actions related to negligence or other liability.
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COLLISION COVERAGE |
Portion of an auto insurance
policy that covers the damage to the policyholder’s car
from a collision.
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COMBINED RATIO |
Percentage of each premium dollar
a property/casualty insurer spends on claims and
expenses. A decrease in the combined ratio means
financial results are improving; an increase means they
are deteriorating.
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COMMERCIAL GENERAL LIABILITY
INSURANCE / CGL |
A broad commercial policy that
covers all liability exposures of a business that are
not specifically excluded. Coverage includes product
liability, completed operations, premises and
operations, and independent contractors.
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COMMERCIAL LINES |
Products designed for and bought
by businesses. Among the major coverages are boiler and
machinery, business interruption, commercial auto,
comprehensive general liability, directors and officers
liability, fire and allied lines, inland marine, medical
malpractice liability, product liability, professional
liability, surety and fidelity, and workers
compensation. Most of these commercial coverages can be
purchased separately except business interruption which
must be added to a fire insurance (property) policy.
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COMMERCIAL MULTIPLE PERIL
POLICY |
Package policy that includes
property, boiler and machinery, crime, and general
liability coverages.
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COMMERCIAL PAPER |
Short-term, unsecured, and usually
discounted promissory note issued by commercial firms
and financial companies often to finance current
business. Commercial paper, which is rated by debt
rating agencies, is sold through dealers or directly
placed with an investor.
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COMMISSION |
Fee paid to an agent or insurance
salesperson as a percentage of the policy premium. The
percentage varies widely depending on coverage, the
insurer, and the marketing methods.
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COMMUNITY RATING LAWS |
Enacted in several states on
health insurance policies. Insurers are required to
accept all applicants for coverage and charge all
applicants the same premium for the same coverage
regardless of age or health. Premiums are based on the
rate determined by the geographic region’s health and
demographic profile.
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COMPETITIVE REPLACEMENT PARTS |
See
Crash parts;
Generic auto parts
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COMPETITIVE STATE FUND |
A facility established by a state
to sell workers compensation in competition with private
insurers.
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COMPLAINT RATIO |
A measure used by some state
insurance departments to track consumer complaints
against insurance companies. Generally, it is written as
the number of complaints upheld against an insurance
company, as a percentage of premiums written. In some
states, complaints from medical providers over the
promptness of payments may also be included.
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COMPLETED OPERATIONS COVERAGE |
Pays for bodily injury or property
damage caused by a completed project or job. Protects a
business that sells a service against liability claims.
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COMPREHENSIVE COVERAGE |
Portion of an auto insurance
policy that covers damage to the policyholder’s car not
involving a collision with another car (including damage
from fire, explosions, earthquakes, floods, and riots),
and theft.
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COMPULSORY AUTO INSURANCE |
The minimum amount of auto
liability insurance that meets a state law. Financial
responsibility laws in every state require all
automobile drivers to show proof, after an accident, of
their ability to pay damages up to the state minimum. In
compulsory liability states this proof, which is usually
in the form of an insurance policy, is required before
you can legally drive a car.
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CONTINGENT LIABILITY |
Liability of individuals,
corporations, or partnerships for accidents caused by
people other than employees for whose acts or omissions
the corporations or partnerships are responsible.
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COVERAGE |
Synonym for insurance.
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CRASH PARTS |
Sheet metal parts that are most
often damaged in a car crash. (See
Generic auto parts)
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CREDIT |
The promise to pay in the future
in order to buy or borrow in the present. The right to
defer payment of debt.
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CREDIT DERIVATIVES |
A contract that enables a user,
such as a bank, to better manage its credit risk. A way
of transferring credit risk to another party.
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CREDIT ENHANCEMENT |
A technique to lower the interest
payments on a bond by raising the issue’s credit rating,
often through insurance in the form of a financial
guarantee or with standby letters of credit issued by a
bank.
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CREDIT INSURANCE |
Commercial coverage against losses
resulting from the failure of business debtors to pay
their obligation to the insured, usually due to
insolvency. The coverage is geared to manufacturers,
wholesalers, and service providers who may be dependent
on a few accounts and therefore could lose significant
income in the event of an insolvency.
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CREDIT LIFE INSURANCE |
Life insurance coverage on a
borrower designed to repay the balance of a loan in the
event the borrower dies before the loan is repaid. It
may also include disablement and can be offered as an
option in connection with credit cards and auto loans.
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CREDIT RATING |
See
Bond rating
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CREDIT SCORE |
The number produced by an analysis
of an individual’s credit history. The use of credit
information affects all consumers in many ways, from
getting a job, finding a place to live, securing a loan,
getting a telephone, and buying insurance. Credit
history is routinely reviewed by insurers before issuing
a commercial policy because businesses in poor financial
condition tend to cut back on safety which can lead to
more accidents and more claims. Auto and home insurers
may use information in a credit history to produce an
insurance score. Insurance scores may be used in
underwriting and rating insurance policies. (See
Insurance score.)
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CRIME INSURANCE |
Term referring to property
coverages for the perils of burglary, theft and robbery.
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CROP-HAIL INSURANCE |
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Protection against damage to
growing crops from hail, fire, or lightning provided by
the private market. By contrast, multiple peril crop
insurance covers a wider range of yield-reducing
conditions, such as drought and insect infestation, and
is subsidized by the federal government.
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