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FACULTATIVE REINSURANCE |
A reinsurance policy that
provides an insurer with coverage for specific
individual risks that are unusual or so large
that they aren’t covered in the insurance
company's reinsurance treaties. This can include
policies for jumbo jets or oil rigs. Reinsurers
have no obligation to take on facultative
reinsurance, but can assess each risk
individually. By contrast, under treaty
reinsurance, the reinsurer agrees to assume a
certain percentage of entire classes of
business, such as various kinds of auto, up to
preset limits.
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FAIR ACCESS TO
INSURANCE REQUIREMENTS PLANS / FAIR PLANS |
Insurance pools that sell
property insurance to people who can’t buy it in
the voluntary market because of high risk over
which they may have no control. FAIR Plans,
which exist in 28 states and the District of
Columbia, insure fire, vandalism, riot, and
windstorm losses, and some sell homeowners
insurance which includes liability. Plans vary
by state, but all require property insurers
licensed in a state to participate in the pool
and share in the profits and losses. (See
Residual market)
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FARMOWNERS-RANCHOWNERS
INSURANCE |
Package policy that
protects the policyholder against named perils
and liabilities and usually covers homes and
their contents, along with barns, stables, and
other structures.
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FEDERAL FUNDS |
Reserve balances that
depository institutions lend each other, usually
on an overnight basis. In addition, Federal
funds include certain other kinds of borrowings
by depository institutions from each other and
from federal agencies.
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FEDERAL INSURANCE
ADMINISTRATION / FIA |
Federal agency in charge
of administering the National Flood Insurance
Program. It does not regulate the insurance
industry.
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FEDERAL RESERVE BOARD |
Seven-member board that
supervises the banking system by issuing
regulations controlling bank holding companies
and federal laws over the banking industry. It
also controls and oversees the U.S. monetary
system and credit supply.
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FIDELITY BOND |
A form of protection that
covers policyholders for losses that they incur
as a result of fraudulent acts by specified
individuals. It usually insures a business for
losses caused by the dishonest acts of its
employees.
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FIDUCIARY BOND |
A type of surety bond,
sometimes called a probate bond, which is
required of certain fiduciaries, such as
executors and trustees, that guarantees the
performance of their responsibilities.
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FIDUCIARY LIABILITY |
Legal responsibility of a
fiduciary to safeguard assets of beneficiaries.
A fiduciary, for example a pension fund manager,
is required to manage investments held in trust
in the best interest of beneficiaries. Fiduciary
liability insurance covers breaches of fiduciary
duty such as misstatements or misleading
statements, errors and omissions.
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FILE-AND-USE STATES |
States where insurers must
file rate changes with their regulators, but
don’t have to wait for approval to put them into
effect.
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FINANCIAL GUARANTEE
INSURANCE |
Covers losses from
specific financial transactions and guarantees
that investors in debt instruments, such as
municipal bonds, receive timely payment of
principal and interest if there is a default.
Raises the credit rating of debt to which the
guarantee is attached. Investment bankers who
sell asset-backed securities, securities backed
by loan portfolios, use this insurance to
enhance marketability. (See
Municipal bond insurance)
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FINANCIAL
RESPONSIBILITY LAW |
A state law requiring that
all automobile drivers show proof that they can
pay damages up to a minimum amount if involved
in an auto accident. Varies from state to state
but can be met by carrying a minimum amount of
auto liability insurance. (See
Compulsory auto insurance)
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FINITE RISK REINSURANCE |
Contract under which the
ultimate liability of the reinsurer is capped
and on which anticipated investment income is
expressly acknowledged as an underwriting
component. Also known as Financial Reinsurance
because this type of coverage is often bought to
improve the balance sheet effects of statutory
accounting principles.
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FIRE INSURANCE |
Coverage protecting
property against losses caused by a fire or
lightning that is usually included in homeowners
or commercial multiple peril policies.
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FIRST-PARTY COVERAGE |
Coverage for the
policyholder’s own property or person. In
no-fault auto insurance it pays for the cost of
injuries. In no-fault states with the broadest
coverage, the personal injury protection (PIP)
part of the policy pays for medical care, lost
income, funeral expenses and, where the injured
person is not able to provide services such as
child care, for substitute services. (See
No-fault;
Third-party coverage)
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FIXED ANNUITY |
An annuity that guarantees
a specific rate of return. In the case of a
deferred annuity, a minimum rate of interest is
guaranteed during the savings phase. During the
payment phase, a fixed amount of income, paid on
a regular schedule, is guaranteed.
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FLOATER |
Attached to a homeowners
policy, a floater insures movable property,
covering losses wherever they may occur. Among
the items often insured with a floater are
expensive jewelry, musical instruments, and
furs. It provides broader coverage than a
regular homeowners policy for these items.
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FLOOD INSURANCE |
Coverage for flood damage
is available from the federal government under
the National Flood Insurance Program but is sold
by licensed insurance agents. Flood coverage is
excluded under homeowners policies and many
commercial property policies. However, flood
damage is covered under the comprehensive
portion of an auto insurance policy. (See
Adverse selection)
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FORCED PLACE INSURANCE |
Insurance purchased by a
bank or creditor on an uninsured debtor’s behalf
so if the property is damaged, funding is
available to repair it.
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FOREIGN INSURANCE
COMPANY |
Name given to an insurance
company based in one state by the other states
in which it does business.
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FRAUD |
Intentional lying or
concealment by policyholders to obtain payment
of an insurance claim that would otherwise not
be paid, or lying or misrepresentation by the
insurance company managers, employees, agents,
and brokers for financial gain.
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FREE-LOOK PERIOD |
A period of up to one
month during which the purchaser of an annuity
can cancel the contract with no penalty. Rules
vary by state.
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FREQUENCY |
Number of times a loss
occurs. One of the criteria used in calculating
premium rates.
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FRONTING |
A procedure in which a
primary insurer acts as the insurer of record by
issuing a policy, but then passes the entire
risk to a reinsurer in exchange for a
commission. Often, the fronting insurer is
licensed to do business in a state or country
where the risk is located, but the reinsurer is
not. The reinsurer in this scenario is often a
captive or an independent insurance company that
cannot sell insurance directly in a particular
country.
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FUTURES |
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Agreement to buy a
security for a set price at a certain date.
Futures contracts usually involve commodities,
indexes or financial futures. |
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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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