保险专业英语名词解释A-Z

保险专业英语名词解释A-Z A Absolute liability: Liability for damages even though fault or negligence cannot be proven, for example, in such situations as occupational injury of employees under a workers compensation law. Accelerated death benefits rider: A rider that allows insureds who are terminally ill or who suffer from certain catastrophic diseases to collect part or all of their life insurance benefits before they die, primarily to pay for the care they require. Accident: A loss-causing event that is sudden, unforeseen, and unintentional. See also Occurrence. Accidental bodily injury: Bodily injury resulting from an act whose result was accidental or unexpected. Actual cash value: Value of property at the time of its damage or loss, determined by subtracting depreciation of the item from its replacement cost. Add-on plan: Pays benefits to an accident victim without regard to fault, but the injured person still has the right to sue the negligent driver who caused the accident. Adjustment bureau: Organization for adjusting insurance claims that is supported by insurers using the bureau's services. Advance funding: Pension-funding method in which the employer systematically and periodically sets aside funds prior to the employee's retirement. 1 Advance premium mutual: Mutual insurance company owned by the policyowners that does not issue assessable policies but charges premiums expected to be sufficient to pay all claims and expenses. Adverse selection: Tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting, results in higher-than-expected loss levels. Agency building system: Marketing system in life insurance by which an insurer builds its own agency force by recruiting, financing, training, and supervising new agents. Agent: Someone who legally represents the insurer, has the authority to act on the insurer's behalf, and can bind the principal by expressed powers, by implied powers, and by apparent authority. Aggregate deductible: Deductible in some property and health insurance contracts in which all covered losses during a year are added together and the insurer pays only when the aggregate deductible amount is exceeded. Aleatory contract: One in which the values exchanged may not be equal but depend on an uncertain event. Alien insurer: Insurance company chartered by a foreign country and meeting certain licensing requirements. "All-risks" policy: Coverage by an insurance contract that promises to cover all losses except those losses specifically excluded in the policy. Alternative dispute resolution (ADR) techniques: Techniques to resolve a legal dispute without litigation. 2 Annuitant: Person who receives the periodic payment from an annuity. Annuity: Periodic payment to an individual that continues for a fixed period or for the duration of a designated life or lives. Applicable credit amount: Tax credit that can be used to reduce the amount of federal estate or gift tax; also known as unified tax credit. Appraisal clause: Used when the insured and insurer agree that the loss is covered, but the amount of the loss is in dispute. Assessment mutual: Mutual insurance company that has the right to assess policyowners for losses and expenses. Assumption-of-risk: Defense against a negligence claim that bars recovery for damages if a person understands and recognizes the danger inherent in a particular activity or occupation. Attractive nuisance: Condition that can attract and injure children. Occupants of land on which such a condition exists are liable for injuries to children. Automatic premium loan: Cash borrowed from a life insurance policy's cash value to pay an overdue premium after the grace period for paying the premium has expired. Automobile insurance plan: Formerly called assigned risk plan. Method for providing automobile insurance to persons considered to be high-risk drivers who cannot obtain protection in the voluntary markets. All automobile insurers in the state are assigned their share of such drivers based on the volume of automobile insurance business written in the state. 3 Average indexed monthly earnings (AIME): Under the OASDI program, the person's actual earnings are indexed to determine his or her primary insurance amount (PIA). Avoidance: See Loss avoidance. B Bailee's customer policy: Policy that covers the loss or damage to property of customers regardless of a bailee's legal liability. Basic form: See Dwelling Property 1. Benefit period: A period of time, typically one to three years, during which major medical benefits are paid after the deductible is satisfied. When the benefit period ends, the insured must then satisfy a new deductible in order to establish a new benefit period. Binder: Authorization of coverage by an agent given before the company has formally approved a policy. Provides evidence that the insurance is in force. Blackout period: The period during which Social Security benefits are not paid to a surviving spouse--between the time the youngest child reaches age 16 and the surviving spouse's sixtieth birthday. Blue Cross plans: Typically nonprofit, community-oriented prepayment plans that provide health insurance coverage primarily for hospital services. Blue Shield plans: Typically nonprofit prepayment plans that provide health insurance coverage mainly for physicians's services. 4 Boat owners package policy: A special package policy for boat owners that combines physical damage insurance, medical expense insurance, liability insurance, and other coverages in one contract. Broad form: See Dwelling Property 2; Homeowners 2 policy. Broker: Someone who legally represents the insured, soliciting or accepting applications for insurance that are not in force until the company accepts the business. Burglary: Taking of property from within the premises by someone who unlawfully enters or leaves the premises, with marks of forcible entry or exit. Business income coverage form: Business income form drafted by the Insurance Services Office to cover the loss of business income regardless of whether the income is derived from retail or service operations, manufacturing, or rents. Businessowners policy: Package policy specifically designed to meet the basic property and liability insurance needs of smaller business firms in one contract. C Cafeteria plan: Generic term for an employee benefit plan that allows employees to select among the various group life, medical expense, disability, dental, and other plans that best meet their specific needs. Also called flexible benefit plans. Calendar-year deductible: Amount payable by an insured during a calendar year before a group or individual health insurance policy begins to pay for medical expenses. 5 Capacity: Term used in the property and liability insurance industry that refers to the relative level of surplus; the greater the industry's surplus position, the more willing underwriters will write new business or reduce premiums. Capital budgeting: Method of determining which capital investment projects a company should undertake based on the time value of money. Capital retention approach: A method used to estimate the amount of life insurance to own. Under this method, the insurance proceeds are retained and are not liquidated. Captive insurer: Insurance company established and owned by a parent firm in order to insure its loss exposures while reducing premium costs, providing easier access to a reinsurer, and perhaps easing tax burdens. Cargo insurance: Type of ocean marine insurance that protects the shipper of the goods against financial loss if the goods are damaged or lost. Cash refund annuity: The balance is paid in one lump sum to the beneficiary after the death of the annuitant, if total payments do not equal the annuity purchase price. Cash surrender value: Amount payable to the owner of a cash-value life insurance policy should he or she decide it is no longer wanted. Calculated separately from the legal reserve. Casualty insurance: Field of insurance that covers whatever is not covered by fire, marine, and life insurance. Includes auto, liability, burglary and theft, workers compensation, glass, and health insurance. 6 Causes-of-loss form: Form added to commercial property insurance policy that indicates the causes of loss that are covered. There are four causes-of-loss forms: basic, broad, special, and earthquake. Ceding company: Insurer that writes the policy initially and later shifts part or all of the coverage to a reinsurer. Certified Financial Planner (CFP): Professional who has attained a high degree of technical competency in financial planning and has passed a series of professional examinations. Certified Insurance Counselor (CIC): Professional in property and liability insurance who has passed a series of examinations sponsored by the Society of Certified Insurance Counselors. Chance of loss: The probability that an event will occur. Change-of-plan provision: Allows life insurance policyowners to exchange their present policies for different contracts, provides flexibility. Chartered Financial Consultant (ChFC): An individual who has attained a high degree of technical competency in the fields of financial planning, investments, and life and health insurance and has passed eight professional examinations administered by The American College. Chartered Life Underwriter (CLU): An individual who has attained a high degree of technical competency in the fields of life and health insurance and has passed eight professional examinations administered by The American College. Chartered Property Casualty Underwriter (CPCU): Professional who has attained a high degree of technical competency in property and liability 7 insurance and has passed eight professional examinations administered by the American Institute for Chartered Property Casualty Underwriters. Chief risk officer (CRO): Person responsible for the treatment of pure and speculative risks faced by an organization. Choice no-fault plans: Motorists can elect to be covered under the state's no-fault law with lower premiums or can retain the right to sue under the tort liability system with higher premiums. Claims adjustor: Person who settles claims: an agent, company adjustor, independent adjustor, adjustment bureau, or public adjustor. Claims-made policy: A liability insurance policy that only covers claims that are first reported during the policy period, provided the event occurred after the retroactive date (if any) stated in the policy. Class rating: Rate-making method in which similar insureds are placed in the same underwriting class and each is charged the same rate. Also called manual rating. CLU: See Chartered Life Underwriter. Coinsurance provision: Common provision in commercial property insurance contracts that requires the insured to maintain insurance on the property at a stated percentage of its actual cash value or its replacement cost. Payment for a loss is determined by multiplying the amount of the loss by the fraction derived from the amount of insurance required. If the coinsurance requirement is not met at the time of loss, the insured will be penalized. Coinsurance is also used to refer to the percentage participation clause in health insurance. See also Percentage participation clause. 8 Collateral source rule: Under this rule, the defendant cannot introduce any evidence that shows the injured party has received compensation from other collateral sources. Collision loss: Damages to an automobile caused by the upset of the automobile or its impact with another vehicle or object. Collision losses are paid by the insurer regardless of fault. Commercial crime coverage form: ISO form that can be added to a package policy to cover crime exposures of business firms. Commercial general liability policy (CGL): Commercial liability policy drafted by the Insurance Services Office containing two coverage forms--an occurrence form and a claims-made form. Commercial package policy (CPP): A commercial policy that can be designed to meet the specific insurance needs of business firms. Property and liability coverage forms are combined to form a single policy. Commodity price risk: Risk of losing money if the price of a commodity changes. Commutative contract: One in which the values exchanged by both parties are theoretically even. Company adjustor: Claims adjustor who is a salaried employee representing only one company. Comparative negligence laws: Laws enacted by many jurisdictions permitting an injured person to recover damages even though he or she may have 9 contributed to the accident. The financial burden is shared by both parties according to their respective degrees of fault. Completed operations: Liability arising out of faulty work performed away from the premises after the work or operations are completed; applicable to contractors, plumbers, electricians, repair shops, and similar firms. Comprehensive major medical insurance: Type of group plan combining basic plan benefits and major medical insurance in one policy. Compulsory insurance law: Law protecting accident victims against irresponsible motorists by requiring owners and operators of automobiles to carry certain amounts of liability insurance in order to license the vehicle and drive legally within the state. Concealment: Deliberate failure of an applicant for insurance to reveal a material fact to the insurer. Conditions: Provisions inserted in an insurance contract that qualify or place limitations on the insurer's promise to perform. Consequential loss: Financial loss occurring as the consequence of some other loss. Often called an indirect loss. Consolidation: Combining of business organizations through mergers and acquisitions. Contingent beneficiary: Beneficiary of a life insurance policy who is entitled to receive the policy proceeds on the insured's death if the primary beneficiary dies before the insured; or the beneficiary who receives the remaining payments 10 if the primary beneficiary dies before receiving the guaranteed number of payments. Contingent liability: Liability arising out of work done by independent contractors for a firm. A firm may be liable for the work done by an independent contractor if the activity is illegal, the situation does not permit delegation of authority, or the work is inherently dangerous. Contract bond: Type of surety bond guaranteeing that the principal will fulfill all contractual obligations. Contract of adhesion: The insured must accept the entire contract, with all of its terms and conditions. Contractual liability: Legal liability of another party that the business firm agrees to assume by a written or oral contract. Contribution by equal shares: Type of other-insurance provision often found in liability insurance contracts that requires each company to share equally in the loss until the share of each insurer equals the lowest limit of liability under any policy or until the full amount of loss is paid. Contributory negligence: Common law defense blocking an injured person from recovering damages if he or she has contributed in any way to the accident. Contributory plan: Group life, health, or pension plan in which the employees pay part of the premiums. 11 Coordination-of-benefits provision: Provision in a group medical expense plan that prevents over-insurance and duplication of benefits when one person is covered under more than one group plan. Corridor deductible: Major medical plan deductible that integrates a basic plan with a supplemental group major medical expense policy. Cost-of-living rider: Benefit that can be added to a life insurance policy under which the policyowner can purchase one-year term insurance equal to the cumulative percentage change in the consumer price index with no evidence of insurability. Coverage for damage to your auto: That part of the personal auto policy insuring payment for damage or theft of the insured automobile. This optional coverage can be used to insure both collision and other-than-collision losses. CPCU: See Chartered Property Casualty Underwriter. Currency exchange rate risk: Risk of loss of value caused by changes in exchange rates between countries. Current assumption whole life insurance: Nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience. An accumulation account is credited with a current interest rate that changes over time. Also called interest-sensitive whole life insurance. Currently insured: Status of a covered person under the Old-Age, Survivors, and Disability Insurance (OASDI) program who has at least six credits out of the last thirteen quarters, ending with the quarter of death, disability, or entitlement to retirement benefits. 12 D Damage to property of others: Damage covered up to $1000 per occurrence for an insured who damages another's property. Payment is made despite the lack of legal liability. Coverage is included in Section II of the homeowners policy. Declarations: Statements in an insurance contract that provide information about the property to be insured and used for underwriting and rating purposes and identification of the property to be insured. Deductible: A provision by which a specified amount is subtracted from the total loss payment that would otherwise be paid. Deferred annuity: A retirement annuity that provides benefits at some future date. Defined-benefit plan: Type of pension plan in which the retirement benefit is known in advance but the contributions vary depending on the amount necessary to fund the desired benefit. Defined-contribution plan: Type of pension plan in which the contribution rate is fixed but the retirement benefit is variable. Demutualization: A term to describe the conversion of a mutual insurer into a stock insurer. Dependency period: Period of time following the readjustment period during which the surviving spouse's children are under eighteen and therefore dependent on the parent. 13 Deposit-administration plan: Type of pension plan in which all pension contributions are deposited in an unallocated fund. An annuity is purchased only when the employee retires. Diagnosis-related groups (DRGs): Method for reimbursing hospitals under the Medicare program. Under this system, a flat, uniform amount is paid to each hospital for the same type of medical care or treatment. Difference in conditions insurance (DIC): "All-risks" policy that covers other perils not insured by basic property insurance contracts, supplemental to and excluding the coverage provided by underlying contracts. Direct loss: Financial loss that results directly from an insured peril. Direct-response system: A marketing method where insurance is sold without the services of an agent. Potential customers are solicited by advertising in the mails, newspapers, magazines, television, radio, and other media. Direct writer: Insurance company in which the salesperson is an employee of the insurer, not an independent contractor, and which pays all selling expenses, including salary. Disability-insured: Status of an individual who is insured for disability benefits under the Old-Age, Survivors, and Disability Insurance (OASDI) program. Domestic insurer: Insurance company domiciled and licensed in the state in which it does business. 14 Double indemnity rider: Benefit that can be added to a life insurance policy doubling the face amount of life insurance if death occurs as the result of an accident. Dram shop law: Law that imputes negligence to the owner of a business that sells liquor in the event that an intoxicated customer causes injury or property damage to another person; usually excluded from general liability policies. Driver education credit: Student discount or reduction in premium amount for which young drivers become eligible on completion of a driver education course. Dwelling Property 1: Property insurance policy that insures the dwelling, structures, personal property, fair rental value, and certain other coverages; covers a limited number of perils. Dwelling Property 2: Property insurance policy that insures the dwelling and other structures at replacement cost. It adds additional coverages and has a greater list of covered perils than the Dwelling Property 1 policy. Dwelling Property 3: Property insurance policy that covers the dwelling and other structures against direct physical loss from any peril except for those perils otherwise excluded. However, personal property is covered on a named-perils basis. E Earnings test (retirement test): Test under the Old-Age, Survivors, and Disability Insurance (OASDI) program that reduces monthly benefits to those persons who have annual earned income in excess of the maximum allowed. 15 Eligibility period: Brief period of time during which an employee can sign up for group insurance without furnishing evidence of insurability. Elimination period (waiting period): Waiting period in health insurance during which benefits are not paid. Also a period of time that must be met before benefits are actually payable. Employee Retirement Income Security Act (ERISA): Legislation passed in 1974 applying to most private pension and welfare plans that requires certain standards to protect participating employees. Employers liability insurance: Covers employers against lawsuits by employees who are injured in the course of employment, but whose injuries (or disease) are not compensable under the state's workers compensation law. Endorsement: Written provision that adds to, deletes, or modifies the provisions in the original contract. See also Rider. Endowment insurance: Type of life insurance that pays the face amount of insurance to the beneficiary if the insured dies within a specified period or to the policyowner if the insured survives to the end of the period. Enterprise risk management: Comprehensive risk management program that considers an organization's pure risks, speculative risks, strategic risks, and operational risks. Entire-contract clause: Provision in life insurance policies stating that the life insurance policy and attached application constitute the entire contract between the parties. 16 Equipment breakdown insurance: Insurance that covers losses due to accidental breakdown of covered equipment; also known as boiler and machinery insurance. Equity in the unearned premium reserve: Amount by which an unearned premium reserve is overstated because it is established on the basis of gross premium rather than net premium. Equity indexed annuity: A fixed, deferred annuity that allows participation in the stock market but guarantees the principal against loss if the contract is held to term. ERISA: See Employee Retirement Income Security Act. Errors and omissions insurance: Liability insurance policy that provides protection against loss incurred by a client because of some negligent act, error, or omission by the insured. Estate planning: Process designed to conserve estate assets before and after death, distribute property according to the individual's wishes, minimize federal estate and state inheritance taxes, provide estate liquidity to meet costs of estate settlement, and provide for the family's financial needs. Estoppel: Legal doctrine that prevents a person from denying the truth of a previous representation of fact, especially when such representation has been relied on by the one to whom the statement was made. Excess insurance: Under an excess insurance plan, the insurer does not participate in the loss until the actual loss exceeds a certain amount. 17 Exclusion ratio: Calculation to determine the taxable and nontaxable portions of annuity payments, which is determined by dividing the investment in the contract by the expected return. Exclusions: Provisions in an insurance contract that list the perils, losses, and property excluded from coverage. Exclusive agency system: Type of insurance marketing system under which the agent represents only one company or group of companies under common ownership. Exclusive provider organization (EPO): A plan that does not cover medical care received outside of a network of preferred providers. Exclusive remedy doctrine: Doctrine in workers compensation insurance that states that workers compensation benefits should be the exclusive or sole source of recovery for workers who have a job-related accident or disease; doctrine has been eroded by legal decisions. Expense loading: See Loading. Expense ratio: That proportion of the gross rate available for expenses and profit. Ratio of expenses incurred to premiums written. Experience rating: (1) Method of rating group life and health insurance plans that uses the loss experience of the group to determine the premiums to be charged. (2) As applied to property and liability insurance, the class or manual rate is adjusted upward or downward based on past loss experience. (3) As applied to state unemployment insurance programs, firms with favorable employment records pay lower tax rates. 18 Exposure unit: Unit of measurement used in insurance pricing. Extended nonowned coverage: Endorsement that can be added to an auto liability insurance policy that covers the insured while driving any nonowned automobile on a regular basis. Extra expense coverage form: A separate form that can be used to cover the extra expenses incurred by a firm to continue operations during a period of restoration. F Factory mutual: Mutual insurance company insuring only properties that meet high underwriting standards; emphasizes loss prevention. Facultative reinsurance: Optional, case-by-case method of reinsurance used when the ceding company receives an application for insurance that exceeds its retention limit. Fair Access to Insurance Requirements (FAIR plan): Property insurance plan that provides basic property insurance to property owners in areas where they are unable to obtain insurance in the normal markets. Each state with such a plan has a central placement facility. Fair rental value: Amount payable to an insured homeowner for loss of rental income due to damage that makes the premises uninhabitable. Family purpose doctrine: Concept that imputes negligence committed by immediate family members while operating a family car to the owner of the car. 19 Federal crop insurance: Various federal insurance programs that provides coverage for unavoidable crop losses, such as hail, wind, drought, and plant disease. Federal surety bond: Type of surety bond required by federal agencies that regulates the actions of business firms. It guarantees that the bonded party will comply with federal standards, pay all taxes or duties accrued, or pay any penalty if the bondholder fails to pay. File-and-use law: Law for regulating insurance rates under which companies are required only to file the rates with the state insurance department before putting them into effect. Financial institution bond: Bond that covers crime loss exposures of commercial banks, savings and loan institutions, and other financial institutions; used to cover bank holdups, employee dishonesty, forgery, alteration of checks, armored car exposures, and other crime exposures of financial institutions. Financial responsibility law: Law that requires persons involved in automobile accidents to furnish proof of financial responsibility up to a minimum dollar limit or face having driving privileges revoked or suspended. Fire legal liability: Liability of a firm or person for fire damage caused by negligence and damage to property of others. Fixed-amount option: Life insurance settlement option in which the policy proceeds are paid out in fixed amounts. Fixed annuity: Annuity whose periodic payment is a guaranteed fixed amount. 20 Fixed-period option: Life insurance settlement option in which the policy proceeds are paid out over a fixed period of time. Flexible-premium annuity: An annuity contract that permits the owner to vary the size and frequency of premium payments. The amount of retirement income depends on the accumulated sum in the annuity at retirement. Flexible-spending account: An arrangement by which the employee agrees to a salary reduction, which can be used to pay for plan benefits, unreimbursed medical and dental expenses, and other expenses permitted by the Internal Revenue Code. Flex-rating law: Type of rating law in which prior approval of the rates is required only if the rates exceed a certain percentage above and below the rates previously filed. Foreign insurer: Insurance company chartered by one state but licensed to do business in another. Fortuitous loss: Unforeseen and unexpected loss that occurs as a result of chance. Franchise deductible: Deductible found in some marine insurance contracts in which the insurer has no liability if the loss is under a certain amount, but once this amount is exceeded, the entire loss is paid in full. Fraternal insurer: Mutual insurance company that provides life and health insurance to members of a social organization. 21 Fully insured: Insured status of a covered person under the Old-Age, Survivors, and Disability Insurance (OASDI) program. To be fully insured for retirement benefits, 40 credits are required. Fundamental risk: A risk that affects the entire economy or large numbers of persons or groups within the economy. Funding agency: A financial institution or individual that provides for the accumulation or administration of the pension contributions that will be used to pay pension benefits. Funding instrument: An insurance contract or trust agreement that states the terms under which the funding agency will accumulate, administer, and disburse the pension funds. G General agency system: Type of life insurance marketing system in which the general agent is an independent businessperson who represents only one insurer, is in charge of a territory, and is responsible for hiring, training, and motivating new agents. General aggregate limit: In the commercial general liability policy, it is the maximum amount the insurer will pay for the sum of the following--damages under Coverage A, B, and medical expenses under Coverage C. General average: In ocean marine insurance, a loss incurred for the common good that is shared by all parties to the venture. Good student discount: Reduction of automobile premium for a young driver at least sixteen who ranks in the upper 20 percent of his or her class, has a B or 22 3.0 average, or is on the Dean's list or honor roll. It is based on the premise that good students are better drivers. Grace period: Period of time during which a policyowner may pay an overdue life insurance premium without causing the policy to lapse. Gross estate: The value of the property that you own when you die. Also includes value of jointly-owned property, life insurance, death proceeds, and certain other items. Gross premium: Amount paid by the insured, consisting of the gross rate multiplied by the number of exposure units. Gross rate: The sum of the pure premium and a loading element. Group deferred annuity: Type of allocated pension plan in which a single-premium deferred annuity is purchased each year and is equal to the retirement benefit for that year. Group life insurance: Life insurance provided on a number of persons in a single master contract. Physical examinations are not required, and certificates of insurance are issued to members of the group as evidence of insurance. Group term life insurance: Most common form of group life insurance. Yearly renewable term insurance on employees during their working careers. Group universal life products (GULP): Universal life insurance plans sold to members of a group, such as individual employees of an employer. There are some differences between GULP plans and individual universal life plans; for instance, GULP expense charges are generally lower than those assessed against individual policies. 23 Guaranteed investment contract: An investment contract with an insurer in which the insurer guarantees both principal and interest on a pension contribution. Guaranteed purchase option: Benefit that can be added to a life insurance policy permitting the insured to purchase additional amounts of life insurance at specified times in the future without requiring evidence of insurability. Guaranteed renewable: Continuance provision of a health insurance policy under which the company guarantees to renew the policy to a stated age, and whose renewal is at the insured's option. Premiums can be increased for broad classes of insureds. Guaranteed replacement cost: In the event of a total loss, the insurer agrees to replace the home exactly as it was before the loss even though the replacement cost exceeds the amount of insurance stated in the policy. H Hard insurance market: A period in the underwriting cycle during which underwriting standards are strict and premiums are high. See also soft insurance market and underwriting cycle. Hazard: Condition that creates or increases the chance of loss. Health maintenance organization (HMO): Organized system of health care that provides comprehensive health services to its members for a fixed prepaid fee. 24 Hedging: Technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling options and futures contracts on an organized exchange. HMO: See Health maintenance organization. Hold-harmless clause: Clause written into a contract by which one party agrees to release another party from all legal liability, such as a retailer who agrees to release the manufacturer from legal liability if the product injures someone. Home service life insurance: Industrial life insurance and monthly debit ordinary life insurance contracts that are serviced by agents who call on the policyowners at their homes to collect the premiums. Homeowners 2 policy (broad form): Homeowners insurance policy that provides coverage on a named-perils basis on the dwelling, other structures, and personal property. Personal liability insurance is also provided. Homeowners 3 policy (special form): Homeowners insurance policy that covers the dwelling and other structures on a risk-of-direct-loss basis and personal property on a named-perils basis. Personal liability insurance is also provided. Homeowners 4 policy (contents broad form): Homeowners insurance policy that applies to tenants renting a home or apartment. Covers the tenant's personal property and provides personal liability insurance. Homeowners 5 policy (comprehensive form): Homeowners insurance policy that provides open perils coverage ("all risks coverage") on both the building and personal property. The dwelling, other structures, and personal property are 25 insured against the risk of direct physical loss to property; all losses are covered except those losses specifically excluded. Homeowners 6 policy (unit-owners form): Homeowners insurance policy that covers personal property of insured owners of condominium units and cooperative apartments on a broad form, named-perils basis. Personal liability insurance is also provided. Homeowners 8 policy (modified coverage form): Homeowner policy that is designed for older homes. Dwelling and other structures are indemnified on the basis of repair cost using common construction materials and methods. Personal liability insurance is also provided. Hospital expense insurance: Individual health insurance that pays for medical expenses incurred while in a hospital. Hospital Insurance (Part A): Part A of Medicare that covers inpatient hospital care, skilled nursing facility care, home health care services, and hospice care for Medicare beneficiaries. Hospital-surgical insurance: Medical expense plan that provides hospital and surgical benefits and other ancillary benefits. Hull insurance (1): Class of ocean marine insurance that covers physical damage to the ship or vessel insured. Typically written on an "all-risks" basis. (2) Physical damage insurance on aircraft--similar to collision insurance in an auto policy. Human life value: For purposes of life insurance, the present value of the family's share of the deceased breadwinner's future earnings. 26 I Immediate annuity: An annuity where the first payment is due one payment interval from the date of purchase. Immediate-participation guarantee plan (IPG): Type of pension plan in which all pension contributions are deposited in an unallocated fund and used directly to pay benefits to retirees. Imputed negligence: Case in which responsibility for damage can be transferred from the negligent party to another person, such as an employer. Incontestable clause: Contractual provision in a life insurance policy stating that the insurer cannot contest the policy after it has been in force two years during the insured's lifetime. Indemnification: Compensation to the victim of a loss, in whole or in part, by payment, repair, or replacement. Independent adjustor: Claims adjustor who offers his or her services to insurance companies and is compensated by a fee. Independent agency system: Type of property and liability insurance marketing system, sometimes called the American agency system, in which the agent is an independent businessperson representing several insurers. The agency owns the expirations or renewal rights to the business, and the agent is compensated by commissions that vary by line of insurance. Indeterminate-premium whole life insurance: Nonparticipating whole life policy that permits the insurer to adjust premiums based on anticipated future experience. Initial premiums are guaranteed for a certain period. After the initial 27 guaranteed period expires, the insurer can increase premiums up to some maximum limit. Indirect loss: See Consequential loss. Individual Retirement Account (IRA): Individual retirement plan that can be established by a person with earned income. An IRA plan enjoys favorable income tax advantages. Industrial life insurance: Type of life insurance in which policies are sold in small amounts and the premiums are collected weekly or monthly by a debit agent at the policyowner's home. Inflation-guard endorsement: Endorsement added at the insured's request to a homeowners policy to increase periodically the face amount of insurance on the dwelling and other policy coverages by a specified percentage. Initial reserve: In life insurance, the reserve at the beginning of any policy year. Inland marine insurance: Transportation insurance that provides protection for goods shipped on land including imports, exports, domestic shipments, means of transportation, personal property floater risks, and commercial property floater risks. Installment refund annuity: Pays the annuitant a lifetime income, but if death occurs before receiving payments equal to the purchase price, the income payments continue to the beneficiary. 28 Insurance: Pooling of fortuitous losses by transfer of risks to insurers who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk. Insurance guaranty funds: State funds that provide for the payment of unpaid claims of insolvent insurers. Insurance Services Office (ISO): Major rating organization in property and liability insurance that drafts policy forms for personal and commercial lines of insurance and provides rate data on loss costs for property and liability insurance lines. Insuring agreement: That part of an insurance contract that states the promises of the insurer. Integrated risk management: A risk management technique that combines coverage for pure and speculative risks in the same insurance contract. Interest-adjusted method: Method of determining cost to an insured of a life insurance policy that considers the time cost of money by applying an interest factor to each element of cost. See also Net payment cost index; Surrender cost index. Interest option: Life insurance settlement option in which the principal is retained by the insurer and interest is paid periodically. Interest rate risk: Risk of loss caused by adverse interest rate movements. Invitee: Someone who is invited onto the premises for the benefit of the occupant. IPG plan: See Immediate-participation guarantee plan. 29 IRA: See Individual Retirement Account. Irrevocable beneficiary: Beneficiary designation allowing no change to be made in the beneficiary of an insurance policy without the beneficiary's consent. ISO: See Insurance Services Office. J Joint and several liability: Rule under which several people may be responsible for the injury, but a defendant who is only slightly responsible may be required to pay the full amount of damages. Joint-and-survivor annuity: Annuity based on the lives of two or more annuitants. The annuity income (either the full amount of the original income or only two-thirds or one-half of the original income when the first annuitant dies) is paid until the death of the last annuitant. Joint underwriting association (JUA): Organization of auto insurers operating in a state that makes auto insurance available to high-risk drivers. All underwriting losses are proportionately shared by insurers on the basis of premiums written in the state. Judgment rating: Rate-making method for which each exposure is individually evaluated and the rate is determined largely by the underwriter's judgment. Judicial bond: Type of surety bond used for court proceedings and guaranteeing that the party bonded will fulfill certain obligations specified by law, for example, fiduciary responsibilities. 30 Juvenile insurance: Life insurance purchased by parents for children under a specified age. K Keogh plan for the self-employed: Retirement plan individually adopted by self-employed persons that allows a tax deductible contribution to a defined-contribution or defined-benefit plan. L Lapsed policy: One that is not in force because premiums have not been paid. Last clear chance rule: Statutory modification of the contributory negligence law allowing the claimant endangered by his or her own negligence to recover damages from a defendant if the defendant has a last clear chance to avoid the accident but fails to do so. Law of large numbers: Concept that the greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures. Legal reserve: Liability item on a life insurer's balance sheet representing the redundant or excessive premiums paid under the level-premium method during the early years. Assets must be accumulated to offset the legal reserve liability. Purpose of the legal reserve is to provide lifetime protection. Liability coverage: That part of the personal auto policy that protects a covered person against a suit or claim for bodily injury or property damage arising out of negligent ownership or operation of an automobile. Liability coverage is also 31 included in the homeowner's policy, which provides coverage for bodily injury and property damage liability. Liability without fault: Principle on which workers compensation is based, holding the employer absolutely liable for occupational injuries or disease suffered by workers, regardless of who is at fault. License and permit bond: Type of surety bond guaranteeing that the person bonded will comply with all laws and regulations that govern his or her activities. Licensee: Someone who enters or remains on the premises with the occupant's expressed or implied permission. Life annuity with guaranteed payments: Pays a life income to the annuitant with a certain number of guaranteed payments. Life income option: Life insurance settlement option in which the policy proceeds are paid during the lifetime of the beneficiary. A certain number of guaranteed payments may also be payable. Life insurance planning: Systematic method of determining the insured's financial goals, which are translated into specific amounts of life insurance, then periodically reviewed for possible changes. Limited-payment policy: Type of whole life insurance providing protection throughout the insured's lifetime and for which relatively high premiums are paid only for a limited period. Liquor liability law: See Dram shop law. 32 Loading: The amount that must be added to the pure premium for expenses, profit, and a margin for contingencies. Long-term-care insurance: A form of health insurance that pays a daily or monthly benefit for medical or custodial care received in a nursing facility or hospital. Loss control: Risk management activities that reduce both the frequency and severity of losses for a firm or organization. Loss frequency: The probable number of losses that may occur during some given time period. Loss ratio: The ratio of incurred losses and loss adjustment expenses to earned premiums. Loss reserve: Amount set aside by property and liability insurers for claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the insurer. Loss severity: The probable size of the losses that may occur. M McCarran-Ferguson Act: Federal law passed in 1945 stating that continued regulation of the insurance industry by the states is in the public interest and that federal antitrust laws apply to insurance only to the extent that the industry is not regulated by state law. Major medical insurance: Health insurance designed to pay a large proportion of the covered expenses of a catastrophic illness or injury. 33 Malpractice liability insurance: Covers acts of malpractice resulting in harm or injury to patients. Managed care: A generic name for medical expense plans that provide covered services to the members in a cost-effective manner. Manual rating: See Class rating. Manuscript policy: Policy designed for a firm's specific needs and requirements. Mass merchandising: Plan for insuring individual members of a group, such as employees of firms or members of labor unions, under a single program of insurance at reduced premiums. Property and liability insurance is sold to individual members using group insurance marketing methods. Master contract: Formed between the insurer and group policyowner for the benefit of the individual members. Maximum possible loss: Worst loss that could possibly happen to a firm during its lifetime. Maximum probable loss: Worst loss that is likely to happen to a firm during its lifetime. Mean reserve: In life insurance, the average of the terminal and initial reserves. Medical Information Bureau (MIB): Bureau whose purpose is to supply underwriting information in life insurance to member companies, which report any health impairments of an applicant for insurance. 34 Medical payments coverage: That part of the personal auto policy that pays all reasonable medical and funeral expenses incurred by a covered person within three years from the date of an accident. Medical payments to others: Pays for medical expenses of others under the homeowners policy in the event that a person (not an insured) is accidentally injured on the premises, or by the activities of an insured, resident employee, or animal owned by or in the care of an insured. Medicare: Part of the total Social Security program that covers the medical expenses of most people age 65 and older and certain disabled people under age 65. Medicare + Choice: A term to describe alternatives to Parts A and B of Medicare, such as managed care plans, private fee-for-service plans, and medical savings accounts; also called Part C of Medicare. Merit rating: Rate-making method in which class rates are adjusted upward or downward based on individual loss experience. MIB: See Medical Information Bureau. Minimum coverage requirement: A test that must be met to prevent employers from establishing a qualified pension plan that covers only the highly compensated. See also Ratio percentage test. Misstatement of age or sex clause: Contractual provision in an insurance policy stating that if the insured's age or sex is misstated, the amount payable is the amount that the premium would have purchased at the correct age. 35 Mobilehome insurance: A package policy that provides property insurance and personal liability insurance to the owners of mobile homes. A special endorsement is added to HO-2 or HO-3. Modified life policy: Whole life policy for which premiums are reduced for the first three to five years and are higher thereafter. Modified no-fault plan: An injured person has the right to sue a negligent driver only if the bodily injury claim exceeds the dollar or verbal threshold. Monetary threshold: An injured motorist would not be permitted to sue but would collect from his or her insurer, unless the claim exceeded the threshold amount. Moral hazard: Dishonesty or character defects in an individual that increase the chance of loss. Morale hazard: Carelessness or indifference to a loss because of the existence of insurance. Multicar discount: Reduction in auto insurance premium for an insured who owns two or more automobiles, on the assumption that two such autos owned by the same person will not be driven as frequently as only one. Multiple distribution systems: Insurance marketing method that refers to the use of several distribution systems by an insurer; for example, a property and liability insurer may use the independent agency method and direct response system to sell insurance. 36 Multiple-line insurance: Type of insurance that combines several lines of insurance into one contract, for example, property insurance and casualty insurance. Mutual insurer: Insurance corporation owned by the policyowners, who elect the board of directors. The board appoints managing executives, and the company may pay a dividend or give a rate reduction in advance to insureds. N NAIC: See National Association of Insurance Commissioners. NALP: See Net annual level premium. Named insured: The person or persons named in the declarations section of the policy, as opposed to someone who may have an interest in the policy but is not named as an insured. Named-perils policy: Coverage by an insurance contract that promises to pay only for those losses caused by perils specifically listed in the policy. National Association of Insurance Commissioners (NAIC): Group founded in 1871 that meets periodically to discuss industry problems and draft model laws in various areas and recommends adoption of these proposals by state legislatures. Needs approach: Method for estimating amount of life insurance appropriate for a family by analyzing various family needs that must be met if the family head should die and converting them into specific amounts of life insurance. Financial assets are considered in determining the amount of life insurance needed. 37 Negligence: Failure to exercise the standard of care required by law to protect others from harm. Net amount at risk: Concept associated with a level-premium life insurance policy. Calculated as the difference between the face amount of the policy and the legal reserve. Net annual level premium (NALP): Annual level premium for a life insurance policy with no expense loading. Mathematically equivalent to the net single premium. Net payment cost index: Method of measuring the cost of an insurance policy to an insured if death occurs at the end of some specified time period. The time value of money is taken into consideration. Net present value: Used in capital budgeting and is the sum of the present values of the future cash flows minus the cost of the project. A positive net present value represents an increase in value for the firm. Net retention: See Retention limit. Net single premium (NSP): Present value of the future death benefit of a life insurance policy. No-fault insurance: A tort reform proposal in which the injured person would collect benefits from his or her insurer and would not have to sue a negligent third party who caused the accident and establish legal liability. Nonbuilding agency system: Life insurance marketing system by which an insurer sells its products through established agents who are already engaged in selling life insurance. 38 Noncancellable: Continuance provision in a health insurance policy stipulating that the policy cannot be cancelled, that the renewal is guaranteed to a stated age, and that the premium rates cannot be increased. Noncontributory plan: Employer pays the entire cost of a group insurance or private pension plan. All eligible employees are covered. Nonforfeiture law: State law requiring insurance companies to provide at least a minimum nonforfeiture value to policyowners who surrender their cash value life insurance policies. Noninsurance transfers: Various methods other than insurance by which a pure risk and its potential financial consequences can be transferred to another party, for example, contracts, leases, and hold-harmless agreements. Nonoccupational disability: The accident or illness must occur off the job. Nonparticipating policy: Term used to describe a life insurance policy that does not pay dividends. O Objective risk: Relative variation of actual loss from expected loss, which varies inversely with the square root of the number of cases under observation. Obligee: The party to a surety bond who is reimbursed for damages if the principal to the bond fails to perform. Occurrence: An accident, including continuous or repeated exposure to substantially the same general, harmful conditions, which results in bodily injury or property damage during the policy period. See also Accident. 39 Occurrence policy: A liability insurance policy that covers claims arising out of occurrences that take place during the policy period, regardless of when the claim is made. See also Claims-made policy. Ocean marine insurance: Type of insurance that provides protection for all types of oceangoing vessels and their cargoes as well as legal liability of owners and shippers. Open-competition law: Law for regulating insurance rates under which insurers are not required to file rates at all with the state insurance department but may be required to furnish rate schedules and supporting data to state officials. Optionally renewable policy: The insurer has the right to terminate a policy on any anniversary date, or in some cases, on a premium date. Ordinary life insurance: Type of whole life insurance providing protection throughout the insured's lifetime and for which premiums are paid throughout the insured's lifetime. Other-insurance provisions: Provisions whose purpose is to prevent profiting from insurance and violation of the principle of indemnity. Other-than-collision loss: Part of the coverage available under Part D: Coverage for Damage to Your Auto in the personal auto policy. All physical damage losses to an insured vehicle are covered except collision losses and those losses specifically excluded. Ownership clause: Provision in life insurance policies under which the policyowner possesses all contractual rights in the policy while the insured is 40 living. These rights can generally be exercised without the beneficiary's consent. P P&I Insurance: See Protection and indemnity insurance. Package policy: Policy that combines two or more separate contracts of insurance in one policy, for example, homeowners insurance. Partial disability: Inability of the insured to perform one or more important duties of his or her occupation. Participating policy: Life insurance policy that pays dividends to the policyowners. Particular average: An ocean marine loss that falls entirely on a particular interest as contrasted with a general average loss that falls on all parties to the voyage. Particular risk: A risk that affects only individuals and not the entire community. Past-service credits: Pension benefits awarded to employees based on service with the employer prior to the inception of the plan. Paul v. Virginia: Landmark legal decision of 1869 establishing the right of the states, and not the federal government, to regulate insurance. Ruled that insurance was not interstate commerce. Pension accrual benefit: A disability income benefit that makes a pension contribution so that the disabled employee's pension benefit remains intact. 41 Pension Benefit Guaranty Corporation (PBGC): A federal corporation that guarantees the payment of vested or nonforfeitable benefits up to certain limits if a private pension plan is terminated. Percentage participation clause: Provision in a health insurance policy that requires the insured to pay a certain percentage of eligible medical expenses in excess of the deductible. Also called coinsurance. Peril: Cause or source of loss. Personal injury: Injury for which legal liability arises (such as for false arrest, detention or imprisonment, malicious prosecution, libel, slander, defamation of character, violation of the right of privacy, and unlawful entry or eviction) and which may be covered by an endorsement to the homeowners policy. Personal liability insurance: Liability insurance that protects the insured for an amount up to policy limits against a claim or suit for damages because of bodily injury or property damage caused by the insured's negligence. This coverage is provided by Section II of the homeowners policy. Personal-producing general agent: Term used to describe an above-average salesperson with a proven sales record who is hired primarily to sell life insurance under a contract that provides both direct and overriding commissions. Personal umbrella policy: Policy designed to provide protection against a catastrophic lawsuit or judgment, whose coverage ranges generally from $1 million to $10 million and extends to the entire family anywhere in the world. Insurance is excess over underlying coverages. Physical hazard: Physical condition that increases the chance of loss. 42 PIA: See Primary insurance amount. Point-of-service plan (POS): Establishes a network of preferred providers. If patients see a preferred provider, they pay little or nothing. Outside provider care is covered, but at a substantially higher deductible and copayment. Policy loan: Cash value of a life insurance policy that can be borrowed by the policyowner in lieu of surrendering the policy. Policyowners' surplus: Difference between an insurance company's assets and its liabilities. Pooling: Spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss. Preexisting condition: Physical or mental condition of an insured that existed prior to issuance of a policy. Preexisting-conditions clause: Contractual provision in a health insurance policy stating that preexisting conditions are not covered or are covered only after the policy has been in force for a specified period. Preferred risks: Individuals whose mortality experience is expected to be lower than average. Primary and excess insurance: Type of other-insurance provision that requires the primary insurer to pay first in the case of a loss; when the policy limits under the primary policy are exhausted, the excess insurer pays. Primary beneficiary: Beneficiary of a life insurance policy who is first entitled to receive the policy proceeds on the insured's death. 43 Primary insurance amount (PIA): Monthly cash benefit paid to a retired worker at the full retirement age, or to a disabled worker eligible for benefits under the Old-Age, Survivors, and Disability Insurance (OASDI) program. Principal: The bonded party in the purchase of a surety bond who agrees to perform certain acts or fulfill certain obligations. Principal of indemnity: States that the insurer agrees to pay no more than the actual amount of the loss. The insured should not profit from a covered loss but should be restored to approximately the same financial position that existed prior to the loss. Prior-approval law: Law for regulating insurance rates under which the rates must be filed and approved by the state insurance department before they can be used. Pro rata liability clause: Clause in a property insurance policy that makes each company insuring the same interest in a property liable according to the proportion that its insurance bears to the total amount of insurance on the property. Probationary period: Waiting period of one to six months required of an employee before he or she is allowed to participate in a group insurance plan. Products-completed operations hazard: Liability losses that occur away from the premises and arise out of the insured's product or work after the insured has relinquished possession of the product, or the work has been completed. Products liability: The legal liability of manufacturers, wholesalers, and retailers to persons who are injured or who incur property damage from defective products. 44 Prospective reserve: In life insurance, the difference between the present value of future benefits and the present value of future net premiums. Protection and indemnity insurance (P&I): Coverage that can be added to an ocean marine insurance policy to provide broad, comprehensive liability insurance on an indemnity basis for property damage and bodily injury to third parties. Proximate cause: Factor causing damage to property for which there is an unbroken chain of events between the occurrence of an insured peril and damage or destruction of the property. Public adjustor: Claims adjustor who represents the insured rather than the insurance company and is paid a fee based on the amount of the claim settlement. A public adjustor may be employed in those cases where the insured and insurer cannot resolve a dispute over a claim, or if the insured needs technical assistance in a complex loss situation. Public official bond: Type of surety bond guaranteeing that public officials will faithfully perform their duties for the protection of the public. Pure no-fault plan: The injured person cannot sue at all, regardless of the seriousness of the claim, and no payments are made for pain and suffering. Pure premium: That portion of the insurance rate needed to pay losses and loss-adjustment expenses. Pure risk: Situation in which there are only the possibilities of loss or no loss. R Rate: Price per unit of insurance. 45 Rate making: Process by which insurance pricing or premium rates are determined for an insurance company. Ratio percentage test: A test that a qualified pension plan must meet to receive favorable income tax treatment. The pension plan must benefit a percentage of employees that is at least 70 percent of the highly compensated employees covered by the plan. Readjustment period: One- to two-year period immediately following the breadwinner's death during which time the family should receive approximately the same amount of income it received while the breadwinner was alive. Reasonable and customary charges: Payment of physicians' normal fees if they are reasonable and customary, such as a fee that does not exceed the 80th or 90th percentile for a similar procedure performed by physicians in the area. Rebating: A practice--illegal in virtually all states--of giving a premium reduction or some other financial advantage to an individual as an inducement to purchase the policy. Reciprocal exchange: Unincorporated mutual insuring organization in which insurance is exchanged among members and which is managed by an attorney-in-fact. Regression analysis: Method of characterizing the relationship between two or more variables, and then using this characterization as a predictor. Reinstatement clause: Contractual provision in a life insurance policy that permits the owner to reinstate a lapsed policy within five years if certain requirements are fulfilled; for example, evidence of insurability is required and overdue premiums plus interest must be paid. 46 Reinstatement provision: Provision of a health insurance policy that allows the insured to reinstate a lapsed policy by payment of premium either without an application or with an application. Reinsurance: The shifting of part or all of the insurance originally written by one insurer to another insurer. Reinsurance facility: Pool for placing high-risk automobile drivers that arranges for an insurer to accept all applicants for insurance. Underwriting losses are shared by all auto insurers in the state. Replacement-cost insurance: Property insurance by which the insured is indemnified on the basis of replacement cost with no deduction for depreciation. Reporting form: Coverage for commercial property insurance that requires the insured to report monthly or quarterly the value of the insured inventory, with automatic adjustment of insurance amount to cover the accurately reported inventory. Representations: Statements made by an applicant for insurance, for example, in life insurance, occupation, state of health, and family history. Residual disability: Residual disability means that a proportionate disability-income benefit is paid to an insured whose earned income is reduced because of an accident or illness. Residual market: The residual market refers to plans in which auto insurers participate to make insurance available to high-risk drivers who are unable to obtain coverage in the standard markets. Examples include an automobile 47 insurance plan, joint underwriting association, and reinsurance facility. Also called the shared market. Res ipsa loquitur: Literally, the thing speaks for itself. Under this doctrine, the very fact that the event occurred establishes a presumption of negligence on behalf of the defendant. Retained limit: Term found in an umbrella policy (also known as self-insured retention). If the loss is covered by the umbrella policy but not by any underlying contract, the insured must retain or pay a certain amount of the loss. Retention: Risk management technique in which the firm retains part or all of the losses resulting from a given loss exposure. Used when no other method is available, the worst possible loss is not serious, and losses are highly predictable. Retention limit: Amount of insurance retained by a ceding company for its own account in a reinsurance operation. Retirement test: See Earnings test. Retrocession: Process by which a reinsurer obtains reinsurance from another company. Retrospective rating: Type of merit-rating method in which the insured's loss experience during the current policy period determines the actual premium paid for that period. Retrospective reserve: In life insurance, the net premiums collected by the insurer for a particular block of policies, plus interest earnings at an assumed rate, less the amounts paid out as death claims. 48 Revocable beneficiary: Beneficiary designation allowing the policyowner the right to change the beneficiary without consent of the beneficiary. Rider: Term used in insurance contracts to describe a document that amends or changes the original policy. See also Endorsement. Risk: Uncertainty concerning the occurrence of a loss. Risk-based capital: Under NAIC standards, insurers are required to have a certain amount of capital that is based on the riskiness of their investments and operations. Risk control: Risk management techniques that reduce the frequency and severity of losses, such as avoidance, loss prevention, and an automatic sprinkler system. Risk financing: Risk management techniques that provide for the funding of losses after they occur, such as retention, noninsurance transfers, and commercial insurance. Risk management: Systematic process for the identification and evaluation of loss exposures faced by an organization or individual, and for the selection and implementation of the most appropriate techniques for treating such exposures. Risk management information system: Computerized data base that permits the risk manager to store and analyze risk management data and to use such data to predict future loss levels. Risk map: Map used in risk management that shows grids detailing the potential frequency and severity of risks faced by the organization. 49 Robbery: Taking of property from a person by someone who has (1) caused or threatens to cause bodily harm to that person, or (2) committed an obviously unlawful act witnessed by that person. Roth IRA: An IRA in which the contributions are not income-tax deductible but distributions are received income-tax free if certain conditions are met. S Safe driver plan: Plan in which the automobile premiums paid are based on the insured's driving record and on the records of those living with the insured. Savings bank life insurance: Life insurance sold by mutual savings banks in Massachusetts, New York, and Connecticut, and certain surrounding states. Scheduled personal property endorsement: Special coverage added at the insured's request to a homeowners policy to insure items specifically listed. Used to insure valuable property such as jewelry, furs, and paintings. Schedule rating: Type of merit-rating method in which each exposure is individually rated and given a basis rate that is then modified by debits or credits for undesirable or desirable physical features. Second-injury fund: State funds paying the excess amount of benefit awarded an employee for a second injury if the disability is greater than that caused by the second injury alone. Its purpose is to encourage employers to hire handicapped workers. Section 401(k) plan: A qualified profit-sharing or thrift plan that allows participants the option of putting money into the plan or receiving the funds as cash. The employee can voluntarily elect to have his or her salary reduced up to 50 some maximum annual limit, which is then invested in the employer's Section 401(k) plan. Self-insurance: Retention program in which the employer self-funds or pays part or all of its losses. Self-insured retention: See Retained limit. SEP: See Simplified Employee Pension. Separate account: Variation of the deposit administration pension plan arrangement in which pension funds are segregated so that account assets are not commingled with insurance company's general assets and can be invested separately. Service benefits: Health insurance benefits that pay hospital charges or payment for care received by the insured directly to the hospital or providers of care. The plan provides service rather than cash benefits to the insured. Settlement options: Ways in which life insurance policy proceeds can be paid other than in a lump sum, including interest, fixed period, fixed amount, and life income options. SEUA case: See South-Eastern Underwriters Association (SEUA) case. Shared market: See Residual market. SIMPLE retirement plan: A qualified retirement plan for smaller employers who are exempt from most nondiscrimination and administrative rules. Employees can elect to contribute up to certain annual limits. The employer has the option of (1) matching the employee's contribution on a dollar-for-dollar 51 basis up to 3 percent of salary, or (2) making a nonelective contribution of 2 percent of salary for all eligible employees. Simplified Employee Pension (SEP): An employer-sponsored individual retirement account that meets certain requirements. Paperwork is reduced for employers who wish to cover employees in a retirement plan. Single limit: The total amount of liability insurance that applies to the entire accident without a separate limit for each person. The total amount of insurance applies to both bodily injury liability and property damage liability. Single-premium deferred annuity: A retirement annuity that is purchased with a single premium with benefits to start at some future date. Single-premium whole life insurance: A whole life policy that provides lifetime protection with a single premium payment. Social insurance: Government insurance programs with certain characteristics that distinguish them from other government insurance programs. Programs are generally compulsory; specific earmarked taxes fund the programs; benefits are heavily weighted in favor of low-income groups; and programs are designed to achieve certain social goals. Soft insurance market: A period during which underwriting standards are more liberal and premiums are relatively low. See also hard insurance market and underwriting cycle. South-Eastern Underwriters Association (SEUA) case: Legal landmark decision of 1944 overruling the Paul v. Virginia ruling and finding that insurance was interstate commerce when conducted across state lines and was subject to federal regulation. 52 Speculative risk: Situation in which either profit or loss are clear possibilities. Split limits: The amounts of insurance for bodily injury liability and property damage liability are stated separately. Stop-loss limit: Modification of the coinsurance provision in major medical plans that places a dollar limit on the maximum amount that an individual must pay rather than requiring that the insured pay 20 percent of all expenses in excess of deductible. Straight deductible: Deductible in an insurance contract by which the insured must pay a certain number of dollars of loss before the insurer is required to make a payment. Subjective risk: Uncertainty based on one's mental condition or state of mind. Subrogation: Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a negligent third party for a loss covered by insurance. Suicide clause: Contractual provision in a life insurance policy stating that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; only premiums paid will be refunded. Supplemental major medical insurance: Group health insurance plan that supplements the benefits provided by a basic medical expense plan. It provides more comprehensive benefits with higher limits and is designed for a catastrophic loss. Supplementary Medical Insurance: Part B of the Medicare program that covers physicians' fees and other related medical services. Most eligible 53 Medicare recipients are automatically included unless they voluntarily refuse this coverage. Surety: Party who agrees to answer for the debt, default, or obligation of another in the purchase of a bond. Surety bond: Bond that provides monetary compensation if the bonded party fails to perform certain acts. Surgical expense insurance: Health insurance that provides for payment of physicians' fees for surgical operations performed in a hospital or elsewhere. Surplus line broker: Specialized insurance broker licensed to place business with a nonadmitted insurer (a company not licensed to do business in the state). Surrender cost index: Method of measuring the cost of an insurance policy to an insured if the policy is surrendered at the end of some specified time period. The time value of money is taken into consideration. T Term insurance: Type of life insurance that provides temporary protection for a specified number of years. It is usually renewable and convertible. Terminal reserve: In life insurance, the reserve at the end of any given policy year. Theft: Unlawful taking of money, securities, or other property to the deprivation of the insured; includes burglary, robbery. See also Burglary; Robbery. 54 Time limit on certain defenses provision: Provision in an individual health insurance policy that prohibits the company from canceling the policy or denying a claim on the basis of a preexisting condition or misstatement in the application after the policy has been in force for two or three years, with the exception of fraudulent misstatement. Total disability: Condition of an insured that makes him or her completely unable to perform all duties of the insured's own occupation or unable to perform the duties of any occupation for which the insured is reasonably fitted by training, education, and experience. Traditional IRA: An IRA that allows workers to deduct part or all of their IRA contributions if taxable compensation is under a certain limit. Distributions are taxed as ordinary income. Traditional net cost method: Traditional method of determining cost to an insured of a life insurance policy, determined by subtracting the total dividends received and cash value at the end of a period from the total premiums paid during that period. Treaty reinsurance: Type of reinsurance in which the primary company must cede insurance to the reinsurer and the reinsurer must accept. The ceding company is automatically reinsured according to the terms of the reinsurance contract. Trespasser: A person who enters or remains on the owner's property without the owner's consent. 55 Trust: Arrangement in which property is legally transferred to a trustee who manages it for the benefit of named beneficiaries for their security and to insure competent management of estate property. Trust-fund plan: Type of pension plan in which all pension contributions are deposited with a trustee who invests the funds according to a trust agreement between employer and trustee. Benefits are paid directly out of the trust fund. Twisting: Illegal practice of inducing a policyowner to drop an existing policy in one company and take out a new policy in another through misrepresentation or incomplete information. U Ultimate net loss: The total amount that the insurer is legally obligated to pay in a commercial umbrella policy. Underinsured motorists coverage: Coverage that can be added to the personal auto policy. Coverage pays damages for a bodily injury to an insured caused by the ownership or operation of an underinsured vehicle by another driver. The negligent driver may have insurance that meets the state's financial responsibility or compulsory insurance law requirement, but the amount carried is insufficient to cover the loss sustained by the insured. Underwriting: The selection and classification of applicants for insurance through a clearly stated company policy consistent with company objectives. Underwriting cycle: A term to describe the cyclical pattern in underwriting standards, premium levels, and profitability. See also Hard insurance market; Soft insurance market. 56 Unearned premium reserve: Liability reserve of an insurance company that represents the unearned part of gross premiums on all outstanding policies at the time of valuation. Unified tax credit: Tax credit that can be used to reduce the amount of the federal estate or gift tax. Also called applicable credit amount. Unilateral contract: Only one party makes a legally enforceable promise. Uninsured motorists coverage: That part of the personal auto policy designed to insure against bodily injury caused by an uninsured motorist, a hit-and-run driver, or a driver whose company is insolvent. Unisex rating: A rating system in which the pooled loss experience of both sexes is used to determine the rates charged. Unit-owners form: See Homeowners 6 policy. Universal life insurance: A flexible-premium whole life policy that provides lifetime protection under a contract that separates the protection and saving components. The contract is an interest-sensitive product that unbundles the protection, saving, and expense components. Unsatisfied judgment fund: Fund established by a small number of states to compensate accident victims who have exhausted all other means of recovery. Utmost good faith: That a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts. V 57 Valued policy: Policy that pays the face amount of insurance, regardless of actual cash value, if a total loss occurs. Valued policy laws: Laws requiring payment to an insured of the face amount of insurance if a total loss to real property occurs from a peril specified in the law, even though the policy may state that only actual cash value will be paid. Vanishing-premium policy: A whole life policy in which the premium vanishes or disappears after a number of years. Variable annuity: Annuity whose periodic lifetime payments vary depending on the level of common stock prices (or other investments), based on the assumption that cost of living and common stock prices are correlated in the long run. Its purpose is to provide an inflation hedge. Variable life insurance: Life insurance policy in which the death benefit and cash surrender values vary according to the investment experience of a separate account maintained by the insurer. Verbal threshold: A suit for damages is allowed only in serious cases, such as those involving death, dismemberment, etc. Vesting: Characteristic of pension plans guaranteeing the employee's right to part or all of the employer's contributions if employment terminates prior to retirement. Vicarious liability: Responsibility for damage done by the driver of an automobile that is imputed to the vehicle's owner. W Waiver: Voluntary relinquishment of a known legal right. 58 Waiver-of-premium provision: Benefit that can be added to a life insurance policy providing for waiver of all premiums coming due during a period of total disability of the insured. War clause: Restriction in a life insurance policy that excludes payment if the insured dies as a direct result of war. Warranty: Statement of fact or a promise made by the insured, which is part of the insurance contract and which must be true if the insurer is to be liable under the contract. Workers compensation insurance: Insurance that covers payment of all workers compensation and other benefits that the employer must legally provide to covered employees who are occupationally disabled. 59