Glossary
of Insurance Terms
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
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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
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The markets
in which equities and debt are traded. (See Securitization of insurance risk)
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CAPTIVE AGENT
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
(See Occurrence policy)
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COBRA
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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
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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
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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
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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
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Portion of an auto insurance policy that covers
the damage to the policyholder’s car from a collision.
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COMBINED RATIO
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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. When the ratio is over 100, the insurer
has an underwriting loss.
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COMMERCIAL GENERAL LIABILITY INSURANCE /
CGL
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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
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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. (See
Commercial multiple peril policy)
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COMMERCIAL MULTIPLE PERIL POLICY
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Package policy that includes property, boiler
and machinery, crime, and general liability coverages.
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COMMERCIAL PAPER
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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
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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
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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
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See
Crash parts;
Generic auto parts
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COMPETITIVE STATE FUND
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A facility
established by a state to sell workers compensation in competition
with private insurers.
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COMPLAINT RATIO
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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
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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
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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
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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
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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
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Synonym for insurance.
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CRASH PARTS
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Sheet metal
parts that are most often damaged in a car crash. (See
Generic auto parts)
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CREDIT
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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
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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
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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
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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
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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
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See
Bond rating
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CREDIT SCORE
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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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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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