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