Glossary
of Insurance Terms
RATE
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The cost of a unit
of insurance, usually per $1,000. Rates are based on historical loss
experience for similar risks and may be regulated by state insurance
offices.
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RATE REGULATION
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The process
by which states monitor insurance companies’ rate changes, done
either through prior approval or open competition models. (See
Open competition states;
Prior approval states)
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RATING AGENCIES
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Six major credit
agencies determine insurers’ financial strength and viability to meet
claims obligations. They are A.M. Best Co.; Duff & Phelps Inc.;
Fitch, Inc.; Moody’s Investors Services; Standard & Poor’s Corp.;
and Weiss Ratings, Inc. Factors considered include company earnings,
capital adequacy, operating leverage, liquidity, investment performance,
reinsurance programs, and management ability, integrity and experience.
A high financial rating is not the same as a high consumer satisfaction
rating.
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RATING BUREAU
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The insurance business
is based on the spread of risk. The more widely risk is spread, the
more accurately loss can be estimated. An insurance company can more
accurately estimate the probability of loss on 100,000 homes than on
ten. Years ago, insurers were required to use standardized forms and
rates developed by rating agencies. Today, large insurers use their
own statistical loss data to develop rates. But small insurers, or insurers
focusing on special lines of business, with insufficiently broad loss
data to make them actuarially reliable depend on pooled industry data
collected by such organizations as the Insurance Services Office (ISO)
which provides information to help develop rates such as estimates of
future losses and loss adjustment expenses like legal defense costs.
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REAL ESTATE INVESTMENTS
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Investments generally owned by life insurers
that include commercial mortgage loans and real property.
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RECEIVABLES
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Amounts owed to a business for goods or services
provided.
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REDLINING
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Literally means to draw a red line on a map
around areas to receive special treatment. Refusal to issue insurance
based solely on where applicants live is illegal in all states. Denial
of insurance must be risk-based.
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REINSURANCE
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Insurance bought by insurers. A reinsurer assumes
part of the risk and part of the premium originally taken by the
insurer, known as the primary company. Reinsurance effectively
increases an insurer's capital and therefore its capacity to sell
more coverage. The business is global and some of the largest
reinsurers are based abroad. Reinsurers have their own reinsurers,
called retrocessionaires. Reinsurers don’t pay policyholder claims.
Instead, they reimburse insurers for claims paid. (See
Treaty reinsurance; Facultative
reinsurance)
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RENTERS INSURANCE
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A form of insurance
that covers a policyholder’s belongings against perils such as fire,
theft, windstorm, hail, explosion, vandalism, riots, and others. It
also provides personal liability coverage for damage the policyholder
or dependents cause to third parties. It also provides additional living
expenses, known as loss-of-use coverage, if a policyholder must move
while his or her dwelling is repaired. It also can include coverage
for property improvements. Possessions can be covered for their replacement
cost or the actual cash value that includes depreciation.
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REPLACEMENT COST
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Insurance that pays the dollar amount needed
to replace damaged personal property or dwelling property without deducting
for depreciation but limited by the maximum dollar amount shown on the
declarations page of the policy.
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REPURCHASE AGREEMENT /'REPO'
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Agreement between a buyer and seller where the
seller agrees to repurchase the securities at an agreed upon time and
price. Repurchase agreements involving U.S. government securities are
utilized by the Federal Reserve to control the money supply.
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RESERVES
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A company’s best
estimate of what it will pay for claims.
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RESIDUAL MARKET
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Facilities, such as assigned risk plans and
FAIR Plans, that exist to provide coverage for those who cannot get
it in the regular market. Insurers doing business in a given state generally
must participate in these pools. For this reason the residual market
is also known as the shared market.
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RETENTION
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The amount of risk
retained by an insurance company that is not reinsured.
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RETROCESSION
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The reinsurance
bought by reinsurers to protect their financial stability.
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RETROSPECTIVE RATING
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A method of permitting
the final premium for a risk to be adjusted, subject to an agreed-upon
maximum and minimum limit based on actual loss experience. It is available
to large commercial insurance buyers.
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RETURN ON EQUITY
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Net income divided
by total equity. Measures profitability by showing how efficiently invested
capital is being used.
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RIDER
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An attachment to
an insurance policy that alters the policy’s coverage or terms.
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RISK
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The chance of loss
or the person or entity that is insured.
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RISK MANAGEMENT
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Management of the varied risks to which a business
firm or association might be subject. It includes analyzing all exposures
to gauge the likelihood of loss and choosing options to better manage
or minimize loss. These options typically include reducing and eliminating
the risk with safety measures, buying insurance, and self-insurance.
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RISK RETENTION GROUPS
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Insurance companies that band together as self-insurers
and form an organization that is chartered and licensed as an insurer
in at least one state to handle liability insurance.
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RISK-BASED CAPITAL
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The need for insurance
companies to be capitalized according to the inherent riskiness
of the type of insurance they sell. Higher-risk types of insurance,
liability as opposed to property business, generally necessitate
higher levels of capital.
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