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Glossary of Terms
We understand that not everyone is familiar with insurance lingo. With that in
mind, here is a brief glossary with definitions of terms found on this website:
Accident: Unplanned injurous or damaging event which interrupts the
normal progress of an activity. An accident may be seen as resulting from
a failure to identify a hazard or from some inadequacy in an existing system
of hazard controls. See occurrence.
Actual cash value (ACV): Flexible valuation standard, most often defined
as the current replacement cost of an item of property minus its accumulated
depreciation.
Actuary:A person professionally trained in the technical aspects of insurance
and related fields. The actuary estimates how much money must be contributed
to an insurance or pension fund in order to provide future coverage.
Casualty: Loss or liability from an accident or mishap, excluding certain
losses or liabilities, which, by law or custom, are considered as falling
exclusively within the scope of the protection provided by fire or marine insurance.
Casualty includes, but is not limited to, losses or liability covered by employees’
liability, plate glass, burglary, and theft insurance.
Claims adjuster: The person responsible for the evaluation and settlement
of an insured claim. An adjuster may be an employee of an insurer, or an individual
operating independently and engaged by an insurer or insured to adjust a particular
loss or claim.
Combination: A pooling of exposures to loss; a method of distributing risk
among a larger group to minimize financial impact to any one person or entity in
that group in order to make losses more predictable.
Cost of risk: Expenditures which an entity makes because of its exposures
to accidental losses. Cost of risk can be computed as the sum of retained losses,
plus insurance premiums, plus expenditures for loss control, plus the administrative
cost of operating a risk management department.
Deductible: Portion of an otherwise insured loss borne by the insured.
Depreciation:A decrease in the value of property over a period of time due
to wear and tear or obsolescence. Depreciation is used to determine the actual cash
value of property at time of loss. See Actual Cash
Value.
Diversification: The practice of using different types of loss exposures
in an attempt to improve the predictability or frequency of the losses.
Estimate: 1. A rough or approximate calculation 2. A numerical value
obtained from a statistical sample and assigned to a population parameter 3.
A statement of the cost of work to be done.
Exposure: 1. Probability of loss. 2. Hazard (see Hazard)
Exposure Unit: Unit of measurement used in insurance pricing.
Frequency rate: Number of occurrences of a given event, expressed in
relation to a base unit of measure. For example, accidents per employee-hours
of exposure, or traffic fatalities per 100,000,000 miles of vehicle travel.
Hazard: Condition of activity which increases the probably frequency or
severity of loss.
- moral hazard: Hazard arising from personal, as distinguished from physical,
characteristics, such as the habits, methods of management, financial standing, mental
condition, or lack of integrity of an insured who may intentionally cause, or hope for,
a loss.
- physical hazard: Hazard arising from physical characteristics of animate of
inanimate objects.
Incurred but not reported loss (IBNR): Loss which has occurred but has
not yet been reported as of a specified date.
Indemnification: Compensation to the victim of a loss, in whole or in
part, by payment, repair, or replacement.
Inland marine insurance: Insurance against an exposure to loss of property
capable of being transported from place to place either in transit or wherever the
property may be located (except on a body of water). Compare with ocean marine insurance.
Insurance rate: Or, Insurance premium. Price per unit of insurance,
usually per $100 or $1000 per year.
Liability: 1. Condition of being bound in law and justice to do something
which may be enforced in the courts. 2. Probable cost of meeting an obligation.
Line of business: Particular type of insurance offered by an insurer, such
as automotive liability, general liability, or worker's compensation.
Limits of insurance: Maximum amount for which an insurer maybe liable for
any loss, as set forth in the policy.
- aggregate limit: In liability insurance, maximum amount of coverage
that an insurer will pay for all losses during a specific period of time, usually
the contract period, no matter how many separate accidents may occur.
- per accident limit: In liability insurance, maximum amount the insurer
will pay for claims growing out of a particular accident, regardless of the number
of persons injured or property interests damaged.
- per person limit: In liability insurance, maximum amount the insurer
will pay for bodily injury to any one person in any one accident.
- single limit: In liability insurance, overall maximum on the insurer's
liability for all types of bodily injury, property damage, or personal injury
claims growing out of one accident, regardless of the number of persons suffering
injury. Compare with split limit
- split limit: In liability insurance, separate limits of liability for
bodily injury and property damage claims. many split-limit liability policies
contain three separate limits for (1) bodily injury to each insured person,
(2) bodily injury to two or more persons injured in the same accident, and
(3) property damage per accident. Contrast with single limit.
Loss control: Or, "Risk Control". All methods of reducing the frequency
and/or severity of losses including exposure avoidance, loss prevention, loss
reduction, segregation of exposure units and non-insurance transfer of risk. A
combination of risk control techniques with risk financing techniques forms the
nucleus of a risk management program.
Maximum foreseeable loss (MFL): Largest loss (usually property loss, but
sometimes combined property loss and loss of income) which can occur under the
most adverse conditions reasonable foreseeable. Compare with Maximum probable loss.
Maximum probable loss (MPL): Largest loss which can occur under the
worst conditions that are likely to occur. Compare with Maximum foreseeable loss.
Named insured: Person, corporation, other entity, or any member thereof,
specifically designated by name as the insured(s) in a policy. Others may be
protected as insureds when members of classes are specified in an insurance policy
even though their names do not appear on the policy, but they are not, therefore,
named insureds.
Occurrence: In insurance contract language, continued or repeated exposure
to conditions which unexpectedly result in injury during the period an insurance
policy is in effect; in contrast to sudden injury or damage from an accident which
takes place at a specific time and location. Contrast with accident.
Ocean marine insurance: Insurance against exposure to loss while in transit
on water (not necessarily an ocean) of property being transported or of the
transport vessel.
Participating plan: One under which the policy owner is entitled to receive
shares of the divisible surplus of the insurer. Such shares are commonly called
dividends.
Peril: Cause of loss.
Physical Damage: Damage to tangible property such as vehicles and structures.
Probable maximum loss (PML): maximum amount of loss foreseeable under ordinary
circumstances.
Property Claim: Demand for payment for insured loss to physical property,
independent of liability or bodily injury.
Reinsurance: Insurance that involves the acceptance by one insurer, called the
reinsurer, of all or a part of the exposures covered by another insurer, called the
ceding insurer.
Replacement cost (RC): Price of reproducing or constructing a new item of property
to replace an older, used item of property. Though comparable to the property being
replaced, the replacement property may be a newer model, may reflect improved construction
techniques, and may be "new" rather than used and "old". For any of these reasons, insurance
coverage on a replacement cost basis may be more favorable to an insured than insurance
coverage on an actual cash value basis.
Reserve: Funds set aside for the purpose of meeting obligations as they fall due.
Retention: 1. Amount of an insurer's liability retained under a given policy equal
to the gross line minus reinsurance. 2. Method of financing an organization's potential
losses through its own funds rather than through insurance or other external sources.
3. Potential dollar amount of losses from the exposures which such an organization retains.
See also Self-insured retention.
Retrospective rating plan: Rating system under which the final premium is determined
at the end of the coverage period, and based, at least in part, on the insured's own loss
experience for that same period, subject to maximum and minimum premiums.
Risk: 1. Possibility of loss or exposure to loss. 2. Probability or chance of loss.
3. Peril which may cause loss. 4. Hazard, or condition which increases the likely frequency
or severity of loss. 5. Property or person exposed to loss. 6. Potential dollar amount of
loss. 7. Variations in actual losses. 8. Probability that actual losses will vary from expected
losses. 9. Psychological uncertainty concerning loss.
Risk Management: A management discipline whose goal is to protect the assets and profits
of an organization by reducing the potential for loss before it occurs, and financing, through
insurance and other means, potential exposures to catastrophic loss such as acts of God, human
error or court judgments. In practice, the process consists of logical steps: risk or exposure
identification; measurement and evaluation of exposures identified; control of those exposures
through elimination and/or reduction; and financing the remaining exposures so that the
organization, in the event of a major loss, can continue to function without severe hardship
to its financial ability.
Risk Manager: Person(s) responsible for carrying out an organization's risk management
program.
Segregation: or, Segregation of exposure units; Risk management technique which
divides or duplicates an existing single loss exposure to reduce the severity and/or
increase the predictability of losses. Segregated units should be sufficiently dispersed
so that they all will note be lost in the same accident. Segregation takes two forms:
- duplication: Creation of a standby or backup facility to be used only in case
the original facility is damaged. Duplication reduces loss severity, but may have no effect
on loss frequency.
- separation: Division of an existing loss exposure into two or more units, all used
in an organization's daily operations. Separation reduces loss severity, but may increase
loss frequency because of the larger number of units exposed to loss in daily use.
Self-insurance: The act of an individual, partnership, or corporation who retains all
or part of its loss. Generally, it retains the first portion of the risk, up to the level
it feels it can absorb financially, and purchases insurance over or in excess of the retained
or self-insured level to protect itself against catastrophic loss.
Self-insured retention (SIR): Portion of a loss exposure assumed by an insured, in the
form of a deductible or a self-insured reserve. usually, excess insurance is purchased over a
large retention.
Severity rate: 1. In worker's compensation, the total days charged for work injuries
per 1,000,000 employee-hours of exposure. Days charged include actual calendar days of
disability resulting from temporary total injuries and scheduled numbers of days for deaths
and permanent disabilities. 2. In other situations, any ratio which relates amount of loss to
values exposed to loss during a specified time period.
Sovereign Immunity: Where public entities are provided exemption from certain liabilities to protect the community and taxpayers
from excessive claims and lawsuits.
Surplus: The amount by which the value of an insurer's assets exceeds its
liabilities.
Third-Party Administrator (TPA): Outside agency or individual responsible for claims
adjustment and administration for an insured entity.
Trigger: Event, accident, or occurrence that invokes insurance coverage.
Underwriter: 1. Insurer's employee who evaluates applications for insurance and
determines the terms (premium rates and policy forms) under which the applicant will be
insured. 2. Insurer.
Valuation: 1. Process of placing monetary value on an item of property, a claim,
or some other legal interest. 2. Monetary value of something.
Workers Compensation: Program that provides benefits to employees injured in
job-related accidents and to those who contract diseases due to workplace exposure.
Benefits include money payments for lost income, the expense of medical treatment,
and new job training.
A more thorough explanation of Risk Management terms and practices can be found at the
Risk and Insurance
Management Society.
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