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Insurance Terms and What They Mean

Sadia Zaheer
June 29, 2022

Insurance is a risk management system that moves the financial responsibility for losses to specialists known as insurance companies. These companies manage the risk of loss by sharing it with a number of people or firms.

Insurance is a great option for helping people manage the threat of unexpected (and unpleasant) events like theft, illness or property damage. If you buy insurance for any assets, the insurance company will pay you an amount equal to the present value of the asset that you lose.

Many people find it difficult to filter through the special language that insurance companies, agents and policies use. Below is a list of insurance terms and definitions that will help you understand the confusing world of insurance.

Insurance Terms

Actuary

These are qualified mathematicians specific to the insurance field. Actuaries conduct statistical studies which are used tocalculate premiums, reserves, and dividends for policies. They also help develop insurance products.

Agent

Agents are people or businesses that sells and manages insurance policies. Agents can be of two types:

  1. Independent agents are those that offer products from at least two insurance companies and offers clients the best possible rates for maximum coverage. Agents earn through commission. This is a percentage from each premium paid. They also earn a fee for servicing the insured’s policy.
  2. Direct writers only offer insurance from one company. This agent is paid commission through a percentage from each premium paid.

Ambiguity

The phrasing of words in the insurance policy that is considered unclear or open to different interpretations. In case of a law suit, courts usually rule in favor of the insured persons and against insurance companies.

Annual Report

These are the statements of the financial position of the insurance company. These statements can be provided to the stockholders or policyholders.

Balance Sheet

This is an Accounting statement showing the financial condition of a company at a particular date. It shows the company’s assets and liabilities, and capital and surplus.

Cargo Insurance

These are insurance policies issued to shippers to cover one cargo exposure or all cargo exposures by sea on ALL RISKS basis. Exclusions are war, nuclear disaster, wear and tear, dampness, mold, losses due to delay of shipment, and loss of market for the cargo.

CEDE

Insurers cede risks to transfer a risk from an insurance company to a reinsurance company.

Ceding Company

This is the insurance company that is transferring its insurance risk to a reinsurance company.

Claim

This is raised when the insured party requests for payment against their policy. it needs to be raised to the insurance company for loss from a risk covered in the policy.

Clause

Clauses in an insurance policy, are sentences and paragraphs that cover the risks covered by the policy, and exclusions. They also include the duties of the insured, locations covered, and conditions that can affect or terminate coverage.

Commission

This is the fee paid to an insurance salesperson as a percentage of the premium generated by an active insurance policy.

Contract

In insurance, this is an agreement between an insurer and an insured under which the insurer has a legally enforceable obligation to make all benefit payments for which it has received premiums.

Damages

The sum that the insurance company is legally obligated to pay an insured for losses incurred. This should be detailed in the insurance policy in the form of a payment plan or sheet.

Death Claim

This will include ‘Proof of Death’ of the insured person through a form included with the policy. It is filed with the insurance company to show the rights of the beneficiary to the death benefit.

Earned Premium

This is the part of the premium paid by an insured that is allocated to the insurance company’s loss experience, expenses, and profit year to date.

Endowment Insurance

This is a form of life insurance under which an insured gets the face value of a policy if the individual survives the endowment period. If the insured does not survive, a beneficiary receives the face value of the policy. The endowment policy is the most expensive type of life insurance.

Expiry

The point in time when the coverage of a Term Life Insurance Policy ends

Group Insurance

This is a single policy under which individuals in a natural group (such as employees of a business firm) and their dependents are covered.

Group Life Insurance

This is a basic employee benefit under which an employer buys a master policy and issues certificates to employees denoting participation in the plan. Group life is also available through unions and associations. It is usually issued as yearly renewable term insurance, although some plans provide permanent insurance.

Income Policy

These are proceeds from a life insurance policy paid on a monthly or other periodic basis instead of in a lump sum.

Indemnity

This is the compensation paid for loss. In a property and casualty contract, the objective is to restore the insured to the same financial position after the loss that he or she was in prior to the loss.  The insured should not be able to profit by damage or destruction of property, nor should the insured be in a worse financial position after a loss.

In life insurance the situation is totally different. By the payment of a single premium, the beneficiary of an insured can be placed in a much better financial position at the death of an insured than he or she was in prior to the death. However, the payment of a predetermined amount upon the insured’s death does not make a life insurance policy a contract of indemnity.

Indirect Loss

This is loss that is not a directly because of a peril. For example, damage to property of a business firm would be a direct loss, but the loss of business earnings because of a fire on its premises would be an indirect loss.

Insolvency Bankruptcy

If an insured business firm goes bankrupt, the circumstance does not relieve an insurance company of its obligations under an insurance contract.

Insurability

These are circumstances under which an insurance company can issue life or health insurance to an applicant based on company selection parameters.

Insurance Agent

These are employees of an insurance company, usually paid in commission for developing and managing a portfolio of policyholders. An agent’s knowledge concerning an insurance transaction is said to be the knowledge of the insurance company as well.

Wrongful acts of the agent are the responsibility of the company; these bind the company to the customer. Notice given by an insured to the agent is the same as notice to the company.

Insurance Broker

These are representatives of the insured, not the insurance company. Acts of a broker are not the responsibility of the company, and notice given by an insured to a broker is not the same as notice to the company. The broker searches the insurance marketplace for a company in which to place the insured’s business for the most coverage at the best price. The broker is not restricted to placing business with any one company.

Insurance Contract, General

This is a legally binding unilateral agreement between an insured and an insurance company to indemnify the buyer of an insurance contract under specified circumstances. In exchange for premium payment(s) the company covers stipulated perils

Insurance Policy

This is a written contract between an insured and an insurance company stating the obligations and responsibilities of each party.

Insured Party

This is the party covered by an insurance policy. In life insurance policies there is one designated insured or a policy can be issued to numerous insureds on a group basis. The insured persons in property and casualty policies may also include residents of the insured’s household, such as a spouse, relatives of either, and other individuals under their care, custody, and control if under the age of 21.

Insurer

This is the company offering protection through the sale of an insurance policy to an insured.

Jacket

This is the outer covering containing an insurance policy; in many instances it lists provisions common to several types of policies.

Lag Time

 This is the time that has elapsed between when claim event occurring and when claims are actually paid.

Liability

The legal obligation to perform or not perform specified act(s). Liability insurance is designed to provide coverage for exposure on either a business or a personal basis.

Loss Ratio

The relationship between incurred losses plus loss adjustment expense to earned premiums.

Marine Insurance

This is insurance coverage for goods in transit and the vehicles of transportation on waterways.

Maturity Date

This is the time at which life insurance death proceeds or endowments are due for payment. This could be at the death of an insured or at the end of the endowment period.

Moral Hazard

These are circumstance that increases the chances of loss because of an applicant’s personal habits or morals; for example, if an applicant is a known criminal.

Net Single Premium

This is the pure cost of protection, or the premium covering the present value of future claims.

Paid Losses

actual amount of total losses paid by an insurance company during a specified time interval.

Paid-Up Insurance

A life insurance policy for which all premiums have already been paid, with no premium payment due.

Pension Plan

A retirement program to provide employees (and their spouses) with a monthly income payment for the rest of their lives. To qualify, an employee must have met minimum age and service requirements.

Per Capita

Distribution of a deceased beneficiary’s s hare of an estate among  all of his or her living heirs.

Policy

A written agreement that puts insurance coverage into effect.

Preferred Risk

An insured, or an applicant for insurance, with lower probability of incurring a loss than the standard applicant. For example, an applicant for life insurance who does not smoke can usually obtain a reduced premium rate to reflect his or her greater life expectancy.

Premium

This is a rate that an insured is charged, reflecting his or her expectation of loss or risk. The insurance company assumes the risks of the insured (length of life, state of health, property damage or destruction or liability exposure) in return for a premium payment.

Premiums are calculated by combining expectation of loss and expense and profit loadings.

Reinsurance

This is a form of insurance that insurance companies buy for their own protection, “a sharing of insurance. “ An insurer (the reinsured) reduces its possible maximum loss on either an individual risk (FACULTATIVE REINSURANCE) or a large number of risks (AUTOMATIC REINSURANCE) by giving (ceding) a portion of its liability to another; insurance company (the reinsurer).

Underwriting

A process of examining, accepting, or rejecting insurance risks, and classifying those selected, in order to charge the proper premium for each. The purpose of under writing is to spread the risk among a pool of insureds in a manner that is equitable for the insureds and profitable for the insurer.

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