An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place. An accident usually involves loss. See also Occurrence.

Accident Frequency

The rate of the occurrence of accidents, often expressed in terms of the number of accidents over a period of time. Contrast with Accident Severity.

Accident Severity

A measure of the severity or seriousness of losses, rather than the number of losses. It is measured by the cost of settlement. Contrast with Accident Frequency.

Accident Year Experience

Measures premiums and losses relating to accidents which occurred during a 12-month period.

Acquisition Cost

The expenses incurred by an insurer or reinsurance company that are directly related to putting the business on the books of the company. The largest portion of this cost for an agency company is the agent’s commission; for a direct insurer it is the acquisition of risk facts, such as inspections, photographs, credit reports and claim histories.

Actual Cash Value

An amount equivalent to the fair market value of the stolen or damaged property immediately preceding the loss. For real property, this amount can be based on a determination of the fair market value of the property before and after the loss. For vehicles, this amount can be determined by local area private party sales and dealer quotations for comparable vehicles.


A specialist trained in mathematics, statistics, and accounting who is responsible for rate, reserve, and dividend calculations and other statistical studies.


This is a characteristic of a unilateral contract which is offered on a "take it or leave it" basis. Most insurance policies are contracts of "adhesion," because the terms are drawn up by the insurer and the insured simply "adheres." For this reason ambiguous provisions are often interpreted by courts in favor of the insured.

Adjuster (or Claim Representative)

A representative of the insurer who seeks to determine the extent of the insurer's liability for loss when a claim is submitted.

Adverse Selection

The tendency of poorer than average risks to purchase insurance. Adverse selection occurs when insureds select only those coverages that are likely to have losses.


A licensed representative of the insurer able to sell the insurer's products and commit the insurer to provide coverage.

Annual Report

The insurer's published statement to its stockholders (or policyholders in the case of a mutual insurance company), giving pertinent financial information and reviewing the year's activities.

Annual Statement

A report to the state insurance department of the year's financial results. The insurer's income and expenses are stated in detail as well as its assets and liabilities.


A representative of the insurer who seeks to determine the cost of indemnifying those who suffer a covered loss.


The items on the balance sheet of the insurer which show the book value of property owned. Under state regulations, not all property or other resources can be admitted in the statement of the insurer. This gives rise to the term "nonadmitted assets." See also Nonadmitted Assets.


The individual who manages a reciprocal insurance exchange and to whom each subscriber gives authority to exchange insurance for him with other subscribers. See also Reciprocal Insurance Exchange.

Automobile Insurance

A type of insurance which protects the insured against losses involving automobiles. Different coverages can be purchased depending on the needs and wants of the insured, e.g., the Liability coverages of Bodily Injury Liability, Property Damage Liability, and Medical Payments, and the Physical Damage coverages of Collision and Comprehensive.


A temporary or preliminary agreement, which provides coverage until a policy can be written or delivered. Often issued by the agent or broker.


A licensed person or organization who looks for insurance on behalf of the purchaser.


The termination of insurance coverage during the policy period. Flat cancellation is the cancellation of a policy as of its effective date, without any premium charge.

Casualty Insurance

That type of insurance that is primarily concerned with the legal liability for losses caused by injury to persons or damage to the property of others. It also includes such diverse forms as Plate Glass Insurance, Crime Insurance, Boiler and Machinery Insurance, and Aviation Insurance. Many Casualty insurers also write surety bonds.

Catastrophe Hazard

The hazard of large loss by reason of occurrence of a peril to which a very large number of insureds are subject. An example would be widespread loss due to a hurricane or tornado.

Catastrophe Reinsurance

A form of Excess of Loss Reinsurance which, subject to a specified limit, indemnifies the ceding company against an amount of loss in excess of a specified amount as the result of an accumulation of losses resulting from a catastrophic event or a series of catastrophic events.

Ceding Company

The insurer which cedes all or part of the insurance or reinsurance it has written to another insurer. A company which has placed reinsurance, distinguished from the company that accepts it.

Chartered Property and Casualty Underwriter (CPCU)

A designation granted by the American Institute of Property and Liability Underwriters upon successful completion of a series of examinations.


A demand made by the insured, or the insured's beneficiary, for payment of the benefits provided by an insurance contract.


The first or third party. That is any person who asserts right of recovery.

Claim Expense

The expense of adjusting a claim, such as investigation and attorneys' fees. It does not include the cost of the claim itself. (Also see Loss Adjustment Expense)

Claims Reserve

Amounts set aside to meet costs of claims incurred but not yet finally settled. At any given point in time, the reserve would be the funds kept based on the estimate of what the claim will cost when finally settled.


Provision in an insurance policy, usually optional, under which the policyholder, for a reduced rate, agrees to maintain insurance equal to a specified percentage of the value of the property covered. Policyholders who fail to maintain the minimum amount of coverage specified, assume a proportionate share of the loss.

Combined Ratio

The sum of the expense ratio and the loss ratio for a given time period and book of business. An underwriting profit occurs when the combined ratio is under 100% and an underwriting loss occurs when the combined ratio is over 100%.

Commercial Lines

This term is used to refer to insurance for businesses, professionals, and commercial establishments. Contrast with Personal Insurance Lines.

Commissioner of Insurance

The title of the head of most state insurance departments. In some states, the title Director or Superintendent of Insurance is used instead.

Contract of Insurance

The contract whereby an insurer agrees to indemnify an insured for losses, provide other benefits, or render services to or on behalf of the insured. The contract of insurance is often called an insurance policy, but the policy is merely the evidence of the agreement.


The scope of the protection provided under a contract of insurance.

Covered Loss

Illness, injury, death, property loss, legal liability, or any other situation or loss for which an insurance company will pay benefits under a policy when such events occur.


That portion of the contract in which is stated such information as the name and address of the insured, the property insured, its location and description, the policy period, the amount of insurance coverage and applicable premiums.


Refusal to accept the request for insurance coverage.


The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.


A decrease in value due to age, wear and tear, etc.

Direct Writer

An insurer whose distribution mechanism is either the direct selling system or the exclusive agency system.

Direct Written Premium

The premiums collected, without any allowance for premiums ceded to reinsurers.

Domestic Insurer (or Company)

An insurer formed under the laws of the state in which the insurance is written.

Earned Premium

The amount of the premium that has been "used up" during the term of a policy. For example, if a 1-year policy has been in effect 6 months, half of the total premium has been earned.

Effective Date

The date on which the protection of an insurance policy or bond goes into effect.


An attachment to the policy which adds or excludes coverage.

Excess Lines

Additional amounts of insurance (layers), written to cover large risks when coverage is not otherwise available.


A statement of what is not covered by the contract, for example certain causes of loss such as War, and Earth Movement.

Excess of Loss Reinsurance

  1. A generic term describing reinsurance which, subject to a specified limit, indemnifies the ceding company against the amount of loss in excess of the specified retention. It includes various types of reinsurance, such as Catastrophe, Per Risk, Per Account, and Aggregate Excess of Loss.
  2. A form of reinsurance which indemnifies the ceding company for that portion of the loss resulting from a single occurrence, however defined, that exceeds a predetermined amount, which is referred to as a first loss retention or deductible.

Exclusive Agency System

An insurance distribution system within which agents sell and service insurance contracts that limit representation to one insurer and which reserve to the insurer the ownership, use, and control of policy records and expiration date. The agent may be an independent business person or a company employee. See also Direct Writer, and contrast with Independent Agency System.

Expense Ratio

The percentage of the premium dollar devoted to paying the expenses of an insurer, other than loss and loss adjustment expenses.

Expiration Date

The date on which coverage under a policy term ends.


  1. The state of being subject to the possibility of loss.
  2. The extent of risk as measured by payroll, gate receipts, area, or other standards.
  3. The possibility of loss to a risk being caused by its surroundings. This is used in Property Insurance rating.
  4. Surroundings producing a loss to the insured property.
An example of definitions (3) and (4) would be an insured building suffering loss because a dynamite factory next to it exploded.

Facultative Reinsurance

Reinsurance by offer and acceptance of individual risks, wherein the reinsurer retains the "faculty" to accept or reject each risk offered by the ceding company. Contrast with Treaty Reinsurance.

Fellow of the Casualty Actuarial Society (FCAS)

This designation is gained by the completion of a series of examinations and other requirements.

Fire Insurance

Coverage for loss of or damage to a building and/or contents due to fire.

Fire Mark

An insignia, generally metal, once placed on buildings insured by the insurer represented by the mark. Since the insurers had their own fire brigades, they had to check the mark on a burning building to determine whether or not they should extinguish the fire.

Guarantee Funds

Funds created by state law from contributions by insurance companies operating in the state which are used to make good any unpaid claims or otherwise to make money available to companies near bankruptcy. Each state which has a fund has a different plan.

Homeowners Insurance

A combination of coverages for the risks of owning a home. Can include coverage for losses due to fire, burglary, vandalism, earthquake, and other perils.


A specific situation that increases the probability of the occurrence of loss arising from a peril, or that may influence the extent of the loss. For example, accident, sickness, fire, flood, liability, burglary, and explosion are perils. Slippery floors, unsanitary conditions, shingled roofs, congested traffic, unguarded premises, and uninspected boilers are hazards.

Home Office

Generally, the corporate headquarters of insurers and the location where the chief officers of the organization are housed.

Homeowners Policy

A Property and Liability Insurance contract that provides insurance against any of the Property and Liability perils listed in the policy to which a homeowner or renter is exposed.

Incontestability Clause

A policy provision in which the company agrees not to contest the validity of the contract after it has been in force for a certain period of time, usually two years.

Incurred But Not Reported(IBNR)

This refers to losses which have occurred during a stated period, usually a calendar year, but have not yet been reported to the insurer as of the date under consideration. For instance, insurance company statements prepared after the end of the calendar year would have to include an estimate of losses that occurred during that year but have not yet been reported.

Incurred Loss Ratio

The percentage of losses incurred to premiums earned.

Incurred Losses

The losses occurring within a fixed period, whether or not adjusted or paid during the same period. As an example, in Workers' Compensation claims losses occur during a given policy period, but benefits may continue to be paid for many years. The estimated value of the total claim would be an "incurred loss" for the policy period during which the loss occurred.

Independent Agency System

An insurance distribution system within which independent contractors, known as agents, sell and service Property-Liability Insurance solely on a commission or fee basis under contract with one or more insurers that recognize the agent's ownership, use, and control of policy records and expiration data.

Independent Agent

An agent operating as an independent contractor under the independent agency system. Independent agents tend to represent multiple competing insurers.

Insurable Risk

A risk which meets most of the following requisites:
  1. The loss insured against must be capable of being defined.
  2. It must be accidental.
  3. It must be large enough to cause a hardship to the insured.It must belong to a homogeneous group of risks large enough to make losses predictable.
  4. It must not be subject to the same loss at the same time as a large number of other risks.
  5. The insurance company must be able to determine a reasonable cost for the insurance.
  6. The insurance company must be able to calculate the chance of loss.


A formal social device for reducing risk by transferring the risks of several individual entities to an insurer. The insurer agrees, for a consideration, to assume, to a specified extent, the losses suffered by the insured.

Insurance Commissioner

The head of a state's insurance regulatory agency in most jurisdictions. In some states, the title of Director or Superintendent is used.

Insurance Department

A governmental bureau in each state and the federal government in Canada charged with the administration of insurance laws, including the licensing of agents and insurers and their regulation and examination. In some jurisdictions, the department is a division of another state department or bureau.


The policyholder – the person(s) protected in case of a loss.


The party to an insurance arrangement who undertakes to indemnify for losses, provide pecuniary benefits, or render services. It is desirable to use the word "insurer" in preference to "carrier" or "company" since it is a functional word applicable without ambiguity to all types of individuals or organizations performing the insurance function. The word insurer is generally used in statutory law.

Investment Income

The return received by insurers from their investment portfolios, including interest, dividends, and realized capital gains on stocks. Realized capital gains means the profit realized on stocks that have actually been sold for more than their purchase price.

Joint Underwriting Association (JUA)

An unincorporated association of insurance companies formed to provide a particular form of insurance to the public. Those who insure with a JUA pay assessments in addition to their premiums which provide monies for the operation of the association. JUA's are usually free to set their own rate levels and use whatever coverage forms are deemed proper, subject to approval by state authorities.

Law of Large Numbers

This law states that the larger the number of exposures considered, the more closely the losses reported will match the underlying probability of loss. The simplest example of this law is the flipping of a coin. The more times the coin is flipped, the closer it will come to actually reaching the underlying probability of 50% heads and 50% tails.

Liability Insurance

That insurance which pays and renders service on behalf of an insured for loss arising out of his or her responsibility to others imposed by law or assumed by contract.


Maximum amount a policy will pay either overall or under a particular coverage.


Exceptions to coverage and limitations of coverage as contained in an insurance contract. For instance, a limit of liability would be one limitation on an Automobile policy. Another example would be policies written to cover only certain described automobiles, or, in the case of General Liability Insurance, certain described premises.


  1. Ages below or above which the insurer will not issue a policy or above which it will not continue a policy presently in force.
  2. The maximum amount of benefits payable for a given situation or occurrence, e.g., a limit of $50,000 on the contents of a home, or a $40,000 per accident limit for Property Damage Liability.


A colloquial term with several meanings. It may be used to mean a particular type of insurance, such as the Liability "line." It may be used to describe all the various types of insurance written for a property owner, e.g., carrying all "lines" of the XYZ Company. It is also used to describe the amount of insurance on a given property, e.g., a $250,000 "line" on buildings of the XYZ Company.

Line of Business

The general classification of business as utilized in the insurance industry, e.g., Fire, Allied Lines and Homeowners.


Generally refers to Lloyd's of London, England, an institution within which individual underwriters accept or reject the risks offered to them. The Lloyd's Corporation provides the support facility for their activities.


Generally refers to
  1. the amount of reduction in the value of an insured's property caused by an insured peril,
  2. the amount sought through an insured's claim, or
  3. the amount paid on behalf of an insured under an insurance contract.

Loss Adjustment Expense

The cost of adjusting losses, excluding the amount of the loss itself.

Loss Control

Any combination of actions taken to reduce the frequency or severity of losses. Installing locks, burglar or fire alarms and sprinkler systems are loss control techniques.

Loss Development

The difference between the amount of losses initially estimated by the insurer and the amount reported in an evaluation on a later date.

Loss Frequency

The number of times a loss occurs over a specific period of time.

Loss Ratio

The losses (pure loss + loss adjustment expense) divided by the premiums paid. The numerator (losses) can be losses incurred or losses paid, and the denominator (premium) can be earned premiums or written premiums, depending on what use is going to be made of the loss ratio.

Loss Reserve

The estimated liability for unpaid insurance claims or losses that have occurred as of a given evaluation date. Usually includes losses incurred but not reported (IBNR), losses due but not yet paid, and amount not yet due. The above describes a loss reserve as it would appear in an insurer's financial statement. As to individual claims, the loss reserve is the estimate of what will ultimately be paid out on that case.

Material Misrepresentation

The policyholder / applicant makes a false statement of any material (important) fact on his/her application. For instance, the policyholder provides false information regarding the location where the vehicle is garaged.

Moral Hazard

A condition of morals or habits that increases the probability of loss from a peril. An extreme instance would be an individual who burns there house to the ground to collect the insurance.

Morale Hazard

A hazard arising out of the insured’s indifference to loss because of the existence of insurance. The attitude “Its insured so why worry” is an example of a morale hazard.

Multiple Line Policy

A policy that includes several different coverages such as Property, Liability, and Crime. Any personal or commercial package policy.

Mutual Insurer

An incorporated insurer without incorporated capital owned by its policyholders. Mutual insurers may distribute their earnings to their policyholders in the form of dividends.

Named Insured

Any person, firm, or corporation, or any member thereof, specifically designated by name as the insured(s) in a policy. Others may be protected as insureds even though their names do not appear on the policy. A common application of this latter principle is in Automobile policies where, under the definition of insured, protection is extended to cover other drivers using the car with the permission of the named insured.

National Association of Insurance Commissioners (NAIC)

An association of state insurance commissioners formed for the purpose of exchanging information and of developing uniformity in the regulatory practices of the several states through drafting model legislation and regulations. The NAIC has no official power to enforce compliance with its recommendations.

Net Written Premium

The written premium retained by the insurer after ceded reinsurance; in other words net written premium is direct written premium minus ceded reinsurance.

Nonadmitted Assets

Assets that do not qualify under state law for insurance statement purposes. Examples would be furniture, fixtures, agents' debit balances, and accounts receivable which are over ninety days old.


An event that results in an insured loss. In some lines of insurance, such as Liability, it is distinguished from accident in that the loss does not have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected nor intended by the insured.


That which is insured against; the cause of a possible loss, for example fire, wind. Contrast with Hazard and Risk.

Personal Lines

This term is used to refer to insurance for individuals and families, such as private passenger automobile insurance and homeowner policies. Contrast with Commercial Lines.


The written contract of insurance.


  1. The person in actual possession of an insurance policy.
  2. Often used loosely to refer to the policy owner and/or insured.

Policyholder's Surplus

The amount over and above liabilities available for an insurer to meet future obligations to its policyholders. In the case of a mutual insurer, it is the whole equity section of the balance sheet. In the case of a stock insurer, the equity section is divided into two parts, stockholder's surplus and policyholder's surplus.

Policy Limit

The maximum amount a policy will pay, either overall or under a particular coverage.

Policy Period (or Term)

The period during which the policy contract affords protection, e.g., six months or one or three years.


The price of insurance protection for a specified risk for a specified period of time.

Premium Financing

A policyholder contracts with a lender to pay the insurance premium on his/her behalf. The policyholder agrees to repay the lender for the cost of the premium, plus interest and fees.

Pro-Rata Cancellation

When a policy is terminated midterm, the earned premium is calculated only for the period coverage was provided. For example: an annual policy with premium of $1,000 is cancelled after 40 days of coverage at the company's election. The earned premium would be calculated as follows: 40/365 days X $1,000 = $110. In this example, had the insured paid the full annual premium in advance a refund of $890 would be due.

Pro Rata Reinsurance

Reinsurance which pays an agreed proportion of a loss from the first dollar. Contrast with Excess of Loss.

Pure Risk

Uncertainty as to whether a loss will occur. Under a pure risk situation, there is no possibility for gain. Contrast with Speculative Risk.


An estimate of the cost of insurance, based on information supplied to the insurance company by the applicant.


The cost of a given unit of insurance. For example, in Property Insurance, it is the rate per $100 of value to be insured. The premium, then, is the rate multiplied by the number of units of insurance purchased. Also refers to the act of calculating the policy premium.

Reciprocal Insurance Exchange

An unincorporated group of individuals, called subscribers, who mutually insure one another, each separately assuming his share of each risk. Its chief administrator is an attorney in fact.


The restoring of a lapsed policy to full force and effect. The reinstatement may be effective after the cancellation date, creating a lapse of coverage. Some companies require evidence of insurability and payment of past due premiums plus interest.


A type of insurance that involves acceptance by an insurer, called the reinsurer, of all or a part of the risk of loss covered by another insurer, called the ceding company. It is a way for an insurer to avoid having to pay for large or catastrophic losses.

Replacement Cost

The cost to repair or replace an insured item. Some insurance only pays the actual cash or market value of the item at the time of the loss, not what it would cost to fix or replace it. If you have personal property replacement cost coverage, your insurance will pay the full cost to repair an item or buy a new one once the repairs or purchases have been made.


  1. The amount of risk which is not transferred either to an insurer by an insured (eg by use of a deductible) or to a reinsurer by a primary insurer.
  2. The number of policies which were renewed in a given time period, as opposed to thoes which lapsed or were cancelled.


Usually known as an endorsement, a rider is an amendment to the policy used to add or delete coverage.


  1. Uncertainty as to the outcome of an event when two or more possibilities exist. See also Pure Risk and Speculative Risk.
  2. A person or thing insured. Contrast with Hazard and Peril.

Short-Rate Cancellation

When a policy is terminated prior to the expiration date at the policyholder's request. Earned premium charged would be more than the pro-rata earned premium. Generally, the return premium would be approximately 90 percent of the pro-rata return premium. However, the company may also establish its own short-rate schedule.

Special Investigations Unit (SIU)

The fraud investigation specialists within a claim department.

Speculative Risk

Uncertainty as to whether a gain or loss will occur. An example would be a business enterprise where there is a chance that the business will make money or lose it. Speculative risks are not normally insurable. Contrast with Pure Risk.

Stock Insurer

An incorporated insurer with capital contributed by stockholders, to whom the earnings are distributed as dividends on their shares. Contrast with Mutual Insurer.

Stop Loss

A form of reinsurance under which the reinsurer reinsures the ceding insurer for an amount by which the latter's incurred losses in a calendar year for a specified class of business exceed a specified loss ratio.


The right of one who has taken over another's loss to also take over his right to pursue remedies against a third party.


An extra charge applied by the insurer. For automobile insurance, a surcharge is usually for accidents or moving violations.

Surplus Lines

A risk or a part of a risk for which there is no market available through the original broker or agent in its jurisdiction. Therefore, it is placed with nonadmitted insurers on an unregulated basis, in accordance with the surplus or excess lines provisions of the state law.


The period of time for which a policy or bond is issued.


A private wrong, independent of contract and committed against an individual, which gives rise to a legal liability and is adjudicated in a civil court. A tort can be either intentional or unintentional, and it is mainly against liability for unintentional torts that one buys Liability Insurance.

Treaty Reinsurance

A contract of automatic reinsurance setting forth the conditions for reinsuring a class or classes of business. Contrast with Facultative Reinsurance.


A technician trained in evaluating risks and determining rates and coverages for them. The term derives from the practice at Lloyd's of each person willing to accept a portion of the risk writing his name under the description of the risk.


The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

Underwriting Profit (or Loss)

  1. The profit or loss realized from insurance operations, as contrasted with that realized from investments.
  2. The excess of premiums over losses and expenses (profit) or the excesses of losses over premiums (loss).

Unearned Premium

That portion of the written premium applicable to the unexpired or unused part of the period for which the premium has been paid. Thus, in the case of an annual premium, at the end of the first month of the premium period eleven-twelfths of the premium is unearned.

Written Premiums

The total premiums on all policies written by an insurer during a specified period of time, regardless of what portions have been earned. Contrast with Earned Premium.

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