NAMIC Glossary


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Additional Living Expenses
Extra charges covered by homeowners’ policies over and above the policyholder’s customary living expenses. These are paid when the insured requires temporary shelter due to damage by a covered peril that makes the home temporarily uninhabitable.

Admitted Assets
Assets recognized and accepted by state insurance laws in determining the solvency of insurers and reinsurers. To make it easier to assess an insurance company’s financial position, state statutory accounting rules do not permit certain assets to be included on the balance sheet. Only assets that can be easily sold in the event of liquidation or borrowed against, receivables for which payment can be reasonably anticipated, are included in admitted assets.

Admitted Company
An insurance company licensed and authorized to do business in a particular state.

Antitrust Laws
Laws that prohibit companies from working as a group to set prices, restrict supplies, or stop competition in the marketplace. The insurance industry is subject to state antitrust laws but has a limited exemption from federal antitrust laws. This exemption, set out in the McCarran-Ferguson Act, permits insurers to jointly develop common insurance forms and share loss data to help them price policies.

Auto Insurance Policy
There are basically six different types of coverages. Some may be required; others are optional. They are:

  1. Bodily injury liability, for injuries the policyholder causes to someone else;

  2. Medical payments or Personal Injury Protection (PIP), for treatment of injuries to the driver and passengers of the policyholder’s car;

  3. Property damage liability, for damage the policyholder causes to someone else’s property;

  4. Collision, for damage to the policyholder’s car from a collision.

  5. Comprehensive, for damage to the policyholder’s car not involving a collision with another car (i ncluding damage from fire, explosions, earthquakes, floods, and riots), and theft.

  6. Uninsured motorists coverage, for costs resulting from an accident involving a hit-and-run driver or a driver who does not have insurance.

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Beach and Windstorm Plans
State-sponsored insurance pools that sell property coverage for the peril of windstorm to people unable to buy it in the voluntary market because of their high exposure to risk. Seven states – Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina, and Texas – offer these plans to cover residential and commercial properties against hurricanes and other windstorms. Georgia and New York provide this kind of coverage for windstorm and hail in certain coastal communities through other property pools. Insurance companies that sell property insurance in the state are required to participate in these plans. Insurers share in profits and losses.

Book of Business
Total amount of insurance on an insurer’s books at a particular point in time.

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The supply of insurance available to meet demand. Capacity depends on the industry’s financial ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite is based on its financial condition. The adequacy of an insurer’s capital relative to its exposure to loss is an important measure of solvency.

A property/casualty insurer must maintain a certain level of capital and policyholder surplus to underwrite risks. This capital is known as capacity. When the industry is hit by high losses, such as after the Sept. 11 terrorist attack, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk, and/or raising additional capital. When there is excess capacity, usually because of a high return on investments, premiums tend to decline as insurers compete for market share. As premiums decline, underwriting losses are likely to grow, reducing capacity and causing insurers to raise rates and tighten conditions and limits in an effort to increase profitability. Policyholder surplus is sometimes used as a measure of capacity.

Insurers that are created and wholly owned by one or more non-insurers to provide owners with coverage. A form of self-insurance.

Term used for statistical recording purposes to refer to a single incident or a series of closely related incidents causing severe insured property losses totaling more than a given amount, currently $25 million.

Catastrophe Model
Using computers, a method to mesh long-term disaster information with current demographic, building, and other data to determine the potential cost of natural disasters and other catastrophic losses for a given geographic area.

Property that is offered to secure a loan or other credit that becomes subject to seizure on default.

Combined Ratio
Percentage of each premium dollar a property/casualty insurer spends on claims and expenses. A decrease in the combined ratio means financial results are improving; an increase means they are deteriorating. When the ratio is more than 100, the insurer has an underwriting loss.

Credit Derivatives
A contract that enables a user, such as a bank, to better manage its credit risk. A way of transferring credit risk to another party.

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Contracts that derive their value from an underlying financial asset, such as publicly traded securities and foreign currencies. Often used as a hedge against changes in value.

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Expense Ratio
Percentage of each premium dollar that goes to insurers expenses, including overhead, marketing, and commissions.

Record of losses.

Possibility of loss.

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Fair Access to Insurance Requirements Plans/FAIR Plans
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.

File-and-Use States
States where insurers must file rate changes with their regulators but don’t have to wait for approval to put them into effect.

Flood Insurance
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. However, flood damage is covered under the comprehensive portion of an auto insurance policy.

Number of times a loss occurs. One of the criteria used in calculating premium rates.

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Graduated Driver Licenses
Licenses for younger drivers that allow them to improve their skills. Regulations vary by state, but often restrict nighttime driving. Young drivers receive a learner’s permit followed by a provisional license before they can receive a standard driver’s license.

Gramm-Leach-Bliley Act
Financial services legislation passed by Congress in 1999 that removed Depression-era prohibitions against the combination of commercial banking and investment banking activities. It allows insurance companies, banks, and securities firms to engage in each others’ activities and own one another.

Guaranty Fund
The mechanism by which solvent insurers ensure that some policyholder and third-party claims against insurance companies that fail are paid. Such funds are required in all 50 states, the District of Columbia, and Puerto Rico, but the type and amount of claim covered by the fund varies from state to state. Some states pay policyholders’ unearned premiums – the portion of the premium for which no coverage was provided because the company was insolvent. Some have deductibles. Most states have no limits on workers’ compensation payments. Guaranty funds are supported by assessments on insurers doing business in the state.

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Homeowners Insurance Policy
The typical homeowners insurance policy covers the house, garage, and other structures on the property as well as personal possessions inside the house, such as furniture, appliances, and clothing, against a wide variety of perils, including windstorms, fire, and theft. The extent of the perils covered depends on the type of policy. An all-risk policy offers the broadest coverage. This covers all perils except those specifically excluded in the policy.

Homeowners insurances also covers additional living expenses. Known as “Loss of Use,” this provision in the policy reimburses the policyholder for the extra cost of living elsewhere while the house is being restored after a disaster. The liability portion of the policy covers the homeowner for accidental injuries caused to third parties and/or their property, such as a guest slipping and falling down improperly maintained stairs.

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Inland Marine Insurance
This broad type of coverage was developed for shipments that do not involve ocean transport. Covers articles in transit by all forms of land and air transportation and communication. Floaters that cover expensive personal items, such as fine art and jewelry, are included in this category.

Insurer’s inability to pay debts. Insurance insolvency standards and the regulatory actions taken vary from state to state. When regulators deem an insurance company is in danger of becoming insolvent, they can take one of three actions: place a company in conservatorship; rehabilitation if the company can be saved; or liquidation if salvage is deemed impossible. The difference between the first two options is one of degree – regulators guide companies in conservatorship but direct those in rehabilitation. Typically, the first sign of problems is inability to pass the financial tests regulators administer as a routine procedure.

Insurance Score
Insurance scores are confidential rankings based on credit information. This includes whether the consumer has made timely payments on loans, the number of open credit card accounts, and whether a bankruptcy filing has been made. An insurance score is a measure of how well consumers manage their financial affairs, not of their financial assets. It does not include information about income or race.

Studies have shown that people who manage their money well tend also to manage their most important asset – their home – well. And people who manage their money responsibly also tend to handle driving a car responsibly. Some insurance companies use insurance scores as an underwriting and rating tool.

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Joint Underwriting Associations/JUA
Insurers that join together to provide coverage for a particular type of risk or size of exposure when there are difficulties in obtaining coverage in the regular market and which share in the profits and losses associated with the program. JUAs may be set up to provide auto and homeowners insurance and various commercial coverages, such as medical malpractice.

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Loss Ratio
Percentage of each premium dollar an insurer spends on claims.

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McCarran-Ferguson Act
Federal law signed in 1945 in which Congress declared that states would continue to regulate the insurance business. Grants insurers a limited exemption from federal antitrust legislation.

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Named Peril
Peril specifically mentioned as covered in an insurance policy.

Auto insurance coverage that pays for each driver’s own injuries, regardless of who caused the accident. No-fault varies state to state. It also refers to an auto liability insurance system that restricts lawsuits to serious cases. Such policies are designed to promote faster reimbursement and to reduce litigation.

No-Pay, No-Play
The idea that people who don’t buy coverage should not receive benefits. Prohibits uninsured drivers from collecting damages from insured drivers. In most states with this law, uninsured drivers may not sue for noneconomic damages such as pain and suffering. In other states, uninsured drivers are required to pay the equivalent of a large deductible ($10,000) before they can sue for property damages and another large deductible before they can sue for bodily harm.

Non-Admitted Assets
Assets that are not included on the balance sheet of an insurance company, including furniture, fixtures, past-due accounts receivable, and agents’ debt balances.

Non-Admitted Insurer
Insurers licensed in some states, but not others. States where an insurer is not licensed call that insurer non-admitted. They sell coverage that is unavailable from licensed insurers within the state.

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Open Competition States
States where insurance companies can set new rates without prior approval, although the state’s commissioner can disallow them if they are not reasonable and adequate or are discriminatory.

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Personal Injury Protection Coverage/PIP
Portion of an auto insurance policy that covers the treatment of injuries to the driver and passengers of the policyholder’s car.

Prior Approval States
States where insurance companies must file proposed rate changes with state regulators and gain approval before they can go into effect.

Property/Casualty Insurance
Covers damage to or loss of policyholders’ property and legal liability for damages caused to other people or their property. Property/casualty insurance, which includes auto, homeowners, and commercial insurance, is one segment of the insurance industry.

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Rate Regulation
The process by which states monitor insurance companies’ rate changes, done either through prior approval or open competition models.

Rating Agencies
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.

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.

A company’s best estimate of what it will pay for claims.

Residual Market
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.

The amount of risk retained by an insurance company that is not reinsured.

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A legal term denoting a wrongful act resulting in injury or damage on which a civil court action or legal proceeding may be based.

Tort Law
The body of law governing negligence, intentional interference, and other wrongful acts for which civil action can be brought, except for breach of contract, which is covered by contract law.

Tort Reform
Refers to legislation designed to reduce liability costs through limits on various kinds of damages and through modification of liability rules.

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Examining, accepting, or rejecting insurance applications, and classifying the ones accepted in order to gauge risks and charge appropriate premiums for them.

Underwriting Income
The insurer’s profit on the insurance sale after all expenses and losses have been paid. When premiums aren’t sufficient to cover claims and expenses, the result is an underwriting loss. Underwriting losses can be offset by investment income.

Uninsurable Risk
A risk for which it is difficult or impossible for someone to get insurance coverage.

Uninsured Motorists Coverage
The portion of an auto insurance policy that protects a policyholder from uninsured and hit-and-run drivers.

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A policy contract that for some reason specified in the policy becomes free of all legal effect. One example under which a policy could be voided is when information a policyholder provided is proven untrue.

Volcano Coverage
Most homeowners policies cover damage from a volcanic eruption.

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War Risk
Special coverage on cargo in overseas ships against the risk of being confiscated by a government in wartime. It is excluded from standard ocean marine insurance and can be purchased separately. It often excludes cargo awaiting shipment on a wharf or on ships after 15 days of arrival in port.

Warranty Insurance
Warranty insurance coverage compensates for the cost of repairing or replacing defective products past the normal warranty period provided by manufacturers.

Water-Damage Insurance Coverage
Protection provided in most homeowners insurance policies against sudden and accidental water damage, from burst pipes for example. Generally does not cover damage from problems resulting from a lack of proper maintenance, such as dripping air conditioners. Water damage from floods is covered under separate flood insurance policies provided through the federal National Flood Insurance Program.

Weather Insurance
A type of business interruption insurance that compensates for financial losses caused by adverse weather conditions, such as constant rain on the day scheduled for a major outdoor concert.

Workers' Compensation
Insurance that pays for medical care and physical rehabilitation of injured workers and helps to replace lost wages while they are unable to work. State laws, which vary significantly, govern the amount of benefits paid and other compensation processes and provisions.

The term for providing coverage for certain risks. A company that offers policies that cover fire damage, for example, is said to write fire insurance coverage.

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Zone Rating
A commercial auto rating system that divides the country into 50 zones with different rating tables applicable for each zone. Vehicles excluding light trucks or trailers used with light trucks, that fall into the long-distance radius class are zone-rated.

Zone System
A triennial insurance company solvency examination system developed by the National Association of Insurance Commissioners. The system divides the United States into three geographical zones, and teams from states in each of the three zones examine the companies in their zones. All states then accept examinations from the other zones.

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