Like any large industry, insurance has developed somewhat of a language of its own. Here’s our abridged “insurance dictionary,” full of insurance terms and definitions for your quick reference.
Actual Cash Value: Actual Cost Value (ACV) is a method used by insurance companies to assign value to a piece of property at the time it is damaged or destroyed. ACV is estimated by taking the cost of replacing the property minus the depreciation from age or “wear and tear.” For example, the ACV of a 20-yr. old roof would be less than the ACV for a 2-yr. old version of the same roof. (contrast with Replacement Cost)
Actuary: An actuary is an expert in statistical insurance information. Actuaries are responsible for reviewing and evaluating the potential for future claims costs and using this information to determine rates and rating methods.
Admitted Company: An admitted company is a company that has been authorized by a particular state to sell insurance in that state.
Assigned Risk Plans: Assigned risk plans are designed to give insurance to high-risk drivers who are unable to find insurance in the regular market. Under assigned risk plans, the state requires auto insurance companies to cover a number of drivers that is proportional to the total number of policies they sell in the state. In Texas, the assigned risk plan is called the Texas Automobile Insurance Plan Association (TAIPA.)
Beach and Windstorm Plans: Beach and Windstorm plans are usually offered in states where high numbers of hurricanes make it impossible for coastal property-owners to find insurance in the regular market. Under this system, the state organizes a pool of funds from all the insurers licensed in that state. The state then uses the pool to provide insurance for coastal properties. Texas is one of seven states to offer a state sponsored windstorm plan.
Blanket Coverage: Blanket coverage is insurance that covers more than one piece of property in one location or multiple pieces of property in multiple locations.
Captive Agent: A captive agent sells policies for only one company. Captive agents have an agreement with their company that they will not submit business to any other company unless it is first rejected by their primary company. (similar to Exclusive Agent)
Chartered Property Casualty Underwriter (CPCU): CPCU is a designation given by the American Institute for Property and Liability Underwriters. In order to receive the designation, an underwriter must have at least three years experience and pass an exam.
Collision Coverage: Collision coverage covers the cost of fixing or replacing your car after an accident, regardless of who was driving and who was at fault. The coverage is limited to the actual cash value of your car minus your deductible.
Competition: In this system rates are controlled by competition between companies instead of by governmental controls. Insurance companies may raise or lower rates without the approval of the state-regulating agency. Usually, the state-regulating agency will reserve the right to disallow rates only if it finds them to be unreasonable or discriminatory.
Comprehensive Coverage: Comprehensive coverage pays for the repair of damages not caused by collisions, i. e. hail-damage, vandalism, and fire. It also pays for the replacement of a car in the case of theft.
Compulsory Auto Insurance: Compulsory auto insurance is the minimum amount of auto insurance required by law. In Texas, drivers are required by law to have liability insurance that covers the policyholder for $20,000 in medical expenses for each injured person, up to a maximum of $40,000 and $15,000 in property damage.
County Mutual: County mutuals are a special type of mutual insurance company that was originally designed to provide insurance for buildings and livestock in remote rural communities. In 1955, county mutuals also began to sell auto insurance statewide.
Declaration: The declaration is the part of the written insurance policy that states all the policy’s specifics, including the name of the policyholder, the type of property insured, the premiums, and the term limits for the coverage.
Deductible: The deductible is the amount of a claim that the policyholder must pay him or herself. Policies with bigger deductibles have lower premiums.
Demutualization: Demutualization is the conversion of an insurance company from a mutual company that is owned by its policyholders to a publicly traded company that is owned by stockholders.
Deregulation: Deregulation is the process of reducing the regulatory control that states have over insurance rates and forms.
Direct Writers: Direct writers are insurance companies that sell their products directly to the public through exclusive agents, their own employees, the mail, by phone or via the Internet.
Endorsement: An endorsement is a specific addition to a policy that alters the coverage and therefore the price of that policy. Endorsements can either add or remove specific types of coverage. In many cases, consumers can buy a basic policy and then custom-tailor it to their needs through specific endorsements.
Exclusion: An exclusion is a provision in an insurance policy that removes coverage for certain risks, people, property, or locations. Exclusions can make policies more affordable by eliminating coverage for unnecessary risks.
Exclusive Agent: An exclusive agent is an agent that sells policies for only one company. Exclusive agents have an agreement with their company that they will not submit business to any other company unless it is first rejected by the primary company. (similar to Captive Agent)
Experience (also Loss Experience): Experience is the history of losses for an individual policyholder.
Exposure (also Loss Exposure): Exposure is the likelihood that a policyholder will suffer a loss.
Fair Access to Insurance Requirements Plans (FAIR Plans): FAIR plans are insurance pools that sell coverage to high-risk property owners who cannot buy in the regular market. FAIR plans require all insurers licensed in a state to contribute a pool of funds that offers property insurance for these high-risk properties.
Federal Insurance Administration (FIA): The Federal Insurance Administration is a federal organization that administers the national Flood Insurance program. Aside from flood insurance, the FIA has no control over insurance regulation.
File-and-Use: Under a file-and-use system, companies must submit rate changes to the state regulating agency but they do not have to wait for approval to put the new rates into effect. If state insurance regulators do not approve of the rate changes, they can then force companies to repeal the changes and return to the original rates.
Financial Responsibility Law: A state law that requires drivers to have a minimum amount of liability coverage in order to show they have the means to pay for damages if they are involved in an accident.
Form (also Policy Form): The “form” of a policy dictates what types of damages a policy covers and the dollar amounts of the coverage. Historically, Texas law has required insurers to offer a limited number of forms forms, primarily the HO-A and the HO-B. Recently, however, companies have been authorized tp begin offering new forms.
Fraud: Fraud is any intentional lying or misrepresentation by policyholders or claims adjusters in order to inflate a claims payment or receive a claims payment that would otherwise not be paid.
Guaranty Fund: A guaranty fund is used when insolvent insurance companies cannot pay their claims. The fund is managed by the state and is created with money collected from insurance companies licensed in that state.
Guaranty Replacement Cost Coverage: Guaranteed replacement cost coverage is coverage that pays the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit.
HO-A: HO-A is one of the policies that insurers in Texas have been required to sell. Historically, HO-A has not been a popular policy because it offered very limited coverage. Recently, insurers have been allowed to offer versions of HO-A that offer more extensive coverage and the policy has gained popularity.
HO-B: HO-B is one of the policies that insurers in Texas have been required to sell. HO-B has been the most popular policy in Texas, mainly because it offered more coverage than HO-A. HO-B offers very extensive coverage and therefore tends to be less affordable.
Independent Adjuster: An independent adjuster is an adjuster who works as an independent contractor with insurance companies or other organizations to investigate and settle claims. Independent adjusters are required to be licensed by the state. Compare to Public Adjuster. (contrast with Public Adjuster)
Insurance Credit Score: An insurance credit score is a number that is determined by looking at certain aspects of an individual’s credit history. This number is provided to insurance companies by a credit evaluation service. Insurance companies then use this number as one of many factors that determine the rates a policyholder is charged. Statistics have shown that insurance scores are an accurate tool to help predict the amount of claims that a policyholder will file.
Insolvency: In the case of insurance, insolvency means that companies do not have sufficient funds in their reserves to pay claims. If a company appears to be at risk for insolvency, the Texas Department of Insurance (TDI) will advise the company to take measures to increase their reserve funds. These measures can include such things as raising rates, adjusting the company’s investment portfolio, and soliciting investment in the company. If the company fails to improve its situation, the TDI can intervene by court order and take control of that company’s operations. If all else fails, the final step is liquidation. Using this last resort, the TDI will dissolve the company and sell off all of its assets to pay the claims.
Insurance Pool: An insurance pool is a group of insurance companies that pool their assets in order to share the loss potential of insuring large risks such as nuclear power stations. Some pools are mandated by the state to cover risks that cannot obtain coverage in the regular market, such as coastal properties that are prone to hurricane risks. (See Beach and Windstorm Plans; Joint Underwriting Association / JUA)
Joint Underwriting Association/JUA: A joint underwriting association consists of insurers who band together to provide coverage for a specific type of risk or exposure. They are only used when it is difficult to obtain a certain type of insurance in the regular market. Companies in JUA’s share in the profits and the losses of the association.
Liability Insurance: Liability coverage pays for expenses from damages or injuries to other people that are caused by the policyholder.
Lloyd’s Companies: Lloyd’s companies are modeled after the Lloyd’s of London insurance syndicate. In Texas, Lloyd’s companies deal primarily with homeowners insurance. Under Texas law, auto insurance issued by Lloyd’s companies is subject to rate-regulation but homeowners insurance is not.
Loss: In insurance terms, loss means an unintentional decrease in the value of a piece of property as the result of some event.
Loss Adjustment Expenses (LAE): LAE are expenses incurred while determining the value of a claim, over and above the cost of the claim. These can include fees from doctors, trial lawyers, and adjusters. Loss adjustment expenses are divided into two categories, Allocated Loss Adjustment Expenses (ALAE) and Unallocated Loss Adjustment Expenses (ULAE).
Loss Ratio: Loss ratio is the percentage of each premium dollar that an insurer spends on claims. For example, a company with a 90% loss ratio will spend 90 cents on claims for every dollar they collect as premium.
Loss Reserve (also Reserve): A loss reserve is a figure that represents an insurance company’s best estimate of what future losses will be, it is not an actual reserve of money. An insurance company must set its rates according to its loss reserve estimate so that it will be able to pay future claims.
McCarran-Ferguson Act: The McCarran-Ferguson Act is a federal law signed in 1945 that gives states the full authority to regulate the insurance business. The law places insurance companies under the authority of state anti-trust laws instead of Federal anti-trust laws.
Mold Remediator: Mold remediators are contractors who specialize in removing mold from homes. Mold remediators are not required to be licensed or certified.
Mutual: The term mutual denotes a company that is owned by its policyholders instead of by stockholders. These companies return part of their profits to policyholders as dividends.
NAIC: The National Association of Insurance Commissioners (NAIC) was founded in 1871 to help promote uniformity in the regulation of insurance among the different states. The NAIC is composed of representatives from every US state and territory as well as the District of Columbia. The NAIC also monitors financial viability of national companies to prevent insolvencies.
NCOIL: The National Conference of Insurance Legislators (NCOIL) is an organization of state legislators who focus on issues of insurance regulation. NCOIL works to educate state legislators about insurance issues and to increase communication between legislators in different states.
Policy: A policy is a written contract for insurance between an insurance company and policyholder that states the details of the coverage.
Prior Approval: When insurance companies wish to change their rates in a prior approval system, they must gain approval of their rate changes from the state regulating agency, (i. e. Department of Insurance,) before they can put the new rates into effect.
Rate Regulation: The process by which state insurance agencies either set insurance rates or monitor any rate changes that insurance companies make. Some examples of rate regulation are file-and-use systems, prior approval systems, and the Texas Benchmark Rating System.
Reciprocal Exchanges: In a reciprocal exchange company, policyholders “insure each other” through a common attorney who manages the premium funds. In Texas most reciprocal exchanges deal with homeowners insurance. homeowners rates are not regulated for reciprocal exchange insurance policies.
Replacement Cost: Replacement cost is a method that assigns value to a piece of property by considering the cost of repairing or replacing the property without taking into account depreciation. (contrast with Actual Cash Value)
Residual Market: The residual market consists of facilities to provide coverage for consumers or businesses that cannot purchase insurance in the regular market. Some examples of residual market facilities are Assigned Risk Plans, Joint Underwriting Agreements, and FAIR plans.
Solvency: Solvency is the ability of an insurance company to pay future claims. In order to remain solvent, insurance companies must always keep an adequate surplus of funds in case an unforeseen increase in claims occurs.
Surplus Lines: Surplus lines denotes coverage that must be purchased from a company that is not licensed by the state because it is not available through licensed companies. For example, surplus lines might be used when unusual coverage is needed but state-licensed companies cannot offer the coverage because the state either restricts them from offering such coverage or restricts them from charging the rates that such coverage would cost.
Texas Automobile Insurance Plan Association (TAIPA): TAIPA is the association that manages Texas’ assigned risk plan. It was designed to provide insurance for high-risk drivers. (see Assigned Risk Plan)
Texas Benchmark Rating System: The benchmark rating system is the system by which all regulated home and auto insurance rates are determined. The Texas Insurance Commissioner sets a benchmark rate and insurance companies must set their rates within a 30% parameter of the benchmark.
Texas Department of Insurance (TDI): The TDI is the state regulatory office that oversees insurance in Texas. The TDI is responsible for:
- Licensing all companies and individuals that sell insurance within the state of Texas;
- Issuing the rules and regulations to which all Texas insurance companies must adhere and enforcing these rules;
- Investigating the financial condition of insurance companies to ensure that they have sufficient funds to pay their claims;
- Setting the range in which rate-regulated companies may sell home or auto insurance; and
- Investigating possible cases of insurance fraud, license violation, misrepresentation in advertising, or discrimination in service and rates.
Tort: A wrongful act which results in injury or damage and on which a civil action may be based.
Tort Reform: An effort by state lawmakers to change legal procedures in order to prevent lawsuit abuse and make liability insurance more affordable. Tort reform includes revising the laws that determine responsibility for damages, reducing the amount of punitive damages that civil actions can seek. In the 1980’s, 45 states enacted tort reform legislation.
Umbrella Policy: A separate policy that offers coverage for costs over and above the dollar limits of an underlying policy.
Unallocated Loss Adjustment Expenses (ULAE): ULAE are adjustment expenses that result from a broad array of claims or that result from the general process of determining the amount of claims payments. (See Loss Adjustment Expenses & Allocated Loss Adjustment Expenses)
Underwriting: Underwriting is the process of examining the risks of potential policyholders and then accepting or rejecting those risks. Underwriting also includes placing limits on the coverage that policies offer and categorizing policies so that the appropriate premium is charged.
Underinsured/Uninsured Motorists Coverage (UM/UIM): UM/UIM coverage pays for losses from an accident caused by an uninsured motorist or a hit-and-run driver. It also covers any remainder of expenses that the driver at fault did not have sufficient insurance to cover.