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Absolute Liability. The principle that a person may be held liable for damages even without a finding of fault or negligence.

Access. A patient's ability to obtain medical care. The ease of access is determined by such components as the availability of medical services and their acceptability to the patient, the location of health care facilities, transportation, hours of operation and cost of care.

Accident. An unforeseen and unintended event or occurrence.

Accident and Health Insurance. A form of insurance covering death or personal injury by accident, as well as sickness or bodily injury.

Accident Year. The twelve-month period during which losses occurred, regardless of when they are reported.

Accidental Death Benefit. See Double Indemnity.

Accord and Satisfaction. A method of settling a claim in which the parties to the dispute agree to accept something different than was originally expected. Theaccordis the substituted agreement, and thesatisfactionis the performance of the new agreement.

Accumulation Period. The period of time during which an insured must incur medical expenses up to the deductible in order to become eligible for reimbursement under a comprehensive major medical or major medical insurance policy. See Comprehensive Major Medical Insurance and Major Medical Insurance.

Acquisition Costs. See Policy Acquisition Costs.

Act of God. An event that occurs without human intervention or culpability. It serves as a defense to tort liability.

Actuarial Opinion. The certification by an actuary as to the reasonableness of an insurer's reserves.

Actuary. A person who uses mathematical analysis of past loss data and other statistics to determine rates and estimate an insurer's future liabilities.

Acute Care. A pattern of health care in which a patient is treated for an acute (immediate and severe) episode of illness, for the subsequent treatment of injuries related to an accident or other trauma, or during recovery from surgery. Acute care usually is given in a hospital by specialized personnel using complex and sophisticated technical equipment and materials. Unlike chronic care, acute care often is necessary for only a short time.

Additional Named Insured. One or more insureds, in addition to the principal named insured, referred to in an insurance policy as one enjoying protection under the policy.

Add-on Tax. The additional amount of federal income tax payable by mutual life insurers due to the disallowance as a deduction of a portion of policyholder dividends.

Adjuster. See Claim Adjuster.

Administration Expense. All the costs incurred by an insurer in the conduct of its business other than policy acquisition costs, loss adjustment expenses and investment expenses.

Administrative Cost. Costs related to utilization review, insurance marketing, medical underwriting, agents' commissions, premium collection, claims processing, insurer profit, quality assurance programs and risk management.

Administrative Services Only (ASO). A fee-based program in which an insurance company or other third-party administrator performs administrative, clerical or managerial services only and does not assume any risk. Services usually include claims processing, but also may include other services, such as actuarial analysis, utilization review, etc. Businesses or self-funded health plans may use an ASO.

Admitted Assets. Assets of an insurer permitted by insurance regulatory authorities to be taken into account in determining the insurer's financial condition under statutory accounting practices.

Admitted Insurer. An insurer licensed to write certain types of insurance within a given state; also known as an authorized insurer.

Admitted Paper. Policies issued by an admitted insurer.

Adverse Selection. The process by which an insurer is left with a disproportionate share of unwanted, higher-risk business. Particularly common in the life and health lines, adverse selection can occur when higher-than-expected claims experience leads an insurer to raise rates, which in turn causes the migration of "good" risks to companies charging less. Adverse selection may be attributable to improper underwriting and risk selection by the insurer or by superior knowledge of the risk by the insured. Among applicants for a given group or individual program, the tendency for those with an impaired health status, or who are prone to higher-than-average utilization of benefits, to be enrolled in disproportionate numbers and lower deductible plans.

AFDC. See Aid to Families with Dependent Children.

Affinity Group. Purchasers of goods and services, including insurance, with common characteristics.

Agency Plant. An insurer's sales organization.

Agent. A person who solicits insurance on behalf of an insurer.

Agents' Balances. An insurer's written premiums minus commissions due and payable; also known as uncollected premiums.

Aggregate Deductible. The aggregate losses occurring within a given policy period that must be exceeded before an insurer becomes liable for losses.

Aggregate Limits of Liability. The maximum amount payable by an insurer upon all claims arising within a single policy period.

Aid to Families with Dependent Children (AFDC). A federal cash assistance entitlement program; states are required to cover its beneficiaries under Medicaid.

ALAE. See Loss Adjustment Expense.

Alien Insurer. An insurer domiciled outside the United States that transacts business within the United States.

All-Risk Insurance. Insurance in which coverage is not limited to specific events or named perils.

Alliance of American Insurers. A Downers Grove, Illinois-based trade organization representing primarily the smaller property-casualty insurers.

Allied Lines. A form of insurance coverage, often written in conjunction with fire insurance, covering perils not included in the basic policy. Includes data processing insurance, demolition insurance, earthquake insurance, increased cost of construction clause, radioactive contamination insurance, sprinkler leakage insurance, standing timber insurance, vandalism and malicious mischief insurance and water damage insurance. Earthquake insurance can be sold as a separate line, and data on earthquake insurance are tracked separately from allied lines in the annual statutory statement.

Allocated Claim or Loss Adjustment Expense. Expenses directly related to a particular claim, including claims investigation and legal expenses, but excluding loss payments.

Alphabet Houses. A small number of national insurance brokerage organizations usually referred to by their initials. For example, Alexander and Alexander was known as "A&A".

Alternative Delivery Systems. Health care providers other than acute-care hospitals, e.g., neighborhood clinics, treatment centers and visiting nurses.

Alternative Market. Self-insurers, captive insurers and risk retention groups. These entities provide insurance protection in competition with traditional insurance companies.

Alternative Minimum Tax (AMT). This term is used to refer to the federal income tax liability of insurers, without regard to whether the insurer has taxable income using standard calculations.

Ambulatory Care. Medical services provided on an outpatient basis.

American Association of Managing General Agents (AAMGA). A Kansas City, Missouri-based trade organization representing managing general agents.

American Council of Life Insurance (ACLI). A Washington, DC-based trade organization representing primarily the larger life insurers.

American Insurance Association (AIA). A Washington, DC-based trade organization representing primarily the larger property-casualty insurers.

American Lloyd's. Associations of individual underwriters permitted to operate within a limited number of states within the United States. These associations have no legal or other relationship with Lloyd's of London.

American Trust Fund. See Lloyd's American Trust Fund.

AMT. See Alternative Minimum Tax.

Ancillary Management. Medical management of such services as pharmacy programs, mental health, EAP and dental care. Larger HMOs tend to keep ancillary services in-house, while smaller ones typically contract with third parties.

Anniversary Date. The anniversary of a policy's effective date.

Annual Statement. A report of an insurer's financial operations filed annually with the insurance regulatory authorities of each jurisdiction in which the insurer is licensed to transact business. The report includes a balance sheet, as well as detailed schedules and exhibits. Also known as a convention blank or statement, statutory statement, yellow book (for property-casualty insurers) and blue book (for life insurers). For a more detailed discussion of the provisions of the annual statement, see Chapter 10.

Annuitant. A person who receives payment pursuant to an annuity contract.

Annuity. A contract that provides for a fixed or variable periodic payment to a person (the annuitant), made from a stated or contingent date and continued for a specified period, such as for a number of years or for life. An annuity may be bought by means of installments, or it may be bought by means of a single lump sum payment.

Anti-Managed Care Laws.Legislation designed to prohibit or restrict the business activities of managed care plans, or that undermines the principles of managed care.

"Any Willing Provider Laws."Legislation that requires managed care plans to accept into their networks any provider willing to agree to the network's terms and conditions.

Appeal Bond. A form of surety bond that guarantees to the court that the party against whom a judgment was rendered will pay the judgment if the appeal fails.

Appurtenant Structure. A building or other structure on the same premises as the primary structure that also is insured under a property or homeowners insurance policy.

Arbitration. A procedure to resolve a dispute between two parties without resorting to litigation.

Arbitration Clause. A provision in a contract in which the parties agree to arbitrate disputes. Most contracts between insurers and reinsurers contain an arbitration clause.

ASO. See Administrative Services Only.

Assessable Mutual Insurer. A mutual insurance company that may assess additional premiums from its insureds in the event losses exceed expectations.

Assessment. This term refers to (1) an additional payment that may be required of policyholders of an assessable mutual insurer in the event losses exceed expectations and (2) a charge levied upon insurers by state guaranty funds or other regulatory authorities.

Asset-Liability Matching. An investment strategy particularly appropriate for insurers in which the asset manager attempts to match the maturities of fixed-income securities to the schedule of claims and other payments anticipated by the insurer.

Asset Valuation Reserve (AVR). A reserve adopted in interim form by the National Association of Insurance Commissioners in December, 1991, to replace the Mandatory Securities Valuation Reserve (MSVR). AVR was established as a liability on life insurance statutory financial statements beginning in 1992. Life insurers are required to establish statutory reserves for mortgage loans, equity, real estate and joint ventures, as well as for those investments (fixed maturities and equity) previously subject to MSVR. AVR captures all unrealized, as well as realized, gains and losses on such assets.

Assigned Risk. An insured whose insurance is provided through an assigned risk pool or plan.

Assigned Risk Pool or Plan. A program for providing automobile insurance to high-risk drivers who cannot obtain insurance in the voluntary markets.

Association Plans. Group annuity contracts marketed to independent businesses affiliated with professional and trade associations.

Assume. The act of accepting a risk from a cedant in consideration of payment of a premium.

Assumed Premiums. Refers primarily to premiums arising from reinsurance policies issued by an insurer or reinsurer. Also may refer to premiums accepted by an individual company under a pooling arrangement.

Assumption of Risk Doctrine. A legal doctrine that provides a defense for a claim of negligence based upon the plaintiff's knowledge and voluntary assumption of risk associated with a particular activity.

Assumption Reinsurance. A transaction in which one insurer transfers its liabilities under existing or in-force contracts to an assuming insurer. The transfer is intended to extinguish the assignor's liabilities under the contracts being assigned.

Assurance. A synonym for insurance.

Attachment Point. The level above which insurance or reinsurance becomes applicable.

Attractive Nuisance Doctrine. A legal doctrine that recognizes that certain conditions can attract and cause injury to children. Upon such a finding, the owner of such property can be held liable for resulting injuries.

Audit Premiums. Premiums developed from an audit of an insured's records. Audit premiums are generated in workers' compensation and other lines of insurance where premiums are based on payroll and other data relating to actual exposures.

Authorized Insurer. See Admitted Insurer.

Authorized Reinsurance. Reinsurance provided by a reinsurer recognized by a particular state regulator.

Automatic Reinstatement. A policy provision that provides for automatic reinstatement of a policy following payment of a loss.

Automobile Insurance. A form of insurance that provides protection against liability for bodily injury and property damage arising from automobile accidents, as well as protection against loss from damage to automobiles owned by the insured.

Automobile Insurance Plan. See Assigned Risk Pool or Plan.

Automatic Treaty. See Treaty Reinsurance.

Aviation Insurance. A form of insurance that provides liability and physical damage protection for aircraft and their contents.

AVR. See Asset Valuation Reserve.


Baby Boom Generation, or Baby Boomers.The large group of 76 million Americans born between 1946 and 1964.

Bad Faith Claim. A claim based upon wrongful conduct, usually asserted by an insured against an insurer. Such claims may give rise to punitive damages far in excess of the actual damages suffered by the claimant.

Bail Bond. A form of surety bond furnished by a person seeking release from incarceration. The bail bond guarantees the person's appearance in court and is forfeited if this obligation is breached.

Bank. Within the context of reinsurance, this term is used to refer to the profits earned by a reinsurer during the life of a program. For example, if a reinsurer providing catastrophe reinsurance has earned $100,000 in premiums and incurred no losses, there would exist a $100,000 bank.

Bank Investment Contract (BIC).A form of GIC issued only by a bank, these are the primary noninsurance competition for GICs, and are particularly popular for maturities of less than three years.

Basic Limits. The minimum limits of liability that may be purchased by an insured.

"Bed Pan" Mutuals. Small mutual insurance companies, usually operating within a single geographic region, that underwrite medical malpractice insurance.

Beneficiary. The person named in an insurance policy as the recipient of the proceeds of the policy. Also refers to any person eligible as either a subscriber or a dependent for a managed care service in accordance with a contract.

Best Ratings. Ratings issued by A. M. Best Company, Inc., a company that publishes reports on the financial condition and history of individual insurers and provides ratings on most of the insurers doing business in the United States. See Chapter 13.

BIC. See Bank Investment Contract.

Bid Bond. An instrument provided by the surety guaranteeing that the surety will deliver a contract performance bond if a contractor's bid is accepted.

Binder. Temporary authorization of coverage issued prior to the issuance of an insurance policy.

Blank. See Annual Statement.

Blanket Contract. A health insurance contract that provides coverage on a group basis, e.g., employees within a business organization.

Blanket Coverage. A form of insurance that covers multiple items of property.

Blue Book. See Annual Statement.

Blue Cross/Blue Shield Plans. Nonprofit prepayment plans that provide health insurance coverage for hospital and physicians' services.

Bodily Injury (BI) Liability Insurance. A form of insurance that provides protection against losses resulting from the imposition of a liability claim against an insured for bodily injury to a third party. Bodily injury can include losses of a purely economic nature, such as loss of wages.

Boiler and Machinery Insurance. A form of insurance that protects an insured from losses resulting from damage to boilers and other machinery.

Bond. See Surety Bond.

Bonding Company. An insurer authorized to issue surety bonds.

Book. Refers to an insurer's in-force business.

BOP. See Business Owners Policy.

Bordereau. A detailed list of premiums and claims prepared periodically by cedants for reinsurers to advise them of risks accepted and claims incurred.

Bornhuetter-Ferguson Method. A reserving technique used by actuaries for estimating a property-casualty insurer's loss liability.

Broad Form.A package policy that covers additional perils beyond those in a basic package policy. See Package Policy.

Broker. An intermediary who represents the insured in its dealings with an insurer and/or shops for coverage on behalf of the insured. Also, organizations that sell Lloyd's policies to insureds.

Builders Risk. A form of insurance that indemnifies an insured for damage to a building under construction.

Bulk Reinsurance.See Portfolio Transfer.

Bundled Arrangement.A defined contribution plan approach in which a single provider handles all aspects of record-keeping, administration and investments for a plan sponsor. Often, the arrangement will be "pseudo-bundled," offering the services of a record-keeper/administrator and a number of fund managers that have entered into strategic alliances that allow others to offer their products.

Business Interruption Insurance. A form of insurance that reimburses a business owner for lost profits and certain other losses.

Business Judgment Rule. A legal doctrine that protects directors and officers of a corporation from personal liability for losses arising from a prudent, good faith decision.

Business Life Insurance. See Key Man Life Insurance.

Business Owners Policy (BOP). A package policy designed to meet the insurance requirements of small- to medium-sized businesses.


Cafeteria Plan. An employee benefit plan that permits employees to choose from among a group of life, medical and other benefit plans; also known as a flexible benefit plan.

Calendar Year. A twelve-month period, January through December, when losses are incurred by an insurer, regardless of the effective date of the original policies.

Cancellation. Termination of an insurance policy by the insurer or the insured prior to the policy's scheduled expiration date.

Capacity. The amount of insurance available from a single insurer or from an insurer within a particular market. In Lloyd's, capacity refers to the historical basic unit of measurement within Lloyd's of the level of premium a syndicate is able to underwrite; a function of the capital pledged to support that syndicate by the capital providers.

Capitation. A payment system whereby managed care plans pay health care providers a fixed, per-capita amount (usually on a monthly basis) to care for a patient over a given period. Providers are not reimbursed for services that exceed the allotted amount. The rate may be fixed for all members or it can be adjusted for the age and gender of the members, based on actuarial projections of medical utilization.

Captive Agent.An insurance agent who has agreed to provide exclusive representation to one insurer. A captive agent usually is an employee of the insurer.

Captive Insurer.An insurer controlled by an insured or a group of insureds, formed for the purpose of insuring risks associated with the activities of its stockholders or members.

Carrier. A synonym for insurer.

Carrying Value. The dollar amount allowed by the NAIC Securities Valuation Office for any invested asset included in an insurer's statutory financial statement. Allowable values for different classifications of assets may vary.

Case Management. The process by which all health-related matters of a case are managed by a physician or nurse or designated health professional. Physician case managers coordinate designated components of health care, such as appropriate referral to consultants, specialists, hospitals, ancillary providers and services. Case management is intended to ensure continuity of services and accessibility to overcome rigidity, fragmented services and the misutilization of facilities and resources. It also attempts to match the appropriate intensity of services with the patient's needs over time, and is a component of utilization management.

Case Reserves. Reserves established with respect to specific reported claims that are intended to reflect the ultimate liability and expense of settling a claim.

Cash Balance Plan.A type of defined benefit plan, sometimes referred to as a hybrid plan because it mimics some of the characteristics of defined contribution plans. Employees receive credits in their own account, based on a percentage of their salary and a credited interest rate, and are provided periodic statements that track their accumulating balance. Although the account is more hypothetical than real, the funds are subject to the same rules as defined benefit plan assets and form part of the company's asset pool.

Cash Flow Underwriting. The process of underwriting in which the insurer seeks to compensate for underwriting losses by investment income derived from the cash flow of its premiums.

Cash Surrender Value. The amount of cash available to a policyholder upon surrender of a life insurance policy or annuity contract.

Casualty Actuarial Society (CAS). An Arlington, Virginia-based professional organization that promotes actuarial science for lines of insurance other than life insurance.

Casualty Catastrophe Cover. See Clash Reinsurance or Cover.

Casualty Insurance. A synonym for liability insurance.

Cat Cover. See Catastrophe Reinsurance.

Catastrophe.A loss or series of losses expected to exceed $25,000,000 in insured property damage. The definition was revised from a $5,000,000 threshhold effective January 1, 1997.

Catastrophe Reinsurance. A form of reinsurance, usually in the form of excess-of-loss reinsurance, that indemnifies the ceding insurer from losses arising from a natural disaster. The actual reinsurance document is referred to as a "catastrophe cover."

CCN. See Community Care Network.

Cedant. A term for an insurer that has underwritten insurance and transfers all or part of its risk to a third party by purchasing reinsurance; also known as a reinsured.

Cede. The act of purchasing reinsurance.

Ceded Premiums.Primarily, refers to premiums paid for reinsurance policies and transferred to the reinsurer. May also refer to premiums transferred by an individual company under a pooling arrangement.

Ceding Commission. An amount payable by a reinsurer to a cedant to cover its acquisition costs plus an anticipated profit margin.

CERCLA. See Comprehensive Environmental Response, Compensation, and Liability Act of 1980.

Certificate of Authority. See License.

Certificate of Insurance.A document issued to individuals insured under a group policy setting forth the essential terms of coverage.

Cession. The amount of insurance ceded to a reinsurer.

CGL. See Commercial General Liability Insurance.

Chartered Life Underwriter (CLU). A person with a minimum of three years of experience in the life and health insurance business who has passed a series of ten professional examinations.

Chartered Property and Casualty Underwriter (CPCU). A person with a minimum of three years of experience in the property-casualty insurance business who has passed a series of ten professional examinations.

Chronic Care. Long-term care of individuals with longstanding, persistent diseases or conditions. It includes care specific to the problem as well as other measures to encourage self-care, to promote health and to prevent loss of function.

Claim. A demand for payment under an insurance policy for a loss covered by that policy.

Claim Adjuster.An individual or firm, whose functions typically include the on-site examination, evaluation and settlement of insurance claims. May be an independent contractor or employee of an insurance company.

Claim Department. A unit within an insurance organization responsible for the evaluation and settlement of claims.

Claimant. One who submits a claim or suffers a loss.

Claims-Made Policy. An insurance policy covering only those claims that occur and are reported during the policy period. In certain instances, a claims-made policy may cover claims arising prior to the policy's inception date. See also Prior Acts Coverage.

Clash Reinsurance or Cover. A form of reinsurance that indemnifies the ceding insurer for losses affecting multiple policies. Such coverage is designed to protect the cedant from multiple catastrophic losses.

Closed Network HMO. An HMO in which all the primary care providers are its employees, i.e., the HMO does not contract with outside providers for primary care.

Closed Panel. Medical services that are delivered in an HMO-owned health center or satellite clinic by physicians who belong to a specially formed, but legally separate, medical group that serves only the HMO. This term usually refers to group or staff HMO models.

CLU. See Chartered Life Underwriter.

CMP. See Commercial Multi-Peril Insurance or see Competitive Medical Plans.

Coinsurance. This term refers to (1) a relationship between two insurers that agree to share a risk proportionally and (2) those instances in which an insured assumes a portion of the risk.

COLI. See Corporate-Owned Life Insurance.

Collateral Assignment. The use of a life insurance policy as collateral for a loan.

Collision Insurance. A form of insurance that covers damage to an insured's automobile resulting from an accident.

Combined Ratio.The sum of an insurer's loss ratio, expense ratio and policyholder dividend ratio, which may be determined in accordance with statutory accounting practices or generally accepted accounting principles. A combined ratio under 100% generally indicates an underwriting profit, and a combined ratio over 100% generally indicates an underwriting loss.

Commercial General Liability (CGL) Insurance. A form of insurance policy that includes a variety of coverages for liability exposures applicable to businesses. New standard-form policies exclude pollution coverage, although such coverage may be available through endorsement or separate policies. Also known as Comprehensive General Liability Insurance.

Commercial Lines Insurance. Insurance that covers commercial and governmental activities.

Commercial Multi-Peril (CMP) Insurance. A form of insurance that provides comprehensive protection to businesses, including coverage for property damage from fire, windstorm and certain other perils, for losses from crime, and for liability for personal injury to others.

Commercial Package Policy (CPP). A package policy designed to meet the needs of larger, more complex businesses.

Commission. Compensation paid to a producer for originating business; primary insurers also are paid a commission for ceding business to a reinsurer.

Common Law. Legal principles established by the courts that are used as precedent for deciding future cases. This contrasts with statutory law that is enacted by legislative bodies.

Community Care Network (CCN). A health care vehicle that provides coordinated, organized and comprehensive care to a community's population. Hospitals, primary care physicians and specialists link preventive and treatment services through contractual and financial arrangements, producing a network that provides coordinated care with continuous monitoring of quality and accountability to the public. While this term often is used interchangeably with Integrated Delivery System (IDS), the CCN tends to be community-based and nonprofit.

Community Rating. The practice of some prepayment plans whereby rates are calculated using a broad range of populations in a community or region. Thus, premiums for subscribers are reasonably uniform and not dependent on individual or group claim experience. This is the rating methodology required of federally qualified HMOs and of HMOs under the laws of many states, and occasionally indemnity plans under certain circumstances. Plans are permitted to factor in differences for age, sex, mix (average contract size) and industry factors; not all factors are necessarily allowed under state laws.

Commute. The process of estimating, paying and discharging an insurer's present and future obligations. Frequently, an insurer and a reinsurer will commute their obligations to each other rather than maintain an ongoing relationship over a number of years.

Company Adjuster. An adjuster who is an employee of an insurer. See Claim Adjuster.

Comparative Negligence. A legal doctrine that enables a claimant to recover damages notwithstanding a finding that the claimant may have a degree of culpability. Damages are apportioned in accordance with degrees of culpability.

Compensatory Damages. Damages awarded to a claimant that compensate the claimant for losses sustained and are designed to make the injured party "whole." This contrasts with punitive damages, which are intended not merely to compensate the claimant but to punish the wrongdoer as well.

Competitive Fund. A state-run workers' compensation insurance facility that competes with private insurers for primary business.

Competitive Medical Plans (CMPs). A type of Medicare private managed care plan, provided for under TEFRA. See Risk HMO.

Completed Operations. The imposition of liability for faulty construction arising after the work has been completed.

Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA or Superfund). Legislation enacted by the federal government to provide funds to clean up hazardous waste sites. The legislation, which was amended and extended in 1986, also holds certain responsible parties liable for the expenses of cleaning up hazardous waste sites. Through the legislation's "joint and several liability" provisions, insurers have been required to pay for the cost of clean-up in certain instances.

Comprehensive General Liability Insurance. See Commercial General Liability Insurance.

Comprehensive Major Medical Insurance. A group health policy that combines basic health care coverage with major medical insurance in a single policy. See Major Medical Insurance.

Compulsory Insurance. Insurance coverage that is required by law, such as automobile liability insurance for drivers or workers' compensation insurance for employers.

Concurrent Causation. A legal doctrine that holds that when a property loss may be attributable to multiple causes, the loss shall be covered by insurance as long asonecause is covered by insurance.

Concurrent Review. Monitoring, under the direction of a medical professional (usually a nurse), of the medical treatment and progress toward recovery once a patient is admitted to a hospital. Its purpose is to assure timely delivery of services and to confirm the necessity of continued inpatient care. This is a component of utilization management.

Condition. A substantive provision of an insurance contract.

Consequential Loss. A loss resulting from, but not caused directly by, an act. This contrasts with the proximate cause of a loss, which refers to an event that is the direct and immediate cause of a loss.

Contingent Beneficiary. A person entitled to receive the proceeds of a life insurance policy if the primary beneficiary dies before the insured.

Contingent Commission. A supplemental commission payable by an insurer based upon the loss ratio or experience of the business being placed.

Contingent Liability. A liability that may occur in the future but has not yet occurred.

Contract Performance Bond. A surety bond that guarantees the performance of specific contractual obligations between the principal and the obligee, as well as payments to suppliers of labor and material.

Contractor's License Bond. A surety bond that guarantees the principal will meet the requirements of such licensing laws as may be applicable to contractors.

Contributory Negligence. A legal doctrine that precludes recovery for damage if the plaintiff has contributed to the loss.

Contributory Plan. A group life or health policy in which the beneficiary pays a portion of the premium.

Convention Blank or Statement. See Annual Statement.

Conversion Annuity. A group annuity contract that at one time shared in the payment of dividends as a participating policy but which subsequently was converted to a non-dividend paying, non-participating policy.

Convertible Term Insurance. Term life insurance that, by its provisions, is convertible to permanent life insurance without evidence of insurability. See Term Life Insurance.

Corporate Name. A new participant in Lloyd's of London, started in 1994, where liability is limited and capital is provided on a corporate basis.

Corporate-Owned Life Insurance (COLI). A life insurance policy covering an employee, with the corporation owning the policy.

Corporation of Lloyd's. Provides administrative support functions for all Lloyd's syndicates, and is paid for by all syndicates.

Cost Containment. Refers to the practice of controlling health care costs through the elimination or reduction of inefficiencies in the health care delivery system.

Cost HMOs. A type of Medicare private managed care plan, provided for under TEFRA, which is essentially a Point-of-Service plan, except that Medicare bears all risk and pays for out-of-network care.

Cost Shifting. Charging one group of patients more in order to make up for underpayment by others. Most commonly, charging some privately insured patients more in order to make up for underpayment by Medicaid or Medicare.

Co-Surety. One of two or more sureties participating in a surety bond and sharing liability.

Council of Lloyd's. The 28-member governing body of Lloyd's.

Country Risk. See Political Risk Insurance.

Court Bond. A surety bond that guarantees that the principal will discharge obligations set by a court.

Cover Note. Same as binder; used primarily outside the United States.

Coverage. The protection provided by an insurance policy.

Covered Participant. A person who meets the eligibility requirements of a pension plan or a group life or health insurance policy and either is receiving or is eligible to receive benefits.

CPCU. See Chartered Property and Casualty Underwriter.

CPP. See Commercial Package Policy.

Credentialling. The process used by managed care companies of reviewing a practitioner's credentials (training, experience or demonstrated ability) for the purpose of determining if criteria for clinical privileging are met, i.e., before admitting the practitioner to the health network.

Credit Enhancement. Use of a financial guaranty to upgrade the credit quality of a security. Credit enhancement may be provided through insurance or a letter of credit.

Credit Life Insurance. A form of decreasing term insurance that covers the life of a debtor and pays the proceeds to the creditor. See Decreasing Term Insurance.

Crediting Rate. The interest rate applied to life insurance policies and annuity contracts, whether contractually agreed upon or declared for a specific period.

Crop-Hail Insurance. A form of insurance that provides protection from damage to crops by hail and certain other named perils, such as fire, lightning and wind. Also referred to as Multiple Peril Crop.

Cut-Through Endorsement. An amendment to an insurance policy for the benefit of a policyholder providing that, in the event of an insurer's insolvency, reinsurance payments shall be made by the reinsurer directly to the policyholder. Such payment bypasses or "cuts through" the usual payment route.

Cycle. See Underwriting Cycle.

Cycle Turn. A change in the property-casualty underwriting cycle suggesting the arrival of either a hard insurance market or a soft insurance market. See also Underwriting Cycle, Hard Insurance Market and Soft Insurance Market.


DAC. See Deferred Acquisition Costs.

DAC Tax. A form of federal alternative minimum tax imposed upon life insurers.

Daily Report. A copy of an insurance policy used as the insurer's record of issuance.

DB. See Defined Benefit Plan.

DC. See Defined Contribution Plan.

Death Benefit. See Face Amount.

Debit Insurance. See Industrial Life Insurance.

Declarations. The portion of an insurance policy that sets forth pertinent information regarding the insured and the coverage provided.

Declination. The rejection of an application for insurance.

Decreasing Term Insurance. A form of term life insurance in which benefits are reduced over the term of the policy.

Deductible. The up-front amount of a loss for which the insured is responsible before benefits are paid; also known as a self-insured retention. The insurer's liability begins when or if the deductible is exhausted.

Deductible Clause. A provision in an insurance policy setting forth the amount of liability being retained by an insured and the sharing of losses once the deductible is exhausted.

Defendant. The party against whom a legal action has been brought.

Deferred Acquisition Costs (DAC). Commissions and other selling expenses that vary with, and are directly related to, the production of business by an insurer. These acquisition costs are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in accordance with generally accepted accounting principles.

Deferred Annuity. An annuity that can be paid either with a single premium or with a series of installments and includes a schedule of periodic income benefit payments to commence after an accumulation period (more than one year). Because the inside build-up on life insurance products is tax-deferred, deferred annuities have become a very popular vehicle for retirement savings and tax planning. Deferred annuities can either be sold on a single-premium (SPDA) or flexible-premium (FPDA) basis.

Defined Benefit (DB) Plan.A retirement pension plan that provides a specified level of benefits upon an employee's retirement, with the employer being responsible for funding the plan. Benefits usually are expressed as a function of an employee's years of service and average salary over the last few years of employment. Plan participants have no responsibility for the investment strategy, which is borne by the sponsor, who has sole discretion over the investment of plan assets. If asset values decline, it is the obligation of the sponsor to make additional contributions to the plan.

Defined Contribution (DC) Plan.A retirement pension plan that allows an employee to make annual contributions to the plan, based on a percentage of compensation, with some of it usually (but not always) matched by the plan sponsor. Contributions and earnings thereon are tax-deferred. There is no guarantee as to the eventual level of benefits to be provided by this plan. The participant selects the desired investment options, which may be changed at regular intervals. The plan sponsor periodically reports to the participant on the amount that is in his or her account. The level of benefits ultimately payable out of plan assets is variable, and depends on the investment performance of the participant's selected asset mix.

Demutualization. The process of converting a mutual company into a stock company.

Department of Health and Human Services. The federal department that is responsible for health-related programs and issues. Its Health Care Financing Administration (HCFA) agency administers the Medicare and Medicaid programs.

Deposit Administration Plan.A type of defined benefit plan that sets up a single fund for all eligible employees, into which deposits are accumulated and money is withdrawn at employees' retirement to purchase an annuity for the employee.

Deposit Term Insurance. A form of term life insurance in which the first year's premium is greater than those in successive years. See Term Life Insurance.

Deposits. Payments received by an insurer not included as revenue but included as a policyholder account balance.

Development. The change in loss estimates between reports.

Deviation. A change from the standard form or published rates of an insurer.

Diagnosis-Related Groups (DRG).A reimbursement system used by Medicare and other insurers to classify illnesses according to diagnosis and treatment. It clusters patients into 468 categories on the basis of their illnesses, diseases and medical problems. All Medicare inpatient hospital operating costs are determined in advance and paid on a per-case basis, according to fixed amount or weight established for each DRG.

Difference in Conditions (DIC) Insurance. An "all-risks" property insurance policy that covers risks not covered by a basic property policy. It is a separate, supplementary policy designed to fill gaps in coverage.

Dingell, John. A member of the U.S. House of Representatives (D-Mich.) and former chairman of the Subcommittee on Oversight and Investigations of the House Committee on Energy and Commerce. He is the principal author ofFailed Promises(1990), the Federal Insurance Solvency Act of 1992 andWishful Thinking(1994), a sequel toFailed Promises. He also is the leading proponent of an increased federal regulatory role over the insurance industry.

Direct Billing. A system in which the insurer, not the independent agent, sends invoices directly to the policyholder.

Direct Response Marketing. A form of marketing insurance products through the media, Internet and the mail.

Direct Writer. An insurer whose products are sold directly to the public by a sales force consisting of employees or exclusive agents of the insurer; it also refers to a reinsurer that provides reinsurance directly to primary companies without using a reinsurance broker.

Direct Premiums Written (DPW). Premiums written by an insurer before any ceding.

Directors' and Officers' Liability Insurance (D&O Insurance). A form of insurance that indemnifies directors and officers for their wrongful acts.

Disability. Physical or mental condition resulting from illness, injury or disease.

Disability Income Insurance. A form of health insurance that provides payments to a disabled insured to replace lost income during periods of disability.

Disability Premium Waiver. See Waiver of Premium Provision.

Discharge Planning. A component of utilization management, wherein medical personnel of the health plan work with the attending physician and hospital staff to assess alternatives to hospitalization, evaluate appropriate settings for care and arrange for the discharge of a patient, including planning for subsequent care at home or in a skilled nursing facility. The goal is to determine when patients are ready to go home and to provide a more comfortable, cost-efficient setting for continued treatment.

Discounting of Reserves. The process of setting the present value of a full value reserve, calculated at a selected interest rate.

Discovery Period. The period of time in which claims must be reported under the terms of an insurance policy.

Disease Management Programs. Programs aimed at preventing or identifying disease earlier, thus improving quality of care and reducing its costs. These programs emphasize preventive medicine for common diseases, such as asthma and diabetes, certain effects of which may be prevented. Databases are used to help flag patients who need prescription refills or monitoring, or to notify physicians when their patients need special disease-related preventive care (e.g., eye exams for diabetics).

Disproportionate Share Hospital. A hospital designated by a state as disproportionately serving Medicaid beneficiaries and other indigent patients. Medicaid allows states to make special payments to disproportionate share hospitals, and they are eligible for federal matching funds.

Dividend. An amount payable by an insurer from earnings to policyholders by mutual, reciprocal and stock insurers, and to stockholders by stock insurers.

Dividend Options. The various methods available to an insured electing to receive dividends under a life insurance policy.

Dividend Scales. The actuarial formulae used by life insurers to determine amounts payable as dividends on participating policies based on a variety of experience factors, including investment results, mortality, lapse rates, expenses, premium taxes, policy loan interest and utilization rates.

Domestic Insurer. An insurer transacting business in the jurisdiction in which it is domiciled.

Double Indemnity. A benefit available as an endorsement to certain life insurance policies. It provides that twice the face amount of the policy shall be payable if death is accidental; also known as accidental death benefit.

Downstream Holding Company. A stock subsidiary of a mutual insurer, which is itself not an insurance company, but which mayowninsurance companies. Frequently, mutual insurers raise capital by the sale of shares in a downstream holding company.

DPW. See Direct Premiums Written.

DRG. See Diagnosis-Related Groups.

Drop Down. An insurance policy that covers a loss either because an underlying policy's limits are exhausted or because an underlying insurer is unable, by reason of insolvency or otherwise, to provide coverage.

Dual Regulation. The prospect of divided and possibly conflicting regulation of insurers cited by opponents of federal regulation as a reason for maintaining the current state-based regulatory system.

Duty to Defend. Under the terms of an insurance policy, an insurer has a "duty to defend" its insured in a court action, even in those instances where a suit may be groundless or false.


E&O. See Errors and Omissions Insurance.

E&S. See Excess and Surplus Lines Insurance.

EAP. See Employee Assistance Program.

Early and Periodic Screening, Diagnosis and Treatment (EPSDT). Programs that cover screening and diagnostic services to determine physical or mental defects in recipients under age 21, as well as health care and other measures to correct or ameliorate any defects and chronic conditions discovered.

Early Warning Tests. See Insurance Regulatory Information System.

Earned Premiums. The prorated portion of an insurance premium that no longer is considered prepaid due to the elapsed time the policy has been in force. For example, after six months, $50 of a prepaid $100 annual premium is consideredearned premium.

Earthquake Project. An initiative begun in 1988 by U.S. property-casualty insurers to call attention to losses that would arise from a major earthquake within the United States. The initiative calls for government incentives to enable insurers to build up appropriate reserves for such an event.

ECF. See Extended Care Facility.

Effective Date. The date on which coverage begins under an insurance policy.

Eligibility Date. The date on which a participant's eligibility period begins.

Eligibility Period. The amount of time during which qualified participants in a group policy may choose to participate as members of the insured group without furnishing evidence of insurability.

Elimination Period. The initial period of time during which benefits under a health insurance policy are not payable.

Employee Assistance Program (EAP). A mental health managed care program, in which a gatekeeper evaluates a patient before referral for the appropriate course of treatment. The evaluation could include a number of office visits, as well as testing. EAP programs typically were started as an in-house, less expensive way for employees to obtain advice and treatment in such areas as substance abuse and other psychological needs, and have evolved as a way to extend managed care to mental health coverage.

Employee Retirement Income Security Act (ERISA). Federal legislation enacted in 1974 applicable to most private pension and welfare plans. The legislation seeks to protect covered employees by establishing certain minimum standards for such plans.

Employee Stock Ownership Plan (ESOP). A defined contribution pension plan that invests primarily in the securities of the employer.

End-Stage Renal Disease. Most people who need a kidney transplant or renal dialysis because of chronic kidney diseaseare automatically covered under Medicare Part A.

Endorsement. An amendment to, or other alteration of, the original insurance policy; also known as a rider.

Endowment Life Insurance. A form of whole life insurance for which premiums are paid until a fixed date, at which time the policy matures and benefits are available to the policyholder. See Whole Life Insurance.

Enrollee. Any person eligible as either a subscriber or a dependent for service in accordance with a contract.

EPO. See Exclusive Provider Organization.

ERISA. See Employee Retirement Income Security Act.

Errors and Omissions (E&O) Insurance. A form of insurance that covers an insured's liability for any actual or alleged breach or neglect of duty committed in the conduct of the insured's business activities.

ESOP. See Employee Stock Ownership Plan.

Estoppel. A legal principle by which a person is precluded from denying the veracity of a statement previously made.

Examination. The process whereby regulators inspect the books and records of an insurer to verify their financial condition and compliance with applicable laws and regulations.

Excess and Surplus (E&S) Lines Insurance. A form of insurance that covers risks for which insurance is unavailable from admitted insurers.

Excess and Surplus (E&S) Lines Insurer. An insurer that, although not licensed to transact business within a given state, writes excess and surplus insurance as a nonadmitted insurer with greater freedom from regulatory restrictions applicable to admitted insurers.

Excess-of-Loss Reinsurance. A form of reinsurance in which the insurer cedes and the reinsurer assumes all or a portion of losses in excess of a specified retention level up to a predetermined limit; also known as nonproportional reinsurance.

Excess Surplus. The amount of surplus over and above that required to meet defined required surplus standards. Also known as "free surplus."

Exclusion. A provision in an insurance policy that eliminates coverage for certain risks, persons, classes of property or locations. In an all-risks policy, excluded items are listed explicitly in the policy. In a named-perils policy, exclusions are understood to be all those risks not listed as being covered.

Exclusive Agent. An insurance agent who has agreed to provide exclusive representation to one insurer; also known as a captive agent.

Exclusive Provider Organization (EPO). A managed care organization that is organized similarly to PPOs in that physicians do not receive capitated payments, but which only allows patients to choose medical care from network providers. If a patient elects to seek care outside of the network, then he or she will not be reimbursed for the cost of the treatment. See Preferred Provider Organizations.

Exclusivity Clause. A part of a contract that prohibits physicians from contracting with more than one managed care organization (HMO, PPO, IPA, etc.).

Exemplary Damages. See Punitive Damages.

Expense Loading. See Loading.

Expense Ratio or Underwriting Expense Ratio. The ratio of an insurer's underwriting expenses to net premiums written, if determined in accordance with statutory accounting practices; or the ratio of underwriting expenses (adjusted by deferred acquisition costs) and operating expenses (excluding interest expense) to earned premiums, if determined in accordance with generally accepted accounting principles.

Experience. The loss history of an insured or a particular class of business.

Experience Rating. A method of setting premium levels for an insured based upon the insured's loss history. Also known as retrospective rating.

Expiration Date. The date on which insurance coverage ends.

Exposure. A unit of measurement of risk being assumed by the insurer. For example, wages serve as the basis for calculating workers' compensation exposure.

Extended Care Facility (ECF). A nursing or convalescent home offering skilled nursing care and rehabilitation services.

Extended Coverage Insurance. Supplemental protection provided against perils in addition to those perils covered in a basic fire insurance policy.

Extended Warranty Insurance. A form of insurance that provides warranty protection against faulty construction for a term beyond the warranty period provided by the manufacturer.

Extra-Contractual Obligations or Liability. See Punitive Damages.

Exxon Valdez. A notable casualty loss resulting from the grounding of the oil supertanker, Exxon Valdez, off the coast of Alaska in 1989.


Face Amount. The payment amount set forth on the cover page of a life insurance policy as payable in the event of the death of the insured or upon maturity of the policy.

Factory Mutuals. Mutual insurers that insure factories and other business establishments and attempt to achieve favorable underwriting results through loss prevention techniques.

Facultative Reinsurance. The reinsurance of a specifically identifiable risk by a cedant on terms and conditions agreed upon by the reinsurer specifically for that risk.

Failed Promises. A report issued in February, 1990, by the Subcommittee on Oversight and Investigations of the U.S. House Committee on Energy and Commerce (the Dingell Committee), which examined U.S. insurer insolvencies and detailed deficiencies in the prevailing solvency regulatory system.

FAIR Plans. Plans that make property insurance available to urban property owners who are unable to obtain coverage in standard markets. FAIR (Fair Access to Insurance Requirements) Plans were created pursuant to the Urban Property and Reinsurance Act of 1968.

FASB. See Financial Accounting Standards Board.

Farm Mutuals or Farm Bureau Mutuals. Regional mutual insurers providing coverage to farms and other agricultural activities.

Fault Liability System. See Tort Liability System.

Federal Crime Insurance Program. A program created by federal legislation in 1971 that provides limited coverage for crime-related losses where coverage is not available in standard markets.

Federal Insurance Administration. A federal agency that administers the Federal Crime Insurance Program and the National Flood Insurance Program. See also Federal Crime Insurance Program and National Flood Insurance Program.

Federal Insurance Solvency Act of 1992. Federal legislation introduced by Representative John Dingell (D-Mich.) calling for a federal role in the solvency regulation of insurers and for the regulation of professional reinsurers.

Federally Qualified HMOs. HMOs that meet certain federally stipulated provisions aimed at protecting consumers, e.g., providing a broad range of basic health services, assuring financial solvency and monitoring the quality of care. HMOs must apply to the federal government for qualification.

Fee-for-Service (FFS). A method of payment to providers based on charges for each service provided. A set schedule of charges may be used. Sometimes used as a synonym for traditional "indemnity" plans. Payment may be made by an insurance company, the patient or a government program such as Medicare or Medicaid.

Fee-for-Service Plan (Traditional Indemnity Plan). A health insurance plan in which patients may select any doctor or hospital, and providers bill the patient or the insurance company their normal fees for their services. Providers have no relationship with the health plan, although most submit claims and accept payments from the plan on behalf of the patient. Coverage usually is provided for conditions caused by illness or injury and related diagnostic tests, and usually excludes routine screening and preventive care/checkups.

Fee Schedule. A listing of accepted fees or established allowances for specified medical procedures. As used in medical care plans, it usually represents the maximum amounts the program will pay for the specified procedures.

FFS. See Fee-for-Service.

Fidelity Bond. An instrument that provides protection to an employer against loss caused by the dishonest or fraudulent acts of employees.

Fiduciary Bond. A surety bond required of executors, trustees and other fiduciaries that guarantees the performance of their duties; also known as a probate bond.

Field Office.An insurer's branch office.

50/50 Rule.Federal regulation requiring that MCO plans maintain commercial membership at least equal to their Medicare enrollment.

File and Use Laws. Legislation that enables insurers to implement rate changes upon filing with insurance regulators. This contrasts with prior approval laws, which require prior regulatory approval before rate changes may be implemented.

Financial Accounting Standards Board (FASB). A self-regulatory organization that establishes financial accounting and reporting standards.

Financial Guaranty. The promise to make payments to the holder of a debt, loan or other similar financial instrument in the event the borrower or underlying obligor fails to do so.

Financial Reinsurance. A reinsurance transaction that provides financial benefits to the cedant as its primary purpose.

Financial Responsibility Laws. Legislation that requires automobile owners to provide evidence of their ability to pay damages up to certain required levels.

Finite Risk Insurance. A form of insurance or reinsurance transaction in which only a limited amount of risk is transferred. As is the case with financial reinsurance, a primary objective of such a transaction is to provide financial benefits to the cedant or insured.

Fire Insurance. A form of insurance that provides coverage for damage to buildings resulting from fire, lightning, windstorm and certain other perils.

First Dollar Coverage. Insurance coverage that provides payment without any deductible.

First Party Coverage. Insurance that applies to the insured's own property or person.

Fixed Annuity. An annuity, either deferred or immediate, where the deposits are accumulated at a fixed rate of interest or immediate payments are constant for the duration of the contract. Also, referred to as "book value" products. The insurance company is liable for payment of the accumulated value less any surrender charge at any time.

Flexible Benefit Plan. See Cafeteria Plan.

Flexible Premium Deferred Annuity (FPDA). An annuity that permits annual premium payments in such amounts as the holder deems appropriate; also known as a 403(b) annuity from the section of legislation.

Flex-Rating Laws. Legislation that enables insurers to implement rate changes within certain parameters. If proposed changes in rates exceed such parameters, prior regulatory approval is required. See also File and Use Laws and Prior Approval Laws.

Floater. A form of insurance that covers movable property within the territorial limits and subject to the terms and conditions established by the policy. The term is derived from the fact that the insurance "floats" with the property.

Flood Insurance. A form of insurance covering losses from floods.

Following Form. A type of umbrella or excess liability insurance policy that follows the underlying policy terms.

"Follow the Fortunes" Clause. A clause often contained in a reinsurance treaty under which the reinsurer agrees to cover all losses within the terms of the underlying policy, thereby following the fortunes of the cedant.

Foreign Credit Insurance Association. A consortium of insurers that provides export credit and political risk insurance for U.S. exporters of goods and services.

Foreign Insurer. An insurer transacting business in a jurisdiction other than the state in which it is domiciled.

Formulary. A list of selected pharmaceuticals and their appropriate dosages felt to be the most useful and cost-effective for patient care. Organizations often develop a formulary under the aegis of a pharmacy and therapeutics committee. In HMOs, physicians often are required to prescribe from the formulary.

Forum Shopping. The practice by litigants and their counsel to select a favorable forum for the adjudication of a legal action.

401(k) Plan.A tax-qualified defined contribution retirement plan offered by a corporation and funded by employees' pretax contributions. Typically permits employees to defer a limited amount of their pretax salary into any of several diversified investment options. Investments build up tax-free until distributed, and corporate sponsors often match part or all of employees' contributions with tax-deductible corporate contributions. See also Keogh Plan.

403(b) Plan.A voluntary "quasi-group" tax-qualified plan generally sold on a payroll deduction basis to teachers, government employees and employees of hospitals and nonprofit organizations, and often viewed as an alternative to 401(k) plans. Premiums paid by such organizations on an annuity contract for an employee are not taxable and, like other annuities, the inside build-up is tax-deferred. Also referred to as Tax-Qualified Annuities (TQAs) or Tax-Sheltered Annuities (TSAs).

404(c).The section of the ERISA code, clarified by Department of Labor regulations, that describes employers' (and other plan fiduciaries') role and ultimate potential liability for employees' inappropriate investment decisions under defined contribution plans, and the conditions under which employers may be relieved of liability.

457 Plan.A tax-qualified deferred compensation retirement plan offered to employees by state or local governments, municipalities and organizations that obtain their funding from government sources.

FPDA.See Flexible Premium Deferred Annuity.

Fraternal Insurer. A mutual insurer that provides coverage to members of religious, charitable and fraternal organizations.

Frequency. The number of losses occurring within a given time period. Thus, an insurer is said to have a "frequency problem" if its operating results are adversely affected by a large number of relatively small losses. This contrasts with a "severity problem."

"Fresh Start."A special provision of the Tax Reform Act of 1986 allowing for a phase-in of discounting of loss reserves.

Fronting. The issuance of insurance policies by an insurer as an accommodation to another insurer. Usually, the insurer providing the fronting facility cedes all or substantially all the risk, as well as a significant percentage of the premium, to the insurer being accommodated. This device often is used to enable an insurer to underwrite risks in a jurisdiction in which it is not licensed.

Fronting Company. An insurer that fronts insurance policies for the benefit of another insurer.

Full-Risk Capitation. A form of managed Medicaid initiative, under which states pay HMOs (or occasionally health insuring organizations, essentially at-risk intermediaries not integrated with its contracted providers) on a capitated basis to provide a comprehensive set of Medicaid services.

Funds Held Account. An account maintained by a cedant to cover unearned premiums or other reserves.


GAAP.See Generally Accepted Accounting Principles.

Gatekeeper. A term sometimes used to refer to the primary care physician in a managed care environment, because of the responsibility to oversee and coordinate the patient's overall care and the fact that the gatekeeper must authorize all referrals to specialists or other services. Without this referral, coverage may be denied by the health plan.

General Account. All of an insurer's assets other than those allocated to a separate account.

General Agency System. A marketing system particularly used in the field of life insurance, in which an agent has responsibility for a given geographic area.

General Damages. Compensation paid to a claimant for losses that cannot be specifically identified, such as those for pain and suffering.

General Liability Insurance. See Liability Insurance.

Generally Accepting Accounting Principles (GAAP). Standards of accounting established by the American Institute of Certified Public Accountants or the Financial Accounting Standards Board and in other recognized accounting literature.

GIC.See Guaranteed Investment Contract.

GPW.See Gross Premiums Written.

Grace Period. The period of time given for the payment of an overdue premium without causing a policy to lapse. The policy remains in force during this interval.

Gross Negligence. An aggravated form of negligence characterized by the intentional failure to act as a prudent and reasonable person under similar circumstances with reckless disregard for an act's consequences.

Gross Premiums Written (GPW). The sum of an insurer's direct premiums written and assumed premiums.

Group Annuity. A form of pension plan provided on a group basis, usually for employees within a business organization, under which annuities are provided upon retirement.

Group Deferred Annuity. A contract for retirement benefits in which an entire group of employees is underwritten, as opposed to a single annuity for each employee.

Group Deposit Administration Annuity. A pension plan funding instrument in which contributions paid by an employer accumulate at interest and, upon retirement, an immediate annuity is purchased for the employee.

Group Life Insurance. Life insurance provided on a group basis, usually for employees within a business organization, through a single master policy.

Group Model HMO. An HMO that contracts with a multispecialty medical group to provide care for HMO members; members are required to receive medical care from a physician within the group unless a referral is made outside the network.

Guaranteed Investment Contract (GIC). An agreement under which an investor, usually a pension fund, places assets with an insurance company, which guarantees the return of principal plus payment of interest at a stipulated rate. While many variables can enter into the agreement, such as the amounts to be deposited and the duration of the contract, all GICs require that the principal be repaid along with the guaranteed interest credited on the deposits. GICs come in many forms. The simplest GICs are "bullet" contracts under which the funds are returned in a lump sum. Other contracts allow for payouts over time. GICs also may differ according to deposit methods (lump sum or "window" periods) and maturity (ranging from one to ten years). Additionally, in recent years, companies have offered indexed or floating rate GICs in addition to the fixed-rate instruments. The primary noninsurance competition for GICs is the Bank Investment Contract (BIC), which is particularly popular for maturities of less than three years.

Guaranteed Purchase Option. The provision in a life insurance policy that grants the insured the option to purchase additional amounts of life insurance without evidence of insurability.

Guaranteed Renewable. A provision in a health insurance policy that grants the insured the option to renew the policy for a specified period.

Guarantor. An entity, such as an insurer, that promises to pay an obligation in the event the obligor fails to do so.

Guaranty Capital. Capital raised by a mutual insurer through the issuance of guaranty capital stock.

Guaranty Fund. A state fund that provides for the payment of the unpaid claims of insolvent insurers. Most guaranty funds are nonprofit associations established by state law and operated by the insurance industry, although a few are operated by state insurance regulators.


Hail Insurance. See Crop-Hail Insurance.

Hard Insurance Market. The period of the property-casualty insurance market cycle that is characterized by a shortage of capital and a lack of competition, causing price increases and decreased availability of coverage in certain lines of business. The last hard insurance market in the United States occurred from 1986 to 1987.

Hazard. A condition that creates or increases the chance of a loss.

Health Care Financing Administration (HCFA). The federal agency within the Department of Health and Human Services (HHS) that administers Medicare, and that is charged with overseeing and approving states' implementation and administration of Medicaid.

Health Care Prepayment Plan (HCPP). A type of Medicare private managed care plan, provided for under TEFRA, that generally works like a cost HMO, but covers some or all Medicare Part B (physician) services, with Medicare covering the rest.

Health Insurance. A form of insurance that pays for treatment for covered illness or injury.

Health Insurance Association of America (HIAA). A Washington, DC-based trade organization representing health insurers.

Health Maintenance Organization (HMO). A health plan that offers comprehensive health coverage to its members for both hospital and physician services for a fixed fee (an amount per member per month), with a small amount collected at the time of each visit. An HMO contracts with health care providers, e.g., physicians, hospitals and other health professionals, and members are required to select a primary care physician from among the network providers, and to use network providers for all health services. Model types include staff, group practice, network and IPA (see separate definitions).

Health Plan Employer and Data Set (HEDIS). A set of performance measures designed to standardize the way health plans report data to employers. HEDIS currently measures five major areas of health plan performance: quality, access and patient satisfaction, membership and utilization, finance and descriptive information on health plan management.

Highly Protected Risk (HPR). A building or other structure of superior construction, designed to be much less susceptible to loss than a standard building, as a result of a commitment to risk management.

HMO. See Health Maintenance Organization.

Hold Harmless Clause. A clause frequently found in managed care contracts whereby the HMO and the physician hold each other not liable for malpractice or corporate malfeasance if either of the parties is found to be liable. Many insurance carriers exclude this type of liability from coverage. It also may refer to language that prohibits the provider from billing patients if their managed care company becomes insolvent. State and federal regulations may require this language.

Home Office. The headquarters of an insurer.

Homeowners Insurance. A form of insurance that provides coverage for damage to residences and their contents from a broad range of perils, including fire, lightning, windstorm and theft. Personal liability insurance coverage also is provided. Also known as Homeowners Multi-Peril.

Hospice. A residential health care facility that provides medical care and support services to terminally ill patients and counseling to their families.

HPR.See Highly Protected Risk.

HR-10 Plan. See Keogh Plan.

Hull Coverage. Insurance covering damage to a vessel or aircraft but not to its contents or cargo.

Hurricane. A tropical storm with wind velocity in excess of 75 miles per hour.

Hybrid Pension Plan. A type of defined benefit plan that mimics some of the characteristics of defined contribution plans. The most popular of these plans are cash balance plans and pension equity plans.


IBNR. See Incurred But Not Reported Reserves.

IDS.See Integrated Delivery System.

Illinois Insurance Exchange. A marketplace established in 1982 to underwrite large or unusual insurance and reinsurance risks. Located in Chicago, Illinois. Renamed INEX Insurance Exchange in 1997.

Immediate Annuity. An annuity on which payment begins one period (30 days, but not more than one year) after purchase. Immediate annuities often are purchased by retirees investing funds from a savings account, investment maturity or the cash value of a life insurance policy. Immediate annuities also are purchased to fund the payment of litigation settlements and generally are referred to as structured settlements.

Immediate Participation Guarantee Plan (IPGP). A type of defined benefit plan, similar to Deposit Administration plans, except that participation in gains or losses for mortality and investments are realized as they occur, rather than spread over the life of the contract.

Impaired Capital. A condition that exists if the difference between an insurer's assets and liabilities is less than the minimum capital required by regulators. An insurer may be impaired without necessarily being insolvent. If an insurer's capital is impaired, its authority to transact business may be suspended by regulators.

Imputed Negligence. The legal principle that one party may be held liable for the negligence of another due to the special relationship existing between the two parties.

IMR.See Interest Maintenance Reserve.

In Force. The aggregate amount of insurance in effect as of a certain date for an insurer.

Inception Date. The date coverage under an insurance policy begins.

Inchmaree. An ocean marine policy clause to cover loss due to boiler explosion and other mechanical failures as well as navigation errors and faulty management of the ship.

Incontestable Clause. A provision in a life insurance policy stating that the insurer cannot contest a policy once it has been in force two years during an insured's lifetime.

Incurred But Not Reported (IBNR) Reserves. Reserves for claims that have occurred but have not yet been reported to the insurer, including future development on claims that may have been reported already to the insurer.

Incurred Losses. The total losses sustained by an insurer, whether paid or unpaid. It includes a provision for IBNR.

Indemnification. The practice of compensating an insured for losses sustained.

Indemnitee. The person being compensated for losses.

Indemnitor. The person (such as an insurer) providing indemnification to one suffering a loss.

Indemnity Plan (Traditional). A health insurance plan where patients may select any doctor or hospital, and providers bill the patient or the insurance company their normal fees for their services. Providers have no relationship with the health plan, although most submit claims and accept payments from the plan on behalf of the patient. Coverage is usually provided for conditions caused by illness or injury and related diagnostic tests, and usually excludes routine screening and preventive care/checkups. "Fee-for-Service" sometimes is used as a synonym.

Indemnity. A principle of insurance that an insured should be fully reimbursed for a loss.

Independent Adjuster. An adjuster who is not an employee of an insurer. See Claim Adjuster.

Independent Agent. An agent who is not an employee of an insurer, but who usually represents a number of insurers. See Agent.

Independent Agency System. The system in which insurers grant independent contractors the right to sell insurance products. See also Agent and Captive Agent.

Independent Insurance Agents of America (IIAA). An Alexandria, Virginia-based trade organization representing independent insurance agents.

Indirect Loss. See Consequential Loss.

Individual (or Independent) Practice Association (IPA). An HMO model in which the HMO contracts with a physician organization, which, in turn, contracts with individual physicians. The IPA physicians practice in their own offices and continue to see fee-for-service patients. The HMO reimburses the IPA on a capitated basis; however, the IPA usually reimburses the physicians on a fee-for-service basis. This type of system combines prepayment with the traditional means of delivering health care.

Individual Retirement Account (IRA). An individual retirement plan that allows an individual to make annual contributions up to $2,000 ($2,250 for one-income married couples). In certain instances, such contributions are tax-deductible.

Industrial Life Insurance. Life insurance issued in small amounts for which premiums are collected on a weekly or monthly basis by an agent (or debit agent); also known as debit insurance.

Inflation Guard Endorsement. An amendment to a homeowners insurance policy that provides for automatic increases in coverage to take into account increases in value resulting from inflation.

Initial Public Offering (IPO).The process by which a private company advertises and sells shares of stock in order to become publicly held.

Inland Marine Insurance. A form of insurance that provides protection for goods shipped on land and coverage for commercial and personal property floater risks.

Innocent Capacity. See Naïve Capacity.

Inside Build-Up. The tax-deferred accumulation value of permanent life insurance policies and annuity contracts.

Insolvency Fund. See Guaranty Fund.

Insurability. The availability of coverage to an applicant for insurance.

Insurable Interest. The principle that an insured must suffer an actual loss in order to make a claim under an insurance policy.

Insurance. An arrangement in which an insured passes risk and obligations to an insurer for the payment of a premium.

Insurance Accounting and Systems Association (IASA). A Durham, North Carolina-based organization that researches and disseminates information regarding insurance accounting and statistics.

Insurance Cycle. See Underwriting Cycle.

Insurance Guaranty Fund. See Guaranty Fund.

Insurance Information Institute (III). A New York City-based educational and public relations organization representing primarily property-casualty insurers.

Insurance Regulatory Information System (IRIS) Tests. A set of eleven financial ratios developed from financial information filed annually by most insurers to serve as an early warning system to identify problems and trends in financial solvency. When a financial ratio falls within the parameters designated by each IRIS Test, it is designated a "usual value"; those falling outside such parameters are designated "unusual values." For a more detailed discussion of the IRIS Tests, see Chapter 12.

Insurance Services Office (ISO). A New York City-based rating organization that prepares forms and provides loss cost data for property-casualty insurers.

Insured. A purchaser of insurance; one who enjoys protection under an insurance policy; also known as a policyholder.

Insured Life. The person on whose life a life insurance policy is issued.

Insurer. A person or entity that provides insurance.

Integrated Delivery System (IDS). See Community Care Network.

Integration. The coordination of disability income insurance benefits with Social Security payments and other disability income benefits to provide income maintenance.

Interest Maintenance Reserve (IMR). A reserve established in interim form by the National Association of Insurance Commissioners in December, 1991. IMR was established as a liability on a life insurer's statutory financial statements beginning in 1992. IMR applies to all fixed-income investments and captures the net gains realized from the sale of such investments and from interest rate changes and will amortize them over the remaining life of the instrument.

Interest-Sensitive Life Products. Life insurance policies in which interest earned in excess of a stipulated amount is credited to the policy.

Intermediary. A broker, agent or other entity through which insurance arrangements are established.

Invested Assets.Those assets of an insurance company that are invested in cash, bonds, common and preferred stock, mortgages and real estate.

Investment Expense Ratio. The ratio of an insurer's investment expenses to net premiums earned.

Investment Expenses. The expenses incurred by an insurer in connection with the management of its investment portfolio.

Investment-Grade Securities. For insurers, this term refers to fixed-income securities held in an insurer's investment portfolio with a Class (2) or higher rating by the Securities Valuation Office of the National Association of Insurance Commissioners.

Investment Income Ratio. The ratio of net investment income to earned premiums. May also include other income.

IPA. See Individual Practice Association.

IPO.See Initial Public Offering.

IPGP.See Immediate Participation Guarantee Plan.

IRA. See Individual Retirement Account.

IRIS.See Insurance Information Regulatory System Tests.

Irrevocable Beneficiary. The beneficiary under a life insurance policy not subject to change by the owner without consent of the beneficiary.


Joint Underwriting Association (JUA). An organization of insurers operating within a particular state that have joined together to form a pool to absorb the high-risk automobile insurance business. Losses and expenses are shared on a pro rata basis.

Joint and Several Liability. The imposition of liability upon two or more parties, each of whom may be held liable for all or a portion of the loss.

Joint and Survivor Benefits. Annuitized payments that provide a guaranteed monthly payment for the rest of a person's lifetime and that ensure income to a surviving spouse.

Junk Bonds. See Non-Investment-Grade Securities.


Keogh Plan. A retirement plan for self-employed persons that affords the opportunity to make tax-deductible contributions up to the lesser of 25% of income or $30,000; also known as an HR-10 Plan. See also 401(k) Plan.

Key Man Life Insurance. A type of life insurance policy that protects a business organization from losses arising from the death or disability of a senior executive or other employee important to the success of the business.


LAD. See Limited Assigned Distribution System.

Lapse. Termination of an insurance policy because of failure to pay a premium or lack of sufficient cash value to maintain the policy's in-force status. A policy that has lapsed is referred to as a "lapsed policy."

Lapse Ratio. The face amount of in-force business that lapses in a given year, expressed as a percentage of in-force business at the beginning of the year. In certain circumstances, this ratio is expressed for the number of policies that lapse without reference to the face amounts of lapsed policies.

Laser Exclusion. An endorsement under a claims-made insurance policy that excludes coverage for the risks, persons, classes of property or locations listed in the endorsement. The term refers to zeroing in with sharp focus to exclude specific exposures.

Last Clear Chance Rule. A legal doctrine that qualifies a contributory negligence defense by permitting a claimant to prevail in a claim, notwithstanding the claimant's own negligence, if the defendant had a last clear chance to avoid an accident but failed to do so.

Last to Die. A form of life insurance policy in which the benefit is payable upon the second death to occur of the two insured lives. This form of policy is used as an estate planning device.

Law of Large Numbers. A concept in probability and statistics that the larger the number of units exposed to loss, the greater the ability to predict loss results accurately.

Layer. The interval between the attachment point and the maximum limit of an excess-of-loss reinsurance policy.

Lead Insurer. An insurer that sets the terms of coverage and pools a portion of the risk with other insurers.

Letter of Credit. A form of credit enhancement provided by banks that competes with surety bonds and other forms of financial guarantees provided by insurers.

Level Commission Life Insurance. A form of life insurance in which commissions remain constant throughout the term of the policy. In such a policy, an agent receives a smaller commission in the first year of a policy than is normal for other life insurance products.

Level Premium Life Insurance. A form of life insurance in which premium levels remain constant throughout the term of the policy. In such a policy, more than the cost of protection is paid in earlier years to compensate for underpayment in later years.

Leverage Ratios.Ratios that are used to analyze various aspects of a company's operating performance. See Chapter 8.

Liability Insurance. A form of insurance that covers an insured's liability to third parties, plus associated expenses.

Liability Risk Retention Act of 1986. Legislation enacted by the federal government to respond to the lack of insurance availability during the hard cycle period of the mid-1980s. This legislation made it possible for purchasing groups to act collaboratively and to circumvent state admission laws.

License. Certificate of authority issued by a state to an insurer or an insurance agent granting permission to act as such within the state.

License and Permit Surety Bond. A surety bond that guarantees that the principal will comply with the laws and regulations governing its activities.

Life Annuity. A form of annuity that produces income during the annuitant's lifetime.

Life Expectancy. The estimated average number of years of life remaining for a group of persons of a particular age, as set forth in a mortality table.

Life Insurance. A form of insurance on the life of a human being; may include related coverages.

LIMRA International. A Farmington, Connecticut-based trade organization providing research for the life insurance industry. Formerly known as Life Insurance Marketing and Research Association.

Lifestyle Fund. Asset allocation fund that is designed to simplify and encourage participants' selection of the mix of assets most appropriate to their financial situation, by offering a portfolio of funds that are designed for different phases of their lifecycle, e.g., funds with a higher proportion of equities for younger participants, some with more conservative asset mix for those nearer retirement. Also known as a lifecycle fund.

Lifetime Disability Benefit. A benefit to replace lost income throughout the insured's lifetime as long as disability exists.

Limited Assigned Distribution (LAD) System. A system of assigned risk allocation, used primarily in private passenger automobile insurance, in which some carriers buy the assignments of other carriers at a premium and take on full underwriting risk.

Limits. An insurer's aggregate liability for policies in force as of a given date.

Line. A class of business written by an insurer; also refers to the limit of insurance an insurer is willing to underwrite either for a particular risk or class of risks.

Line Slip. See Slip.

Link Ratio. The ratio determined by dividing loss amounts at one development point (for example, 60 months) by the loss amount of a previous point (for example, 48 months). This ratio is used as a tool by actuaries in estimating loss development during comparable development periods in the future.

Liquidated Damages. The amount of damages to be awarded in the case of a breach of a contract agreed upon in advance by both parties.

Little Miller Acts. State legislation patterned after the federal Miller Act requiring surety bonds for those providing goods and services to state governments. See Miller Act.

Living Benefits Rider. An optional provision of a life insurance policy that offers an insured the option to collect all or a portion of available life insurance benefits upon the occurrence of terminal or other catastrophic illness. See Viatical Settlement Companies.

Lloyd's. A London-based insurance marketplace, whose underwriting members (or Names) have considerable worldwide influence in property-casualty markets, particularly those dealing with marine and aviation insurance. Approximately one-third of Lloyd's premiums is derived from the United States.

Lloyd's American Trust Fund. A trust fund maintained with an American bank as security for the payment of claims by Lloyd's of London arising within the United States.

LMX. See London Market Excess.

LMX Spiral. The practice once prevalent within Lloyd's and other London markets of retroceding a portion of the reinsurance assumed. Thus, once a loss occurs, it works its way (or "spirals") through the various layers of retrocessionaires.

Loading. An insurer's marketing and administrative expenses added to the pure premium being charged. See also Pure Premium.

Lock-In Provisions. State laws or regulations that impede the ability of insurers to withdraw from unprofitable lines of business.

London Market Excess (LMX). This term is used to refer to an excess-of-loss reinsurance treaty written in the Lloyd's market or in other London markets.

"Long-Tail" Business. A class of business in which claims take a long period of time to occur or be settled.

Long-Term Care. Health care service provided to chronically ill or incompetent persons, whether provided on an inpatient or outpatient basis or at home.

Long-Term Disability. Similar to disability income, but the coverage is for an employed group and is offered as an employee benefit.

Loss. The amount an insurer is required to pay to a claimant.

Loss Adjuster. See Claim Adjuster.

Loss Adjustment Expense (LAE). Expenses related to the settlement of an insurer's claims, including legal and other fees and expenses, and the portion of an insurer's general expenses allocated to claim settlement costs. Subdivided into Allocated (ALAE) and Unallocated (ULAE). Allocated LAE are expenses that relate directly to a particular claim; Unallocated LAE are general, or overhead, expenses that cannot be assigned directly to a claim.

Loss Control. Activities designed to minimize losses through the design and implementation of safety prevention programs.

Loss Cost. Losses incurred divided by the number of units insured. For example, if an insurer incurs $10,000 in losses on its book of automobile insurance business and it insured 1,000 automobiles in a given period, its loss cost per unit would be $10.

Loss Development. See Development.

Loss Frequency. See Frequency.

Loss Portfolio Transfer. See Portfolio Transfer.

Loss Prevention. See Loss Control.

Loss Ratio. The ratio of incurred losses and loss adjustment expenses to earned premiums; may also refer to individual components. The ratio of incurred losses to earned premium is the Pure Loss Ratio.

Loss Reserve. An amount set aside by an insurer to cover outstanding claims- those that have been reported to the insurer, as well as those incurred but not yet reported.

Loss Severity. See Severity.

Lump Sum. Money provided in a single payment.

Lump Sum Distribution. A defined contribution plan participant's taking the assets in his or her account as a single sum, instead of as an annuity (upon retirement), or rolling the assets over into an IRA or a new employer's plan. A few defined benefit plans allow participants to take their assets as a lump sum, as well.


Maintenance Bond. A type of surety bond under which the surety guarantees that the contractor will fulfill its obligations during the warranty period.

Major Medical Insurance. A form of health insurance covering expenses relating to a catastrophic illness or injury.

Malpractice Insurance. See Medical Malpractice Insurance and Professional Liability Insurance.

Managed Care. A health care system integrating the financing and delivery of health care services by a group of providers. In a managed care system, standards are set for efficiency and quality assurance. A coordinated approach to the design, financing and delivery of health care, which balances price and utilization controls with access to care. Also a general term for organizing doctors, hospitals and other providers into groups in order to enhance the cost-effectiveness and manage the quality of health care.

Managed Care Organization (MCO). An entity that provides or contracts for managed care. Includes entities such as HMOs, PPOs, POS plans, EPOs, etc.

Managed Competition.A purchasing strategy for health care that encourages those managed care plans that do the best job of improving quality, cutting cost and satisfying patients to flourish.

Managed Indemnity Plan.An indemnity plan that uses some utilization management techniques (such as hospital precertification) to monitor how doctors and patients use health care services. As there is no network, providers have no relationship or contract with the health plan. This is not a true managed care plan.

Managing Agent. The agency support mechanism behind syndicates on Lloyd's. Employs the underwriting staff and maintains compliance with Lloyd's rules.

Managing General Agent (MGA). An agent who produces and underwrites business for an insurer and either adjusts or pays claims or negotiates reinsurance on behalf of the insurer.

Mandatory Securities Valuation Reserve (MSVR). A reserve required by state insurance regulators as a liability on a life insurer's statutory financial statements intended to capture realized and unrealized gains and losses sustained by the insurer's fixed-income and equity portfolios. In December, 1991, the National Association of Insurance Commissioners (NAIC) proposed that the MSVR be replaced by Asset Valuation Reserves and Interest Maintenance Reserves, effective with 1992 statutory financial statements. See Asset Valuation Reserve and Interest Maintenance Reserve.

Manual Rates. An insurer's standard rates as established in its rating or underwriting manuals.

Manuscript Policy. An insurance policy drafted to meet the specific needs of insurer and insured.

Marine Insurance. A form of insurance covering transportation and communication activities, as well as goods in transit. See Inland Marine Insurance and Ocean Marine Insurance.

Market Assistance Plan. A program that provides assistance to consumers of insurance who have experienced difficulty in obtaining coverage in the voluntary markets.

Market Capacity. The aggregate amount of insurance capable of being underwritten by all insurers operating in a relevant market.

Master Policy. The practice of combining several locations or operations under coverage provided by a single insurance policy.

Mature. Within the context of life insurance, a policy whose face amount has become payable.

Maximum Probable Loss. See Probable Maximum Loss.

McCarran-Ferguson Act. Federal legislation enacted in 1945, in which Congress agreed to defer to state regulatory authorities in the regulation of the insurance industry. The legislation specifically provides for a limited federal antitrust exemption.

MCO. See Managed Care Organization.

Medicaid. State-administered programs created by federal legislation in 1966 that provide assistance to pay for health care benefits for disadvantaged persons regardless of age. Federal matching funds supplement such payments. The state, under broad federal guidelines, determines what benefits are covered, who is eligible and how much providers will be paid.

Medical Malpractice Insurance. A form of insurance that covers a health care professional's liability for any actual or alleged breach or neglect of duty committed in the conduct of the insured's duties.

Medical Trend. A quantitative measure of the change in medical costs per plan member. Medical trend is driven by numerous factors, including inflation, medical care consumption patterns, physician practice patterns (e.g., referrals), new medical technology, defensive medicine and cost shifting.

Medical Savings Account (MSA). A program analogous to an Individual Retirement Account (IRA), permitting tax-preferred savings toward medical expenses. The Health Insurance Portability and Accountability Act of 1996 provided for an experiment of the concept, and some Republicans have proposed its adaptation (via a Medicare Medical Savings Account, or MMSA) to Medicare.

Medicare. A federally funded insurance program adopted in 1966 that provides health insurance coverage for hospital and physicians' services to persons age 65 and older and certain other disabled persons. A nationwide, federal health insurance program for people age 65 and older. It also covers certain people under 65 who are disabled or have chronic kidney disease. Medicare Part A is the hospital insurance program; Part B covers physicians' services.

Medigap Insurance. A form of health insurance sold by private insurers to supplement coverage or otherwise fill in coverage gaps provided by the Medicare program. Also known as MedSupp (Medicare Supplemental) Insurance.

Members' Agent. A Lloyd's underwriting agency; introduces members to an underwriting syndicate but does not manage one.

MGA. See Managing General Agent.

Miller Act. Federal legislation enacted in 1935 that requires surety bonds to be supplied by those providing goods and services to the federal government. Some individual state governments have enacted similar legislation in relation to their own outside contracting activities.

Minimum Premium Plan. A program under which an insurer provides administrative services and insures large claims for a self-insured group.

Miscellaneous Surety Bond. A surety bond that guarantees the performance of various obligations of a principal, including guarantees of honesty (such as notary public bonds), financial guarantees (such as utility deposit bonds) and other credit guaranty bonds.

Monetary Threshold. A type of "no fault" insurance system, in which the claimant has the right to sue for damages if they exceed a specified minimum dollar limit.

Monoline Insurer. An insurer that writes only a single line of business. Over time, the term has been expanded to include insurers writing predominantly a single line of business.

Monopolistic Fund. A state-run workers' compensation insurance that allows virtually no competition from private insurers for primary business. (Private insurers may insure excess business.)

Moral Hazard. The increase in the chance of loss caused by the disregard of traditionally "moral" behavior, e.g., misrepresentation, concealment, arson.

Morale Hazard. The increase in the chance of loss caused by the insured's indifference or carelessness because of the existence of insurance, e.g., failure to check brakes regularly.

Morbidity Experience. The incidence of disability due to disease or physical impairment.

Mortality Experience. The incidence of death based upon the experience of a particular insurer.

Mortality Table. A statistical listing of anticipated death rates for various age groupings, normally expressed as deaths per thousand.

Mortgage Redemption Insurance. A form of decreasing term insurance that covers the life of a person taking out a mortgage. Death benefits are designed to provide for payment of the outstanding balance of the loan. See Decreasing Term Insurance.

MSA. See Medical Savings Account.

MSVR. See Mandatory Securities Valuation Reserve.

Multiline Insurer. An insurer that issues insurance policies covering a wide range of perils. Such insurers may underwrite life, health and property-casualty risks.

Multi-Peril or Multiple-Peril. A term describing an insurance policy covering a wide range of perils, rather than a single peril or limited range of perils.

Multiple Employer Trust.An arrangement whereby a number of unrelated employers join together for the purpose of providing group medical coverage.

Multiple Fund.A fund operated by an investment company that raises money from shareholders and invests in a group of stocks, bonds or other investments. It is professionally managed for the benefit of the shareholders. Each share in the fund represents part ownership of many different stocks, bonds, etc. Many insurance companies sell mutual funds.

Mutual Insurance Company. An insurance company owned by its policyholders, in contrast to a stock insurance company, which is owned by its stockholders.


NAIC Accreditation System. A voluntary program designed by the National Association of Insurance Commissioners in which a review team certifies that a particular state insurance department has met certain standards established by the NAIC. This program is part of a larger-scale effort by the NAIC to respond to critics of state regulation and to forestall federal regulation.

Naïve Capacity. A term describing insurers that enter the insurance marketplace without appropriate knowledge of the risks inherent in the business, thereby contributing to an excess of available capital and a soft insurance market; also known as innocent capacity.

Name. An alternative term for an underwriting member of Lloyd's. Underwriting members are individuals or organizations that provide capital (the "capital providers") to Lloyd's syndicates. Severally liable for all underwriting results of a syndicate on an unlimited basis.

Named Insured. The insured specifically referred to in an insurance policy as one enjoying protection under the policy.

Named Perils. The perils specifically referred to in an insurance policy as those covered by the policy.

National Association of Independent Insurers (NAII). A Des Plaines, Illinois-based trade organization representing primarily the smaller property-casualty insurers.

National Association of Insurance Brokers (NAIB). A Washington, DC-based trade organization representing insurance brokers.

National Association of Insurance Commissioners (NAIC). A Kansas City, Missouri-based organization of state insurance commissioners founded in 1871 to study insurance regulatory affairs and assist state insurance departments in carrying out their regulatory responsibilities.

National Association of Life Companies (NALC). A Washington, DC-based trade organization that represented primarily the smaller life insurers. This organization was merged with the American Council of Life Insurance in 1992.

National Association of Mutual Insurance Companies (NAMIC). An Indianapolis, Indiana-based trade organization representing mutual property-casualty insurers.

National Association of Professional Insurance Agents (PIA). An Alexandria, Virginia-based trade organization representing independent insurance agents.

National Association of Surety Bond Producers (NASBP). A Washington, DC-based trade organization representing surety bond producers.

National Committee for Quality Assurance (NCQA). A national nonprofit organization created to develop and monitor health care provider quality measurements and standards.

National Council on Compensation Insurance (NCCI). A Boca Raton, Florida-based organization that develops and administers rating plans and systems for workers' compensation insurance.

National Flood Insurance Program. A program created by federal legislation and administered by the Federal Insurance Administration to provide flood insurance at subsidized rates to those who reside in designated flood areas. In 1983, participation in the program was opened to private insurers through the "Write Your Own" program.

Natural Death. Death by means other than accident or war.

Negligence. The failure to act as a prudent and reasonable person would under similar circumstances.

Net Line. See Retention.

Net Premiums Earned (NPE). An insurer's premiums recorded as earned in a specific period, net of premiums assumed and ceded.

Net Premiums Written (NPW). An insurer's premiums recorded as written in a specific period, net of premiums assumed and ceded. The difference between written premiums and earned premiums is amortization. For example, a one-year policy written in November has its premium recorded as written entirely in that year, while 1/12 of the premium is earned each month over the period insured.

Network. An organized groups of physicians, hospitals and other health care providers working with a health plan to offer care at negotiated rates (lower than their usual charges) in return for patient flow. Network-based products are central to managed care. Examples are HMOs, PPOs and POS plans.

Network Model HMO. A health plan that contracts with multiple physician groups to deliver health care to members. Generally limited to large single or multispecialty groups.

Network Provider. Physicians, hospitals or other providers of medical services that have agreed to participate in a network, to offer their services at negotiated rates and to meet other contractual provisions. Also known as a "participating provider."

New York Insurance Exchange. A marketplace established in 1980 to underwrite reinsurance and large or unusual insurance risks. It ceased operation in December, 1991.

"No Fault" Insurance. A system in which an injured person receives benefits from an insurer without having to establish fault.

Nonadmitted Assets. Assets of an insurer that are not permitted by insurance regulatory authorities to be taken into account in determining the insurer's financial condition under statutory accounting practices.

Nonadmitted Insurance. Insurance written by a nonadmitted insurer.

Nonadmitted Insurer. An insurer not licensed to write insurance within a given state.

Nonadmitted Reinsurance. Reinsurance written by a reinsurer not licensed or authorized to transact business within a given state. Unless the ceding company holds a letter of credit or other appropriate security for such reinsurance, such reinsurance is not considered as an admitted asset for purposes of the cedant's annual statement.

Nonadmitted Reinsurer. A reinsurer not licensed or approved to do business in a particular jurisdiction.

Noncontributory Plan. A group plan or health policy in which the employer pays the entire premium. Such a plan is referred to as "noncontributory" because the beneficiaries are not required to contribute to the payment of premiums.

Non-Investment-Grade Securities. For insurers, fixed-income securities held in an insurer's investment portfolio with a Class (3) or lower rating by the Securities Valuation Office of the National Association of Insurance Commissioners.

Nonparticipating Policy. A policy that does not entitle a policyholder to receive dividends from the surplus of an insurer.

Nonproportional Reinsurance. See Excess-of-Loss Reinsurance.

Nonqualified Tax Annuity. An annuity that does not comply with the requirements of a tax-qualified retirement plan. Premiums and deposits are made with after-tax dollars.

Nonstandard Automobile Insurer. An insurer specializing in insuring drivers who have a record of traffic accidents or violations or who have been canceled or refused insurance.

Nonstandard Risk. A policyholder with above-average loss experience and higher-than-average loss frequency potential. This term is used most often with reference to purchasers of automobile insurance.

NPE. See Net Premiums Earned.

NPW. See Net Premiums Written.

Nuclear Insurance Pools. This term refers to special insurance pools created by property-casualty insurers to cover losses resulting from nuclear accidents. Among the pools in existence are American Nuclear Insurers (ANI), the Mutual Atomic Energy Research Pool (MAERP) and the Mutual Atomic Energy Liability Underwriters (MAELU). See also Price-Anderson Act.


Obligatory Treaty. See Treaty Reinsurance.

Obligee. The person protected by a surety bond.

Obligor. The person providing a surety bond to an obligee; also known as a principal.

Occupational Safety and Health Act (OSHA). Legislation enacted by the federal government in 1970 establishing standard safety codes with the intention of reducing the number of employment-related injuries, illnesses and deaths.

Occurrence. An accident or loss.

Occurrence Policy. An insurance policy covering losses occurring during the policy period, without regard to when the claim is reported to the insurer.

Ocean Marine Insurance. A form of insurance that covers sea vessels and cargoes being carried on those vessels, as well as liabilities in connection with such activities.

Offset. The concept of allowing one party to net amounts due from another before making payments. Many contracts between insurers and reinsurers have offset clauses.

Omnibus Clause. A provision in automobile insurance policies that includes certain persons as insured without specifically naming them.

Operating Income. The profit or loss stemming from all operations, including underwriting and investments.

Operating Margin. Operating income divided by net premium.

Operating Ratio. An insurer's Combined Ratio minus the Investment Income Ratio.

Ordinary Life Insurance. A form of whole life insurance for which premiums are paid throughout the insured's lifetime. See Whole Life Insurance.

OSHA. See Occupational Safety and Health Act.

Outcomes Management. A health care term referring to the clinical outcome of a medical or surgical intervention or nonintervention. It is thought that, through a database of outcomes experience, caregivers will know better which treatment modalities result in consistently better outcomes for patients.

Out-of-Area Benefits. The coverage allowed to HMO members for emergency situations outside the prescribed geographic area of the HMO.

Override. A form of commission paid by an insurer to an intermediary, such as a managing general agent, for producing business.

Overseas Private Investment Corporation (OPIC). A government-sponsored organization that provides insurance to U.S. businesses for foreign investments against a variety of risks, including expropriation and war.


Package Policy. An insurance policy combining several different coverages within a single policy.

Paid-up Insurance. An insurance policy for which all required premiums have been paid.

Part A. The Medicare coverage that helps pay for medically necessary inpatient hospital care and, after a hospital stay, for inpatient care in a skilled nursing facility, for home care by a home health agency or for hospice care by a licensed and certified hospice agency. It is financed almost entirely by a nearly universal tax on employee pay, with no beneficiary premiums charged.

Part B. The Medicare coverage that helps pay for medically necessary physician services, outpatient hospital services, outpatient physical therapy and speech pathology services, and a number of other medical services and supplies that are not covered by the hospital insurance. It is a voluntary program, financed through a combination of payments from general federal revenues and premiums paid by beneficiaries who elect to participate.

Partial Disability. A disability that prevents an insured from performing one or more duties related to the insured's employment. See Disability.

Partial-Risk Capitation. A form of state-managed Medicaid, under which partial-risk prepaid health plans (PHPs) receive a fixed payment per enrollee per monthto provide for a specified subset of Medicaid services, usually primary care and/or certain ancillary services. States usually remain at risk under their traditional program for hospital and specialty care.

Participating GIC. A GIC in which the assets are owned by the customer.

Participating Policy. A policy entitling a policyholder to receive dividends from the surplus of an insurer to the extent that dividends are declared by its board of directors.

Participating Provider. A health care provider who participates through a contractual arrangement with a health care service contractor, HMO, PPO, IPA or other managed care organization.

Past Service Credits. Pension benefits awarded to a beneficiary for service prior to inception of the plan.

PCCM. See Primary Care Case Management.

PCP. See Primary Care Provider.

Peer Review Organization (PRO). An independent, state-based organization that uses local doctors and nursesto assess the quality of care provided to beneficiaries.

Penal Sum. The maximum amount of a surety's liability under a surety bond.

Pension. A retirement annuity. The monthly income that is paid to a plan participant (and, often, to a spouse) for the rest of his or her life, after reaching a certain retirement age.

Pension Benefit Guaranty Corporation (PBGC). A federal agency established as part of ERISA to monitor pension plans and ensure that the vested benefits are fully funded. It acts also as a guarantor for pension participants in plans that become insolvent.

Pension Equity Plan. A type of defined benefit plan, sometimes referred to as a hybrid plan because it mimics some of the characteristics of defined contribution plans. Employees receive credits in their own account, based on a percentage of their salary and a credited interest rate, with proportionately greater benefits provided to employees as they get older. Although the account is more hypothetical than real, the funds are subject to the same rules as defined benefit plan assets and form part of the company's asset pool.

Pension Plan. A defined benefit or defined contribution plan in which employees are granted certain retirement benefits. A retirement program to provide employees (and, often, spouses) with a monthly income payment for the rest of their lives.

Per Member Per Month (PMPM). The unit of measure related to each member for each month the member was enrolled in a managed care plan.

Performance Bond. See Contract Performance Bond.

Performance Standards. Standards an individual provider is expected to meet, especially with respect to quality of care. The standards may define volume of care delivered per time period.

Peril. The cause of a loss.

Periodic Payment. Payments made on a regular basis (per week, per month, etc.) over the life of a benefit plan.

Permanent Disability Payment. A benefit payment for an insured who is permanently unable to perform duties related to the insured's employment or to engage in any other type of employment appropriate for the insured.

Permanent Life Insurance. All forms of life insurance other than term insurance.

Perpetual Mutual. A mutual insurer that, for a one-time premium deposit, provides property insurance coverage with no expiration date.

Persistency. The renewal rate of insurance policies. A high persistency rate means that a high percentage of policies stay in force until the end of the policy term; a low persistency rate means that a high percentage of policies lapse. The term is applied particularly with reference to life insurance policies and annuities.

Personal Injury.(1) Any physical or mental harm to a person's tangible or intangible property covered under general liability insurance. (2) In legal terms, injury solely to a person's body.

Personal Lines Insurance. Insurance that covers individuals or families, in contrast to commercial lines insurance, which covers commercial and governmental activities.

Personal Retirement Savings Accounts (PSAs). A self-directed retirement saving plan that has been proposed as a replacement for part of Social Security. Similar in some respects to IRAs, PSAs would allow workers to divert part of their Social Security taxes into their own personal accounts, which they could invest with various financial services companies and in a variety of financial assets.

Personal Surety. An individual, usually operating without supervision by state insurance regulators, who supplies surety bonds.

Personal Umbrella Policy. See Umbrella Liability Policy.

PHP. Pre-Paid Health Plan. See Partial-Risk Capitation.

Physical Damage. Actual damage to tangible property.

Physician-Hospital Organization (PHO). An alliance formed by physicians and hospitals to share administrative services and costs, and to improve their bargaining position with payers and when contracting with managed care providers.

Physician Payment Review Commission (PPRC). The body that advises Congress on Medicare physician payment issues.

Piper Alpha. An oil rig disaster that occurred in 1988 in the North Sea off the coast of Scotland. The total loss was approximately $1.5 billion.

Plaintiff. The party bringing a legal action.

Plan Participants. Employees participating in and covered under a qualified employee benefit plan, such as a pension or profit-sharing plan.

Plan Sponsor. An employer (business, nonprofit organization, government, etc.), association, labor union or other group offering a qualified employee benefit plan, such as a pension or profit-sharing plan.

"Play or Pay" Programs. In the field of health insurance, "play or pay" programs refer to legislative initiatives that would require employers either to provide minimum levels of health insurance to their employees or be taxed to fund publicly supported alternatives.

PML. See Probable Maximum Loss.

PMPM. See Per Member Per Month.

Point-of-Service Plan (POS). A health care delivery system in which insureds are encouraged, but not required, to choose health care providers within the designated provider network. Also known as an open-ended HMO. As in traditional HMOs, the chosen primary care physician acts as a "gatekeeper" when making referrals; plan members may, however, opt to visit non-network providers at their discretion. Subscribers choosing not to use the primary care physician must pay higher deductibles and copays than those using network physicians.

Policy. An insurance policy or annuity contract issued by an insurer.

Policy Acquisition Costs. Direct expenses relating to an insurer's acquisition and retention of business, including agents' and brokers' commissions, premium taxes, and marketing and underwriting expenses.

Policy Exclusion. See Exclusion.

Policy Jacket. The outside cover of an insurance policy where common provisions of the policy are listed.

Policy Loan. A provision in a life insurance policy granting the owner the right to borrow the policy's cash value.

Policy Reserves. See Reserves.

Policy Year Experience. A recording of financial results based upon policies issued in a given year. Thus, an insurer's policy year experience for 1992 would be based upon the loss experience of all policies issued in 1992.

Policyholder. A person or entity in whose name an insurance policy has been issued.

Policyholder Dividend. The surplus payable to a holder of a participating policy as declared by an insurer's board of directors.

Policyholders' Surplus. The amount remaining after an insurer's liabilities are subtracted from its admitted assets, applying statutory accounting practices.

Political Risk Insurance. A form of insurance that indemnifies exporters and funding sources against losses arising from political events, such as expropriation, war or currency restrictions.

Pool. An underwriting mechanism in which the participants share premiums, expenses, losses and profits for business written.

Pooling. The act of becoming a member of a pool.

Portability. The employee's right to transfer pension benefit credits from a former employer to a current employer, or to a tax-deferred vehicle such as an IRA.

Portfolio. All of an insurer's premiums and reserves in a particular category of insurance. Also refers to an insurer's investments.

Portfolio Transfer. The act of reinsuring or otherwise assigning a portfolio by one insurer to another.

POS. See Point-of-Service Plan.

PPO. See Preferred Provider Organizations.

PPS. See Prospective Payment System.

Pre-Existing Condition. The physical or mental condition of an insured that exists prior to issuance of an insurance policy. In certain instances, an undisclosed pre-existing condition can result in cancellation of a policy. A physical condition of an insured person that existed prior to the issuance of the policy or enrollment in a health plan, and which may result in the limitation in the contract on coverage or benefits. Federally qualified HMOs cannot limit coverage for pre-existing conditions.

Precertification. The process of notification and approval of elective inpatient admission and identified outpatient services before the service is rendered. Often involves appropriateness review against criteria and assignment of length of stay. Failure to obtain precertification often results in a financial penalty to either the provider or the subscriber. Also known as preadmission certification, preadmission review and precert, this is a component of utilization management.

Preferred Provider Organizations (PPOs). Health care delivery systems in which hospitals, physicians and other health care providers agree to provide health care services at a discount. A health care arrangement between purchasers of care (e.g., employers, insurance companies) and providers that provides benefits at a reasonable cost by providing members incentives (such as lower deductibles and copays) to use providers within the network. Members who prefer to use nonpreferred physicians may do so, but only at a higher cost. Preferred providers must agree to specified fee schedules in exchange for a preferred status and are required to comply with certain utilization review guidelines.

Preferred Risk.An insurable interest anticipated to have a better or lower-than-average loss experience. Based on this prediction, preferred risks generally pay lower premiums than do standard risks.

Premises. The location of property, as specified in an insurance policy.

Premium. The payment to an insurer in consideration of the insurance coverage being provided.

Premium-to-Surplus Ratio. The ratio of net premiums written to policyholders' surplus; one of the major leverage ratios used to analyze company performance.

Premiums Earned. See Earned Premiums.

Premium Taxes. Taxes levied by states on premiums received by insurers. Premium taxes usually are assessed at rates approximating 2% to 3% of premiums.

Price-Anderson Act. Federal legislation that establishes a no-fault liability scheme for nuclear accidents and limits liability for each nuclear reactor facility. See also Nuclear Insurance Pools.

Primary Beneficiary. A person entitled to receive the proceeds of a life insurance policy on a priority basis.

Primary Care. Basic or general health care usually rendered by general practitioners, family practitioners, internists, obstetricians and pediatricians, often referred to as the primary care provider (PCP). Referral is made to secondary care specialists, as necessary.

Primary Care Case Management (PCCM). A form of state-managed Medicaid in which beneficiaries select a primary care physician, who is paid a flat monthly fee and must approve and monitor the use of Medicaid services. Other providers are paid as under a traditional Medicaid program.

Primary Care Provider or Primary Care Physician (PCP). The physician responsible for overseeing and coordinating all aspects of a patient's medical care. In order for a patient to receive a specialty care referral or hospital admission, this physician must preauthorize the visit, unless there is an emergency. Also known as a "gatekeeper."

Primary Company. An insurer that deals directly with the consumer to provide insurance coverage.

Principal. The party primarily liable under a surety bond.

Prior Acts Coverage. A provision in certain claims-made insurance policies that specifies that acts as of a certain retroactive date will be covered.

Prior Approval Laws. Legislation that requires insurers to file proposed rates with insurance regulators and obtain approval by the regulators before the rates can be used.

PRO. See Peer Review Organization.

Probable Maximum Loss (PML). The largest loss estimated by an underwriter as applicable to a particular risk, given the worst combination of circumstances perceived as possible.

Probate Bond. See Fiduciary Bond.

Probationary Period. The waiting period required before one can participate in a group plan or have coverage under a policy.

Proceeds. The amount payable from an insurance policy.

Producer. A person who originates insurance business, e.g., an agent.

Products Liability Insurance. A form of insurance that covers legal liability for losses resulting from products designed, manufactured or distributed by the insured.

Professional Liability Insurance. A form of insurance that covers an insured's liability for any actual or alleged breach or neglect of duty committed in the conduct of the insured's profession.

Professional Reinsurer. An insurer whose business is limited primarily to reinsurance coverages. Most reinsurers do not underwrite primary coverages, although they are not prohibited from doing so.

Professional Review Organization. A group of physicians with responsibility to review the quality of health care service provided under the Medicaid and Medicare programs.

Professional Standards Review Organization (PSRO). A physician-sponsored organization charged with reviewing the services provided patients who are covered by Medicare, Medicaid and maternal and child health programs. The purpose of the review is to determine if the services rendered are medically necessary, provided in accordance with professional criteria, norms and standards, and provided in the appropriate setting.

Proof of Loss. A written statement submitted by a policyholder to the insurer setting forth information regarding a claim, thereby enabling the insurer to evaluate its liability for payment.

Property Insurance. A form of insurance policy that indemnifies an insured for losses, damage and loss of use of tangible property.

Proportional Reinsurance. See Quota Share Reinsurance.

Proposition 103 (Prop.103). An initiative passed by the voters of the State of California in 1988 that, among other provisions, called for the roll-back of insurance rates by 20% and imposed restrictions upon the ability of insurers to raise rates for California insureds.

Prospective Payment. An advance payment for health care expenses to be incurred in the future.

Prospective Payment System (PPS). A payment method that establishes rates, prices or budgets before services are rendered and costs are incurred. Providers retain or absorb at least a portion of the difference between established revenues and actual costs.

Protection and Indemnity (P&I) Insurance. Liability insurance associated with sea vessels and cargoes, covering losses other than those covered by workers' compensation and those arising from collisions.

Provider. Any individual, group of individuals or organization that provides a health care service, such as a physician, hospital, group practice, nursing home, pharmacy, etc.

Provider-Sponsored Organization (PSO). Essentially, provider-owned and -run HMOs.

Provisional Premium. The premium charged by an insurer upon inception of the policy, which is subject to adjustment upon audit or other measurement of actual exposure.

Proximate Cause. The direct and immediate cause of loss. If an event is the proximate cause of a loss, an insurer providing liability coverage for such event will be required to provide indemnification.

PSA. See Personal Retirement Savings Accounts.

PSO. See Provider-Sponsored Organization.

PSRO. See Professional Standards Review Organization.

Public Adjuster. A person hired by the insured to assist in the claim settlement process.

Punitive Damages. Damages awarded not as compensation but to punish a wrongdoer and to deter future misconduct by others; also known as exemplary damages.

Pure Loss Ratio. The ratio of losses incurred to premiums earned, without taking into account an insurer's marketing and administrative expenses or loss adjustment expenses.

Pure Premium. The portion of an insurance premium sufficient to pay an insurer's losses and loss adjustment expenses but not its marketing and administrative expenses.

Pure Risk. A risk that a loss may or may not occur but will not result in a gain; as opposed to a speculative risk, which may result in a loss or a gain. Pure risks are generally insurable, whereas speculative risks, such as gambling, are not.


Qualified Annuity. Products whose premiums or deposits can be made with pretax dollars. In segmenting the qualified market, the specific section of the Internal Revenue Code is used. Typical sections include 401, 403, 408, 457 and 501. Section 401 covers group pension plans, including defined benefit plans and defined contribution plans (401(k)). Individual retirement accounts, simplified employee pension plans (SEPPs), TSAs and deferred compensation are covered under the other sections.

Quality Assurance (QA). Activities and programs intended to assure the quality of care in a defined medical setting. Such programs include peer or utilization review components to identify and remedy deficiencies in quality. The program must have a mechanism for assessing its effectiveness and may measure care against pre-established standards.

Quota Share Reinsurance. A form of treaty or facultative reinsurance in which the insurer cedes and the reinsurer assumes an agreed-upon percentage of risks. Also known as proportional reinsurance.


Rate. The price per unit of insurance.

Rate on Line. A term, typically used in the London markets, referring to the ratio between premiums and coverage limits.

Rated Policy. An insurance policy issued at a higher premium rate to cover risks considered to be particularly severe.

Rating Agencies. Providers of credit opinions and analysis of financial institutions, including insurers. For a listing of rating agencies that cover the insurance industry, see Chapter 13.

Reasonable and Customary Charges. Fees and expenses relating to health care services that are comparable to rates and charges for similar services within a given territory.

Reassured. A synonym for reinsured.

Rebating. The practice, illegal in most jurisdictions, by which an insurer or agent returns a portion of the premium or provides other consideration to induce the purchase of insurance.

Receiver. An insurance regulator acting in the capacity of a rehabilitator or liquidator of an insurer.

Reciprocal Insurer. An unincorporated business, usually managed by an attorney-in-fact, that underwrites insurance for its subscribers.

Redlining. The practice of discriminating against certain classes of consumers, particularly purchasers of insurance in urban areas.

Rehabilitate. To restore an insurer to financial stability and solvency.

Rehabilitator. A public official, usually an insurance commissioner or an appointed deputy, with responsibility for rehabilitating an insurer.

Reinstatement. The process of restoring a lapsed policy by the payment of an overdue premium.

Reinsurance. An arrangement in which an insurer passes risk and obligations to another insurer.

Reinsurance Association of America (RAA). A Washington, DC-based trade organization representing professional reinsurers and other reinsurers.

Reinsurance Recoveries. Outstanding amounts due and payable by a reinsurer to a cedant.

Reinsured. The term for an insurer that has transferred all or part of its underwritten risk to a third party by purchasing reinsurance; also known as a Cedant.

Reinsurer. An insurer that assumes reinsurance risk.

Renewable Term Insurance. Term life insurance that, by its terms, is renewable for a limited number of additional terms by the policyholder without evidence of insurability. See Term Life Insurance.

Rent-A-Captive. An insurer formed for the purpose of insuring risks associated with the activities of a group of insureds; it is controlled not by the insured but by an insurer, a broker or other third party.

Renters Policy. See Tenants' Policy.

Replacement Cost Insurance. A form of property insurance in which the insured is indemnified for property losses based upon replacement cost, without regard to depreciation.

Reserve Deficiency. The shortfall between the currently estimated cost of claim payments and related expenses that an insurer ultimately will be required to pay and the reserves currently established by the insurer.

Reserve Discounting. See Discounting of Reserves.

Reserve Redundancy. The amount by which the reserves currently established by an insurer exceed the currently estimated cost of claim payments and related expenses that the insurer ultimately will be required to pay.

Reserves. Liability established by an insurer to reflect the estimated cost of claim payments and related expenses that the insurer ultimately will be required to pay with respect to the insurance it has underwritten.

Residual Market. An assigned risk plan, joint underwriting association or any similar mechanism designed to make coverages available to those unable to obtain them in the voluntary markets.

Residual Value Insurance. A form of insurance that guarantees the owner of leased property a specified value as of a particular date, usually the termination of the lease.

Res Ipsa Loquitor. A Latin phrase meaning "the thing speaks for itself." As a legal doctrine, because the event speaks for itself, the burden of proof falls to the defendant to overcome a presumption of negligence.

Respondeat Superior. The legal doctrine that employers may be held liable for the acts of their employees acting within the scope of their employment.

Retention. The amount or portion of risk that an insurer or a self-insured retains for its own account. Also known as "net line."

Retrocession. A transaction in which a reinsurer cedes to another reinsurer (the "retrocessionaire") all or a part of the reinsurance it has assumed. A retrocession does not legally discharge the ceding reinsurer from its liability to the reinsured.

Retrocessionaire. The reinsurer of a reinsurer.

Retrospective Rating. See Experience Rating.

Retrospective Review. After-treatment monitoring of utilization patterns against objective medical norms to detect inappropriate care (too little or too much) or excess cost. This is a component of utilization management.

Return on Surplus (ROS).Operating income divided by mean surplus.

Return Premium. Premium that has been paid to an insurer but which has not been earned and is returned to the insured when the policy is canceled or the terms of the policy are changed, thus reducing the amount of premium due.

Revocable Beneficiary. The beneficiary under a life insurance policy whose designation as beneficiary can be changed at the discretion of the policy owner.

Rider. See Endorsement.

Risk. The chance or possibility of loss. For example, physicians may be held at risk if hospitalization rates exceed agreed-upon thresholds. The sharing of risk often is employed as a utilization control mechanism within the HMO setting. Risk also is defined in insurance terms as the possibility of loss associated with a given population.

Risk and Insurance Management Society (RIMS). A New York City-based trade organization of risk managers and purchasers of commercial lines insurance.

Risk-Based Capital. A formula method for estimating the capital requirements of an insurer by measuring its risk characteristics in areas such as asset risk, credit risk and underwriting risk and then comparing the results to the company's stated capital. See Chapter 12.

Risk HMO. A type of Medicare private managed care plan, provided for under TEFRA, which is essentially a closed-network HMO that provides Medicare-covered services and (usually) supplemental benefits in exchange for fixed payments from Medicare, including what are referred to as Competitive Medical Plans (CMPs).

Risk Management. The practice of evaluating and managing the risks to which a particular business or organization may be exposed.

Risk Manager. A person with responsibility for the evaluation and management of risks. Among the functions usually performed by a risk manager is the purchase of insurance.

Risk Retention Act. See Liability Risk Retention Act of 1986.

Risk Purchasing Group (RPG). A large group of individuals, companies or trade associations combining to request insurance rates based on their perceived loss experience. Requests for reduced rates may be justified by some special characteristic of the group (e.g., specialized training), which will result in fewer and/or less severe claims.

Risk Retention Group (RRG). A group of companies or trade associations combining to operate as a limited-purpose insurer as permitted under the Liability Risk Retention Act of 1986. RRGs combine resources as well as pool risk.

Risk Transfer. The process of transferring responsibility for losses from one party to another, such as from an insured to an insurer.

Rollover Individual Retirement Account. An IRA established to receive distribution of assets from a qualified pension or retirement plan, thus providing a way to maintain the tax-deferred status of distributions until an age specified by law.

ROS. See Return on Surplus.

RPG. See Risk Purchasing Group.

RRG. See Risk Retention Group.

Rule of 78s. A method, used primarily in credit insurance, for earning premiums which is faster than level amortization; also known as the sum-of-the-years'-digits method.

Run-off. The process of managing a discontinued line of business.


Sales Tax Surety Bond. A surety bond that guarantees that sales taxes collected by the principal will be paid to a state or local government.

Salvage. The process by which an insurer, after payment of a claim, takes over property to reduce its losses. For example, a surety may take over the property of a principal to reduce its exposure on a surety bond claim.

Savings Bank Life Insurance (SBLI). Life insurance sold over-the-counter by mutual savings banks in certain states.

Second Injury Funds. A program supported by assessments from workers' compensation insurers to provide benefits for employee injury and death.

Section 1115 Medicaid Waiver. Refers to a section of the Social Security Act that gives states wide latitude to test new approaches to serving their needy populations. Section 1115 or "research and demonstration" waivers enable states to set up trial programs that use managed care savings to expand program eligibility beyond the usual federally authorized groups.

Section 1915(b) Medicaid Waiver. Refers to a section of the Social Security Act that provides for the waiver of certain program requirements. These so-called 1915(b) or "programmatic" waivers have a number of provisions that promote the enrollment of Medicaid beneficiaries in managed care plans.

Securities Valuation Office (SVO). A unit of the National Association of Insurance Commissioners that accepts ratings of financial instruments from the public rating agencies, assigns ratings to financial instruments not rated by the public rating agencies and publishes the results to insurers.

Self-Insurance. The retention of risk by a person or business. This usually includes setting up a fund against which claim payments are drawn. Claims processing often is handled through an administrative services contract with an independent organization. Another method of self-insurance is the organization of a captive insurer. See Captive Insurer.

Self-Insured Retention (SIR). See Deductible.

Semiautomatic Treaty. A reinsurance treaty that allows for individual risk selection by the reinsurer, based on certain underwriting criteria.

Separate Account. An investment account maintained by an insurer to which funds have been allocated. A separate account is maintained independently from an insurer's general account and other separate accounts.

Separate Account GIC. A GIC in which the assets are owned by the insurer, but are segregated from the General Account.

SEPP. See Simplified Employee Pension Plan.

Settlement Options. The term refers to the alternatives available to a policyholder or beneficiary concerning the payment of benefits.

Severity. The magnitude of losses occurring within a given time period. Thus, an insurer is said to have a "severity problem" if its operating results are adversely affected by a small number of relatively severe losses. This in contrast to a "frequency problem."

SFAS 115. Statement of Financial Accounting Standard requiring that, under Generally Accepted Accounting Principles (GAAP), about 80% of insurer bond holdings be valued at current rates instead of amortized cost.

"Short-Tail" Business. A class of business in which claims are reported and settled in a relatively short period of time.

Simplified Employee Pension Plan (SEPP). An employer-sponsored individual retirement account pursuant to which an employer may make a maximum annual tax-deductible contribution equal to 15% of the employee's compensation or $30,000, whichever is lower.

Single-Premium Deferred Annuity (SPDA). An annuity that requires a one-time lump sum premium payment upon issuance of the contract. SPDAs generally are back-end loaded with surrender charges beginning at 7% to 10% and scaling down over seven to ten years. The long surrender periods for SPDAs typically produce longer durations than the primary noninsurance competition, CDs and money market accounts. Because of this, insurance companies can offer yields based on investments farther out on the yield curve. Consequently, steep yield curve environments are favorable to annuity sales. The flatter the yield curve, the greater the competition from banks and money markets. Due to the heavy competition in the SPDA market, margins tend to be fairly narrow- depending on the company, margins can range from 50 to 150 basis points. In an attempt to increase margins, some annuity writers will intentionally mismatch assets and liabilities in a steep yield curve environment by investing long. The danger of this strategy manifests itself if the yield curve shifts up and flattens. Competition from noninsurance products increases and surrenders rise. If forced to liquidate assets to meet surrender demands, an insurer might generate large capital losses.

Skilled Nursing Facility (SNF). A licensed institution, as defined by Medicare, that is engaged primarily in the provision of skilled nursing care.

Sliding Scale. A method of calculating commission based upon the loss ratio or experience of the business being placed. The lower the loss ratio, the higher the commission payable.

Slip. A document in which a broker sets forth the details of a risk proposed for insurance.

Small Business Administration (SBA) Surety Bond. A contract performance bond for which the Small Business Administration has issued a guaranty to the insurer covering up to 90% of the insurer's losses in exchange for a portion of the premium. See Contract Performance Bond.

Social Security Act. Federal legislation enacted in 1935 that created a variety of publicly funded insurance and health benefits.

Society of Lloyd's. An informal term commonly used in Lloyd's of London to encompass all Names.

Soft Insurance Market. The period of the property-casualty insurance market cycle that is characterized by excessive capital and competition, causing decreased prices and increased availability of coverage. 1997 was the tenth year of a soft insurance market within the United States.

South-Eastern Underwriters.United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944). A case decided by the United States Supreme Court that held that (1) insurance is commerce and subject to federal regulation of interstate commerce and (2) the conduct of insurers is subject to federal antitrust laws.

Sovereign Immunity. A legal doctrine that precludes a person from making a claim against the government (based on the principle that "the king can do no wrong.")

SPDA. See Single-Premium Deferred Annuity.

Special Acceptance. The agreement by a reinsurer to assume certain risks not automatically covered by an existing treaty.

Special Damages. Damages that do not arise directly from a loss, but are incurred as an indirect consequence.

Special Multi-Peril (SMP) Insurance. A package policy for businesses that combines various coverages within a single policy.

Special Risk. An unusual or large risk not covered by a regular insurance policy.

Spiral. See LMX Spiral.

Spread. The difference between what the company earns on assets and what it credits to policyholders.

Split Dollar Life Insurance. A form of whole life insurance in which two persons, usually an employer and employee, share in the payment of premiums.

SSI. See Supplemental Security Income.

Stable Value Fund. Also known as guaranteed funds, interest income funds and fixed yield funds, the stable value fund is an investment option offered to defined contribution plan participants that offers protection of principal, a guarantee that the participant's full account will not decline in value and liquidity without a penalty.

Stacking. The accumulation of limits of liability under one or more insurance policies with one insurer, all relating to a single matter.

Staff Model HMO. A health care model that employs physicians to provide health care to its members. All premiums and other revenues accrue to the HMO, which compensates physicians by salary and incentive programs. Generally, all ambulatory health services are provided under one roof.

Stamp. A document that sets forth the share of a particular risk taken by each underwriting syndicate at Lloyd's. Underwriting capacity of a syndicate may be referred to as "stamp size."

Statutory Accounting Practices (STAT or SAP). The recording of transactions and preparation of financial statements in accordance with the rules and regulations prescribed or permitted by state regulatory authorities. Statutory accounting practices generally reflect the underlying accounting assumption of liquidating rather than remaining a going concern. For a discussion of the differences between statutory and GAAP accounting, see Chapter 11.

Statutory Admitted Assets.See Admitted Assets.

Statutory Surplus. The excess of an insurer's admitted assets over admitted liabilities as shown on an insurer's financial statements prepared in accordance with statutory accounting practices.

Stop-Loss Reinsurance. A form of reinsurance that protects the ceding insurer against an aggregate amount of claims over a period, in excess of either a stated amount or a specified percentage of estimated benefit costs.

"Stress and Strain" Claims. Workers' compensation claims relating to injuries or illnesses arising out of psychological pressures in the workplace. Stress and strain claims recently have emerged as a particularly troubling category of claims in California.

Straight Life Insurance. Ordinary life insurance.

Strict Liability. The imposition of liability without a proof of fault.

Structured Settlement. A method of settling claims in which periodic payments are made to a claimant in lieu of a lump sum payment. Usually, an annuity contract is the device used to fund the periodic payments.

Subrogation. The process by which an insurer, after payment of a claim, is able to substitute itself for the insured and assert the rights of an insured against a third party. For example, a surety may be subrogated to the rights of an obligee of a surety bond or an automobile insurer may be subrogated to the rights of the insured against a negligent third party.

Substandard Automobile Insurer. See Nonstandard Automobile Insurer.

Suicide Clause. A provision in a life insurance policy stating that an insurer will not pay a claim under a policy if the insured commits suicide within two years after the policy is issued. In such circumstances, the premium is returned.

Superfund. See Comprehensive Environmental Response, Compensation, and Liability Act of 1980.

Supersedeas Bond. A form of appeal bond. See Appeal Bond.

Supplemental Security Income (SSI). A federal cash assistance entitlement program for certain aged and disabled individuals; states are required to cover its beneficiaries under Medicaid.

Surety. An insurer or other party that issues a surety bond.

Surety Bond. An instrument that guarantees the performance of certain obligations, as well as payments to third parties.

Surplus Debenture. A debt instrument issued by an insurer for which the obligation to repay principal is conditioned upon the maintenance of the insurer's statutory surplus above a stated level. Generally, such an instrument qualifies as regulatory capital.

Surplus Lines. See Excess and Surplus Lines Insurance.

Surplus Relief Reinsurance. A form of reinsurance that increases the ceding insurer's statutory surplus.

Surplus Strain. The amount of free surplus used when premiums are insufficient to cover expenses and the policyholder liability that must be set up at policy issuance.

Surrender. The withdrawal of the cash value of a life insurance policy.

Surrender Charge. The fee charged to a policyholder when a life insurance policy or annuity is surrendered for its cash value.

SVO. See Securities Valuation Office.

Syndicate. An underwriting pool. At Lloyd's, the group of underwriters- headed by an "active underwriter" and backed by the capital of Names signed onto the syndicate- that enters into insurance contracts under authority delegated by the individuals providing the capital.

Synthetic GIC. A fund constructed to perform similarly to GICs, consisting of bonds that are owned by the plan sponsor/participants, who bear the credit/default risk. A third-party guarantor, usually an insurer, provides a guarantee for the plan sponsor and participants against interest rate (market) risk.


Tail. The period of time that elapses between the writing of an insurance policy and the payment of the claim or between the loss occurrence (or the insurer's knowledge of the loss) and the payment of the claim.

Tax-Qualified Annuity. An annuity that is issued to a tax-qualified retirement plan. TQAs also are referred to as Tax-Sheltered Annuities (TSAs) and 403(b) plans. Generally sold on a payroll deduction basis to teachers, government employees and employees of hospitals and nonprofit organizations. The 403(b) is tax-qualified in that it allows for pretax contributions and often is an alternative to 401(k) plans. Like other annuities, the inside build-up is tax-deferred. TSAs are marketed under a two-tier system. First, a company must obtain an endorsement from the school board or other oversight committee. Then, the selling agents market directly to the individual employees. This two-tier system creates relatively high barriers to entry for potential new participants in the market.

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).Federal tax legislation that modified tax rules and qualifications for tax shelters, changed the computation of taxes on life insurance earnings and limited tax-free withdrawals from annuity plans. The Act also defined the primary and secondary coverage responsibilities of the Medicare program and the provisions to be used by health plans in their contracts with the Health Care Financing Administration (HCFA). Among other things, this legislation spurred a rapid shift toward privatization and managed care for Medicare beneficiaries.

Tenants' Policy. A form of homeowners insurance policy modified to meet the needs of tenants. Also known as "renters' policy."

Term. (1) The period of time for which an insurance policy is effective and in force; and (2) a provision in an insurance policy.

Term Life Insurance. Life insurance protection that pays the sum insured only if the insured dies within the term of the policy. See also Decreasing Term Insurance, Deposit Term Insurance and Convertible Term Insurance.

Terminal Funding Plans. A type of defined benefit plan, not widely used, in which an annuity is purchased for each employee, in an amount based on service and salary, as the employee reaches retirement, with the required funding amounts coming from the general resources of the plan sponsor.

Territorial Rating. A rating formula that takes into account geographical factors in the setting of rates.

Third-Party Administrator (TPA). A service provider engaged in the performance of administration, clerical and managerial functions related to insurance policies or employee benefit plans.

"Three-Legged Stool."An historical ideal "model" of retirement income, under which people ultimately would rely on a combination of personal savings, Social Security and an employer-sponsored pension plan to fund their retirement.

"Time and Distance" Cover. A form of reinsurance policy that provides the cedant with guaranteed payments. The payment schedule is dependent upon investment yields and not upon traditional risk criteria. See Financial Reinsurance.

Title Insurance. Insurance that insures the owner of property or the holder of a mortgage upon such property against defects in the title to the property.

Tontine Scheme. A pooling arrangement, no longer legal, in which a group of people agree to the payment of funds to those living after a specified period of time at the expense of those who have died.

Tort. A civil wrong or injury, other than that arising from a breach of contract.

Tort Liability System. A liability system in which fault must be established as a basis for liability, in contrast with a no-fault system where fault need not be established.

Total Disability. A disability that prevents an insured from performing every duty related to the insured's employment or from engaging in any other type of employment appropriate to the insured. See Disability.

TPA. See Third-Party Administrator.

Treasury List. A listing maintained by the United States Department of the Treasury of those sureties eligible to provide surety bonds on federal projects.

Treaty. A contract between an insurer and a reinsurer pursuant to which the reinsurer must automatically accept the business being ceded.

Treaty Reinsurance. The reinsurance of a class of business by a cedant that the reinsurer must automatically accept. Also known as obligatory reinsurance.

Trending. The process of using historical data and other statistics to forecast future events, especially with regard to price inflation of loss costs.

Triangle. An exhibit used by actuaries to show historical loss development for an insurer. The exhibit is triangular in form because losses for earlier underwriting years have longer development than those for later underwriting years.

Triennial Examination. A periodic examination of an insurer's books and records by regulators to verify its financial condition and compliance with applicable laws and regulations. These are labeled triennial examinations because, under NAIC guidelines, they are to occur at least once every three years.

12(b)-1 Fee. A fee charged by mutual funds to cover promotional expenses, including advertising and commissions, or to pay custodian and service fees to insurers, brokerage houses, etc.

Twisting. The (illegal) practice of inducing a policyholder to terminate existing life insurance coverage through misrepresentation or incomplete disclosure.


Uberrimae Fidei. A Latin phrase meaning "of the fullest confidence or absolute openness and honesty." See Utmost Good Faith.

ULAE. See Loss Adjustment Expense.

Ultimate. The value of claims or premiums when they have fully matured.

Umbrella Liability Policy. An insurance policy providing limits of liability in excess of primary and excess liability insurance and providing coverage for risks not covered by a primary policy. The termumbrellais derived from the fact that it is a separate policy of insurance and provides coverage above the insured's other liability policies.

Unallocated Claim Expense. See Loss Adjustment Expense.

Unauthorized Reinsurance. See Nonadmitted Reinsurance.

Unauthorized Reinsurer. See Nonadmitted Reinsurer.

Uncollected Premiums. See Agents' Balances.

Under-insurance. Failure to maintain adequate insurance coverage.

Underinsured Motorists Coverage. A provision in an automobile insurance policy that protects the insured from losses caused by a driver with inadequate insurance coverage.

Underwriter. A synonym for insurer or an employee of an insurance company whose responsibilities include reviewing applications submitted for insurance coverage, deciding whether to accept or reject all or part of the coverage requested and fixing the terms of coverage.

Underwriting. The process undertaken by an underwriter in reviewing applications submitted for insurance coverage, deciding whether to accept or reject all or part of the coverage requested and fixing the terms of coverage.

Underwriting Capacity. See Capacity.

Underwriting Cycle. The phenomenon within the property-casualty insurance industry in which prices, profits and availability fluctuate between shortage and abundance. See also Cycle Turn, Hard Insurance Market and Soft Insurance Market.

Underwriting Expense. Administrative, general and other expenses attributable to an insurer's underwriting operations.

Underwriting Manager.An individual, at the local or home office level, responsible for setting company underwriting criteria to assist underwriters in the risk selection process.

Underwriting Profit. Income earned by an insurer from its underwriting activities. This does not include income derived from the insurer's investment activities.

Underwriting Reserves. See Reserves.

Underwriting Year. The year in which a policy was issued.

Unearned Premiums. The portion of an insurer's premiums attributable to the unexpired period of policies.

Unearned Premium Reserve. A reserve account that contains the portion of an insurer's premium attributable to the unexpired period of a policy that has been collected but has not yet been recognized as earned premium and accounted for as revenues.

Uninsured Motorists Coverage. A provision in an automobile insurance policy that protects the insured from uninsured and hit-and-run drivers.

Unisex Rating. A rating formula required in certain jurisdictions that forbids the use of sex as a separate rating factor. For example, although women on average live longer than men, unisex rating charges both sexes the same for annuities and life insurance policies. Without unisex rating, for two individuals of equal age, a woman would pay more for an annuity and a man would pay more for a life insurance policy.

Universal Life Insurance. A flexible-premium life insurance policy that allows the policyholder to change the death benefit and vary the amount or timing of premium payments.

Unreported Claims. See IBNR.

Urban Property and Reinsurance Act of 1968. See FAIR Plans.

USPCC (United States Per Capita Cost). Medicare's payment amount, based on actual historical expenditures, including traditional Medicare program claims, risk HMO capitation payments and all other expenses, which is projected forward based on anticipated inflation rates, utilization trends and program changes.

Usual, Customary, and Reasonable Charges.See Reasonable and Customary Charges.

Utilization.The patterns of use of a service or type of service within a specified time. Utilization usually is expressed in rate per unit of population-at-risk for a given period (e.g., the number of hospital admissions per year per 1,000 persons enrolled in an HMO).

Utilization Management (UM).All activities directly or primarily related to the provision of efficient, cost-effective and appropriate use of health care resources. These managed care techniques and tools are used to manage costs through case-by-case assessments of the clinical necessity for proposed medical services before, during and after treatment. UM techniques include precertification, case management, concurrent review, discharge planning, retrospective review, utilization review and others.

Utilization Rate.The rate at which a covered group uses a particular health plan or program.

Utilization Review (UR). A cost-containment measure used by health care insurers, third-party administrators and others to evaluate the need for treatment and assess alternatives to expensive or complex procedures. Among the techniques used are preadmission certification, solicitation of second opinions and use of rehabilitation programs. Evaluation of the use of hospital services, including admission, length of stay, ancillary services and outpatient costs, using objective clinical criteria. The objective is to ensure that services are medically necessary and provided at the appropriate level of care.

Utmost Good Faith (Uberrimae Fidei). A contract isuberrimae fideiwhen the obligee is required to disclose to the obligor every fact or circumstance that may influence a decision concerning whether to enter into a contract. This duty exists whether such information is requested. Contracts of insurance are subject to the duty of utmost good faith, while ordinary commercial contracts are subject to the doctrine ofcaveat emptor.


Valued Policy Law. A statute governing property insurance that requires payment of at least the face amount of the policy in the event of a total loss, or a partial loss exceeding a percentage of the market value.

Variable Annuity. An annuity under which the annuitant's payments will vary, depending upon the results of an investment portfolio or in accordance with a formula prescribed in the annuity contract.

Variable Life Insurance. Life insurance under which the benefits will vary, depending upon the investment experience of a separate account supporting such a policy.

Verbal Threshold. A type of "no-fault" insurance provision in which the claimant has the right to sue for damages if certain named conditions (or thresholds) are met. For example, if the provision names broken bones or disfigurement as a threshold, an insured need only show that one of those conditions has occurred to be permitted to sue for damages.

Vesting. The principle that a beneficiary gains entitlement to benefits attributable to an employer's contributions under a pension plan within a specified time period.

Viatical Settlement Companies. Companies that arrange cash payments for the life insurance of terminally ill policyholders. These companies provide early payouts for the policyholder, assume the premium payments on the purchased policies and collect the face value upon the death of the insured.

Vicarious Liability. A legal doctrine that one person may be held liable for the acts of another. For example, an employer may be held vicariously liable for the acts of an employee.

Voluntary Market. The market in which insurers are free to choose which risks to accept; also referred to as the standard market.


Waiver. The intentional or voluntary relinquishment, abandonment or surrender of a claim, right or privilege. An exception to the usual requirements of Medicaid granted to a state by HCFA. See Section 1115 Medicaid Waiver and Section 1915(b) Medicaid Waiver.

Waiver of Premium Provision. A provision in a life insurance policy stating that, upon the total disability of the insured, the payment of premiums shall be waived.

Whole Life Insurance. Permanent life insurance offering guaranteed death benefits and guaranteed cash values.

Willful Misconduct. An intentional action with knowledge of its potential to cause serious injury or with reckless disregard for the consequences of such act.

Wind-up Annuity. An annuity sold by an insurer to satisfy liabilities under terminated pension plans.

Wishful Thinking. The Dingell Committee's latest report and a 1994 sequel toFailed Promises(1990). The report describes the inadequacies of state insurance regulation in either anticipating illegal or inappropriate insurance company behavior or stopping it before it occurs. The report also claims that state regulators and the NAIC lack the authority to regulate the insurance marketplace effectively. See Dingell.

Workers' Compensation Insurance. A statutory no-fault form of insurance purchased by employers to provide benefits to employees for injuries sustained during employment.

Working Layer. A layer of an excess-of-loss reinsurance treaty just above the cedant's retention layer, in which frequent losses are expected.

"Write Your Own" Flood Insurance. See National Flood Insurance Program.

Writing. See Underwriting.

Written Premiums. See Premium.

No terms listed.
Yellow Book. See Annual Statement.
Zone Examination. A multi-state insurance department examination in which regulators of several states participate.