Important Insurance Terminology

Commonly Used Terms in the Insurance Industry

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Actuary A specialist in the mathematics of insurance who calculates rates, reserves, etc. (Americanism. In most other countries the individual is known as “mathematician”.)

Adjuster An individual representing the insurance company and acting for the company in working on agreements as to the amount of a loss and the liability of the company in same.

Admitted Assets Assets permitted by state law to be included in an insurance company’s annual statement. These assets are an important factor when regulators measure insurance company solvency. They include mortgages, stocks, bonds, and real estate.

Agent individual who sells and services insurance policies in either of two classifications:

1. Independent agent represents at lease two insurance companies and (at least in theory) services clients by searching the market for the most advantageous price for the most coverage. The agent’s commission is a percentage of each premium paid and includes a fee for servicing the insured’s policy.

2. Direct writer represents only one company and sells only its policies. This agent is paid on a commission basis in much the same manner as the independent agent.

Aggregate Limit Usually refers to Liability Insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no later how many separate accidents may occur.

Approved for Reinsurance Indicates the company is approved (or authorized) to write reinsurance on risks in this state. A license to write reinsurance may not be required in these states.

Approved or not Disapproved for Surplus Lines Indicates the company is approved (or not disapproved) to write excess or surplus lines in this state.

Assets Assets refer to “all the available properties of every kind or possession of an insurance company that may be used to pay its debts.” There are three classifications of assets: invested assets, all other assets, and total admitted assets. Invested Assets refer to things such as bonds, stocks, cash, and income-producing real estate. All other assets refer to non-income producing possessions such as the building the company is in, office furniture, and debts owed (usually in the form of deferred and unpaid premiums.) Total Admitted Assets refer to everything a company owns. All other + invested assets = Total Admitted Assets. Some states by law do not permit insurance companies to claim certain goods and possessions, such as deferred and unpaid premiums, in the all other assets category, declaring them “nonadmissable.”

Authorized under Federal Products Liability Risk Retention Act (Risk Retention Groups) Indicates companies operating under the Federal Products Liability Risk Retention Act of 1981 and the Liability Risk Retention Act of 1986.

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Best’s Capital Adequacy Relativity (BCAR) This percentage measures a company’s relative capital strength compared to its industry peer composite. A company’s BCAR, which is an important component in determining the appropriateness of its rating, is calculated by dividing a company’s capital adequacy ratio by the capital adequacy ratio of the median of its industry peer composite using Best’s proprietary capital mode. Capital adequacy ratios are calculated as the net required capital necessary to support components of underwriting, asset, and credit risks in relation to economic surplus.

Broker Insurance salesperson who searches the marketplace in the interest of clients, not insurance companies.

Broker-Agent Independent insurance salesperson who represents particular insurers but may also function as a broker by searching the entire insurance market to place an applicant’s coverage to maximize protection and minimize cost. This person is licensed as an agent and broker.

Business Net Retention This item represents the percentage of a company’s gross writings that are retained for its own account. Gross writings are the sum of direct writings and assumed writings. This measure excludes affiliated writings.

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Capital Equity of shareholders of a stock insurance company. The company’s capital and surplus are measured by the difference between its assets minus its liabilities. This value protects the interests of the company’s policy owners in the event it develops financial problems; the policy owners’ benefits are thus protected by the insurance company’s capital. Shareholders’ interest is second to that of policy owners.

Capitalization, or Leverage measures the exposure of a company’s surplus to various operating and financial practices. A highly leveraged, or poorly capitalized, company can show a high return on surplus, but may be exposed to a high risk of instability.

Captive Agent Representative of a single insurer or fleet of insurers who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights on a sale. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as an extensive list of employee benefits such as pensions, life insurance, health insurance, and credit unions.

Casualty Liability or loss resulting from an accident.

Casualty Insurance That type of insurance that is primarily concerned with losses caused by injuries to persons and legal liability imposed upon the insured for such injury or for damage to property of others. It also includes such diverse forms as Plate Glass, insurance against crime, such as robbery, burglary and forgery, Boiler and Machinery insurance and Aviation insurance. Many casualty companies also write surety business.

Ceded Reinsurance Leverage The ratio of the reinsurance premiums ceded, plus net ceded reinsurance balances from non-US affiliates for paid losses, unpaid losses, incurred but not reported (IBNR), unearned premiums and commissions, less funds held from reinsurers, plus ceded reinsurance balances payable, to policyholders’ surplus. This ratio measures the company’s dependence upon the security provided by its reinsurers and its potential exposure to adjustment on such reinsurance.

Change in NPW (IRIS) The annual percentage change in Net Premiums Written. A company should demonstrate its ability to support controlled business growth with quality surplus growth from strong internal capital generation.

Change in PHS (IRIS) The percentage change in Policyholders’ Surplus from the prior year-end. This ratio measures a company’s ability to increase policyholders’ security.

Change in Policyholders’ Surplus The annual change in a company’s policyholders’ surplus derived from operating earnings, investment gains, net contributed capital and other miscellaneous sources.

Chartered Property and Casualty Underwriter (CPCU) Professional designation earned after the successful completion of 10 national examinations given by the American Institute for Property and Liability Underwriters. Covers such areas of expertise as insurance, risk management, economics, finance, management, accounting, and law. Three years of work experience are also required in the insurance business or a related area.

Claim The demand for benefits as provided by the policy.

Class 3-6 Bonds (% of PHS) This test measures exposure to non-investment grade bonds as a percentage of surplus. Generally, non-investment grade bonds carry higher default and illiquidity risks. The designation of quality classifications that coincide with different bond ratings assigned by major credit rating agencies.

Combined Ratio after Policyholder Dividends The sum of the Loss Ratio, Expense Ratio and the Policyholder Dividend Ratio. This ratio measures the company’s overall underwriting profitability. This ratio does not reflect investment income or income taxes. A combined ratio of less than 100 indicates the company has reported an underwriting profit.

Conditional Reserves This item represents the aggregate of various reserves which, for technical reasons, are treated by companies as liabilities. Such reserves, which are similar to free resources or surplus, include unauthorized reinsurance, excess of statutory loss reserves over statement reserves, dividends to policyholders undeclared and other similar reserves established voluntarily or in compliance with statutory regulations.

Coverage Protection under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits.

Current Liquidity (IRIS) The sum of cash, unaffiliated invested assets and encumbrances on other properties to net liabilities plus ceded reinsurance balances payable, expressed as a percent. This ratio measures the proportion of liabilities covered by unencumbered cash and unaffiliated investments. If this ratio is less than 100, the company’s solvency is dependent on the collectibility or marketability of premium balances and investments in affiliates. This ratio assumes the collectibility of all amounts recoverable from reinsurers on paid and unpaid losses and unearned premiums.

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Developed to NPE The ratio of Developed through the year to Net Premiums Earned expressed as a percent. If premium growth has been relatively steady, and if the mix of business by line has not changed materially, this ratio measures whether or not a company’s loss reserves are keeping pace with premium growth.

Development to PHS (IRIS) The ratio measures reserve deficiency or redundancy in relation to Policyholders’ Surplus. This ratio reflects the degree to which year-end surplus was either overstated (+) or understated (-) in each of the past several years, if original reserves had been restated to reflect subsequent development through year-end.

Direct Premiums Written This item represents the aggregate amount of recorded originated premiums, other than reinsurance, written during the year whether collected or not at the close of the year (plus retrospective audit premium collections), after deducting all return premiums.

Dividend In a mutual or participating company, it is the return to the policyholder out of the earnings of the company. In a stock or nonparticipating insurance company it is the division of the profits among the stockholders of the company. A refund of part of the premium on a participating life insurance policy. It is a share of the surplus earned apportioned for distribution and reflects the difference between the premium charged and the actual experience.

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Earned Premium That portion of a premium for which the policy protection has already been given during the now-expired portion of the policy term.

Employers Liability Insurance Coverage against common law liability of an employer for accidents to employees, as distinguished from liability imposed by a workers’ compensation law.

Encumbrance Any outside interest in or right to property founded on legal grounds, such as a mortgage, lien for work and materials, or a right of dower. it diminishes the interest of the person owning the property.

Expense Ratio The ratio of underwriting expenses (including commissions) to net premiums written, expressed as a percent. This ratio measures the company’s operational efficiency in underwriting its book of business.

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Gross Leverage The sum of Net Leverage and Ceded Reinsurance Leverage. This ratio measures a company’s gross exposure to pricing errors in its current book of business, to errors of estimating its liabilities, an exposure to its reinsurers.

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Hazard Circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion.

Health Maintenance Organization (HMO) Prepaid group health insurance plan that entitles members to services of participating physicians, hospitals, and clinics. Emphasis is on preventative medicine. Members of the HMO pay a flat periodic fee (usually deducted from each paycheck.

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Insurance Institute of America (IIA) An institution offering a variety of insurance diplomas after the successful completion of certain examinations.

Independent Insurance Agents of America (IIAA) Membership is made up of agents of fire and casualty insurers who operate as a part of the American Agency System. Numerous state associations are affiliated with the IIAA

Income Taxes Incurred income taxes (including income taxes on capital gains) reported in each annual statement for that year.

Insurance Adjuster an individual who investigates losses and determines the amount of the loss and the insurance company’s liability. Independent insurance adjusters are hired by insurance companies on an “as needed” basis and may work for several insurance companies at the same time. Independent adjusters charge insurance companies both by the hour and by miles traveled. Public adjusters work for the insured in the settlement of claims and receive a percentage of the claim as their fee. A.M. Best’s Directory of Recommended Insurance Attorneys and Adjusters lists independent adjusters only.

Insurance Attorneys an attorney who practices the law as it relates to insurance matters. Attorneys may be solo practitioners or work as part of a law firm. Insurance companies who retain attorneys to defend them against law suits may hire staff attorneys to work for them in-house or they may retain attorneys on an as-needed basis, A.M. Best’s Directory of Recommended Attorneys and Adjusters lists insurance defense attorneys who concentrate their practice in insurance defense such as coverage issues, bad faith, malpractice, products liability, and workers’ compensation.

Investment Income Investment income refers to dividends and interest derived from any stocks or bonds owned by an insurance company. It also includes any profit made from the sale of any stocks or bonds but does not include the value of any stocks or bonds that the company currently owns.

Investments in Affiliates Bonds, stocks, collateral loans, short-term investments in affiliated and real estate properties occupied by the company.

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Leverage, or Capitalization measures the exposure of a company’s surplus to various operating and financial practices. A highly leveraged, or poorly capitalized, company can show a high return on surplus, but may be exposed to a high risk of instability.

Liability Broadly, any legally enforceable obligation. The term is most commonly used in a pecuniary sense.

Liability Insurance That insurance that pays and renders service on behalf of an insured for loss arising out of his responsibility, due to negligence, to others imposed by law or assumed by contract.

Licensed Indicates the company is incorporated (or chartered) in another state but is a licensed (admitted) insurer for this state to write specific lines of business for which it qualifies.

Licensed for Reinsurance Only Indicates the company is a licensed (admitted) insurer to write reinsurance on risks in this state.

Liquidity Liquidity is defined as “the ability of an individual or business to quickly convert assets into cash without incurring a considerable loss.” There are two kinds of Liquidity: quick and current. Quick liquidity refers to funds, cash, short-term investments, and government bonds possessions which can immediately be converted into cash in the case of an emergency. Current liquidity refers to current liquidity plus possessions such as real estate which cannot be immediately liquidated, but can be sold and converted into cash eventually. Quick liquidity is a subset of Current Liquidity. Again, the importance of Liquidity has to do with how fast and how much cash an insurance company can get their hands on in case there is a disaster and they need to pay off claims. This reflects the financial stability of a company and thus their rating.

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

Loss Adjustment Expenses Expenses incurred to investigate and settle losses.

Loss and LAE Reserves to PHS The ratio of Reported Loss and Loss Adjustment Reserves to Policyholders’ Surplus, expressed as a percent. The higher the multiple of loss reserves to surplus, the more critical is a company’s solvency dependent upon having and maintaining reserve adequacy.

Losses and Loss Adjustment Expenses This item represents the total reserves for unpaid losses and loss adjustment expenses, including reserves for incurred but not reported losses, in any, and supplemental reserves established by the company. It is the total for all lines of business and all accident years.

Loss Control All methods of reducing the frequency and/or severity of losses including exposure avoidance, loss prevention, loss reduction, segregation of exposure units and non-insurance transfer of risk. A combination of risk control techniques with risk financing techniques forms the nucleus of a risk management program. The use of appropriate insurance, avoidance of risk, loss control, risk retention, self-insuring, and other techniques that minimize the risks of a business, individual, or organization.

Losses Incurred (Pure Losses) Net paid losses during the current year plus the change in loss reserves since the prior year end.

Loss Ratio The ratio of incurred losses and loss adjustment expenses to net premiums earned, expressed as a percent. This ratio measures the company’s underlying profitability, or loss experience, on its total book of business.

Lloyds Organizations These organizations are voluntary unincorporated associations of individuals. Each individual assumes a specified portion of the liability under each policy issued. The underwriters operate through a common attorney-in-fact appointed for this purpose by the underwriters. The laws of most states contain some provisions governing the formation and operation of such organizations, but these laws do not generally provide as strict a supervision and control as the laws dealing with incorporated stock and mutual insurance companies.

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Mortgage Insurance Policy In life and health insurance, a policy the benefits from which are intended to pay off the balance due on a mortgage or meet the payments on a mortgage as they fall due upon or after the death or disability of the insured.

Mutual Insurance Companies Companies with no capital stock, owned by policyholders. The earnings of the company over and above the payments of the losses and operating expenses and reserves are the property of the policyholders. There are two types of mutual insurance companies, the nonassessable charges a fixed premium and the policyholders cannot be assessed. Legal reserves and surplus are maintained to provide payment of all claims. Assessable mutuals are those companies that charge an initial fixed premium, and if that is not sufficient may assess the policyholders to meet losses in excess of the premiums that have been charged as well as provide statistical services.

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National Association of Insurance Commissioners (NAIC) Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and develop model laws for passage by state legislatures.

Net Income The total after-tax earnings generated from operations and realized capital gains as reported in the company’s NAIC annual statement page 4, line 16.

Net Investment Income This item represents Investment Income earned during the year less investment expenses and depreciation on real estate. Investment expenses are the expenses related to generating investment income and capital gains but exclude income taxes.

Net Leverage The sum of a company’s Net Premium Written to PHS and Net Liabilities to PHS. This ratio measures the combination of a company’s net exposure to pricing errors in its current book of business and errors of estimation in its net liabilities after reinsurance, in relation to policyholders’ surplus.

Net Liabilities to PHS Net liabilities expressed as a ratio to Policyholders’ Surplus. Net liabilities equal total liabilities, less conditional reserves, plus encumbrances on real estate, less the smaller of receivables from or payable to affiliates. This ratio measures company’s exposures to errors of estimation in its loss reserves and all other liabilities. Loss reserve leverage is generally the key component of net liability leverage. The higher the loss reserve leverage the more critical a company’s solvency depends upon having the maintaining reserve adequacy.

Net Premium is the portion of the premium for which the insurance company is responsible. It does not include the part of the premium that covers expenses, contingencies (commissions paid to agents) or profits. Why not profit? Because net premium is only potential profit at this point. The insurance company does not yet know whether it will be paid with this money or if the insurance company will get to keep it once it becomes earned premium.

Net Premiums Earned This item represents the adjustment of the net premiums written for the increase or decrease during the year of the liability of the company for unearned premiums. When an insurance company’s business is increasing in amount from year to year, the earned premiums will usually be less than the written premiums. With the increased volume, the premiums are considered fully paid at the inception of the policy so that at the end of a calendar period, the company must set up premiums representing the unexpired terms of the policies. On a decreasing volume, the reverse is true.

Net Premiums Written This item represents gross premium written, direct and reinsurance assumed, less reinsurance ceded.

Net Underwriting Income Net premiums earned less incurred losses, loss adjustment expenses, underwriting expenses incurred, and dividends to policyholders.

Non-standard Auto (High Risk auto aka sub-standard auto) Insurance for motorists who have poor driving records or have been canceled or refused insurance. The premium is much higher than standard auto due to the additional risks.

NPW to PHS (IRIS) (Net Premiums Written to Policyholders’ Surplus) This ratio measures a company’s net retained premiums written after reinsurance assumed and ceded, in relation to its surplus. This ratio measures the company’s exposure to pricing errors in its current book of business.

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Operating Cash Flow This test measures the funds generated from insurance operations, which includes the change in cash and invested assets attributed to underwriting activities, net investment income and federal income taxes. This measure excludes stockholder dividends, capital contributions, unrealized capital gains/losses and various non-insurance related transactions with affiliates. This test measures a company’s ability to meet current obligations through the internal generation of funds from insurance operations. Negative balances may indicate unprofitable underwriting results or low yielding assets.

Operating Ratio (IRIS) Combined Ratio less the Net Investment Income Ratio (net investment income to net premiums earned, expressed as a percent). The operating ratio measures a company’s overall operational profitability from underwriting and investment activities. This ratio does not reflect other operating income/expenses, capital gains or income taxes. An operating ratio of more than 100 indicates a company is able to generate profits from its underwriting and investment activities.

Other Income/Expenses This item represents miscellaneous sources of operating income or expense that principally relate to premium finance income or charges for uncollectible premium and reinsurance business.

Overall Liquidity Total Admitted Assets divided by Total Liabilities less Conditional Reserves, expressed as a percent. This ratio indicates a company’s ability to cover net liabilities with total assets. This ratio does not address the quality and marketability of premium balances, affiliated investments and other uninvested assets.

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Peril Cause of a possible loss.

Policy The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clause, riders, endorsements, and papers attached thereto and made a part thereof.

Policyholder Dividend Ratio The ratio of dividends to policyholders related to net premiums earned, expressed as a percent.

Policyholders’ Surplus This item is the sum of paid in capital, paid in and contributed surplus, and net earned surplus, including voluntary contingency reserves. It also is the difference between total admitted assets and total liabilities.

Preferred Auto Driver has never had an accident in her life, waits three seconds at every stop sign, and actually uses the left lane on a highway for passing only. She is no risk for any insurance company that writes auto insurance. No insurance company would be afraid to take her on as a risk.

Premium The payment or one of the regular periodical payments a policyholder is required to make for an insurance policy. The amount of money which the policyholder agrees to pay to the insurance company for the policy of insurance.

Premium Balances Premiums and agents’ balances in course of collection; premiums, agents’ balances and installments booked but deferred and not yet due; bills receivable, taken for premiums and accrued retrospective premiums.

Premium earned The amount of the premium that as been paid for in advance that has been “earned” by virtue of the fact that time has passed without claim. A three-year policy that has been paid in advance and is one year old would have only partly earned the premium.

Premium to Surplus Ratio An insurance company’s surplus, the equivalent of capital and retained earnings or net worth for a manufacturing company, is the amount by which assets exceed liabilities. It provides a cushion for absorbing above-average losses. The premium to surplus ratio is designed to measure the adequacy of this cushion or the company’s financial strength. The ratio is computed by dividing net premiums written by the surplus. A company that has $2 in net premiums written for every $1 of surplus has a 2-to-1 premium to surplus ratio.

The lower the ratio, the greater the company’s financial strength. State regulators have established as a guideline a premium to surplus ratio no higher than 3 to 1. The average for the property-casualty insurance industry in 1985 was 1.9 to 1.

Premium, unearned That part of the premium applicable to the unexpired part of the policy period.

Pre-Tax Operating Income Pre-tax operating earnings, before any capital gains, generated from underwriting, investment and other miscellaneous operating sources.

Pre-tax ROR (Return on Revenue) pre-tax operating income divided by net premiums earned, expressed as a percent. This ratio measures a company’s operating profitability.

Private Passenger Auto Insurance Policyholder Risk Profile This refers to the risk profile of auto insurance policyholders (you and I) and can be divided into three categories: standard, non-standard, and preferred. In the eyes of an insurance company, it is the type of business (or the quality of driver you could say) that the company has chosen to taken on.

Profit A measure of the competence and ability of management to provide viable insurance products at competitive prices and maintain a financial strong company for both policyholders and stockholders

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Quick Liquidity Quick Assets divided by Net Liabilities plus Ceded Reinsurance Balances Payable, expressed as a percent. Quick assets are defined as the sum of cash, unaffiliated short-term investments, unaffiliated bonds maturing within one year, government bonds maturing within five years, and 80% of unaffiliated common stocks. These assets can be quickly converted into cash.

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Reciprocal Exchanges These organizations are composed of a group of persons, firms or corporations commonly termed “Subscribers” who exchange contracts of insurance on the Reciprocal or Inter-Insurance plan through the medium of an attorney-in-fact. Under this plan, each Subscriber executes an agreement identical with that executed by every other Subscriber, empowering the attorney-in-fact to assume on his behalf an underwriting liability on policies issued by the Exchange covering the risks of the other Subscribers. The attorney-in-fact assumes no liability as an underwriter. The Subscribers’ Liability is several and not joint an is limited by the terms of the Subscribers’ Agreement.

Reinsurance An agreement between two or more insurance companies by which the risk of loss is proportioned. Thus the risk of loss is spread and a disproportionately large loss under a single policy does not fall on one company. Acceptance by an insurer, called a reinsurer, of all or part of the risk of loss of another insurer. A company issuing an automobile liability policy, with a limit of $100,000. A fire insurance company which issues a large policy generally reinsures a portion of the risk with one or several other companies.

Reinsurance Ceded Premiums ceded to other affiliated and nonaffiliated insurance companies.

Reinsurance Recoverables to PHS The total ceded reinsurance recoverables due from non-US affiliated for paid losses, unpaid losses, losses incurred but not reported (IBNR), unearned premiums and commissions less funds held from reinsurers expressed as a percent of policyholders’ surplus. This ratio measures a company’s dependence upon its reinsurers and the potential exposure to adjustments on such reinsurance.

Return on PHS (ROE) The sum of after-tax net income and unrealized capital gains, to the mean of prior and current year-end policyholders’ surplus, expressed as a percent. This ratio measures a company’s overall after-tax profitability from underwriting and investment activity.

Risk Management Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through such practices as avoiding the risk, retaining the risk, reducing the risk, or transferring the risk, usually by insurance.

Risk Retention Groups These entities, formed under the Liability Risk Retention Act of 1986, enable businesses or professionals with similar risks to band together to provide needed liability overages for each other. Under statue, RRGs are precluded from writing certain coverages; most notably property lines and workers’ compensation. RRGs predominately write medical malpractice, general liability, professional liability, products liability excess liability coverages. RRGs can be formed as a mutual or stock company, or a reciprocal.

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Standard Auto Driver has had one or two accidents in his life and is an average driver. Any insurance company would be willing to give him a policy. He pays average premiums.

State of Domicile The state in which the company is incorporated or chartered. The company is also licensed (admitted) under the state’s insurance statutes for those lines of business for which it qualifies.

Stock insurance company A company owned and controlled by stockholders and conducted for profit. It sets a premium charge for insurance, assuming all liabilities on a corporate basis. The owners of the business are paid the profits.

Subrogation The right of the insurance company to recover from a third party the amount paid under the policy. For example, if damage is done to your automobile, protected by a collision insurance policy, the insurance company may collect, from the party whose automobile ran into your car, the amount of damages which was paid to you by the process of subrogation.

Surplus A safety cushion to protect against the unexpected and is a key denominator of many financial ratios measuring the financial strength of an insurance company.

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Total Admitted Assets This item is the sum of all admitted assets. These assets are valued in accordance with state laws and regulations, as reported by the company in its financial statements filed with state insurance regulatory authorities. This item is reported net as to encumbrances on real estate (the amount of any encumbrances on real estate is deducted from the value of the real estate) and net as to amounts recoverable from reinsurers (which are deducted from the corresponding liabilities for unpaid losses and unearned premiums).

Total Loss A loss of sufficient size so that it can be said there is nothing left of value. The complete destruction of the property. The term is also used to mean a loss requiring the maximum amount a policy will pay.

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Unaffiliated Investments These investments represent total unaffiliated investments as reported in the exhibit of Admitted Assets. It is cash, bonds, stocks, mortgages, real estate and accrued interest, excluding investment in affiliates and real estate properties occupied by the company.

Underwrite To determine whether an individual is insurable under the policy for which he has applied and at what premium rate.

Underwriter The individual whose duty it is to determine the acceptability of insurance risks. A person whose duty it is to select risks for insurance and to determine in what amounts and on what terms the insurance company will accept the risks. Also, an insurer.

Underwriting The process of selecting risks for insurance and determining in what amount and on what terms that insurance company will accept the risk.

Underwriting Expenses Incurred Expenses, including net commissions, salaries and advertising costs, which are attributable to the production of net premiums written.

Underwriting Expense Ratio This represents the percentage of a company’s net premiums written that went toward underwriting expenses, such as commissions to agents and brokers, state and municipal taxes, salaries, employee benefits and other operating costs. The ratio is computed by dividing underwriting expenses by net premiums written. The ratio is computed by dividing underwriting expenses by net premiums written. A company with an underwriting expense ratio of 31.3 percent is spending more than 31 cents of every dollar of net premiums written by pay underwriting costs. It should be noted that different lines of business have intrinsically differing expense ratios. For example, boiler and machinery insurance, which requires a corps of skilled inspectors, is a high expense ratio line. On the other hand, expense ratios are usually low on group health insurance.

Underwriting Guide Underwriting guide, also call underwriting manual, underwriting guidelines, or manual of underwriting policy. Regardless of its name, the guide details the underwriting practices of the insurance company and provides specific guidance as to how underwriters should analyze all of the various types of applicants they might encounter.

Unearned Premiums The calculated aggregate net amount, after deducting reinsurance credits, which an insurance company would be obliged to tender to its policyholders as return premiums for the unexpired terms, should it wish to cancel every policy in force.

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Yield on Invested Assets (IRIS) Annual net investment income after expenses, divided by the mean of cash and net invested assets. This ratio measures the average return on a company’s invested assets. This ratio is before capital gains/losses and income taxes.