BEACH AND WINDSTORM PLANS

State-sponsored insurance pools that sell property coverage for the peril of windstorm to people unable to buy it in the voluntary market because of their high exposure to risk. Seven states (AL, FL, LA, MS, NC, SC, TX) offer these plans to cover residential and commercial properties against hurricanes and other windstorms. Georgia and New York provide this kind of coverage for windstorm and hail in certain coastal communities through other property pools. Insurance companies that sell property insurance in the state are required to participate in these plans. Insurers share in profits and losses.

 

BENEFICIARY*

The person or legal entity the owner of an insurance policy names to receive the policy benefit if the event insured against occurs.

 

BINDER

Temporary authorization of coverage issued prior to the actual insurance policy.

 

BLANKET INSURANCE

Coverage for more than one type of property at one location or one type of property at more than one location. Example: chain store

 

BODILY INJURY LIABILITY COVERAGE

Portion of an auto insurance policy that covers injuries the policyholder causes to someone else.

   

BURGLARY AND THEFT INSURANCE

Insurance for the loss of property due to burglary, robbery or larceny. It is provided in a standard homeowners policy and in a business multiple peril policy.

  

CAPACITY

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

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

CAR YEAR

Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for automobile insurance.

  

CATASTROPHE

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

 

CATASTROPHE BONDS

Risk-based securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catastrophe such as those caused by a major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk.

 

CATASTROPHE DEDUCTIBLE

A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in when a major natural disaster occurs. These large deductibles limit an insurer’s potential losses in such cases, allowing it to insure more property. A property insurer may not be able to buy reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a certain level.

 

CATASTROPHE FACTOR

Probability of catastrophic loss, based on the total number of catastrophes in a state over a 40-year period.

 

CATASTROPHE MODEL

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

 

CATASTROPHE REINSURANCE

Reinsurance for catastrophic losses. The insurance industry is able to absorb the multibillion dollar losses caused by natural and man-made disasters such as hurricanes, earthquakes and terrorist attacks because losses are spread among thousands of companies including catastrophe reinsurers who operate on a global basis. Insurers’ ability and willingness to sell insurance fluctuates with the availability and cost of catastrophe reinsurance. After major disasters, such as Hurricane Andrew and the World Trade Center terrorist attack, the availability of catastrophe reinsurance becomes extremely limited. Claims deplete reinsurers’ capital and, as a result, companies are more selective in the type and amount of risks they assume. In addition, with available supply limited, prices for reinsurance rise. This contributes to an overall increase in prices for property insurance.

   

CLAIMS MADE POLICY

A form of insurance that pays claims presented to the insurer during the term of the policy or within a specific term after its expiration. It limits liability insurers’ exposure to unknown future liabilities. (See Occurrence policy)

  

COINSURANCE

In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20 percent health insurance coinsurance clause, the policyholder pays for the deductible plus 20 percent of his covered losses. After paying 80 percent of losses up to a specified ceiling, the insurer starts paying 100 percent of losses.

 

COLLATERAL

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

 

COLLATERAL ASSIGNMENT*

A temporary transfer of some of the ownership rights in a particular property, such as a life insurance policy or an annuity contract, as collateral for a loan. The transfer is made on the condition that upon payment of the debt for which the contract is collateral, all transferred rights shall revert back to the original owner. Contrast with absolute assignment.

 

COLLISION COVERAGE

Portion of an auto insurance policy that covers the damage to the policyholder’s car from a collision.

 

COMBINED RATIO

Percentage of each premium dollar a property/casualty insurer spends on claims and expenses. A decrease in the combined ratio means financial results are improving; an increase means they are deteriorating.

 

COMMISSION

Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer, and the marketing methods.

  

COMPREHENSIVE COVERAGE

Portion of an auto insurance policy that covers damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods and riots), and theft.

 

COMPULSORY AUTO INSURANCE

The minimum amount of auto liability insurance that meets a state law. Financial responsibility laws in every state require all automobile drivers to show proof, after an accident, of their ability to pay damages up to the state minimum. In compulsory liability states this proof, which is usually in the form of an insurance policy, is required before you can legally drive a car.

 

CONTESTABLE PERIOD*

The time during which an insurer has the right to cancel or rescind an insurance policy if the application contained a material misrepresentation. (See Incontestability provision)

 

CONTINGENT LIABILITY

Liability of individuals, corporations, or partnerships for accidents caused by people other than employees for whose acts or omissions the corporations or partnerships are responsible.

  

COVERAGE

Synonym for insurance.

  

CRIME INSURANCE

Term referring to property coverages for the perils of burglary, theft and robbery.

 

CROP-HAIL INSURANCE

Protection against damage to growing crops from hail, fire or lightning provided by the private market. By contrast, multiple peril crop insurance covers a wider range of yield reducing conditions, such as drought and insect infestation, and is subsidized by the federal government.

 

The terms found on pages A-Z are prevalent insurance terms. The majority are courtesy of the Insurance Information Institute and LOMA, *Terms marked with an asterisk are from LOMA’s Glossary of Insurance and Financial Services Terms.