RATE

The cost of a unit of insurance, usually per $1,000. Rates are based on historical loss experience for similar risks and may be regulated by state insurance offices.

 

RATE REGULATION

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

 

RATED POLICY*

An insurance policy that is classified as having a greater-than-average likelihood of loss, usually issued with special exclusions, a premium rate that is higher than the rate for a standard policy, a reduced face amount, or any combination of these.

 

RATING AGENCIES

Six major credit agencies determine insurers’ financial strength and viability to meet claims obligations. They are A.M. Best Co.; Duff & Phelps Inc.; Fitch, Inc.; Moody’s Investors Services; Standard & Poor’s Corp.; and Weiss Ratings, Inc. Factors considered include company earnings, capital adequacy, operating leverage, liquidity, investment performance, reinsurance programs, and management ability, integrity and experience. A high financial rating is not the same as a high consumer satisfaction rating.

 

RATING BUREAU

The insurance business is based on the spread of risk. The more widely risk is spread, the more accurately loss can be estimated. An insurance company can more accurately estimate the probability of loss on 100,000 homes than on ten. Years ago, insurers were required to use standardized forms and rates developed by rating agencies. Today, large insurers use their own statistical loss data to develop rates. But small insurers, or insurers focusing on special lines of business, with insufficiently broad loss data to make them actuarially reliable depend on pooled industry data collected by such organizations as the Insurance Services Office (ISO) which provides information to help develop rates such as estimates of future losses and loss adjustment expenses like legal defense costs.

   

REINSTATEMENT*

The process by which an insurer puts back into force an insurance policy that has either been terminated for nonpayment of premiums or continued as extended term or reduced paid-up coverage.

 

REINSURANCE

Insurance bought by insurers. A reinsurer assumes part of the risk and part of the premium originally taken by the insurer, known as the primary company. Reinsurance effectively increases an insurer's capital and therefore its capacity to sell more coverage. The business is global and some of the largest reinsurers are based abroad. Reinsurers have their own reinsurers, called retrocessionaires. Reinsurers don’t pay policyholder claims. Instead, they reimburse insurers for claims paid.

  

RENTERS INSURANCE

A form of insurance that covers a policyholder’s belongings against perils such as fire, theft, windstorm, hail, explosion, vandalism, riots, and others. It also provides personal liability coverage for damage the policyholder or dependents cause to third parties. It also provides additional living expenses, known as loss-of-use coverage, if a policyholder must move while his or her dwelling is repaired. It also can include coverage for property improvements. Possessions can be covered for their replacement cost or the actual cash value that includes depreciation.

RENTAL REIMBURSEMENT

You may receive reimbursement for auto rental up to a specified limit if you have rental coverage. Typically it applies if you get into an auto accident with your insured auto and the car is damaged to the point where you can’t drive it. If another car causes the accident, the at-fault party’s liability coverage may reimburse you for your car rental. In most cases, you must buy collision coverage before you can buy rental reimbursement coverage. (The Florida Department of Financial Services).

 

REPLACEMENT COST

Insurance that pays the dollar amount needed to replace damaged personal property or dwelling property without deducting for depreciation but limited by the maximum dollar amount shown on the declarations page of the policy.

  

RETENTION

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

 

RETROCESSION

The reinsurance bought by reinsurers to protect their financial stability.

 

RIDER

An attachment to an insurance policy that alters the policy’s coverage or terms.

 

RISK

The chance of loss or the person or entity that is insured.

SALVAGE

Damaged property an insurer takes over to reduce its loss after paying a claim. Insurers receive salvage rights over property on which they have paid claims, such as badly-damaged cars. Insurers that paid claims on cargoes lost at sea now have the right to recover sunken treasures. Salvage charges are the costs associated with recovering that property.

 

SCHEDULE

A list of individual items or groups of items that are covered under one policy or a listing of specific benefits, charges, credits, assets or other defined items.

 

SELF-INSURANCE

The concept of assuming a financial risk oneself, instead of paying an insurance company to take it on. Every policyholder is a self-insurer in terms of paying a deductible and co-payments. Large firms often self-insure frequent, small losses such as damage to their fleet of vehicles or minor workplace injuries. However, to protect injured employees state laws set out requirements for the assumption of workers compensation programs. Self-insurance also refers to employers who assume all or part of the responsibility for paying the health insurance claims of their employees. Firms that self insure for health claims are exempt from state insurance laws mandating the illnesses that group health insurers must cover.

 

SEVERITY

Size of a loss. One of the criteria used in calculating premiums rates.

 

SEWER BACK-UP COVERAGE

An optional part of homeowners insurance that covers sewers.

  

SOLVENCY

Insurance companies’ ability to pay the claims of policyholders. Regulations to promote solvency include minimum capital and surplus requirements, statutory accounting conventions, limits to insurance company investment and corporate activities, financial ratio tests, and financial data disclosure.

 

SPREAD OF RISK

The selling of insurance in multiple areas to multiple policyholders to minimize the danger that all policyholders will have losses at the same time. Companies are more likely to insure perils that offer a good spread of risk. Flood insurance is an example of a poor spread of risk because the people most likely to buy it are the people close to rivers and other bodies of water that flood.

 

STACKING

Practice that increases the money available to pay auto liability claims. In states where this practice is permitted by law, courts may allow policyholders who have several cars insured under a single policy, or multiple vehicles insured under different policies, to add up the limit of liability available for each vehicle.

 

STANDARD RISK CLASS*

In insurance underwriting, the group of proposed insureds who represent average risk within the context of the insurer’s underwriting practices and therefore pay average premiums in relation to others of similar insurability. Contrast with declined risk class, preferred risk class and substandard risk class.

 

SUBROGATION

The legal process by which an insurance company, after paying a loss, seeks to recover the amount of the loss from another party who is legally liable for it.

 

SUBSTANDARD PREMIUM RATES*

The premium rates charged insureds who are classified as substandard risks. Also known as special class rates.

 

SUBSTANDARD RISK CLASS*

In insurance underwriting, the group of proposed insureds who represent a significantly greater-than-average likelihood of loss within the context of the insurer’s underwriting practices. Also known as special class risk. Contrast with declined risk class, preferred risk class and standard risk class.

 

SUPPLEMENTAL COVERAGE*

An amount of coverage that adds to the amount of coverage specified in a basic insurance policy.

  

SURPLUS

The remainder after an insurer’s liabilities are subtracted from its assets. The financial cushion that protects policyholders in case of unexpectedly high claims.

 

SURPLUS LINES

Property/casualty insurance coverage that isn’t available from insurers licensed in the state, called admitted companies, and must be purchased from a non-admitted carrier. Examples include risks of an unusual nature that require greater flexibility in policy terms and conditions than exist in standard forms or where the highest rates allowed by state regulators are considered inadequate by admitted companies. Laws governing surplus lines vary by state.

 

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.