Chapter 1: The Nature of Risk: Losses and Opportunities

systemic financial risk

Risk that affects everything, as opposed to individuals being involved in risky enterprises.

uncertainty

Having two potential outcomes for an event or situation.

risk

Uncertainty about a future outcome, particularly the consequences of a negative outcome.

risk averse

Refers to shying away from risks and preferring to have as much security and certainty as is reasonably affordable.

risk seeker

Someone who will enter into an endeavor as long as a positive long run return on the money is possible, however unlikely.

risk neutral

When one’s risk preference lies between the extremes of risk averse and risk seeking.

diversify away risk

To take actions that are seemingly not related or have opposite effects or to invest in many possible unrelated products or entities such that the impact of any one event decreases the overall risk.

fortuitous

A matter of chance.

anticipated variability

An expected deviation of an occurrence from what one expects.

exposure

Term used to describe the enterprise, property, person, or activity facing a potential loss.

pure risk

Risk that features some chance of loss and no chance of gain.

speculative risk

Risk that features a chance to either gain or lose.

hedging

Activities that are taken to reduce or eliminate risks.

securitization

Packaging and transferring the insurance risks to the capital markets through the issuance of a financial security.

risk retention

When a firm retains its risk, self-insuring against adverse contingencies out of its own cash flows.

product liability

Situation in which a manufacturer may be liable for harm caused by use of its product, even if the manufacturer was responsible in producing it.

enterprise risk management (ERM)

The simultaneous consideration of all risks and the management of risks in an enterprise-wide (and risk-wide) context.

consequential or indirect losses

A nonphysical loss such as loss of business.

property loss exposures

Losses associated with both real property such as buildings and personal property such as automobiles and the contents of a building.

liability loss

Loss caused by a third party who is considered at fault.

fundamental risk or systemic risk

Risks that are pervasive to and affect the whole economy, as opposed to accidental risk for an individual.

diversifiable risks

Risks whose adverse consequences can be mitigated simply by having a well-diversified portfolio of risk exposures.

idiosyncratic

Risks viewed as being amenable to having their financial consequences reduced or eliminated by holding a well-diversified portfolio.

perils

The causes of loss.

natural perils

Causes of losses over which people have little control.

human perils

Causes of losses that lie within individuals’ control.

economic perils

Causes of losses resulting from the state of the economy.

hazards

Conditions that increase the cause of loss.

frequency

The number of losses during a specified period.

severity

The average dollar value of a loss per claim.

physical hazards

Tangible environmental conditions that affect the frequency and/or severity of loss.

intangible hazards

Attitudes and nonphysical cultural conditions can affect loss probabilities and severities of loss.

moral hazards

Hazards that involve behavior that can be construed as negligence bordering on criminality.

morale hazards

Hazards that involve attitudes of carelessness and lack of concern.

Chapter 2: Risk Measurement and Metrics

model

A symbolic representation of the possible outcomes.

likelihood

The probability that an event will occur in a specified amount of time.

distribution

The display of the events on a map that tells us the likelihood that the event or events will occur.

fair value

The numerical average of the experience of all possible outcomes if you played a game over and over.

range

The distance between the highest possible outcome value to the lowest in a distribution.

coefficient of variation

The standard deviation of a distribution divided by its mean.

semivariance

The average square deviation of values in a distribution.

Value at Risk (VaR)

The worst-case scenario dollar value loss (up to a specified probability level) that could occur for a company exposed to a specific set of risks.

risk premium

The premium over and above the actuarially fair premium that a risk-averse person is willing to pay to get rid of risk.

Chapter 3: Risk Attitudes: Expected Utility Theory and Demand for Hedging

utility theory

A theory postulated in economics to explain behavior of individuals based on the premise people can consistently rank order their choices depending upon their preferences.

utility theory

A theory postulated in economics to explain behavior of individuals based on the premise people can consistently order rank their choices depending upon their preferences.

positive theory

Theory that seeks to explain an individual’s observed behavior and choices.

normative theory

Theory that dictates that people should behave in the manner prescribed by it.

utility function

A mathematical formulation that ranks the preferences of the individual in terms of satisfaction different consumption bundles provide.

ordinal utility

Utility that can only represent relative levels of satisfaction between two or more alternatives, that is, rank orders them.

cardinal utility

Utility that can represent the absolute level of satisfaction.

completeness

Property in which an individual’s preferences enable him/her to compare any given consumption bundle with any other bundle.

monotonicity assumption

The assumption that more consumption is always better.

mix-is-better assumption

The assumption that a mix of consumption bundles is always better than stand-alone choices.

rationality

The assumption that individuals’ preferences avoid any kind of circularity.

well-behaved utility function

A representation of the preferences of the individual that satisfies the assumptions of completeness, monotonicity, mix-is-better, and rationality.

expected value

The sum of the products of two numbers, the outcomes and their associated probabilities.

fair game

Game in which the cost of playing equals the expected winnings of the game, so that net value of the game equals zero.

expected utility

A construct to explain the level of satisfaction a person gets when faced with uncertain choices.

expected utility theory

Theory that says persons will choose an option that maximizes their expected utility rather than their expected wealth.

concavity

Property of a curve in which a chord connecting any two points on the curve will lie strictly below the curve.

diminishing marginal utility

Feature of a utility function in which utility is always increasing although at a decreasing rate.

actuarially fair premium (AFP)

The expected loss in wealth to the individual.

increasing marginal utility

Feature of a utility function in which utility is always increasing at an increasing rate.

convex utility function

Utility function in which the curve lies strictly below the chord joining any two points on the curve.

behavioral economics

Realm of academic study that deals with departures from E(U) maximization behavior.

framing effect

The coding of alternatives, which makes individuals vary from E(U) maximizing behavior.

value function

A mathematical formulation that seeks to explain observed behavior without making any assumption about preferences.

availability bias

Tendency to work with whatever information is easily availability.

experience bias

Tendency to assign more weight to the state of the world that we have experienced and less to others.

anchoring bias

Tendency to base subjective assessments of outcomes on an initial estimate.

sunk cost

Money spent that cannot be recovered.

total premium

The sum of the actuarially fair premium and the risk premium.

risk premium

The premium over and above the actuarially fair premium that a risk-averse person is willing to pay to get rid of risk.

information asymmetry

A problem encountered when one party knows more than the other party in the contract.

adverse selection

Situation in which a person with higher risk chooses to hedge the risk, preferably without paying more for the greater risk.

monopolistic market

A market with only one supplier.

deductibles

Initial part of the loss absorbed by the person who incurs the loss.

coinsurance

Situation where individuals share in the losses with the insurance companies.

principal-agent problem

The inability of the principal (owner) to observe actions of the agent (manager).

optimal capital structure

A company’s optimal mix of debt and equity financing.

Chapter 4: Evolving Risk Management: Fundamental Tools

self-insuring

Retaining the risk within the firm.

risk map

A visual tool used to consider alternatives of the risk management tool set.

risk management policy statement

The primary tool to communicate risk management objectives.

risk profiling

A process that evaluates all the risks of the organizations and measures the frequency and severity of each risk.

risk mapping

Charting entire spectrums of risk, not individual risk “silos” from each separate business unit.

financial risks

Uncertainty regarding the outcome of financial decisions, as influenced by factors such as prices, volatility, liquidity, credit markets, currency exchange, and general market conditions.

risk management matrix

Matrix that provides alternative financial action to undertake for each frequency/severity combination on the risk map.

forecasting

Projecting the frequency and severity of losses into the future based on current data and statistical assumptions.

cash flow analysis

Analysis that looks at the amount of cash that will be saved and brings it into today’s present value.

risk management information systems

Computerized data systems to allows a risk manager to quantify the organization’s loss history.

data warehousing

A system of housing large sets of data for strategic analysis and operations.

transfer of risk

Displacement of risk to a third, unrelated party.

risk retention group

A group that provides risk management and retention to a few players in the same industry who are too small to act on their own.

loss prevention

Efforts that seek to reduce the probability of a loss occurring.

loss reduction

Efforts to lessen loss severity.

Chapter 5: The Evolution of Risk Management: Enterprise Risk Management

chief risk officer (CRO)

Part of the executive team responsible for all risk elements in the organization.

stockholders’ wealth

Value of equity held by the owners of a company plus income in the form of dividends.

market value

For a public firm, the price of the stock times the number of shares traded.

brand equity

The value created by a company with a good reputation and good products.

sustainability

The capacity to maintain a certain process or state.

balance sheet

Document that provides a snapshot of a firm’s assets and liabilities.

financial statements

Income statements and balance sheets.

capital structure

A firm’s choice between debt and equity.

covenants

The details of the contracts and promises between the debt contract parties.

financial risk managers

Managers responsible for managing the risk of the investments and assets of a firm.

underwriting

The process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection.

reserving liabilities

Calculating the amount that the insurer needs to set aside to pay future claims.

asset allocation

The mix of assets held by an insurer.

asset-liabilities matching

Allocation of an insurer’s assets to meet claims obligations as they become due.

liquidity

Degree to which assets can be used to meet a firm’s obligations (the more liquid an asset, the easier it can be used to meet obligations).

asset portfolio

Details the assets that are to be matched to liabilities in the asset-liabilities matching process.

investment portfolio

Details the assets that are to be matched to liabilities in the asset-liabilities matching process..

asset allocation

The mix of assets held by an insurer.

liability accounts

Reserves held on balance sheets to cover future claims and other obligations, such as taxes and premium reserves.

capital and surplus

The equivalent of equity on the balance sheet of any firm—the net worth of the firm, or assets minus liabilities.

actuaries

Individuals who specialize in forecasting the losses and developing the losses’ potential future impact on the insurers.

mortality tables

Tables that indicate the percent of expected deaths for each age group.

life expectancy

Measure of the length of life expected for people born in each year.

due diligence

The process of examining every action and items in the financial statement of companies to ensure the data reflect true value.

derivatives

Financial securities whose value is derived from another underlying asset.

forwards

Financial securities traded in the over-the-counter market whose characteristics can be tailored to meet specific customer needs.

basis

The amount of money above and beyond the futures price.

futures

Financial securities that trade on an exchange and that have standardized contract specifications.

swaps

Agreements to exchange or transfer expected future variable-price purchases of a commodity or foreign exchange contract for a fixed contractual price today.

options

Agreements that give the right (but not the obligation) to buy or sell an underlying asset at a specified price at a specified time in the future.

securitization

Packaging and transferring the insurance risks to the capital markets through the issuance of a financial security.

counterparty risk

Risk of loss from failure of a counterparty, or second party, in a derivatives contract to perform as agreed or contracted.

insurance-linked securities

General term for securitization instruments.

catastrophe bonds

Bonds that seek to protect the insurance industry from catastrophic events.

catastrophe equity puts (Cat-E-Puts)

Financial instrument that gives an insurer the option to sell equity (e.g., preferred shares) at predetermined prices, contingent upon the catastrophic event.

contingent surplus notes

Options to borrow money in case of a specific event.

collateralized debt obligations (CDOs)

Securities backed by a pool of diversified assets.

weather derivatives

Derivative contracts that pay based on weather-related events.

Chapter 6: The Insurance Solution and Institutions

insurance

A social device in which a group of individuals transfer risk to another party in such a way that the third party combines or pools all the risk exposures together.

insureds

Individuals who transfer risk to a third-party.

insurer

The third party that accepts the risks transferred by insureds.

law of large numbers

As a sample of observations is increased in size, the relative variation about the mean declines.

insurer assumes risk

The insurer promises to pay whatever loss may occur as long as it fits the description given in the policy and is not larger than the amount of insurance sold.

finite risk programs

Financial methods that can be construed as financing risk assumptions.

discriminate

Classify exposures according to expected loss.

fortuitous

A matter of chance.

catastrophic loss

Loss that could imperil the insurer’s solvency.

dependent loss

When loss to one exposure unit affects the probability of loss to another.

economically feasible

When the size of the possible loss must be significant to the insured and the cost of insurance must be small compared with the potential loss.

personal insurance

Insurance that is purchased by individuals and families for their risk needs. Such insurance includes life, health, disability, auto, homeowner, and long-term care.

group insurance

Insurance provided by the employer for the benefit of employees.

commercial insurance

Property/casualty insurance for businesses and other organizations.

life/health insurance

Insurance that covers exposures to the perils of death, medical expenses, disability, and old age.

property/casualty insurance

Insurance that covers property exposures such as direct and indirect losses of property caused by perils such as fire, windstorm, and theft.

stock insurers

Insurers created for the purpose of making a profit and maximizing the value of the organization for the benefit of the owners.

mutual insurers

Insurers owned and controlled, in theory if not in practice, by their policyowners.

policyowners’ dividends

Profits shared by insurance policyholders.

Lloyd’s of London

The oldest insurance organization in existence.

captive insurance company

A company that provides insurance coverage to its parent company and other affiliated organizations.

risk retention group

A group that provides risk management and retention to a few players in the same industry who are too small to act on their own.

governmental risk pools

Pools formed for governmental entities to provide group self-insurance coverage.

Chapter 7: Insurance Operations

producer

Another name for both agents and brokers.

general agent

An independent businessperson rather than an employee of the insurance company who is authorized by contract with the insurer to sell insurance in a specified territory.

personal producing general agent

Agent who sells for one or more insurers, often with a higher-than-normal agent’s commission and seldom hires other agents.

branch manager

A company employee who is compensated by a combination of salary, bonus, and commissions related to the productivity of the office to which he or she is assigned.

independent agent

Agent who usually represents several companies, pays all agency expenses, is compensated on a commission plus bonus basis, and makes all decisions concerning how the agency operates.

owns the x-date

Has the right to contact the customer when a policy is due for renewal.

direct writers

Companies that market insurance through exclusive agents.

exclusive agents

Agents permitted to represent only their company or a company in an affiliated group of insurance companies.

salaried representatives

Employees of the company.

broker

Individual who solicits business from the insured and also acts as the insured’s legal agent when the business is placed with an insurer.

Internet marketing

Selecting an insurance product and comparing price and coverage on the Internet.

mass merchandising

The selling of insurance by mail, telephone, television, or e-mail.

financial planner

Individual who facilitates some insurance sales by serving as a consultant on financial matters, primarily to high-income clients.

underwriting

The process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection.

underwriter

Individual who decides whether or not to insure exposures on which applications for insurance are submitted.

redlining

When an insurer designates a geographical area in which it chooses not to provide insurance, or to provide it only at substantially higher prices.

Equal Credit Opportunity Act (ECOA)

Law requiring that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within sixty days.

service

The ultimate indicator upon which the quality of the product provided by insurance depends.

engineering and loss control

Methods of prevention and reduction of loss whenever the efforts required are economically feasible.

actuarial analysis

A highly specialized mathematic analysis that deals with the financial and risk aspects of insurance.

actuary

Individual who determines proper rates and reserves, certifies financial statements, participates in product development, and assists in overall management planning.

loss development

The calculation of how amounts paid for losses increase (mature) over time for the purpose of future projection.

incurred losses

Paid losses plus known, but not yet paid losses.

incurred but not reported (IBNR)

Estimated losses that insureds did not claim yet but are expected to materialize in the future.

rate calculations

The computation of how much to charge for insurance coverage once the ultimate level of loss is estimated plus factors for taxes, expenses, and returns on investments.

catastrophe (cat) modeling

The use of computer technology to synthesize loss data, assess historical disaster statistics, incorporate risk features, and run event simulations as an aid in predicting future losses.

mortality tables

Tables that indicate the percent of expected deaths for each age group.

premium elements

The adjustments for various factors in life insurance premiums.

investment income

Returns from all the assets held by the insurers from both capital investment and from premiums.

mortality curve

Curve that illustrates the relationship between age and the probability of death.

capital and surplus

The equivalent of equity on the balance sheet of any firm—the net worth of the firm, or assets minus liabilities.

reinsurance

An arrangement by which an insurance company transfers all or a portion of its risk under a contract (or contracts) of insurance to another company.

ceding insurer

The company transferring risk in a reinsurance arrangement.

assuming reinsurer

The company taking over the risk in a reinsurance arrangement.

treaty arrangement

Arrangement in which the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance.

facultative arrangement

Arrangement in which both the primary insurer and the reinsurer retain full decision-making powers with respect to each insurance contract.

proportional (pro rata) reinsurance

Situation in which the reinsurer assumes a prespecified percentage of both premiums and losses.

ceding commission

A fee paid by the reinsurer to the original insurer.

nonproportional reinsurance

Reinsurance that obligates the reinsurer to pay losses when they exceed a designated threshold.

excess-loss reinsurance

Reinsurance that requires the reinsurer to accept amounts of insurance that exceed the ceding insurer’s retention limit.

aggregate reinsurance

Policy that can be purchased for coverage against potentially catastrophic situations faced by the primary insurer.

claims adjusting

The process of paying insureds after they sustain losses.

claims adjuster

The person who represents the insurer when the policyholder presents a claim for payment.

company adjuster

An employee of the insurer who handles claims.

independent adjuster

An employee of an adjusting firm that works for several different insurers and receives a fee for each claim handled.

Chapter 8: Insurance Markets and Regulation

underwriting cycles

The movement of insurance prices through time.

insurance capacity

The quantity of coverage that is available in terms of limits of coverage.

soft market

Condition that occurs when insurance losses are low and prices are very competitive.

hard market

Condition that occurs when insurance losses are above expectations and reserves no longer are able to cover all losses.

combined ratio

The loss ratio (losses divided by premiums) plus the expense ratio (expenses divided by premiums).

cash flow underwriting

Strategy pursued when the combined ratio is low, in which the industry lowers its underwriting standards in order to obtain more cash that can be invested.

break-even combined ratio level

The level of combined ratio that is required for each line of business to not lose money.

commissioner (or superintendent) of insurance

State insurance department that administers insurance laws.

National Association of Insurance Commissioners (NAIC)

A group that deals with the creation of model laws for adoption by the states to encourage uniformity.

domestic insurers

A group that deals with the creation of model laws for adoption by the states to encourage uniformity.

alien insurers

Insurance companies organized in another country.

excess and surplus lines insurers

Companies that provide coverages that are not available from licensed insurers.

surplus lines agents or brokers

Persons who hold special licenses to provide access to nonadmitted insurers.

generally accepted accounting (GAP)

The acceptable system of accounting for publicly traded firms.

statutory accounting (SAP)

System of reporting of insurance that allows companies to account differently for accrued losses.

unearned premiums

Premiums collected in advance of the policy period.

risk-based capital

Assets, such as equities held as investments, with values that may vary widely over time.

state guaranty fund associations

Security deposit pools made up of involuntary contributions from state-regulated insurance companies to assure that insureds do not bear the entire burden of losses when an insurer becomes insolvent.

prior approval

Method of regulation in which an insurer or its rating bureau must file its new rates and have them approved by the commissioner before using them.

file-and-use

Method of regulation that allows an insurer to begin using a new rate as soon as it is filed with the commissioner.

open competition

Method of regulation that requires no rate filings by an insurer, as the underlying assumption is that market competition is a sufficient regulator of rates.

twisting

Inducing a policyholder to cancel one contract and buy another by misrepresenting the facts or providing incomplete policy comparisons.

rebating

Providing substantial value as an inducement to purchase insurance.

unfair practice

A catch-all term that can be applied to many undesirable activities of agents, claim adjusters, and insurers.

misappropriation of funds

Situations in which the agent keeps funds belonging to the company, the policyholder, or a beneficiary.

Gramm-Leach-Bliley Financial Services Modernization Act (GLBA)

1999 law that allowed financial institutions to consolidate their services.

speed-to-market

Expediting the introduction of new insurance products into the marketplace.

regulatory reengineering

A movement that promotes legislative uniformity.

market conduct reform

A movement that creates a process to respond to changing market conditions, especially relating to e-commerce.

Chapter 9: Fundamental Doctrines Affecting Insurance Contracts

contract (or policy)

Document received when one transfer risks to the insurance company; is the only physical product received at the time of the transaction.

relational contracts

Contracts whose provisions are dynamic with respect to the environment in which they are executed.

incomplete contracts

Contracts that contain terms that are implicit rather than explicit.

law of agency

Law that deals basically with the legal consequences of people acting on behalf of other people or organizations.

principal

Individual who creates an agency relationship with a second party by authorizing him or her to make contracts with third parties (policyholders) on the principal’s behalf.

agent

Individual who is authorized to make contracts with a third party.

apparent authority

The implied authority of the agent to fulfill the principal’s responsibilities.

producer

Another name for both agents and brokers.

binding authority

Authority that secures (binds) coverage for an insured without any additional input from the insurer.

binder

The agreement that exists before a contract is issued.

conditional binder

Agreement that implies that coverage exists only if the underwriter ultimately accepts (or would have accepted) the application for insurance.

waiver

The intentional relinquishment of a known right.

private pension

When the investment portion or cash accumulation of a permanent life insurance policy is elevated to a position of a retirement account.

vanishing premiums policies

Policies that policyholders were led to believe would be paid in full after a certain period of time, and they would no longer have to make premium payments.

compliance officer

Individual charged with overseeing all sales materials and ensuring compliance with regulations and ethics.

respondeat superior

A Latin phrase referring to the doctrine that the master is responsible for the actions taken by his or her servant during the course of duty.

estoppel

Situation that occurs when the insurer or its agent has led the insured into believing that coverage exists, and as a consequence, it means that the insurer cannot later claim that no coverage existed.

offer and acceptance

The process of two parties entering into a contract.

consideration

The price each party demands for agreeing to carry out his or her part of the contract.

competent parties

Individuals of undiminished mental capacity.

legal purpose

Not be for the performance of an activity prohibited by law.

legal form

Appropriate language.

uberrimae fidei

Utmost good faith.

representations

Statements concerning an insured’s exposures.

material facts

Information that influences a party’s decision to accept a contract.

concealment

Intentionally withholding a material fact.

adhesion

Situation in which insureds have no input in the design of a policy’s terms.

expectations principle

The event of a dispute, courts will read insurance policies as they would expect the insured to do.

indemnity

The insurer agrees to pay no more (and no less) than the actual loss suffered by the insured.

insurable interest

Financial interest in life or property that is subject to loss.

life-settlement companies

Firms that buy life insurance policies from senior citizens for a percent of the value of the death benefits.

viatical-settlement companies

Firms that buy life insurance policies from persons with short life expectancies.

janitor’s insurance

Inexpensive life insurance coverage.

corporate-owned life insurance (COLI)

Policies in which employers own life insurance policies on employees.

valued policies

Contracts to pay a stated sum upon the occurrence of the event insured against, rather than to indemnify for loss sustained.

subrogation

Situation that gives the insurer whatever claim against third parties the insured may have as a result of the loss for which the insurer paid.

actual cash value

The replacement cost at the time of the loss, less physical depreciation including obsolescence.

fair market value

The amount a willing buyer would pay a willing seller.

replacement cost

Indemnification for a property loss with no deduction for depreciation.

other insurance provisions

Clauses in in insurance contracts is to prevent insureds from making a profit by collecting from more than one insurance policy for the same loss.

personal

Insuring against loss to a person, not to the person’s property.

Chapter 10: Structure and Analysis of Insurance Contracts

application

An offer to buy insurance

conditional receipt

Policy that does not bind the coverage of life insurance at the time it is issued, but it does put the coverage into effect retroactive to the time of application if one meets all the requirements for insurability as of the date of the application.

binding receipt

Policy that will be paid if death occurs while one’s application for life insurance is being processed, even if the deceased is found not to be insurable.

declarations

Statements that identify the person(s) or organization(s) covered by a contract, give information about the loss exposure, and provide the basis upon which the contract is issued and the premium determined.

period of coverage

The time duration for which coverage applies.

limitations of liability

The maximum amount payable by an insurance policy.

insuring clause

A general statement of the promises the insurer makes to the insured.

perils

The causes of loss.

named-perils policy

Policy that covers only losses caused by the perils listed in the policy.

open-perils policy

Policy that covers losses caused by all perils except those excluded.

direct loss

The value of property that is physically destroyed or damaged, not including the loss caused by inability to use the property.

consequential or indirect losses

A nonphysical loss such as loss of business.

business interruption

Losses that occur when an organization is unable to sell its goods or services and/or unable to produce goods for sale because of direct or indirect loss.

contingent business interruption

Loss caused by property damage not owned by the business.

extra expense losses

Additional costs incurred by organizations that choose to continue operating following property damage.

property damage

Liability that includes responsibility both for the physical damage to property and the loss of use of property.

bodily injury

Physical injury to a person, including the pain and suffering that may result.

personal injury

Nonphysical injury to a person, including damage caused by libel, slander, false imprisonment, and the like.

punitive damages

Awards intended to punish an offender for exceptionally undesirable behavior.

exclusions

Perils, risks, losses, and properties that are not covered in an all-risk policy.

other insurance clause

Provision in a policy that apportions the insurer’s financial responsibility so that payment in excess of the insured’s loss is avoided.

conditions

Clauses in a policy that enumerate the duties of the parties to the contract and, in some cases, define the terms used.

suspension of coverage

Release of the insurer from liability.

voidance of coverage

Termination of coverage under an insurance policy.

rider

Attachment to a life/health insurance policy that changes the terms of the policy.

endorsement

Attachment to a the property/casualty insurance policy that changes the terms of the policy.

Chapter 11: Property Risk Management

physical property

Consists of real or personal property.

real property

Permanent structures (realty) that if removed would alter the functioning of the property.

personal property

Physical property that is mobile (not permanently attached to something else).

standard fire policy (SFP)

The generally accepted method of insuring against property loss due to fire until being replaced by homeowners policies and commercial insurance options.

replacement cost

Indemnification for a property loss with no deduction for depreciation.

straight deductible

One that requires payment for all losses less than a specified dollar amount.

franchise deductible

One that pays the entire amount in full once the amount of loss equals the deductible.

disappearing deductible

One whose amount decreases as the amount of the loss increases.

coinsurance clause

Clause that requires one to carry an amount of insurance equal to a specified percentage of the value of property in order to be paid the full amount of loss incurred and that stipulates a proportional payment of loss for failure to carry sufficient insurance.

e-commerce property risk

Business risk exposures due to of the use of computers, the Internet, and the Web.

e-commerce property risk

Business risk exposures due to of the use of computers, the Internet, and the Web.

hackers

Virtual vandals who try to poke holes in a company’s security network.

crackers

Vandals who want to break in to a company’s security network and steal proprietary information for personal gain.

insiders

Internal employees who vandalize a company because they are upset with it for some reason.

virus

Program or code that replicates itself inside a personal computer or a workstation with the intent to destroy an operating system or control program.

domain name hijacking

When an individual or a business reserves a domain name that uses the trademark of a competitor.

cybersquatting

Seeking compensation for the use of a registered domain name from the rightful trademark holder.

Web site hijacking

When a Web site operator knowingly deceives the user by redirecting the user to a site the user did not intend to view.

encryption

Allows the sender of an e-mail to scramble the contents of the document.

firewall

Device that protects a network from intrusion by preventing access unless certain criteria are met.

virtual private network (VPN)

Network that connects satellite offices with a central location and allows remote users to gain secure access to a corporate network.

global risk

The unique problems that arise when companies cross national borders.

political risk

Unanticipated political events that disrupt the earning or profit-making ability of an enterprise.

nonadmitted coverage

Contracts issued by a company not authorized to write insurance in the country where a risk exposure is located.

admitted insurance

Contracts written by companies authorized to write insurance in the country where a risk exposure is located.

Chapter 12: The Liability Risk Management

legal liability

The responsibility, based in law, to right some wrong done to another person or organization.

remedy

Compensation for a person who has been harmed in some way.

tortfeasor

A person who commits a wrong.

special damages (economic damages)

Compensation for harms that generally are easily quantifiable into dollar measures.

general damages

Compensation for harms that are not specifically quantifiable but that require compensation all the same.

noneconomic damages

Compensation for harms that are not specifically quantifiable but that require compensation all the same.

punitive damages

Awards intended to punish an offender for exceptionally undesirable behavior.

plaintiff

The party harmed in litigation.

defendant

The party being sued in litigation.

statutory law

The body of written law created by legislatures.

common law

Body of law based on custom and court decisions.

stare decisis

Principle that once a court decision is made in a case with a given set of facts, the courts tend to adhere to the principle thus established and apply it to future cases involving similar facts.

criminal law

Law concerned with acts that are contrary to public policy (crimes), such as murder or burglary.

civil law

Law that deals with acts that are not against society as a whole but rather cause injury or loss to an individual or organization.

contractual liability

When the terms of a contract are not carried out as promised by either party to the contract.

warranty

A guarantee that property or service sold is of the condition represented by the seller.

tort

A private or civil wrong or injury, other than breach of contract, for which the court will provide a remedy in the form of an action for damages.

negligence

Failure to act reasonably, where such failure to act causes harm to others.

proximate cause

A causal connection.

assumption of risk

Doctrine that holds that if the plaintiff knew of the dangers involved in the act that resulted in harm, but chose to act in that fashion nonetheless, the defendant will not be held liable.

contributory negligence

Situation that disallows any recovery by the plaintiff if the plaintiff is shown to be negligent to any degree in not avoiding the relevant harm.

comparative negligence

Situation in which the court compares the relative negligence of the parties and apportions recovery on that basis.

partial comparative negligence

Rule under which only the individual less than 50 percent at fault in causing harm receives compensation.

complete comparative negligence

Rule under which both parties share damage in relation to their levels of responsibility for fault.

last clear chance

Doctrine under which a plaintiff who assumed the risk or contributed to an accident through negligence is not barred from recovery if the defendant had the opportunity to avoid the accident but failed to do so.

immunity

A complete defense against liability because of status as a protected entity, professional, or other party.

res ipsa loquitur (“The thing speaks for itself”)

Doctrine that shifts the burden of proof to the defendant.

strict liability

Liability without regard to fault.

vicarious liability

Situation in which the liability of one person may be based on the tort of another.

joint and several liability

Situation that exists when a plaintiff is permitted to sue any of several defendants individually for the full harm incurred.

trespasser

A person who enters the premises of another without either express or implied permission from a person with the right to give such permission.

licensee

A person who enters premises with permission but (1) not for the benefit of the person in possession, or (2) without a reasonable expectation that the premises have been made safe.

invitee

A person who enters the premises with permission and for the benefit of the person in possession.

hold-harmless agreement

A contractual provision that transfers financial responsibility for liability from one party to another.

attractive nuisance

Anything that is (1) artificial, (2) attractive to small children, and (3) potentially harmful.

family purpose doctrine

Doctrine that makes the owner of a family car responsible for whatever damage it does, regardless of which member of the family may be operating the car at the time of the accident.

nonownership liability

Situation in which an employer is held liable for an injury caused by an employee using his or her own property when acting on the employer’s behalf.

errors and omissions (E&O) liability coverage

Insurance protection for mistakes made by professionals that result in professional liability claims.

class-action lawsuits

Lawsuits filed on behalf of many plaintiffs.

malpractice

Failure by a professional to use reasonable care and diligence, and/or failure to use one’s best judgment in exercising skill and applying knowledge.

operations liability

Liability arising from the ownership, maintenance, and use of premises and conduct of activity.

product liability

Situation in which a manufacturer may be liable for harm caused by use of its product, even if the manufacturer was reasonable in producing it.

breach of warranty

Situation arising when an individual uses a product as directed and suffers injury as a result.

completed operations liability

Liability stemming from activities of the firm in installing equipment or doing other jobs for hire off its own premises.

contingent liability

Situation in which a firm is liable for an independent contractor’s negligence because the firm did not use reasonable care in selecting someone competent.

dramshop laws

Laws that impose special liability on anyone engaged in any way in the liquor business.

contingency fee

A percentage (typically one third) of the award to a plaintiff, collected by the attorney only if the plaintiff prevails.

statutes of limitation

Laws that determine the time frame within which a claim must be filed.

collateral source rule

A legal doctrine that prevents including information about a plaintiff’s financial status and/or compensation of losses from other sources in the litigation.

Chapter 13: Multirisk Management Contracts: Homeowners

package policies

Another name for homeowners policies, so called because they combine different types of coverage that were previously provided by several policies and a number of endorsements.

declarations page

Part of a policy that identifies the specifics that are unique to the insured, such as the covered location, and also lists policy limits, period of coverage, the name of the insurer, and similar information.

residence premises

The home being insured.

special limit of liability

Situation in which dollar limits are placed on some property for loss caused by any peril and on other property for loss caused by theft.

loss of use

Coverage that protects a policyholder from losses sustained if the premises cannot be lived in as a result of a direct loss to either the premises or neighboring premises.

additional living expense

Coverage provided if a loss covered under Section I of the homeowners policy renders the residence uninhabitable.

mysterious disappearance

Coverage that requires that there be loss of property from a known place in such a fashion that theft is the likely cause.

concurrent causation

Doctrine that states when a loss is caused simultaneously (concurrently) by two or more perils, and at least one is not excluded, the loss is covered.

inflation guard endorsement

Endorsement that increases the amount of insurance automatically every year, or increases the amount of insurance to between 90 and 100 percent of replacement value and keeps the amount up to date every time the policyholder pays the premium.

damage to property of others

Coverage that provides up to $500 for losses to property belonging to someone other than the insured on the insured’s premises, but for which the insured is not liable.

mold exclusions

Endorsement adopted by many states to lower the cost of homeowners insurance, particularly mold claims.

title defect

A claim against property that has not been satisfied.

Chapter 14: Multirisk Management Contracts: Auto

personal injury protection (PIP) and medical payments (Med Pay)

Compensation paid to insureds for medical expenses, lost wages, replacement service costs, and funeral expenses incurred as a result of an automobile accident.

no-fault

Insurance laws under which benefits are provided by insurers without regard to who caused the accident.

pure no-fault

Theoretical insurance laws that would pay only specific damages (economic losses, such as medical expenses and lost wages), but these would be unlimited.

modified no-fault

Insurance plan, in which rights to litigate are limited but not eliminated; generally, suit can be brought against an automobile driver only when serious injury has resulted from the accident or special damages exceed a given dollar amount.

add-on plans

Auto insurance plans that offer compensation to an injured motorist through the individual’s own insurer.

financial responsibility law

Law that acts to induce motorists to buy auto liability insurance so victims of their negligence will receive compensation.

unsatisfied judgment funds

State organizations that provide compensation in situations when an injured motorist obtains a judgment against the party at fault but cannot collect because the party has neither insurance nor resources.

compulsory auto liability insurance law

Law that requires automobile registrants to have specified liability insurance in effect at all times.

substandard market

Insurance market in which some companies offer limited auto coverage to high-risk drivers at high premium rates.

residual market (shared market)

Insurance market created by state law that exists to provide insurance to people who cannot buy it through the usual channels.

auto insurance plans

Arrangement in which drivers who cannot buy auto liability insurance through the usual channels can apply to be assigned to an insurer who must sell them coverage that meets the requirements of the financial responsibility law.

reinsurance facility

State plan in which every auto insurer is required to issue auto insurance to any licensed driver who applies and can pay the premium; in return, insurers can transfer the burden of bad risks to a pool to which all auto insurers belong.

joint underwriting association (JUA)

State plan in which all automobile insurers are members and the association is, in effect, an insurance industry company.

personal automobile policy (PAP)

The automobile insurance contract purchased by most individuals.

single limit

Coverage under which the insurer will pay on your behalf for all losses up to a specified limit for any single accident, whether the losses are property-related or bodily injury-related.

split limit

Coverage under which the insurer applies a set of two limits to bodily injury, and an single, aggregate to property damage.

stacking

Situation that arises when a single auto policy covers two vehicles, and the court interprets this situation to yield a limit of liability equal to double the amount shown in the policy declarations.

primary coverage

Coverage for the first payee in a situation where two or more coverages apply.

uninsured motorists coverage

Insurance that pays for bodily injuries (and property damage in some states) caused by an accident with another vehicle whose driver is negligent and (1) has no liability insurance or less than that required by law, (2) was a hit-and-run driver, or (3) is a driver whose insurance company is insolvent.

underinsured motorists coverage

Insurance that fills in the coverage gap that arises when the negligent party meets the financial responsibility law of the state, but the auto accident victim has losses in excess of the negligent driver’s liability limit.

collision

The upset (turning over) of a covered auto or nonowned auto, or striking another object.

comprehensive (or other-than-collision)

Any type of nonexcluded loss-causing event other than collision.

Chapter 15: Multirisk Management Contracts: Business

commercial property policy

Policy that provides insurance for direct physical loss to business property and income.

commercial general liability (CGL) policy

The liability module of the commercial package policy.

pollutant cleanup and removal

A provision that specifies the conditions under which, and the extent to which, protection for cleanup costs are paid by the insurer.

agreed value option

Requires the policyholder to buy insurance equal to 100 percent of the value of the property, as determined at the start of the policy.

inflation guard option

Provides for automatic periodic increases in insurance limits; the intent is to keep pace with inflation.

basic causes of loss form

A named-perils option of the commercial property policy that covers eleven named perils.

broad causes of loss form

A named-perils option of the commercial property policy that covers fifteen named perils.

special causes of loss form

An open perils or all risk coverage option for the commercial property policy.

business income coverage (BIC)

Protects against both business interruption and extra expense losses.

monthly limit of indemnity

Negates the coinsurance provision of business income coverage; instead, a total limit is listed, as is the percentage of that limit available each month.

maximum period of indemnity

Option also negates the coinsurance provision of the BIC; instead, this option limits the duration of coverage to 120 days (or until the limit is reached, whichever comes first).

payroll endorsement

Allows the insured to deduct some or all payroll expenses from the value of operating expenses before calculating the coinsurance requirement.

fidelity bond

A guarantee provided to employers by each employee promising loyalty and faithfulness and stipulating a mechanism for financial recovery should the promise be broken.

inland marine (IM) insurance

Covers nonwater forms of transportation such as rails and trucking.

ocean marine insurance

Coverage for property while being transported by water (including coverage for the vessels doing the transporting).

boiler and machinery (B&M) insurance

Protects against loss that results from property damage to the insured’s own property and to nonowned property caused by explosions or other sudden breakdowns of boilers and machinery.

Capital Assets Program

Provides businesses coverage on a blanket, replacement-cost basis without a coinsurance provision to sufficiently large accounts.

business owners policy (BOP)

Provides a comprehensive policy that would omit the need for small businesses to make numerous decisions while also incorporating coverage on exposures often overlooked.

seasonal fluctuation

Permits recovery of lost personal property up to 125 percent of the declared limit, as long as the average value of the personal property over the prior twelve months is not greater than the limit.

claims-made basis

A policy that limits the period in which the claims for injuries need to be made.

claims-made basis

A policy that limits the period in which the claims for injuries need to be made.

retroactive date

Date after which an event causing liability must take place in order to be covered.

occurrence policy

Covers liability for events that take place within the policy period, regardless of when the plaintiff makes a claim.

extended reporting period

Provides coverage for claims brought after the policy period has expired for events that occurred between the retroactive date and the end of the policy period.

bodily injury (BI)

Bodily injury, sickness, or disease sustained by a person, including death resulting from any of these at any time.

property damage (PD)

Physical injury to tangible property, including all resulting loss of use of that property, or loss of use of tangible property that is not physically injured.

umbrella liability policy

Provides excess coverage over underlying insurance. Except for excluded risks, it also provides excess over a specified amount, for which there is no underlying coverage.

Employment-Related Practices Liability Program

Covers insureds’ liability for claims arising out of an injury to an employee because of an employment-related offense, as well as providing legal defense for the insured.

Chapter 16: Risks Related to the Job: Workers’ Compensation and Unemployment Compensation

workers’ compensation

A system to enforce a series of state laws that requires employers to pay workers for their work-related injuries and illnesses with no relationship to who caused the injury or illness.

common law defenses

The three arguments that employers utilized to avoid assuming responsibility for employees’ work-related injuries prior to the establishment of of workers’ compensation laws: the fellow-servant rule, the assumption of risk doctrine, and the contributory negligence doctrine.

fellow-servant rule

Defense under which an employee injured as a result of the conduct of a fellow worker cannot recover damages from the employer.

assumption of risk doctrine

Defense providing that an employee who knew, or should have known, of unsafe conditions of employment assumed the risk by remaining on the job.

contributory negligence

Defense arguing that an employee was injured through negligence of the employer but was also partly at fault.

employers’ liability

Portion of a worker’s compensation policy that protects against potential liabilities not within the scope of the workers’ compensation law, yet arising out of employee injuries.

quid pro quo

(Latin phrase meaning “this for that”)—give-and-take of rights and duties between employers and employees.

inclusive laws

Laws that list all the types of employment covered under workers’ compensation.

exclusive laws

Laws that cover all the types of employment under workers’ compensation except those that are excluded.

elective laws

State laws providing that either the employer or the employee may elect not to be covered under workers’ compensation law.

sole remedy

Provides that employees cannot (in most circumstances) sue their employers for work-related injuries, regardless of fault, when covered by workers’ compensation.

occupational disease

An injury arising out of employment and due to causes and conditions characteristic of, and peculiar to, the particular trade, occupation, process, or employment, and excluding all ordinary diseases to which the general public is exposed.

indemnity benefits

Reimburse insureds for actual costs incurred for health care up to covered limits in traditional fee-for-service plans.

temporary partial benefits

Payments made to an injured employee can perform some, but not all, work duties.

permanent partial disability

The loss of certain body parts.

scheduled injuries

Injuries covered under permanent partial disability.

employers’ liability

Portion of a worker’s compensation policy that protects against potential liabilities not within the scope of the workers’ compensation law, yet arising out of employee injuries.

Other States Insurance

Portion of a worker’s compensation policy that allows the insured to list states (perhaps all) where the employees may have potential exposure.

state-operated workers’ compensation funds

State government agencies responsible for collecting workers’ compensation founds and distributing benefits.

experience-rated premiums

When a group’s own claims experience affects the cost of coverage for group insurance.

retrospective plan

Worker’s compensation policy that involves payment of a premium between a minimum and a maximum, depending on the insured’s loss experience.

second-injury fund

Fund that reimburses an insurer (or employer) that pays a workman’s compensation benefit to an employee who suffers more than one job-related injury.

unemployment compensation

Government programs that pay weekly cash benefits to workers who are involuntarily unemployed.

benefit formula

Calculation used to determine the amount of the weekly benefit payment a worker may receive through unemployment compensation.

Federal Unemployment Tax Act (FUTA)

Law that places a tax on employers at the rate of 6.2 percent of workers’ pay in covered jobs, excluding anything over $7,000 paid to a worker in a year for the purpose of financing unemployment compensation.

Chapter 17: Life Cycle Financial Risks

mortality risk

Life cycle risk of premature death.

premature death

Dying prior to certain age (commonly, the expected retirement age).

economic loss

In mortality risk, the financial loss experienced by those that depended on a deceased person and the lost future income that would have been earned if the person had not died.

life table

Shows how many people are expected to survive at each age out of an initial population.

select tables

The figures of a mortality table that relate to an insured population where the possible effects of medical examinations used for selecting the terms of insurance may influence the findings.

ultimate

The figures of a mortality table that relate to an insured population where the possible effects of medical examinations used for selecting the terms of insurance do not influence the findings.

longevity risk

Life cycle risk of living too long, such that one’s advanced age hinders one’s ability to continue adequately providing for oneself.

life expectancy

Measures the average length of life in a population; in a stable population, it would be an approximation of the average age of deceased people.

conditional life expectancy

Life expectancy after retirement.

health and disability risk

Life cycle risk that physical and mental well-being will be diminished throughout one’s lifetime.

life insurance planning

A technique that considers only the worst possible scenario.

family dependency period

A period wherein the children remain dependent to their parents.

spousal dependency period

A period during which support might be provided to a spouse.

special needs

Is a category that could include college expenses that we have placed in the family dependency period, care of a dependent parent, or other expenses that do not fit neatly in the other three categories.

Chapter 18: Social Security

social insurance

An insurance program that is compulsory for nearly all Americans with eligibility criteria and benefits specified by law and financed wholly or partially through employment taxes.

OASDHI

Old age (or retirement), survivors, disability, and health insurance (or Medicare) benefits, which include hospital insurance and supplemental medical insurance.

Social Security

Social insurance program in the United States guaranteeing old age, survivors, disability (OASD) and health insurance (HI) benefits to eligible citizens who have contributed to the program.

fully insured

Status achieved by a Social Security beneficiary once forty credits of coverage are earned, or when the beneficiary has a minimum of six credits of coverage and, if greater, at least as many quarters of coverage as there are years elapsing after 1950 (or after age twenty-one, if later)

currently insured

Status achieved by a Social Security beneficiary having at least six credits in the thirteen-quarter period ending with the quarter of death.

disability insured

Status achieved by a Social Security beneficiary having twenty credits in the ten years before disability begins; less rigorous disability requirements apply to a beneficiary who is under age thirty-one or blind.

normal retirement age

The age at which full retirement benefits become available to retirees; age sixty-five in most private retirement plans.

full retirement benefits

What fully insured beneficiaries of Social Security are entitled to receive at the normal retirement age (or reduced benefits as early as age sixty-two)

early retirement

In the case of Social Security, can be taken as early as age sixty-two; results in reduction of benefit benefit by 5/9 of one percent for each month before the normal retirement age and a reduction of 5/12 percent beyond 36 months.

late retirement

In the case of Social Security, results in a permanently increased benefit amount to compensate for the shortened length of the pay-out period and to encourage older workers to continue working full-time; has no effect for retirement beyond age sixty-nine

survivors’ benefits

Feature of Social Security that protects the surviving dependents of a fully or currently insured deceased worker; eligible recipients include dependent children, widows at least sixty years old, widows caring for dependent children under age sixteen or disabled children, disabled widows 50 years old and younger, and parents at least sixty-two years old considered dependents.

disability benefits

Available to a fully insured worker (and eligible dependents) in Social Security who has a medically determinable physical or mental condition preventing any gainful work after a waiting period of five full months if he or she is under age sixty-five and has been disabled for twelve months, is expected to be disabled for at least twelve months, or has a disability that is expected to result in death.

primary insurance amount (PIA)

The basic unit used to determine the amount of monthly Social Security benefits.

average indexed monthly earnings (AIME)

Adjusts workers’ earnings from prior years (up to the maximum wage base) to what they would have been if wage levels in earlier years had been the same as they are now in computing a beneficiary’s primary insurance amount from Social Security.

replacement ratios

Expression of Social Security benefit levels weighted in favor of lower-income workers; calculated as the benefit divided by the AIME.

bend points

The AIME ranges in the Social Security benefit formula representing the dollar amounts at which the primary insurance amount calculation changes.

automatic cost-of-living adjustments (COLAs)

Increases Social Security benefit amounts annually in relation to increases in the consumer price index.

earnings test

Reduces the Social Security benefit for a retiree who is younger than normal retirement age and whose annual earned income exceeds the retirement earnings exempt amount.

wage base level

Specifies the maximum amount of earnings on which Social Security taxation applies.

pay-as-you-go system

The nature of Social Security, in which current tax revenues are used to pay the current benefits of recipients.

disability benefits

Available to a fully insured worker (and eligible dependents) in Social Security who has a medically determinable physical or mental condition preventing any gainful work after a waiting period of five full months if he or she is under age sixty-five and has been disabled for twelve months, is expected to be disabled for at least twelve months, or has a disability that is expected to result in death.

Medicare Part A

Benefit of Social Security that provides hospital-related benefits of: inpatient hospital services, posthospital home health services, and hospice care.

Medicare Part B

Benefit of Social Security that provides physician services, outpatient services, certain home health services, durable medical equipment, and other items.

Medicare Part C

Allows eligible participants to receive the benefits of Medicare Parts A and B through private health plans, in addition to certain items not covered by Medicare Parts A and B.

Medicare Part D

Benefit of Social Security created through the Medicare Prescription Drug, Improvement and Modernization Act of 2003 that provides assistance for costs relating to prescription medications.

Chapter 19: Mortality Risk Management: Individual Life Insurance and Group Life Insurance

premium elements

Adjustments made in life insurance rates for items such as investment income, marketing/administrative costs, taxes, and actuarial risks.

yearly renewable term life insurance

Term life insurance purchased on a year-by-year basis.

level premium

In life insurance, a premium that remains constant throughout the premium-paying period instead of rising from year to year.

cash value

Accumulated funds of level premium life insurance policies as that can be utilized to meet various savings needs.

reserve

In life insurance, funds accumulated to offset the deficiency of periodic premium payments falling short of providing promised death benefits in later years of a policy.

net amount at risk

For the insurer, the difference between the funding reserve at any point in time and the face amount of the policy.

protection element

For the insured, the difference between the funding reserve at any point in time and the face amount of the policy.

term life insurance

Provides coverage for a specified period, called the policy’s term (or duration).

lapse rates

In term life insurance, failure to renew policies.

renewability option

In term life insurance, gives the right to renew the policy for a specified number of additional periods of protection at a predetermined schedule of premium rates without new evidence of insurability.

convertability option

In term life insurance, provides the right to convert the policy to a whole life or another type of insurance before a specified time without proving insurability.

attained age premium rates

In life insurance conversion, when the premium for the new policy is based on the age at the time of the conversion.

mortgage protection insurance

Decreasing term insurance; with each mortgage payment, the face value of the insurance decreases to correspond to the amount of the loan that is outstanding.

credit life insurance

Provides that the death benefit changes, up or down, as the balance changes on an installment loan or other type of consumer loan.

reentry term

In life insurance, allows the insured to re-demonstrate insurability periodically, perhaps every five years, and qualify for a new (lower) select category of rates that are not initially loaded for adverse selection.

whole life insurance

Provides for payment of the face value upon death regardless of when the death may occur; “permanent insurance”

straight life

Form of whole life insurance where premiums are paid in equal periodic amounts over the life of the insured.

limited-payment life

Form of whole life insurance that offers lifetime protection but limits premium payments to a specified period of years or to a specified age; after premiums have been paid during the specified period, the policy remains in force for the balance of life without further premium payment.

single premium life

Form of life insurance where the only premium paid is an amount equal to the present value of future benefits, with discounts both for investment earnings and mortality.

dividends

Paid by participating whole life contracts to insureds for the purpose of refunding higher-than-necessary premiums and sharing company profits with policyowners.

dividends

Paid by participating whole life contracts to insureds for the purpose of refunding higher-than-necessary premiums and sharing company profits with policyowners.

universal life insurance

Offer competitive investment features and the flexibility to meet changing consumer needs by allowing policyholder to change the amount of premium periodically, discontinue premiums and resume them at later date without lapsing the policy, and change the amount of death protection.

unbundling

Feature of universal life that clearly shows the separate effect of mortality, investment, and expense components.

disclosure statement

In universal life, annually reporting of the gross rate of investment return credited to the account, the charge for death protection, expense charges, and the resulting changes in accumulation value and in cash value.

accumulation value

The value of the annuity contract during the accumulation period; consists of premiums plus investment earnings minus expenses.

COLA riders

Increase the death benefit of universal life annually, consistent with the previous year’s increase in the consumer price index.

current mortality rate

In universal life, can be any amount determined periodically by the insurer as long as the charge does not exceed the guaranteed maximum mortality rate specified in the contract.

front-end expenses

In universal life, expenses applied at the beginning of each month or year consisting of some combination of (1) a percentage of new premiums paid, (2) a small flat dollar amount per month or year, and (3) a larger flat dollar amount in the first policy year.

surrender expenses

In universal life, marketing and administrative expenses applied when policies are terminated.

indexed investment strategy

Ties the rate of return on cash values in life insurance to a published index, such as rates on ninety-day U.S. Treasury bills or Moody’s Bond Index.

new money rate

In life insurance, credits the cash value account with the return an insurer earns on its latest new investments.

variable life insurance

Provides the opportunity to invest funds in the stock market; created to overcome policyholder fears that inflation will erode life insurance values.

assumed rate of return

In variable life insurance, generally is a rate necessary to maintain the level of cash values found in a traditional fixed-dollar straight life contract.

prospectus

Statement issued by insurers as required by the SEC explaining the risks of variable life and illustrates how the death benefit and cash values would perform if future investment experience results in returns of 0, 4, 6, 8, 10, and 12 percent.

variable universal life insurance

Combines the premium and death benefit flexibility of a universal policy design with the investment choices of variable life.

current assumption whole life insurance

Works like universal life, except, similar to traditional whole life contracts, the premiums are fixed.

vanishing premiums provision

In higher premium versions of current assumption life insurance, allow the policyowner to stop premium payments and essentially have a nonguaranteed, paid-up contract for the initial face amount.

interest-sensitive whole life

Another name for current assumption life insurance, emphasizing the product’s participatory investment feature.

ownership

In life insurance, refers to rights policyholders have over their policies such as the right to assign the policy to someone else, to designate the beneficiary, to make a policy loan, or to surrender the policy for its cash value.

ownership provision (labeled rights)

A provision filled out by the policyowner stating where the rights of the policy should be assigned (e.g., insured, spouse, or a trust).

changes in basic amount provision

In life insurance, specifies the conditions under which a policyowner can change the total face amount of the policy.

payment of benefits provision

In life insurance, enables the owner of the policy to designate to whom the proceeds shall be paid when the insured dies.

revocable beneficiary

Life insurance beneficiary that can be changed at will by the policyowner.

irrevocable beneficiary

Life insurance beneficiary that cannot be changed only with the consent of the beneficiary.

contingent beneficiaries

In life insurance, beneficiaries who are entitled to the proceeds in the event that the primary (first-named) beneficiary does not survive the insured.

common disaster provision (or survivorship clause)

Provides that the beneficiary of a life insurance policy must survive the insured by a specified period of time or must be alive at the time of payment to be entitled to the proceeds.

settlement options (or settlement plans)

Allows the policyholder or beneficiary of a life insurance contract to stipulate, from a variety of options, how the death benefit will be provided.

grace period

Period of time within which payment of a past-due insurance premium (excluding the first premium) must be accepted by the insurer.

automatic premium loans

If selected by a life insurance policyholder, provides that loans are taken automatically from the policy’s cash value to pay premiums at the end of a policy grace period.

reinstatement provision

Provides that unless a life insurance policy has been surrendered for cash, it may be reinstated at any time within five (in some cases, three, ten, or more) years after premium payments were stopped.

premium refund provision

In whole life policies only, after the death of the insured, the insurers refund any premium paid but unearned for the term.

dividend options

When purchasing a participating life insurance policy, the policyowner can choose how the dividend money will be distributed from among several choices.

nonforfeiture options

In whole life insurance, guarantees that a policyholder who decides to cancel the policy can either take cash for the surrender (cash) value or continue the policy in force as extended term insurance and paid-up insurance.

extended term insurance

Nonforfeiture option where the death benefit of a whole life policy continues at its previous level for as long as the cash value supports this amount of term insurance.

paid-up insurance

Nonforfeiture option where death benefits are paid up completely without expiration date, as if a new policy providing a lower death benefit was in place.

policy loan provisions

Apply to whole life and the universal life policies and allow the owner to borrow an amount up to the cash value from the insurer at a rate of interest specified in the policy and up to the account value in universal life.

assignment provision

Provides that the insurer will not be bound by any policy assignment until it has received notice, that any indebtedness to the company shall have priority over any assignment, and that the company is not responsible for the validity of any assignment.

misstatement of age or sex

Provision in life insurance policies that if age or sex has been misstated in a life insurance policy, the amount of the insurance will be adjusted to that which the premium paid would have covered correctly.

incontestable provision

Makes a life insurance contract incontestable after it has been in force for two years during the lifetime of the insured.

suicide clause

In life insurance, states that the insured is not to be paid death benefits in case of death by suicide within two years of the policy being in place.

Attachmenst to a life/health insurance policy that change the terms of the policy.

waiver of premium rider

In life insurance, provides that premiums due after commencement of an insured’s total disability shall be waived for a period of time.

disability income rider

In life insurance, provides a typical income benefit of $10 per month per $1,000 of initial face amount of life insurance for as long as an insured’s total disability continues and after the first six months of such disability, provided it commences before age fifty-five or sixty.

accidental death benefit (or double indemnity) rider

In life insurance, usually provides that double the face amount of the policy will be paid if the insured’s death is caused by accident, and, sometimes, triple the face amount if death occurs while the insured is riding as a paying passenger in a public conveyance.

guaranteed insurability (GIO) option

In life insurance, gives the policyowner the right to buy additional amounts of insurance, usually at three-year intervals up to a specified age, without new proof of insurability.

accelerated death benefits

Triggered by either the occurrence of a catastrophic (dread) illness or the diagnosis of a terminal illness, resulting in payment of a portion of a life insurance policy’s face amount prior to death.

catastrophic illness rider

In life insurance, provides that a portion (usually 25 to 50 percent) of the face amount of the policy is payable upon diagnosis of specified illnesses.

inflation rider (or cost-of-living)

Automatically increases the amount of life insurance as the consumer price index rises.

group universal life insurance

Usually offered as a supplement to a separate program of group term benefits.

Chapter 20: Employment-Based Risk Management (General)

employee benefits

All noncash compensation items sponsored by employers for their employees; includes group insurance, educational assistance, legal assistance, childcare, discounts, and so forth.

nondiscrimination rules

Rules set forth by the IRS stipulating that employee benefit plans must be for the benefit of all employees, not just executives and top management in order to qualify for tax incentives.

master contract

In group insurance, document issued to employer describing all the terms and conditions of the group policy.

certificate of insurance

Provided by employers to insured employees as evidence of participation in a group insurance plan.

participants

In a group benefit plan may include employees; their dependents (including a spouse and children under a specified age, such as twenty-one, when enrolled in school); retirees; and their dependents.

self-insured

When large employers with sufficient means pay claims in a group insurance arrangement and bear the risk that actual claims will exceed expected claims.

third-party administrators (TPAs)

Unaffiliated party contracted to administer self-funded group insurance plans.

administrative services only (ASO)

Arrangement under which an insurer or third-party administrator (TPA) handles record keeping and claim payment functions for employers sponsoring self-insured group insurance plans, who pay 5 to 10 percent of the normal premium for these services.

stop-loss insurance

A form of reinsurance or excess insurance for self-insured group insurance plans whereby an insurer or third-party administrator (TPA) provides protection against unexpectedly high claims.

specific stop loss

Stop-loss insurance for self-insured group insurance plans that provides a limit per claim above which the employer is not responsible.

aggregate stop loss

Stop-loss insurance for self-insured group insurance plans that provides a limit on the total claims in a year for which the employer is responsible.

group underwriting

Does not involve an application to the insurer by each participant or a medical examination (except in some very small employer groups); the employer makes one application for the entire group, and, instead of selecting individual insureds, the insurer makes an underwriting decision based on group characteristics.

employer sharing of costs

When an employer pays some portion of group insurance premiums; in group benefit plans where employees pay all or part of the premium amount, 75 percent of employees must participate to protect the plan from adverse selection.

supplemental plans

Specific, additional group insurance coverages and amount that employees can purchase on a fully contributory basis.

probationary period

Three- to six-month period through which a newly hired worker must be employed before becoming eligible for group benefits.

eligibility period

Timeframe (usually thirty-one days) during which employees may sign up for group insurance coverage.

open enrollment

The process of employees selecting group insurance coverage during the eligibility period.

noncontributory plan

Pension plan funded only by employer contributions.

contributory plan

Pension plan that requires the employee to pay all or part of pension fund contributions.

experience-rated premiums

When a group’s own claims experience experience affects the cost of coverage for group insurance.

flexible benefit plans

Give the employee choices among an array of benefits or cash to choose from.

cafeteria plan

Allow employees to select the types and amounts of desired benefits using flex credits and usually involves five elements: flexible benefit credits, minimum levels of certain benefits, optional benefits, cash credits, and tax deferral.

core plus cafeteria plan

Requires selection of basic employee benefits such as group life insurance and long-term disability, while giving the employee a choice among some health plans, additional disability coverage, dental coverage, and so forth.

premium conversion plan

Allows employees to purchase additional coverage in a cafeteria plan with pretax dollars through a payroll deduction.

modular cafeteria plan

A less-flexible cafeteria plan that includes a few packages available for employees to choose from.

flexible spending account (FSAs)

Allow employees to pay for specified benefits (defined by law) and out-of-pocket medical expenses using before-tax dollars contributed to the account at the beginning of the year; any funds not used by year-end are forfeited.

Age Discrimination in Employment Act (ADEA)

Eliminated mandatory retirement on the basis of age by employers.

Civil Rights Act

Requires employers to provide the same benefits for pregnancy and related medical conditions as are provided for other medical conditions.

Americans with Disabilities Act (ADA)

Forbids employers with more than fifteen employees from discriminating against disabled persons in employment.

Family Medical Leave Act (FMLA)

Requires an employer with fifty or more employees to grant an eligible employee (one who has been employed by the employer for at least twelve months) up to a total of twelve weeks of unpaid leave during any twelve-month period for one or more of the following reasons: the birth and care of the employee’s newborn child, for placement with the employee of a child for adoption or foster care, to care for an immediate family member (spouse, child, or parent) with a serious health condition, to take medical leave when the employee is unable to work because of a serious health condition.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Directs that employers of more than twenty employees who maintain a group medical plan must allow certain minimum provisions for continuation of benefit coverage.

Health Insurance Portability and Accountability Act (HIPPA)

Protects employees who change jobs from having to start a new waiting period before a preexisting condition is covered.

portability

Carrying forward the qualification for preexisting conditions.

expatriates

U.S. citizens working outside the United States.

international benefit network

Can be used to cover employees across countries under one master insurance contract when employers provide benefits in several international locations.

Chapter 21: Employment-Based and Individual Longevity Risk Management

qualified plan

Type of retirement plan where employer contributions to an employee’s pension during the employee’s working years are deductible as a business expense, are not taxable income to the employee until they are received as benefits, and investment earnings on funds held by the trustee for the plan are not subject to income taxes as they are earned.

nonqualified plan

Type of retirement plan that does not allow employer funding contributions to be deducted as business expenses unless classified as compensation to the employee (in which case they become taxable income for the employee), investment fund earnings are also subject to taxation, and retirement benefits are deductible business expenses when paid to the employee (if not previously classified as compensation).

Employee Retirement Income Security Act (ERISA) of 1974

Federal law that regulates the design, funding, and communication aspects of qualified retirement plans; specifically, protects the benefits of plan participants and prevents discrimination in favor of highly compensated employees (those who control the organization).

Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001

Federal law that regulates the design, funding, and communication aspects of qualified retirement plans; allows increases in retirement savings limits and mandates faster participant vesting in employers’ matching contributions to defined contribution plans.

Pension Protection Act of 2006

Federal law that regulates the design, funding, and communication aspects of qualified retirement plans; specifically, added permanency to EGTRRA 2001 laws and provides greater portability, increases in flexibility in plan funding and design, and administrative simplification.

eligibility criteria

Determines who participates in employer pension plans, subject to ERISA, the Age Discrimination in Employment Act, and other federal requirements.

coverage requirements

ERISA provisions designed to improve participation in qualified pension plans by nonhighly compensated employees.

controlled group

Employees of businesses with related ownership; treated for coverage requirements as if employees of one plan.

normal retirement age

The age at which full retirement benefits become available to retirees; age sixty-five in most private retirement plans.

contributory plan

Pension plan that requires the employee to pay all or part of pension fund contributions.

noncontributory plan

Pension plan funded only by employer contributions.

vesting

In pension plans, specifies the extent of employee’s right to benefits for which the employer has made contributions, subject to ERISA, EGTRRA 2001, TRA86, and other federal requirements.

top-heavy plans

Pension plans in which the owners or highest-paid employees hold over 60 percent of the value of the plans.

preretirement survivor annuity

Provision made possible once a participant becomes vested in a pension plan that gives lifetime benefits to the spouse if the participant dies before the earliest retirement age allowed by the plan.

joint and survivor annuity

Provision made possible once a participant reaches the earliest allowed retirement age that qualifies the spouse for a lifetime benefit in the event of the participant’s death (in most cases, 50 percent of the annuity).

defined benefit (DB) plan

Type of pension plan that assures employees of a certain amount at retirement, leaving all risk to the employer to meet the specified commitment; accumulated funds for all participants are managed in one account.

final average formula

Sets the compensation base as compensation for a recent number of years (e.g., the last three or highest consecutive five years) in computing the retirement benefit in a defined benefit plan; tends to keep the initial benefit in line with inflation.

career average formula

Bases benefits on average compensation for all years of service under the plan in computing the retirement benefit in a defined benefit plan.

supplemental liability

In a retirement benefit formula, past service liability giving credit to employees’ service prior to the adoption of a defined benefits plan; can be amortized over a certain number of years.

cash balance plan

Defined benefit plan that is a hybrid of the traditional defined benefit plan and a defined contribution plan where the employer commits to contribute a certain percentage of compensation each year and guarantees a rate of return such that employees can calculate the exact lump sum that will be available at retirement (since the employer guarantees both contributions and earnings).

cost-of-living adjustment (COLA)

Increases retirement benefits automatically with changes in a cost-of-living or wage index to account for inflation during retirement years.

integrated plan

Defined benefit plan that coordinates Social Security benefits (or contributions) with the benefit (or contribution) formula, thus reducing private retirement benefits based on the amount received through Social Security and lowering employer costs.

Pension Benefit Guaranty Corporation (PBGC)

Federal agency that ensures the benefits of defined benefit plans up to annual limits in case the pension plan cannot meet its obligations.

normal costs

In defined benefit plans, the annual amount needed to fund pension benefits during an employee’s working years.

supplemental costs

In defined benefit plans, the amounts necessary to amortize any past service liability over a period that may vary from ten to thirty years.

defined contribution (DC) plan

Type of pension plan that promises only to contribute an amount to the employee’s separate or individual account; the employee has the investment risk and no assurances of the level of retirement amount; has separate accounts under the control of each participant.

money purchase plan

In this simplest of the defined contribution plans, the employer guarantees only the annual contribution to an employee’s retirement account, but not any returns.

target plan

Hybrid age-weighted defined contribution plan in which each employee is targeted to receive the same formula of benefit at retirement, but the benefits are not guaranteed; older employees receive a larger contribution as a percentage of compensation than younger employees since they have less time to accumulate funds to retirement.

profit sharing plans

Incentive defined contribution plans whereby employers may voluntarily elect to annually distribute a specified portion of company profits among employees in relation to salary.

deferred profit-sharing plan

Profit sharing plan in which the employer puts part of its profits in trust for the benefit of employees.

employee stock ownership plan (ESOP)

Special type of profit sharing plan where all investments are in employer’s common stock.

401(k) plan

Defined contribution plan that allows an employee to defer before-tax compensation toward a retirement account, which may be matched or supplemented by employer contributions.

403(b) plans

Allows employees of tax-exempt entities to defer compensation toward retirement accounts, similar to 401(k) plans.

Section 457 plans

Allows employees of state and local governments and nonproft, noneducational institutions to defer compensation toward retirement accounts, similar to 401(k) plans; the money must be held separately from employer assets in a trust, custodial account, or annuity contract.

Keogh plans

Allow tax-deferred retirement contributions toward retirement savings for self-employed persons.

simplified employee pension (SEP)

Allows employers to make deductible contributions to employee individual retirement accounts (IRAs) at higher limits than the traditional IRA.

Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)

Allow employees of small businesses who meet income eligibility to make retirement savings contributions through payroll deductions that can be supplemented by employer contributions.

traditional IRA

Individual retirement account that allows individuals to defer taxes on account contributions and earnings on contributions until the account is withdrawn, subject to annual income and contribution limits; also the vehicle for rolling over employers’ sponsored retirement accounts in order to avoid penalties and tax issues.

Roth IRA

Individual retirement account funded with after-tax dollars, but earnings on the account are never taxed, even when drawn upon at retirement, subject to annual income and contribution limits.

Roth 401(k) and Roth 403(b)

After-tax contribution plans created from EGTRRA 2001 that work like the Roth IRA subject to a five-year waiting period and attainment of age fifty-nine and a half for distributions; have no income limits and no coordination limits.

life annuity

Contract in which the duration of payment from an annuity depends upon the expected length of a life or lives.

owner

The person or entity that purchases an annuity.

annuitant

The person on whose life expectancy payments are based.

beneficiary

The person or entity who receives any death benefits due at the death of the annuitant.

accumulation period

The time during which premiums are being paid toward an annuity and benefits (distribution) have not begun.

accumulation value

The value of the annuity contract during the accumulation period; consists of premiums plus investment earnings minus expenses.

liquidation period

The time during which the accumulation value and future investment returns of an annuity contract are being liquidated by benefit payments.

immediate annuity

Begins payments at the next payment interval (e.g., month, quarter, or year) after purchase; requires a single premium.

deferred annuity

Begins payments sometime in the future as elected by the owner, such as at age sixty-five; may be funded by a single premium, equal installments, or, more commonly, by flexible premiums.

fixed dollar annuity

Earns investment returns at rates guaranteed by the insurer, subject to periodic changes in the guaranteed rate for the next period; a set amount of benefit per dollar of accumulation (varying also by life expectancy when benefits begin) is paid during the liquidation period.

variable annuity

Returns vary with the investment performance of special investment accounts; the amount of benefit payment may vary from month to month or at another interval.

single life annuity

When the income option is based on the life expectancy of the annuitant alone, assuming the annuitant lives until the liquidation period.

fixed period annuity

Makes payments for a specified period, such as twenty years, and then ceases.

fixed amount annuity

Pays benefits of a set amount per period until the accumulation value at the time benefits begin plus investment earning during the liquidation period are exhausted.

temporary life annuity

Combination of a fixed period annuity and a life annuity; payments stop at the end of a specified period or at the death of the annuitant, whichever comes first.

period-certain option

Guarantees a minimum number of annuity payments whether the annuitant lives or dies.

refund annuity

Guarantees that the annuitant and/or beneficiary will receive, during the liquidation period, minimum payments equal to the single premium in an immediate annuity or the accumulation value in a deferred annuity.

joint annuity

Names two annuitants and payments stop when the first joint annuitant dies.

joint-and-survivor annuity

Names two annuitants and continues payments as long as at least one annuitant is alive.

flexible premium deferred annuity

Allows owners to change the amount of contributions, stop contributions, and resume them at will.

single premium deferred annuity

Requires payment of a single premium and a stipulates a longer period to which a current rate of interest is guaranteed.

single premium immediate annuity

Begins benefit payments to the annuitant on the next payment date following the premium payment, usually as a large sum.

structured settlement annuity

Makes periodic payments to a plaintiff in a legal liability judgment to lower the total cost of liability.

accumulation units

Credits variable annuity accounts when premiums are paid, as determined by the amount of premium and current market value.

annuity units

Exchanged for accumulation units during an annuity’s liquidation or distribution period, as determined by current market value, assumed investment return, and key features of the annuitant.

exclusion ratio

Expression of annuity payments during distribution as taxable and nontaxable portions and calculated as investment in contract divided by expected return.

noninsured trust plan

Pension plan funding technique whereby the employer creates a trust to accumulate funds and disburse benefits; the trustee may be an individual, a bank, a trust company, an insurer, or some combination of cotrustees whose responsibilities are to invest funds contributed by the employer to the trust (and by employees, if contributory); accumulate earnings; and pay benefits to eligible employees.

group deferred annuity

Insured pension funding option that is a contract between insurer and employer to provide for the purchase of specified amounts of deferred annuity for employees each year.

deposit administration

Insured pension funding arrangement that requires the employer to make regular payments (as determined by actuaries) to the insurance company on behalf of employees, and these contributions accumulate at interest.

immediate participation guarantee (IPG) contract

Insured pension funding plan that is a form of deposit administration whereby the employer makes regular deposits to a fund managed by the insurance company and the insurer receives deposits and makes investments.

separate account plans

Insured pension funding plans that are a modification of deposit administration contracts designed to give the insurer greater investment flexibility; contributions are not commingled with the insurer’s other assets and not subject to the same investment limitations.

guaranteed investment contracts (GICs)

Insured pension funding arrangements used by insurers to guarantee competitive rates of return on large, lump-sum transfers (usually $100,000 or more) of pension funds, usually from another type of funding instrument.

Chapter 22: Employment and Individual Health Risk Management

usual, customary, and reasonable (UCR)

The costs of health care services that insurers generally agree to cover in fee-for-service or managed care arrangements, based on studies of the appropriate cost for each medical procedure.

preferred provider organizations (PPOs)

Groups of hospitals, physicians, and other health care providers that contract with insurers, third-party administrators, or directly with employers to provide medical care to members of the contracting group(s) at discounted prices.

point of service (POS)

A preferred provider organization (PPO) that includes a primary care physician to serve as a gatekeeper, keeping costs contained.

individual practice associations (IPAs)

HMO model where contractual arrangements are made with physicians and other providers in a community who practice out of their own offices and treat both HMO and non-HMO members.

capitation

As in the case of managed care, a set amount paid to each health care provider based on the number of subscribers in the provider’s plan.

health care providers

Include health professionals, such as physicians and surgeons, and health facilities, such as hospitals and outpatient surgery centers.

indemnity benefits

Reimburse insureds for actual costs incurred for health care up to covered limits in traditional fee-for-service plans.

fee-for-service

Medical expense insurance providing hospital, surgical, and medical expenses, plus major medical and comprehensive coverage.

basic health care benefits

The hospital, surgical, and medical expenses of a fee-for-service plan.

basic hospital policy

Basic health care benefit for room and board (for a specified number of days) and hospital ancillary charges, such as for X-ray imaging and laboratory tests.

basic surgical policy

Basic health care benefit that usually pays providers according to a schedule of procedures, regardless of whether surgery is performed in a hospital or elsewhere.

basic medical expense policy

Basic health care benefit for all or part of doctors’ fees for hospital, office, or home visits due to nonsurgical care.

major medical insurance

Covers virtually all charges for hospitals, doctors, medicines, blood, wheelchairs, and other medically necessary items in a fee-for-service arrangement and has four fundamental features: high maximum limits (or no limits), a large deductible, coverage of a broad range of different medical services, and coinsurance provisions.

maximum limits

In major medical insurance, apply to the total amount the insurer will pay over the insured’s lifetime.

internal policy limits

In major medical insurance, apply to specified services such as hospital room and board charges.

benefit period

Term for which premiums, deductibles, copayments, and limits on insurance apply; in group insurance, usually a calendar year.

coinsurance provision

Gives the percentage of expenses the insurer will pay in excess of the deductible, usually between 70 and 90 percent.

stop-loss limit

Amount above which an insured is no longer responsible for paying on a covered loss, regardless of any coinsurance provision.

cost sharing

Provisions such as deductibles and coinsurance requirements that increase personal costs to insureds, reducing overall costs and moral hazard.

comprehensive medical insurance

Reduces financial burdens of major medical policies on insureds by providing smaller deductibles and broad coverages in a single policy.

coordination of benefits provision

Establishes a system of primary and secondary insurers specifying the order and terms of payment when an insured has coverage under two separate insurance plans.

cost containment techniques

Methods of controlling costs in traditional fee-for-service policies through plan design, administration/funding, and utilization review.

second surgical opinion provision

Requires that an insured seeks a second opinion to increase information available before making a decision about whether to have the surgery; does not require that two surgeons agree as to the need for surgery.

preadmission testing

Diagnostic tests done on an outpatient basis prior to a patient’s surgery to reduce the total time spent in the hospital.

preadmission certification

In fee-for-service plans, requires the physician of the insured to contact the plan administrator for approval of hospital admission for a specified number of days.

extended care facilities

Provide basic medical care needed during some recoveries rather than the intensive and more expensive medical service of a hospital.

hospice care

Arrangement where volunteers and family members help to care for a dying person in the hospital, at home, or in a dedicated hospice facility.

home health care

Organized system of care at home that substitutes for hospital admission or allows early discharge from the hospital.

utilization review organizations

Run by physicians, surgeons, and nurses, offer peer judgments on whether hospital admission is necessary, whether the length of hospital stay is appropriate for the medical condition, and whether quality of care is commensurate with the patient’s needs.

statistical analysis of claims

Has the purpose of identifying any over utilization or excessive charges by providers of medical care.

diagnostic related groups (DRGs)

A medical or surgical condition that recognizes age, sex, and other determinants of treatment costs.

prospective payment

Practice of paying a flat fee for patient care based on a patient’s DRG; provided an economic incentive to providers, specifically hospitals, to minimize length of stay and other cost parameters.

wellness programs

Designed to promote healthy lifestyles and reduce the incidence and severity of employee medical expenses.

managed care

Controlled access to doctors, procedures, and medicines through a variety of plans.

preferred provider organizations (PPOs)

Groups of hospitals, physicians, and other health care providers that contract with insurers, third-party administrators, or directly with employers to provide medical care to members of the contracting group(s) at discounted prices.

health maintenance organizations (HMOs)

Provide a comprehensive range of medical services, including physicians, surgeons, hospitals, and other providers, emphasizing preventive care; either employs providers directly or sets up contracts with outside providers to care for subscribers.

group practice association

Not-for-profit HMO model where physicians and other providers work for salaries or capitation.

individual practice associations (IPAs)

HMO model where contractual arrangements are made with physicians and other providers in a community who practice out of their own offices and treat both HMO and non-HMO members.

health savings accounts (HSAs)

Designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis by providing participants in high deductible health plans with personal accounts funded by employer or employee contributions with before-tax dollars to put toward out-of-pocket medical expenses.

medical savings accounts (MSAs)

Allowed limited contributions from employers and employees of small businesses and self-employed persons to help cover out-of-pocket medical expenses.

high deductible health plan (HDHP)

Any health insurance plan that requires deductibles up to the amounts established by the IRS annually.

health reimbursement arrangement (HRA)

Plan similar to the Health Savings Account (HSA), with the distinction that the employer controls plan contributions.

preferred provider organizations (PPOs)

Groups of hospitals, physicians, and other health care providers that contract with insurers, third-party administrators, or directly with employers to provide medical care to members of the contracting group(s) at discounted prices.

health maintenance organizations (HMOs)

Provide a comprehensive range of medical services, including physicians, surgeons, hospitals, and other providers, emphasizing preventive care; either employs providers directly or sets up contracts with outside providers to care for subscribers.

cancer or critical illness policy

Pays for the extra expenses incurred during the period of medical treatment for a covered illness; used to supplement medical coverage.

dental insurance policies

Available in both the individual and group market, typically pay for normal diagnostic, preventive, restorative, and orthodontic services, as well as services required because of accidents.

sick leave plans

Allow employees to accumulate leave time that can be used in the event of injury or illness at 100 percent income replacement, typically at a rate of one day per month of work up to a maximum of twenty-six weeks.

paid time off (PTO)

Consolidates sick leave, personal leave, and vacation leave into a total number of personal days off each year to reduce employee incentive to abuse sick leave and reward those who never use sick leave.

short-term disability (STD) income replacement

Pays employees between 65-75 percent of salary from three months to two years in the event of nonoccupational injury or illness that interrupts employment.

elimination period

The one- to seven-day absence from work often required before employees qualify for benefits from short-term disability; in the case of long-term disability, may be the benefit period under short-term disability.

definition of disability

Determines when an employee is eligible for short-term disability insurance benefits, generally stated as the inability of the employee to perform any and every duty of the job; long-term disability definitions are more restrictive.

long-term disability (LTD) insurance

After satisfying an elimination (generally equivalent to the benefit period in short-term disability), pays employees between 60 and 70 percent of salary for a five to ten years or longer in the event of nonoccupational injury or illness that interrupts employment.

preexisting condition clauses

Restrict coverage of named preexisting conditions in the case of disability benefits.

total disability

Definitions vary across different disability policies, but generally: the complete inability to perform “any and every duty” of the individual’s own job; alternatively, the inability to engage in any “reasonable and gainful occupation” for which the individual is (or could become) qualified by education, training, or experience.

partial disability

Usually measured in terms of the inability to perform some of the important duties of one’s job; paid in some disability policies only if partial disability follows total disability or only if a loss of income results.

social insurance substitute

Disability policy provision that replaces Social Security benefits if the individual does not qualify under the strict definition of disability in Social Security.

average earnings provision

Coordinates benefits under different disability policies by providing for a reduction in benefit payments if the total amount of income payments under all insurance policies covering the loss exceeds earnings at the time disability commences or exceeds the average earnings for two years preceding disability, whichever is greater.

group long-term care (LTC) insurance

Up to maximum daily benefits, covers the costs of skilled nursing care, intermediate care, custodial care needed to handle personal needs, home health care, and adult day care for individuals whose ability to perform a certain number of activities of daily living is impaired.

activities of daily living (ADL)

Activities such as bathing, dressing/undressing, eating, and grooming that, once unable to be performed independently, qualifies a person for long-term care insurance.

LTC annuity

Life insurance rider that covers the costs of nursing home stays, home health care treatment, and other long-term care services typically covered by stand-alone long-term care insurance policies.

Medigap insurance

Private individual health contracts used to supplement the coverage provided by Medicare that represent a range of benefits and premiums; ten standard Medigap insurance policies are approved for use.

Chapter 23: Cases in Holistic Risk Management

alternative risk financing

Risk-funding arrangements that typically apply to losses above a firm’s primary self-insurance retentions or losses above the primary insurance layer.

integrated risk management

Coordinated alternative risk-financing approach of identifying, measuring, and monitoring diverse and multiple risks that require effective and rapid response to changing circumstances.

multitrigger contract

Insurance in which coverage is triggered by the occurrence of more than one event happening within the same time period.

finite risk programs

Allow insureds to share in the underwriting profit and investment income that accrues on premiums if loss experience is favorable and recognize firms’ individual risk transfer needs.

: Appendix A

: Appendix B

: Appendix C

: Appendix D