LOMA’s Glossary of Insurance and Financial Services Terms

Copyright © 2002 LOMA (Life Office Management Association, Inc.). Used with permission from the publisher. All rights reserved.

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1035 exchange. See Section 1035 Exchange.

1099. See IRS Form 1099.

20 percent rule. See percentage-of-income rule.

401(k) plan. In the United States, a special type of profit-sharing plan, savings plan, or retirement plan that is established by employers for the benefit of employees and that allows both employers and employees to make specified contributions to the plan on a tax-deferred basis.

403(b) plan. In the United States, an arrangement that allows not-for-profit employers and their employees to make contributions to a tax-deferred retirement savings plan established for the benefit of employees.

457 plan. In the United States, an arrangement that allows state and local governments and their employees to make contributions to a tax-deferred retirement savings plan established for the benefit of employees.

5498. See IRS Form 5498.

AADLs. See advanced activities of daily living.

absolute assignment. An irrevocable transfer of complete ownership of a life insurance policy or an annuity from one party to another. Contrast with collateral assignment. See also assignment.

ACB. See adjusted cost basis.

Accelerated Benefits Model Regulation. In the United States, a National Association of Insurance Commissioners (NAIC) model regulation designed to regulate accelerated death benefit provisions and to impose disclosure standards on insurers that provide such benefits.

accelerated death benefit. A benefit included in a life insurance policy or added to a life insurance policy through a policy rider that gives the policyowner the right to receive a portion—usually between 50 and 80 percent—of the policy’s death benefit during the insured’s lifetime when the insured is terminally ill as defined in the policy. Also known as terminal illness (TI) benefit.

acceptable alternative mechanism. For purposes of the Health Insurance Portability and Accountability Act (HIPAA) in the United States, a state-approved plan that provides health insurance coverage to all eligible individuals without imposing preexisting conditions exclusions and gives eligible individuals a choice of health insurance coverage.

accident insurance. A type of health insurance coverage that only provides benefits for an insured’s death, dismemberment, disability, or medical care that results from the insured being in an accident. See also health insurance.

accidental death and dismemberment (AD&D) benefit. A supplementary life insurance policy benefit that provides for an amount of money in addition to the policy’s basic death benefit. This additional amount is payable if the insured dies as the result of an accident or if the insured loses any two limbs or the sight in both eyes as the result of an accident.

accidental death benefit (ADB). A supplementary life insurance policy benefit that provides a death benefit in addition to the policy’s basic death benefit if the insured’s death occurs as the result of an accident. See also double indemnity benefit.

account fee. In unbundled variable insurance products, an annual charge to customers generally expressed as the lesser of a specified dollar amount or a percentage, such as 2 percent of the account value.

account form. The presentation format of a balance sheet in which asset accounts appear on the left side and liabilities and owners’ equity accounts appear on the right side.

accredited reinsurer. A reinsurance company that is not licensed in the ceding company’s jurisdiction, but meets specified financial and reporting requirements of that jurisdiction and holds a license in and is domiciled in at least one other jurisdiction.

accumulated cost of insurance. For a life insurance product at a specified point in time, the total amount the insurer has paid in benefits, accumulated at interest.

accumulated value. The total of an amount of money invested plus the interest earned by that money.

accumulated value of an annuity. At any given date during the accumulation period of a fixed deferred annuity, the net amount paid for the annuity, plus interest earned, less the amount of any withdrawals or surrender charges. The accumulated value of a variable, deferred annuity is calculated based on the value of the contract owner’s interest in the separate accounts used to fund the annuity. Also known as accumulation value of an annuity and account value of an annuity.

accumulated value of net premiums. For a life insurance product at a specified point in time, the total of the net premiums collected, accumulated at interest.

accumulation at interest dividend option. An option, available to the owners of participating insurance policies, that allows a policyowner to leave policy dividends on deposit with the insurer and earn interest. See also dividends and policy dividend options.

accumulation period. For a deferred annuity contract, the time period between the date that the contract owner purchases the annuity and either (1) the date that periodic income payments begin or (2) the date that the contract’s surrender value is paid. During the accumulation period, the accumulation value of the annuity account grows.

accumulation unit. A unit of measurement that represents an ownership share in a selected subaccount of a variable deferred annuity during its accumulation period. After the accumulation period ends, the accumulation units are used to buy annuity units. See also accumulation period and annuity units.

ACLF. See adult congregate living facility.

ACLI. See American Council of Life Insurers.

acquisition-cost concept. See cost concept.

acquisition expenses. Costs that are directly attributable to the production of new business. See also policy acquisition expenses.

active management strategy. An investment strategy in which an asset manager views any security in a portfolio as potentially tradable, if doing so would improve the portfolio’s performance. See also portfolio and security.

activities of daily living (ADLs). In long-term care insurance, activities such as eating, bathing, and dressing that an insured must be unable to perform in order to demonstrate a need for long-term care and, thus, qualify for long-term care benefits.

actual cash value insurance. A type of homeowner’s insurance that pays the policyholder an amount equal to the replacement cost of the property minus an amount for depreciation.

actual net debt. For purposes of determining the benefit payable under a consumer credit insurance policy, the lump-sum amount needed on any given date to pay off the debt, excluding unearned interest and any other unearned finance charges.

actuarial assumptions. The estimated values—for such elements of insurance product design as mortality rates, investment earnings, expenses, and policy lapses—on which an insurer bases its product pricing and policy reserve calculations.

actuarial cost method. A formal approach used for preparing valuations of defined benefit pension plan liabilities in order to ensure that the plan is adequately and systematically funded. Also known as actuarial funding method and pension plan valuation method.

actuarial function. The area of an insurance company responsible for seeing that the company’s operations are conducted on a mathematically sound basis. In conjunction with other departments, it designs and revises a company’s insurance products, establishes premium and dividend rates, determines what a company’s reserve liabilities should be, and establishes nonforfeiture, surrender, and loan values. It also does the research needed to predict mortality and morbidity rates, to establish guidelines for selecting risks, and to determine the profitability of the company’s products.

actuarial funding method. See actuarial cost method.

actuarial liabilities. See reserves.

actuarial memorandum. A report, required in many U.S. policy form filings, which demonstrates that the policy in question complies with all state insurance laws and regulations that apply to the actuarial (mathematical) soundness of the policy.

Actuarial Opinion and Memorandum Regulation (AOMR). Under the Standard Valuation Law in the United States, a requirement for insurers to (1) submit an actuarial opinion to state in essence that the insurer’s reserves and associated assets make adequate provision for anticipated cash flows arising from the insurer’s contractual obligations and (2) prepare an actuarial memorandum in support of the opinion. This memorandum is not submitted unless requested by an insurance department.

actuarial opinion statement. In the United States, a separate document that must be submitted along with the Annual Statement by insurance companies that issue interest-sensitive products; this document represents an independent analysis of an insurance company’s financial data.

actuarial valuation of pension plan benefits. The outcome or process of finding the actuarial present value, as of a specified valuation date, of a defined benefit pension plan’s future benefit payments.

actuarial valuation. A determination by an actuary, based on statistical probability, of the value of assets and/or liabilities.

actuary. A technical expert in insurance, annuities, and financial instruments who applies mathematical knowledge to industry and company statistics to calculate an insurance company’s mortality rates, morbidity rates, lapse rates, premium rates, policy reserves, and other financial values. See also product actuary, valuation actuary, and appointed actuary.

ADA. See Americans with Disabilities Act.

additional insured rider. See second insured rider.

additional term insurance option. An option available to owners of participating insurance policies under which the insurer uses a policy dividend as a net single premium to purchase one-year term insurance on the insured’s life. Also known as fifth dividend option. See also dividend and policy dividend options.

ADEA. See Age Discrimination in Employment Act.

adjustable life insurance. A form of life insurance that allows policyowners to vary the type of coverage provided by their policies as their insurance needs change.

adjusted cost basis (ACB). A measure of the cost of a life insurance policy at a given time.

adjusted premium. An amount used in the calculation of cash values for life insurance; this amount is equal to the policy’s valuation net annual premium plus an amount added to account for an insurer’s expenses.

adjustment methods provision. In an annuity contract, a written statement describing the steps the insurer will take to correct any material misstatement of age or sex. See also misstatement of age or sex provision.

ADLs. See activities of daily living.

administrative fee. For annuities, a fee charged by insurers to cover costs such as issuing a fixed or variable annuity, making administrative changes to the annuity contract, and preparing the contract owner’s statement. In the case of some fixed annuity contracts, fees are not charged separately but have been included in the premiums charged for the contract. In other cases, a stated, flat dollar amount is automatically deducted from the customer’s annuity account value each year. For variable annuities, the fee may be expressed as a percentage of the assets in the investment subaccounts. Also known as administration charge, administration expense fee, and contract fee.

administrative services only (ASO) contract. A contract under which an insurer or other organization, such as a third-party administrator, agrees to provide administrative services for an employer that is self-funding an insurance benefit plan rather than purchasing group insurance. See also third-party administrator (TPA).

Administrative Supervision Model Act. In the United States, a National Association of Insurance Commissioners (NAIC) model law that authorizes the insurance commissioner of an insurer’s state of domicile to place the insurer under administrative supervision. See also administrative supervision.

administrative supervision. A legal condition under which an insurer in the United States may be required to obtain the permission of the insurance commissioner of its domiciliary state before the insurer takes any of a variety of specified actions. See also Administrative Supervision Model Act.

admitted assets. For an insurer, assets whose full value can be reported on the Assets page of the U.S. Annual Statement. Contrast with nonadmitted assets.

admitted reinsurer. See authorized reinsurer.

adult congregate living facility (ACLF). In long-term care insurance, a type of assisted living facility designed mostly for middle- to lower-income groups, with less spacious living quarters than continuing care retirement communities and meals served in a central dining room.

adult day care. In long-term care insurance, care provided to adults in a group setting during hours when primary caregivers are working.

advanced activities of daily living (AADLs). In long-term care insurance, vocational, social, or recreational activities that reflect personal choice and add meaning and richness to a person’s life. The AADLs include working; attending church; going out to dinner, a theater, or a concert; playing cards; participating in physical recreational activities; and driving an automobile.

advanced underwriting department. A department within an insurance company that assists agents with estate planning and business insurance cases; this department prepares proposals based on the information the agent has collected; accompanies the agent, if requested, on sales presentations; provides computer support services; and conducts seminars and counsels agents regarding tax laws and methods of using insurance products to solve estate planning problems.

adverse action. According to the Fair Credit Reporting Act in the United States, (1) a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested; or (2) a denial or cancellation of insurance, an increase in any charge for insurance, a reduction in coverage, or any other adverse or unfavorable change in the terms or amount of existing insurance or coverage applied for by a consumer.

adverse deviation. In insurance product design, a difference between actual and assumed product values that produces a decrease in actual product profitability relative to assumed product  profitability. Contrast with favorable deviation.

adverse selection. See antiselection.

adverse underwriting decision. An underwriting decision in which an insurer refuses to issue insurance coverage to an applicant, terminates existing coverage, or offers to provide an applicant with insurance at higher than standard premium rates.

advertisement. According to the National Association of Insurance Commissioners (NAIC) Rules Governing the Advertising of Life Insurance, any material designed (1) to create public interest in life insurance or annuities, an insurer, or an insurance producer or (2) to induce the public to purchase, increase, modify, reinstate, borrow on, surrender, replace, or retain a policy.

affiliate reinsurer. A type of captive reinsurer that is established for use by a group of affiliated insurers. See also captive reinsurer.

after-tax dollars. Money after taxes have been paid on it.

Age Discrimination in Employment Act (ADEA). A United States federal law that protects workers age 40 and older from being discriminated against because of their age.

age provision. An annuity contract provision that specifies a maximum issue age for annuitants, typically between 70 and 85 years old.

agency. A legal relationship in which one party, known as the principal, authorizes another party, known as the agent, to act on the principal’s behalf. See also agent and principal.

agency administration. All of the activities performed by an insurer’s home office employees or by field office personnel to provide support and service to the insurer’s field force. See also field force.

agency agreement. A written contract that spells out the rights and duties of a principal and an agent and the scope of the agent’s actual authority. Also known as agency contract. See also agent and principal.

agency-building distribution system. A type of insurance sales distribution system wherein companies recruit and train their salespeople, and provide them with financial support and office facilities. Four general types of agency-building distribution systems are ordinary agency distribution systems, multiple-line agency (MLA) systems, salaried sales distribution systems, and location-selling distribution systems. Contrast with nonagency building distribution system. See also location-selling distribution systems, multiple-line agency (MLA) systems, ordinary agency distribution systems, and salaried sales distribution systems.

agency contract. See agency agreement.

agency distribution plan. A document that describes an insurance company’s goals and objectives for product distribution and serves as a guide for each field office’s own operating plan.

agency system. See agency-building distribution system.

agent. (1) In agency law, a party who is authorized by another party, the principal, to act on the principal’s behalf in contractual dealings with third parties. See also principal. (2) In insurance, any person or entity representing an insurance company and selling insurance. See also agent-broker, broker, general agent (GA), and personal producing general agent (PPGA).

agent-broker. A career insurance agent who places business with a primary company and with other insurance companies.

agents’ debit balances. Amounts that sales agents have collected from customers and owe to an insurer.

agent’s statement. A portion of the insurance application that contains the agent’s comments about or impressions of the proposed insured and the risk involved; this statement is usually not made a part of the policy contract.

aggregate level cost allocation methods. Pension plan valuation methods that measure costs directly for an entire pension plan without attribution to individual plan participants. Also known as aggregate level-premium cost methods. Contrast with individual level cost allocation methods.

aggregate level-premium cost methods. See aggregate level cost allocation methods.

aggregate stop-loss coverage. A type of stop-loss insurance coverage purchased by self-insured employers that provides benefits to the employer when total group health claims exceed a stated dollar amount within a stated period of time. See also individual stop-loss coverage.

aggregation rule. A United States federal income tax rule stating that all deferred annuity contracts that were entered into after October 21, 1988, and that were issued by the same insurer to the same contract owner during the same calendar year, will be treated as one contract for purposes of determining the amount of any withdrawal that is included in income.

aggressive financial strategy. A financial management strategy that places an unusually strong emphasis on profitability and de-emphasizes solvency.

AICPA. See American Institute of Certified Public Accountants.

AIR. See assumed investment return.

aleatory contract. A contract in which one party provides something of value to another party in exchange for a conditional promise, which is a promise that the other party will perform a stated act upon the occurrence of an uncertain event. Insurance contracts are aleatory because the policyowner pays premiums to the insurer, and in return the insurer promises to pay benefits if the event insured against occurs. Contrast with commutative contract.

alien corporation. From the point of view of any state in the United States, a company that is incorporated under the laws of another country. Contrast with domestic corporation.

allied medical practitioner. A licensed health care provider who is not a licensed medical doctor; for example, chiropractors, osteopaths, or nurse midwives.

allocated pension funding contract. A type of pension plan contract in which all of the plan sponsor’s contributions are credited to individuals in a manner that gives the individual-participants a legally enforceable claim to the benefits attributable to those contributions. Contrast with unallocated pension funding contract.

allowable expenses. According to the coordination of benefits provision included in most group medical expense insurance policies, those reasonable and customary expenses that the insured incurred and that are covered under at least one of the insured’s group medical expense plans.

allowance. In a reinsurance arrangement, the reinsurer’s proportionate share of the agent commissions, underwriting costs, administration costs, policy issue costs, and other expenses that an insurer incurs in acquiring a policy.

all-risk policy. A type of homeowner’s insurance that covers losses caused by all perils other than those excluded in the policy.

ALM. See asset/liability management.

alpha split. See alphabetic split.

alphabetic split. A method insurance companies use to transfer excess risk to two or more reinsurers by assigning cases to each reinsurer according to policyowners’ last names. Also known as alpha split. See also reinsurance.

alternate care benefits. In long-term care insurance (LTC) plans, benefits for nonconventional services developed cooperatively by a physician and an insurer to substitute for more expensive nursing home care. May include special medical care and treatments, different sites of care, or even medically necessary modifications to an insured person’s home.

amendment. A provision added to a contract that modifies an existing provision.

American Academy of Actuaries. A professional organization of actuaries in the United States.

American Council of Life Insurers (ACLI). A U.S. organization that collects and disseminates data on life insurance markets.

American Institute of Certified Public Accountants (AICPA). A professional association of U.S. Certified Public Accountants (CPAs) that directly influences accounting practice in the United States in a variety of ways, including the development of generally accepted auditing standards (GAAS).

Americans with Disabilities Act (ADA). A U.S. federal law that protects disabled individuals against all types of discrimination, including employment discrimination.

amortized cost. An asset’s historical cost, less any adjustment, such as depreciation or amortization, to the asset’s book value.

analytical phase of IRIS. The second phase of the Insurance Regulatory Information System (IRIS) used in the United States to monitor the financial condition of insurers. IRIS was established and is operated by the National Association of Insurance Commissioners (NAIC). During this phase, NAIC examiners apply qualitative and quantitative standards to further analyze the Annual Statement data of insurers that had a number of unusual ratios during the first phase of IRIS analysis. See also Insurance Regulatory Information System (IRIS) and statistical phase of IRIS.

annual annuity. An annuity that provides for a series of annual benefit payments.

annual percentage rate (APR). See effective interest rate.

annual policy report. A statement an insurer issues at the end of each policy year to a policyowner to provide a summary of policy transactions that year.

annual report. (1) A financial document that an incorporated business issues to its stockholders, and other interested parties, to report the business’s activities and financial status for a specified period, which is usually the preceding year. (2) A report that an insurer must provide to variable insurance contract owners describing the investment performance of subaccounts for the preceding year.

annual reset method. A method for crediting excess interest to an equity-indexed annuity that involves comparing the value of the index at the start of the contract year with its value at the end of the contract year. The starting value for the next year is reset to the value of the index at the end of the current contract year. The insurer determines the amount of excess interest by averaging the results for each contract year of the contract term. Also known as ratchet method.

Annual Return. In Canada, an accounting report that presents information about an insurer’s operations and financial performance which every company subject to federal regulation must file with the Office of the Superintendent of Financial Institutions.

Annual Statement. A financial report that every insurer in the United States must file at least annually with the National Association of Insurance Commissioners (NAIC) and the insurance regulatory organization in each state in which the insurer conducts business. Regulators use the information in the report to evaluate an insurance company’s solvency and its compliance with insurance laws.

annualized premium. In the home service insurance distribution system, the amount of premium scheduled to be paid to an insurer for all the insurance policies in an agent’s book of business during the course of one year.

annually renewable term (ART) insurance. See yearly renewable term (YRT) insurance.

annuitant. The person whose lifetime is used to measure the length of time periodic income payments are payable under an annuity contract and who usually receives the annuity benefit payments.

annuitization period. See payout period.

annuitization. An annuity contract payout option that provides annuity benefit payments that are tied to the life expectancy of the annuitant.

annuity. (1) A series of periodic payments. (2) A financial contract between an insurer and a customer under which the insurer promises to make a series of periodic benefit payments to a named individual—the payee—in exchange for the contract owner’s payment of a premium or series of premiums to the insurer. See also annuity certain, annuity due, deferred annuity, ordinary annuity, and straight life annuity.

annuity beneficiary. The person or party named to receive any survivor benefits that are payable during the accumulation period of a deferred annuity. See also survivor benefits.

annuity certain. A type of annuity contract that pays periodic income benefits for a stated period of time, regardless of whether the annuitant lives or dies. Also known as period certain annuity. Contrast with straight life annuity. See also payout options.

annuity contract. See annuity.

annuity conversion cost. The amount that a deferred annuity contract owner pays to obtain a specified dollar amount of periodic income payment upon annuitization of the contract. Contrast with annuity purchase cost.

annuity cost. A monetary amount that is equal to the present value of future periodic income payments under an annuity. See also gross annuity cost, net annuity cost, and income date.

annuity cost factor. A factor provided for use in determining the price or cost for a given amount of periodic income payment under an annuity payout option. An annuity conversion factor is the type of annuity cost factor used for converting a deferred annuity to an immediate annuity. An annuity purchase factor is the type of annuity cost factor used when a new customer purchases an immediate annuity.

annuity date. See income date.

Annuity Disclosure Model Regulation. In the United States, a National Association of Insurance Commissioners (NAIC) model regulation that requires insurers to provide prospective purchasers of specified types of annuities with information to help them select an annuity appropriate to their needs.

annuity due. A series of periodic payments for which the payment occurs at the beginning of each payment period. Also known as annuity in advance. Contrast with ordinary annuity.

annuity immediate. See ordinary annuity.

annuity in advance. See annuity due.

annuity in arrears. See ordinary annuity.

annuity mortality table. A chart that shows the projected mortality rates for persons purchasing annuities. Actuaries use annuity mortality tables to calculate premiums and reserves for annuities. Annuity mortality tables usually project lower rates of mortality than do mortality tables that are used for life insurance. See also mortality rate and mortality table.

annuity payee. See payee.

annuity period. The time span between each of the payments in a series of periodic annuity payments; for example, if benefits are payable monthly, then the annuity period is one month.

annuity purchase cost. Amount paid by the owner of an immediate annuity contract to obtain a specified dollar amount of periodic income payment upon annuitization of the contract. Contrast with annuity conversion cost.

annuity unit. A share in an insurer’s variable subaccounts that determines the size of an annuitant’s benefit payments during the payout period of a variable deferred annuity. See accumulation unit, payout period, and subaccount.

antiselection. The tendency of individuals who suspect or know they are more likely than average to experience loss to apply for or renew insurance to a greater extent than people who lack such knowledge of probable loss. Also known as adverse selection and selection against the company.

antitrust laws. In the United States, federal and state laws designed to protect commerce from unlawful restraints of trade, price discrimination, price fixing, and monopolies.

AOMR. See Actuarial Opinion and Memorandum Regulation.

APL provision. See automatic premium loan provision.

apparent authority. Authority that is not expressly given to an agent, but that a principal either intentionally or negligently allows a third party to believe the agent possesses.

applicant. In the insurance industry, the person or business that applies for an insurance policy or annuity contract.

appointed actuary. An actuary who has been duly appointed by an insurer’s board of directors to render an official opinion as to the insurer’s financial condition. See also actuarial memorandum.

appointment. A written statement from an officer of a licensed insurer that accompanies the application for an agent’s license and that indicates that the insurer appoints the applicant as an agent to sell a particular line or lines of insurance for the insurer.

appropriated surplus. See special surplus.

APR. See effective interest rate.

APS. See attending physician’s statement.

ART insurance. See yearly renewable term insurance.

articles. In reinsurance, the standard provisions found in many reinsurance treaties.

articles of incorporation. In the United States, the document that organizers of a company seeking incorporation must file with a state agency. The document contains the essential features of a proposed company, including its name, the location of its principal place of business, the kind of business it will transact, and the names of its original directors. See also certificate of incorporation.

ASA. See Associate of the Society of Actuaries.

ASO contract. See administrative services only contract.

assessment method. A historical method of funding life insurance in which the participants in an insurance plan prepaid an equal portion of the estimated annual cost of the plan’s death benefits. If actual costs were less than expected, then participants received refunds. If costs were more than expected, then participants paid an additional amount. See also mutual benefit method.

asset allocation. The process of investing money in predetermined proportions in different types of assets to create a collection of assets with the desired expected return and the desired expected risk characteristics.

asset-based commissions. For annuities, commissions calculated on the basis of an annuity contract’s accumulated value and growth, after an initial commission was paid upon the initial premium at the inception of the contract. Also known as trail commissions.

asset class. A group of similar investment instruments linked by related risk and return features.

asset fluctuation reserve. In the United States, a statutory reserve designed to absorb gains and losses in an insurer’s investment portfolio. See also asset valuation reserve and interest maintenance reserve.

asset-liability management (ALM). A system that coordinates the administration of an insurer’s obligations to customers with the administration of the insurer’s investment portfolios so as to achieve the best possible financial effects.

asset management fee. A fee insurers charge for variable annuities to cover the costs of managing and operating the investment funds underlying the variable subaccounts. Asset management fees are generally a percentage of the dollar amount invested in each fund, with the percentage varying for each fund.

asset risk. See C-1 risk.

assets. The items of value owned by an individual or a company. Examples of assets include cash, computer equipment, investments, buildings, furniture, and land. See also intangible assets and tangible assets.

asset share. For an annuity or a life insurance product at a given time, the net amount of cash that the product has accumulated per unit of product. The applicable units of product differ for annuities and life insurance so that, for an annuity product at a given time, the asset share is the net amount of cash that the annuity product has accumulated per unit of annuity premium. For a life insurance product at a given time, the asset share is the net amount of cash that the product has accumulated per unit of face amount.

asset-share model. A mathematical simulation model that insurance companies use to illustrate how a product’s assets, liabilities, and surplus would change from year to year under given sets of conditions. See asset share.

asset valuation reserve (AVR). A reserve account that insurers in the United States use to absorb changes in the value of assets caused by credit-related factors. Capital gains increase the AVR, while capital losses decrease the AVR.

assigned surplus. See special surplus.

assignee. A person or party to whom a property owner transfers some or all of the property owner’s rights in a particular property by means of an assignment. See also assignment and assignor.

assignment. An agreement under which one party—the assignor—transfers some or all of his ownership rights in a particular property, such as a life insurance policy or an annuity contract, to another party—the assignee. See also absolute assignment and collateral assignment.

assignment of benefits. A statement on a medical expense claim form that, if signed by the claimant, directs an insurer to pay benefits directly to a health care provider rather than to the claimant.

assignment provision. An individual life insurance and annuity policy provision that describes the roles of the insurer and the policyowner when the policy is assigned.

assignor. A property owner who transfers some or all of the ownership rights in a particular property to another party by means of an assignment. See also assignment and assignee.

assisted living facility. In long-term care (LTC) insurance, a residential facility designed to meet (LTC) needs by providing accommodations and access to medical services.

Associate of the Society of Actuaries (ASA). A professional designation that an actuary may use upon completion of a specified series of examinations administered by the Society of Actuaries.

association examination. A method for examining the operations of multi-state insurance companies that was developed by the states and is recommended by the National Association of Insurance Commissioners (NAIC). According to this system, each insurer is domiciled within one of four geographic zones and examiners representing various states in a zone are responsible for conducting examinations of insurers within that zone. See also financial condition examination, market conduct examination, and on-site regulatory examination.

association group. A type of group that generally is eligible for group insurance and that consists of members of an association of individuals formed for a purpose other than to obtain insurance coverage, such as teachers’ associations and physicians’ associations.

assumed investment return (AIR). For variable annuity contracts, the total return that the subaccount investments must earn in order for annuity payments to remain the same from period to period under a variable payout option.

assuming company. See reinsurer.

assumption. In reinsurance, an insurer’s act of accepting an insurance risk from another insurer.

assumption certificate. An insurance certificate issued to an insurer’s existing policyowners to show that a reinsurer has assumed from the issuing company all of the risk under the policies. See also assumption reinsurance.

assumption reinsurance. A type of reinsurance that involves the total and permanent transfer of risk from the issuing company to a reinsurer. In assumption reinsurance, a reinsurer purchases a block of in-force insurance, creating contractual relationships with all insureds and assuming responsibility for policy administration and all liabilities. Contrast with indemnity and reinsurance. See also reinsurance.

Assumption Reinsurance Model Act. In the United States, a National Association of Insurance Commissioners (NAIC) model law designed to regulate insurers that assume or transfer risks under an assumption reinsurance agreement.

attachment point. In nonproportional reinsurance, an amount over which a reinsurer agrees to start paying benefits. See also nonproportional reinsurance.

attained age. For insurance purposes, the current age of an insured.

attained age conversion. The conversion of a term life insurance policy to a permanent plan of insurance at a premium rate that is based on the insured’s age when the coverage is converted. Contrast with original age conversion. See also conversion provision.

attending physician. For underwriting purposes, a physician who has given or is giving medical care to a proposed insured. Contrast with examining physician.

attending physician’s statement (APS). A written statement from a physician who has treated, or is currently treating, a proposed insured or an insured for one or more conditions. The statement provides the insurance company with information relevant to underwriting a risk or settling a claim.

audit. The process of examining and evaluating a company’s records and procedures to ensure that accounting records and financial statements are accurate and reliable, the company maintains quality assurance, and operational procedures and policies are effective and legally compliant.

auditor’s opinion. A statement, prepared by an independent public accounting company, that attests that the information contained in a company’s annual report fairly represents the operations of the company and that the audit was conducted in accordance with generally accepted auditing standards (GAAS).

audit trail. A chronological, sequential set of accounting records and reports from the beginning to the end of a business transaction.

authorization to release information. A section of a claimant’s statement that permits an insurer to obtain claim-specific information from medical caregivers and institutions, government agencies, other insurers, consumer reporting agencies, and other sources.

authorized reinsurer. A reinsurance company that is licensed or otherwise recognized by the insurance department in the jurisdiction of a ceding company. Also known as admitted reinsurer. See also reinsurer.

automatic binding limit. Under an automatic reinsurance agreement, the maximum dollar amount of risk the reinsurer will accept on a life without making its own underwriting assessment of the risk.

automatic dividend option. For participating life insurance policies, a specified policy dividend option that an insurance company will apply if the policyowner does not choose an option. The specified option typically is the paid-up additional insurance option.

automatic dollar cost averaging. A process whereby a variable annuity contract owner deposits premiums directly into a fixed account or money market account, and the insurer transfers a portion of this money on a regular basis into one or more of the insurer’s variable subaccounts.

automatic nonforfeiture benefit. The specified nonforfeiture benefit that becomes effective automatically when a renewal premium for a permanent life insurance policy is not paid by the end of the grace period and the insured has not elected another nonforfeiture option. The most typical automatic nonforfeiture option is the extended term insurance benefit.

automatic premium loan (APL) provision. A permanent life insurance policy nonforfeiture provision that allows an insurer to automatically pay an overdue premium for a policyowner by making a loan against the policy’s cash value as long as the cash value equals or exceeds the amount of the premium due. See also nonforfeiture options.

automatic rebalancing provision. A variable annuity contract provision which states that values automatically will be transferred between specified accounts to maintain the asset allocation percentages designated by the contract owner.

automatic reinsurance. A type of reinsurance under which a reinsurer agrees to automatically accept, within limits, the risks transferred by a ceding company. In this agreement, the ceding company assumes full underwriting responsibility for all cases reinsured. Contrast with facultative reinsurance. See also reinsurance.

automobile insurance. A type of insurance that protects an insured from financial losses arising from the operation of a vehicle.

AVR. See asset valuation reserve.

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backdating. A practice by which an insurer makes the effective date of a life insurance policy earlier than the date of the application for the policy so that the premium rate will be lower. Also known as dating back.

back-end load. A surrender charge. For mutual funds or variable annuities, a sales charge that the share owner or contract owner pays upon withdrawing funds from the arrangement. Also known as contingent deferred sales charge. Contrast with front-end load and no-load fund.

back-loaded policy. A life insurance policy or a deferred annuity contract in which most of the expense charges occur when the policy owner or contract owner surrenders the policy or makes cash withdrawals from the policy. Contrast with front-loaded policy.

bailout provision. An annuity contract provision that enables the contract owner to surrender the annuity contract, usually without a surrender charge, if renewal interest rates on a fixed annuity fall below a pre-established level, typically 1 percent below the initial interest rate. Also known as escape clause and cash-out provision.

balance sheet. A financial statement that shows a company’s financial condition or position as of a specified date; summarizes what a company owns (assets), what it owes (liabilities), and its owners’ investment in the company (owners’ equity) on a specified date. Also known as statement of financial position.

balance sheet equation. See basic accounting equation.

balanced mutual fund. A mutual fund that has the objective of preservation of capital with moderate income and growth in value.

bancassurance company. See bank insurance company.

bank insurance. Insurance coverage that is manufactured and underwritten by a commercial bank’s own insurance company and distributed through the bank’s distribution channels.

bank insurance company. A company that offers both banking and insurance services. Also known as bancassurance company.

bank line. See line of credit.

bank reconciliation. The process of identifying and explaining the difference between the balance presented on a bank statement and the balance in the accounting records of an individual or a company. Insurers sometimes refer to this process as the book balance.

bank-sold insurance. A type of location-selling insurance distribution system in which insurance is distributed by a bank and manufactured and underwritten by an insurance company.

base period. The earliest financial reporting period used in horizontal analysis. See also horizontal analysis.

basic accounting equation. The formula that expresses the relationship among the three key account classifications—assets, liabilities, and owners’ equity—on the balance sheet. Also known as balance sheet equation.

basic health care services. According to the National Association of Insurance Commissioners (NAIC) Health Maintenance Organizations (HMO) Model Act, specified medically necessary services that HMOs must provide to enrollees, such as preventive care, emergency care, inpatient and outpatient hospital care, diagnostic laboratory services, and diagnostic and therapeutic radiological services.

basic illustration. A spreadsheet, a ledger, or a proposal used in the sale of life insurance that falls under the scope of the National Association of Insurance Commissioners (NAIC) Life Insurance Illustrations Model Regulation and that shows both guaranteed and nonguaranteed elements of the policy. See also illustration.

basic mortality table. A mortality table that has no safety margin built into the mortality rates and that is used for the technical design of life insurance and annuity products. Contrast with select mortality table and ultimate mortality table.

basis point (bp). An increment of one-hundredth of a percent (0.01 percent); e.g., half a percent is equal to 50 bp, and one and a half percent is equal to 150 bp. Insurers often use this unit of measurement in calculating interest margins for insurance products with a significant investment component. See also interest margin.

bed reservation benefit. A long-term care (LTC) policy benefit that pays an amount to reserve a bed in a nursing home or other LTC facility while the insured person is hospitalized for treatment.

before-tax dollars. Money that has not been taxed.

benchmarking. The process by which a company compares its own performance, products, and services with those of other organizations that are recognized as the best in a particular category. The product or service that is determined to be the industry standard is known as a benchmark.

beneficiary. The person or legal entity the owner of an insurance policy names to receive the policy benefit if the event insured against occurs. See also annuity beneficiary, contingent beneficiary, and irrevocable beneficiary.

beneficiary for value. According to laws that are no longer in force in the common law jurisdictions of Canada, a life insurance policy beneficiary who has vested rights to policy proceeds because the beneficiary provided the policyowner with valuable consideration. Although the law no longer exists, some of these beneficiary designations continue to remain in effect in older policies.

benefit. (1) For an insurance contract, the amount of money that is paid as compensation when the loss insured against occurs. (2) For an annuity contract, the periodic payments made as specified in the contract.

benefit expenses. For insurers, the cost of paying contractual obligations to customers. Also known as expense for contractual benefits and benefit costs. Contrast with operating expenses.

benefit formula. For pension plans, a statement that describes a pension plan sponsor’s financial obligation to plan participants.

benefit period. The specified time during which benefits will be paid under certain types of health insurance coverages. (1) For disability income coverage, the length of time during which disability income benefits are paid, typically lasting from less than a year to age 65 or 70. (2) For long-term care coverage, the number of days, months, or years during which a LTC policy will pay a daily benefit amount.

benefits budget. A type of budget indicating the amount of money an insurer expects to pay for claims, cash surrenders, and policy dividends during the next accounting period.

benefit schedule. See schedule of benefits.

benefits survey. A report that contains information on the benefits being offered to employees in a specified geographic area or industry.

benefit transmittal. A document compiled by a prospective group insurance policyholder for a group insurer that provides details concerning the insurance benefits being requested for each employee class, the effective date of coverage, how premium billing and claims will be administered, and other information concerning the type of plan being requested.

benefit unit. See unit of coverage.

bilateral contract. A contract between two parties who both make legally enforceable promises when they enter into the contract. Contrast with unilateral contract.

binding limit. See automatic binding limit.

binding premium receipt. See temporary insurance agreement.

blended rating. A process for calculating premium rates for group insurance that combines manual rating and experience rating; underwriters assign a credibility factor to the group’s experience and include that factor in the premium calculations. See also experience rating and manual rating.

block of business. In insurance, a large number of similar life insurance policies or annuity contracts.

block of policies. A group of policies issued to insureds who are all the same age, the same sex, and in the same risk classification.

blood chemistry profile. A laboratory test that identifies various aspects of possible chronic and acute diseases in a sample of blood. Underwriters commonly order this laboratory test as part of the risk selection process for life insurance and health insurance.

bond. A debt security whereby the bond issuer promises to pay the bondholder a stated rate of interest over a specified period of time, at the end of which time, the original amount of borrowed money must be repaid. The owner of the bond is known as the bondholder. The entity that sells the bond to raise money is known as the bond issuer.

bond principal. The sum the issuer of a bond borrows from the bond’s initial purchaser. This amount which is stated on the face of the bond is payable by the issuer of the bond on or before the bond’s maturity date. Also known as bond’s face value, maturity value, and par value.

bond rating. A letter grade assigned by a bond rating agency that indicates the credit quality of a bond issue.

bond subaccount. One of the three main asset classes in an insurance company’s separate account within which owners of variable insurance contracts can deposit funds and have the funds invested in a variety of both short-term and long-term government and corporate bonds. See also money market subaccount and stock subaccount.

bonus additions. In Canada, additional amounts of paid-up life insurance or one-year term life insurance acquired through a life insurance policyowner’s dividend payout option.

book balance. See bank reconciliation.

book value. The value at which an asset is recorded in a company’s accounting records.

bordereau. In reinsurance, a regular report that is exchanged between a ceding company and a reinsurer.

bottom-up budgeting. A budget-setting approach for business organizations that requires lower-level managers to prepare their own departmental budgets for approval by upper-level managers.

boycott. An agreement among competing companies to refrain from doing business with another company.

bp. See basis point.

branch manager. In the insurance industry, the person who heads a field office of an insurance company that uses the branch office distribution system. This individual recruits, selects, and trains career agents, and acts as the sales manager for the geographic area covered by the sales office. Also known as general manager.

branch office distribution system. A type of ordinary agency insurance distribution system wherein companies establish and maintain field offices in key areas throughout a marketing territory that are headed by a branch manager. See also branch manager and ordinary agency distribution system.

breakeven analysis. See cost-volume-profit (CVP) analysis.

break-even period. See validation period.

break-even point. The point at which a product’s revenues are equal to its costs. See also validation point.

broker. (1) Any person or entity engaged in the business of buying or selling investment securities for the account of another. Contrast with dealer. (2) An insurance sales agent who sells insurance products for more than one insurance company. Contrast with captive agent.

brokerage distribution system. A type of nonagency building insurance distribution system that relies on the use of agent-brokers and brokers to sell and deliver insurance and annuity products. See also agent-broker, broker, and nonagency building distribution system.

broker-dealer. A person or firm that provides information or advice to customers regarding the sale and/or purchase of securities, serves as a financial intermediary between buyers and sellers of securities, and supervises the sales process to make sure that salespeople comply with all applicable regulations.

budget. A financial plan of action, expressed in monetary terms, which covers a specified time period, such as one year.

build chart. A chart that underwriters use to assess the degree of risk a proposed insured represents. The chart indicates average weights for various heights for each sex, along with the mortality debits associated with increases in weight.

bulk administration. A method of reinsurance administration in which the ceding company administers the reinsurance and periodically submits summarized reports on premiums and on the policies to the reinsurer, but does not provide individualized detailed information about risks reinsured until a claim needs to be processed.

bundled product structure. Insurance or annuity product design in which an insurer presents the product to customers as a package of benefits, provided in exchange for a given payment. The mortality, investment, and expense factors are not identified separately in the product. Contrast with unbundled product structure.

business continuation insurance plan. An insurance plan designed to enable a business owner (or owners) to provide for the business’ continued operation if the owner or a key person dies. See also partnership insurance.

business financial supplement. A specialized questionnaire used in underwriting business insurance that requests information about the type of business, the current financial condition of the business, and the purpose for which the insurance is being requested.

business overhead expense coverage. Disability coverage that provides benefits designed to pay a disabled insured’s share of a business’ overhead expenses.

Buyer’s Guide. A publication designed to educate consumers about life insurance or annuity products and enable them to get the most for their money when shopping for these products. In the United States, many states have enacted legislation that requires insurers to provide prospective buyers of certain insurance and annuity products with a Buyer’s Guide. See also Guide to Buying Life Insurance.

buy-sell agreement. An agreement in which one party agrees to purchase the financial interest that a second party has in a business following the second party’s death, and (2) the second party agrees to direct his estate to sell his interest in the business to the purchasing party.

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C risks (contingency risks). In the United States, four officially recognized categories of risk that the actuarial profession has identified as being vital to insurers. See also C-1 risk (asset risk), C-2 risk (pricing risk), C-3 risk (interest-rate risk), and C-4 risk (general management risk).

C-1 risk (asset risk). For insurers, the risk of a loss of asset value on investments in such assets as stocks, bonds, mortgages, and real estate.

C-2 risk (pricing risk). For insurers, the risk that an insurer’s experience with mortality or expenses will differ significantly from the actuarial assumptions used in product pricing, causing the insurer to lose money on its products.

C-3 risk (interest-rate risk). For insurers, the risk that market interest rates might shift, causing an insurer’s assets to lose value or its liabilities to gain value.

C-4 risk (general management risk). For insurers, the risk of losses resulting from the insurer’s ineffective general business practices, from the need to pay a special assessment to cover another insurer’s unsound business practices, from unfavorable regulatory changes, or from unfavorable changes in tax laws.

cafeteria plan. See flexible benefits plan.

calendar-year deductible. For medical expense insurance policies, an amount of eligible medical expenses that the insured must incur during a given calendar year (from January 1 to December 31) before the insurer becomes liable to pay any benefits for further covered expenses.

call center. Within a business organization, any group of individuals whose main function is to provide customer service by answering incoming customer calls or electronic mail messages that are routed through a computerized distribution system.

Canada Customs and Revenue Agency. The federal governmental agency responsible for enforcing the provisions of Canadian laws and regulations concerning income taxes.

Canada Health Act. In Canada, federal legislation that requires that each Canadian province provide its residents with health care coverage for hospital and medical services.

Canada Labour Code. Canadian federal legislation that mandates minimum wage and overtime standards that are similar to the standards established by the Fair Labor Standards Act in the United States.

Canada Pension Plan (CPP). A Canadian federal program that primarily provides retirement benefits for retirees who reside in all provinces except Quebec and who have contributed money into the plan during their working years. The program also provides a benefit to disabled workers, as well as to the widows, widowers, and surviving dependent children of deceased and disabled workers.

Canadian and British Insurance Companies Act. A Canadian federal statute that describes the requirements that federally incorporated Canadian insurers and British insurers must meet in order to transact business in Canada.

Canadian Council of Insurance Regulators (CCIR). In Canada, a committee of provincial superintendents of insurance that recommends uniform insurance legislation to the provinces.

Canadian Institute of Chartered Accountants (CICA). A professional organization of Canadian Chartered Accountants (CAA) that establishes generally accepted accounting principles (GAAP) for Canadian insurers to follow in recording and presenting their financial information.

Canadian Life and Health Insurance Association (CLHIA). An insurance industry association of life and health insurance companies operating in Canada.

Canadian Life and Health Insurance Compensation Corporation (CompCorp). In Canada, a federally incorporated, nonprofit company established by the Canadian Life and Health Insurance Association to protect insurance consumers against loss of benefits in the event a life or health insurance company becomes insolvent. Operates similarly to state guaranty associations. See also guaranty association.

Canadian Reinsurance Conference (CRC). An annual meeting of Canadian insurance companies and reinsurance companies that provides a forum for current life and health insurance and reinsurance issues. The CRC establishes the Canadian Reinsurance Guidelines.

Canadian Reinsurance Guidelines. A set of common reinsurance principles, established by the Canadian Reinsurance Conference (CRC), that can be voluntarily used as a basis upon which new reinsurance treaties can be written and existing treaties can be interpreted.

cancellable policy. An individual health insurance policy that gives the insurer the right to terminate the policy at any time, for any reason, simply by notifying the policyowner that the policy is cancelled and by refunding any advance premium paid for the policy. See also conditionally renewable policy, noncancellable and guaranteed renewable policy, and optionally renewable policy.

cap. For an equity-indexed annuity contract, the upper limit on the amount of an index’s gain in value that will be credited to the annuity contract.

capacity. In insurance, the highest dollar amount of coverage that an insurer or reinsurer is financially able to accept on a specified risk.

capital. (1) An amount of money invested in a company by its owners, usually through the purchase of the company’s stock. Also known as owners’ equity. (2) Long-term funds.

capital and surplus. For insurers, the amount remaining after liabilities are subtracted from assets; owners’ equity in an insurance company.

capital and surplus ratios. Financial ratios insurance companies use to express the relationship between the insurer’s capital and/or surplus and its liabilities and thus to measure an insurer’s financial strength. Also known as capital ratios and capitalization ratios.

capital appreciation. An increase in the market value of invested assets.

capital budget. A budget that shows a company’s plans for the financial management of its long-term, high-cost investment proposals, such as new investments, major repairs to or remodeling of existing investments, acquisitions of other companies or lines of business, mandated safety and environmental improvements, expense reduction projects, and revenue expansion projects.

capital gain. The amount by which the selling price of an asset exceeds its purchase price. Contrast with capital loss.

capitalization ratios. See capital and surplus ratios.

capitalize. To record an expense, such as deferred acquisition costs, as an asset.

capital loss. The amount by which the purchase price of an asset exceeds its selling price. Contrast with capital gain.

capital ratios. See capital and surplus ratios.

capitation. A fee payment method used by some health maintenance organizations (HMOs) under which the HMO prepays a medical care provider a flat amount for each subscriber’s medical care—usually on a monthly basis.

captive agent. An insurance agent who is under contract to only one insurer and who is not permitted to sell the products of other insurers. Also known as exclusive agent. Contrast with broker.

captive reinsurer. A reinsurance company that is formed and controlled by an insurance company or another type of insurance marketer for the purpose of providing reinsurance to that insurer or marketer.

career agency system. See agency building distribution system.

career agent. A licensed insurance salesperson who is under contract with at least one insurance company. A career agent is considered to be an independent contractor and not an employee of the insurance company.

caregiver training benefit. A benefit provided in a long-term care (LTC) policy to cover the cost of training someone to help care for a covered person who is to receive LTC at home or at an alternate living facility.

case assignment system. A system for organizing underwriting work in which cases are distributed to an appropriate person or group for underwriting based on certain characteristics of the case; for example, the face amount requested, the type of application of policy change, or the geographic origin of the application or location of the agent. Contrast with work division system.

case management. A process insurers use in managed health care plans to evaluate the necessity and quality of an insured’s medical care and the appropriateness of alternative treatments or solutions for the insured’s medical care.

cash-basis accounting. An accounting system in which a company recognizes revenues or expenses only when it receives or disburses cash.

cash budget. A type of budget that projects a company’s beginning cash balance, cash inflows, cash outflows, and ending cash balance for a specified accounting period, typically by quarter.

cash disbursement. The payment of cash by a company.

cash disbursements budget. A schedule of expected cash disbursements, including their timing and amount, during the accounting period.

cash dividend option. For participating insurance policies, a dividend option under which the insurer sends the policyowner a check in the amount of the policy dividend. See also dividend and policy dividend options.

cash equivalents. Short-term assets that are not cash, but can typically be converted to cash within 90 days with little or no risk of losing value.

cash flow. Any movement of cash into or out of a company. A cash inflow is a source of funds and a cash outflow is a use of funds.

cash flow statement. A financial statement that provides information about an insurer’s cash receipts (inflows) and its cash disbursements (outflows) during a specified period.

cash-flow testing (CFT). The use of simulation modeling to project into a future period the cash flows associated with an insurance company’s existing business, as of a given valuation date, and to compare the timing and amounts of asset and liability cash flows after the valuation date. Contrast with dynamic financial analysis (DFA).

cash inflow. See cash flow.

cash management. The management of short-term funds. Also known as working capital management.

cash-out provision. See bailout provision.

cash outflow. See cash flow.

cash payment option. One of several nonforfeiture options included in life insurance policies and some annuity contracts that allows a policyowner to receive the cash surrender value of a life insurance policy or an annuity contract in a single payment. Also known as cash surrender option. See also nonforfeiture options and cash surrender value.

cash receipt. A check, money order, electronic funds transfer (EFT), or other cash transaction that is remitted to a company as a form of payment for goods or services rendered.

cash receipts budget. A schedule of cash receipts expected during the specified accounting period.

cash surrender option. See cash payment option and cash surrender value.

cash surrender value. (1) For life insurance, the amount, before adjustments for factors such as policy loans, that the owner of a permanent life insurance policy is entitled to receive if the policy does not remain in force until the insured’s death. (2) For annuities, the amount of a deferred annuity’s accumulated value, less any surrender charges, that the contractholder is entitled to receive if the policy is surrendered during its accumulation period. Also known as cash value and surrender value.

cash value. See cash surrender value.

cash value accumulation test. For U.S. federal income tax purposes, one of the qualification tests an insurance policy must satisfy in order to be considered a life insurance contract that provides a tax-free death benefit. A policy passes this test if, according to the contract terms, the amount of its cash surrender value is never greater than the amount of net single premium needed to fund the policy death benefit.

casualty insurance. See liability insurance.

cat cover. See catastrophe reinsurance.

catastrophe reinsurance. A type of nonproportional reinsurance that protects a ceding company from multiple individual claims and/or excessive losses resulting from a single event. Also known as cat cover.

CBO. See collateralized bond obligation.

CCIR. See Canadian Council of Insurance Regulators.

CCRC. See continuing care retirement community.

CD. See certificate of deposit.

CDS. See Complaints Database System.

CDSC. See surrender charge.

CDSL. See surrender charge.

cede. An insurance company’s transfer of all or part of a specified risk to a reinsurance company.

ceding company. In a reinsurance transaction, the insurance company that purchases reinsurance to cover all or part of those risks that the insurer does not wish to retain in full. Contrast with reinsurer.

certificate holder. An individual who is insured under a group insurance contract and who has received a certificate of insurance. See also certificate of insurance.

certificate of authority. In the United States, a document issued by a state insurance department granting an insurer the right to conduct an insurance business in that state. Also known as license.

certificate of coverage. See certificate of insurance.

certificate of coverage provision. In the United States, a provision that most states require group life, health, and annuity policies to include which states that the insurer will issue a certificate to the policyholder for delivery to each person insured by the policy.

certificate of deposit (CD). A contractual agreement issued by a bank that returns the investor’s principal with interest on a specified date.

certificate of incorporation. In the United States, a document issued by a state agency that grants a corporation its legal existence and right to operate as a corporation. Also known as corporate charter. See also articles of incorporation.

certificate of insurance. In group insurance, a document that a group policyholder delivers to each group insured which describes the coverage provided and the group insured’s rights to insurance. Also known as certificate of coverage. See also master contract.

certificate of registry. In Canada, a document that is issued by the federal Minister of Finance and that grants an insurance company subject to federal regulation the right to transact business in Canada.

cession. Both the unit of insurance that an insurance company cedes to a reinsurer and the document used to record the transfer of risk from a ceding company to a reinsurer.

CFT. See cash-flow testing.

change in health statement. A statement contained in most individual life insurance applications and premium receipts that requires a proposed insured to notify the insurer in writing if her health or any material information in the application changes before the policy is delivered.

change of beneficiary provision. A provision included in individual life insurance policies and health insurance policies providing a death benefit that states the procedure the policyowner should follow for making a beneficiary change.

change of occupation provision. An individual disability income insurance policy provision that permits the insurer to adjust the policy’s premium rate or the amount of benefits payable under the policy if the insured changes occupation.

chargeback. A method for allocating costs within an organization that allocates indirect costs to departments based on a department’s usage.

children’s insurance rider. A rider that may be added to a whole life insurance policy that provides term life insurance coverage on the insured’s children.

chronically ill individual. Under the Health Insurance Portability and Accountability Act (HIPAA) in the United States, an insured person whom a licensed health care practitioner certifies as someone who is unable to perform, without substantial assistance, at least two activities of daily living (ADLs), or has a similar level of disability, or requires substantial supervision to protect themselves from threats to health or safety due to severe cognitive impairment. See also activities of daily living (ADLs).

churning. An unethical and often illegal sales practice designed to increase commission sales. (1) In insurance sales, churning can occur when an agent induces a policyowner to cash in a policy and buy another, even though the replacement is not in the policyowner’s best interest. See also replacement. (2) In stock and bond sales, churning can occur when a broker engages in excessive and unwarranted trading of clients’ accounts.

CICA. See Canadian Institute of Chartered Accountants.

CI insurance. See critical illness insurance.

Civil Rights Act of 1964. In the United States, a federal anti-discrimination statute that applies to employers that are engaged in interstate commerce and that have 15 or more employees. Title VII of this act prohibits employers from discriminating in hiring, advancement, wages, and other terms and conditions of employment on the basis of sex, race, color, religion, or national origin.

claim. A request for payment of benefits under the terms of an insurance policy following the occurrence of a covered loss.

claim administration. Within an insurance company, the insurance administration function that assesses each claim made, decides whether the claim is justified, and authorizes the payment of benefits to the proper person.

claim analyst. See claim examiner.

claimant. A person who submits a claim to an insurance company.

claim approver. See claim examiner.

claim examiner. An insurance company employee who is responsible for processing and paying claims for policy benefits that the insurer receives. Also known as claim approver, claim analyst, and claim specialist.

claim fraud. An action by which a person intentionally uses false information in an unfair or unlawful attempt to collect benefits under an insurance policy.

claim investigation. The process an insurer undertakes to obtain additional information necessary to make a claim decision.

claim liabilities. See policy and contract claims.

claim philosophy. A precise statement of the principles an insurer will follow in conducting claim administration.

claim reserves. On an insurance company’s financial statements, liabilities that identify the amounts that an insurer will pay in the future on claims already incurred but not paid in full as of the statement date. See also disabled life reserves.

claim settlement. A lump-sum payment by an insurer to a claimant in exchange for the claimant’s agreement to release the insurer from further responsibility for coverage under the policy.

claim specialist. See claim examiner.

class beneficiary designation. A life insurance policy beneficiary designation that identifies the beneficiaries of the policy as members of a group—for example, "my children"—rather than naming each person individually.

class of policies. All policies of a particular type that an insurer has issued or all policies an insurer has issued to a particular group of insureds.

Clayton Act. U.S. federal antitrust law that makes it unlawful for businesses to engage in certain actions that are believed to lessen competition and to lead to monopolies.

CLHIA. See Canadian Life and Health Insurance Association.

CLHIA Guidelines. Recommendations to insurance companies adopted by the Canadian Life and Health Insurance Association (CLHIA). Insurers are expected to abide by these guidelines as a condition of membership in the CLHIA.

closed contract. A contract for which only those terms and conditions that are printed in—or attached to—the contract are considered to be part of the contract. Contrast with open contract.

closed group valuation. An assessment of the value of a pension plan that takes into account only the benefits of persons currently affiliated with the plan as active participants, terminated vested participants, retired participants, or beneficiaries. Also known as static valuation. Contrast with open group valuation.

closed panel HMO. A type of health maintenance organization (HMO) that requires physicians either to belong to a group of physicians that has contracted with the HMO or to be employees of the HMO in order to provide services to HMO members. Contrast with open panel HMO.

closing. (1) In insurance sales, the part of an insurance sales presentation that occurs when an agent secures a purchase commitment from a prospect by asking for and obtaining the prospect’s agreement to submit an application for the coverage recommended in the proposal. (2) Generally, a conclusion of a transaction, usually accomplished by satisfaction of all conditions stated in a purchase contract.

closing entry. An accounting entry that a company makes at the end of each accounting period to start the next accounting period with a zero balance in its temporary accounts.

CMO. See collateralized mortgage obligation.

COB provision. See coordination of benefits provision.

COBRA. See Consolidated Omnibus Budget Reconciliation Act.

COBRA continuation coverage. In the United States, group health insurance coverage provided to an individual who’s employer-provided group health insurance has terminated because of certain qualifying events that are specified in the Consolidated Omnibus Budget Reconciliation Act (COBRA). See also Consolidated Omnibus Budget Reconciliation Act (COBRA).

cognitive impairment. In long-term care (LTC) insurance underwriting, mental incapacity that prevents a person from performing activities of daily living (ADLs) or from living safely. See also activities of daily living (ADLs).

cognitive reinstatement provision. A provision in a long-term care (LTC) insurance policy that permits reinstatement of the policy if the reason for the policy’s lapse is that the policyholder has a cognitive impairment and that the reason for the missed premium payment was mental impairment.

coinsurance. (1) In medical expense insurance coverage, the percentage, usually 10 to 25 percent, of all eligible medical expenses, in excess of the deductible, that the insured is required to pay. Also known as expense participation feature. (2) In reinsurance, a type of proportional reinsurance in which an insurer and a reinsurer share the obligations of a policy, including paying the death benefit and the nonforfeiture values, and establishing the reserves.

coinsurance with funds withheld. A type of proportional reinsurance in which the ceding company retains funds that are due to the reinsurer, usually in an amount equal to the reserve required by law.

COLA benefit. See cost-of-living increase benefit.

cold calling. An insurance sales method in which an agent writes, calls, or visits prospects for insurance with whom he has had no prior contact. Also known as cold canvassing.

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

collateralized bond obligation (CBO). A type of bond that is secured by and represents a share in a portfolio of bond investments.

collateralized mortgage obligation (CMO). A type of bond that is secured by and represents a share in a portfolio of mortgage investments.

collision insurance. Insurance that covers an insured for losses to a vehicle caused by a collision regardless of whether the insured was at fault for the accident.

collusion. A secret agreement entered into by two or more persons to perpetrate an illegal act.

combination pension plan. A type of pension plan that uses both insured and uninsured funding. Also known as split-funded plan. Contrast with trusteed pension plan and fully-insured pension plan.

combined retention. See corporate retention limit.

commingling of funds. In insurance sales, the illegal practice of combining money belonging to policyowners with an agent’s own funds.

commission. An amount of money paid to compensate a sales producer. For insurance sales, the amount is usually expressed as a percentage of the gross premiums paid by the insurance customer each year the policy is in force. For life insurance sales, the first-year commission is traditionally a higher percentage than the percentage commission paid in subsequent years. See also deposit-based commission schedule, level commission schedule, and levelized commission schedule.

committed cost. In accounting, a cost that results from a prior management decision and that cannot be changed quickly.

committee underwriting. A method used to organize underwriting work in which a committee of highly qualified people from inside and outside the underwriting function is called together for case assessment.

common cost. See indirect cost.

common disaster clause. A life insurance policy provision which states that the beneficiary must survive the insured by a specified period, such as 30 or 60 days, in order to receive the policy proceeds. Otherwise, the policy proceeds will be paid as though the beneficiary had died prior to the insured. Also known as survivorship clause and time clause.

common interest association. An association of individuals who share a common status or a common interest. Examples include associations of retired persons, gun owners, participants in a specific sport, or alumni of a specific college. Common interest associations typically are eligible for an association group insurance policy.

common stock. An equity asset that represents an ownership share in a corporation and that usually entitles the owner to vote on the selection of directors and on other important company matters and also entitles the owner to receive dividends on the stock. Contrast with preferred stock. See also dividend and equity assets.

community-property laws. In the United States, state laws, which provide that a spouse is entitled to receive an equal share of earned income and an equal share of property acquired by the other spouse during a marriage.

commutation right. The right granted by an insurer to an annuity contract owner to withdraw a lump sum from an annuity during the payout period. Any lump sum withdrawn reduces the dollar amount of future annuity payments.

commutative contract. An agreement under which the contracting parties specify the values that they will exchange; moreover, the parties generally exchange items or services that they think are of relatively equal value. Contrast with aleatory contract.

comparative financial statements. Financial statements that present a company’s data for two or more accounting periods so that interested users can identify similarities and differences.

CompCorp. See Canadian Life and Health Insurance Compensation Corporation.

compensatory damages. In a lawsuit, an amount of money awarded to a plaintiff for the actual damage suffered from another’s wrongdoing. See also punitive damages.

Competition Act of 1986. Canadian federal legislation designed to prevent undesirable monopolies, price fixing, and other anticompetitive or deceptive trade practices. In Canada, federally incorporated (registered) companies are subject to federal regulation.

complaint examiner. In the United States, a state insurance department employee who is responsible for handling complaints received from consumers about insurers.

Complaints Database System (CDS). In the United States, a database compiled and maintained by the National Association of Insurance Commissioners (NAIC) to provide state insurance regulators with aggregated complaint data on insurers across the country.

compliance. For insurers and their agents, the act of adhering to applicable laws and regulations that govern the operations of insurance companies.

compliance function. Within an insurance company, the area responsible for ensuring that all of the actions the insurer takes comply with applicable laws and regulatory requirements.

compound accounting entry. An accounting record of a financial transaction that affects more than two accounts.

compound interest. The type of interest that is earned on both the original principal amount and on the interest accumulated from earlier periods. Contrast with simple interest.

comprehensive budget. See master budget.

comprehensive personal liability insurance. Insurance that covers insureds from liability losses they incur that are not the result of practicing their profession or operating a vehicle.

comptroller. See controller.

concurrent review. A component of utilization review used by some health insurers whereby the utilization review organization monitors an insured’s treatment and prognosis while he is in the hospital. See also utilization review.

conditional premium receipt. A type of premium receipt that specifies certain conditions that must be met before temporary insurance coverage provided by the receipt becomes effective.

conditionally renewable policy. An individual health insurance policy that gives the insurer a limited right to refuse to renew the policy at the end of a premium payment period for reasons specified in the policy. For example, a disability income policy might specify the continued employment of the insured, and a long-term care insurance policy might specify a maximum age limit. See also cancellable policy, noncancellable and guaranteed renewable policy, and optionally renewable policy.

confirmation statement. See transaction confirmation.

conflict of laws. The area of law that determines which substantive laws apply to each issue in a case when the laws of more than one jurisdiction are involved in the action.

conformity with state statutes provision. In the United States, an individual health insurance policy provision which states that any policy provision in conflict with the laws of the state in which the insured resides is amended to conform to the minimum requirements of such laws.

conservation. In the insurance industry, an insurer’s efforts to ensure that insurance policies and annuities, once issued, do not lapse but are retained on the insurer’s books for as long as possible.

conservation unit. Within an insurance company, a group of employees dedicated to promoting conservation of policies.

conservative financial strategy. A financial management strategy that avoids risks and places an unusually strong emphasis on company solvency.

conservative mortality table. A mortality table with a mortality safety margin built into its rates. For annuities, a conservative mortality table shows lower mortality rates than the expected mortality rates. For life insurance policies, a conser-vative mortality table shows higher mortality rates than the expected mortality rates.

conservator. See receiver.