Chapter 2 Glossary

Question 1

All risks

Answer 1

Cover that is not restricted to specific perils such as fire, storm, flood and so on. The cover is for loss, destruction or damage by any peril not specifically excluded. The exclusions will often be inevitabilities like wear and tear. The term is sometimes loosely used to describe a policy that covers a number of specified risks, though not all.

Question 2

Average

Answer 2

In non-marine insurance, the term relates to the practice of reducing the amount of a claim in proportion to the extent of underinsurance
In marine insurance, the term is generally used to describe damage or loss.

Question 3

Business interruption insurance

Answer 3

Insurance cover for financial losses arising following damage to business premises. Also called loss of profits or consequential loss insurance.

Question 4

Captive

Answer 4

An insurer wholly owned by an industrial or commercial enterprise and set up with the primary purpose of insuring the parent or associated group companies, and retaining premiums and risk within the enterprise. Some insurers are set up with the primary purpose of selling insurance to the customers of the parent. These are often known as captives, but, as they write third-party business, should not properly be so called. If the word “captive” is used without qualification it precludes this interpretation. Lighter regulatory capital requirements for captive reinsurers only apply if the purpose of the captive is to provide cover exclusively for the risks of the undertaking or group to which it belongs and so does not provide cover for third parties.

Question 5

Casualty insurance

Answer 5

Specifically the term is used in the USA, and to a lesser extent in the UK, as an alternative to liability insurance. In a wider context “casualty insurance” may be used as a phrase to cover all non-life insurance as in the phrase “property/casualty insurance”

Question 6

Claim amount distribution

Answer 6

A statistical frequency distribution describing the total amount of claims

Question 7

Claim frequency

Answer 7

The number of claims in a period per unit of exposure, such as the number of claims per vehicle year for a calendar year or per policy over a period.

Question 8

Claim frequency distribution

Answer 8

A statistical frequency distribution for claim occurrence.

Question 9

Claim size distribution

Answer 9

A statistical distribution describing the size of individual claims.

Question 10

Claims made policy

Answer 10

A policy that covers all claims reported to an insurer within the policy period irrespective of when the incident occurred. The type of cover provided by such a policy is known as claims made cover.

Question 11

Consequential loss insurance

Answer 11

Same as business interruption insurance

Question 12

Commercial lines

Answer 12

Classes of insurance for commercial and business policyholders. Those for individuals are usually referred to as personal lines.

Question 13

Escalation clause

Answer 13

A policy clause that permits the insurer to raise automatically the level of benefits or sum insured (and therefore the premium) in line with some form of inflation index.

Question 14

Estimated maximum loss

Answer 14

The largest loss that is reasonably expected to arise form a single event in respect of an insured property/ This may well be less than either the market value or the replacement value of the insured property and is used as an exposure measure in rating certain classes of business.

Question 15

Fidelity guarantee insurance

Answer 15

Insurance covering the insured against financial losses caused by dishonest actions of its employees.

Question 16

Fleet

Answer 16

A group of vehicles, ships or aircraft that are insured together under one policy.

Question 17

Franchise

Answer 17

A minimum percentage or amount of loss that must be attained before insurers are liable to meet a claim. Once it is attained the insurers must pay the full amount of the loss. The feature distinguishes a franchise from a deductible or excess. Note that franchise is also a term to describe the permission given to syndicates to operate within the Lloyd’s market.

Question 18

Indemnity, the principle of

Answer 18

The principle whereby the insured is restored to the same financial position after a loss as before the loss. This is typical of most types of insurance. This contrasts with the new-for-old basis of settlement, often used in home contents insurance, under which the insured is entitled to the full replacement value for the property without any deduction for depreciation or wear and tear. It is important to note that the sum insured under the new-for-old basis of settlement is equal to the value of the new item.

Question 19

Liability insurance

Answer 19

Insurance against the risk of being held legally liable to pay compensation to a third party.

Question 20

Loss of profits

Answer 20

Same as business interruption

Question 21

Possible/Probable Maximum loss

Answer 21

The term “probable maximum loss” represents an attempt to quantify exposure, used in rating or to judge requirements for outwards reinsurance. It may be used as another term for estimation maximum loss, depending on the class of business. The term “possible maximum loss” implies the consideration of more remote scenarios than those for probable or estimated maximum loss and therefore carries a higher value. The fact that the same abbreviation, PML, may be used for both is a source of possible confusion.

Question 22

Suretyship

Answer 22

Insurance to provide a guarantee of performance or for the financial commitments of the insured. In the UK this is known as financial guarantee insurance.