General Insurance Definitions

Question 1

Acquisition costs

Answer 1

Costs arising from the writing of insurance contracts such as commission

Question 2

Adjustment premium

Answer 2

An additional premium payable at the end of a period of cover. This may result from the use of retrospective experience rating or from a situation where the exposure cannot be adequately determined at the start of the period of cover.

Question 3

Agents’ balances

Answer 3

Moneys (typically premiums) that belong to an insurer but are held by an agent

Question 4

All risks

Answer 4

Covers that are not restricted to specific perils. The cover is for loss, destruction or damage by any peril not specifically excluded (exclusions will often be inevitabilities like wear and tear).

Question 5

Allocated loss adjustment expenses (ALAE)

Answer 5

The expenses incurred in handling and settling a claim. ALAE differs from ULAE because they can be allocated to a specific claim (e.g. legal fees for settling a claim).

Question 6

Bancassurance

Answer 6

An arrangement in which a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank’s client base.

Question 7

Binding authorities

Answer 7

Contractual agreements setting out the scope of delegated authority, allowing cover holders to enter into contracts of insurance and to issue insurance documents on behalf of Lloyd’s managing agents

Question 8

Bonus-malus

Answer 8

A rating system in which the base premium can be discounted or loaded in response to the policyholder’s claims experience

Question 9

Broker

Answer 9

An intermediary between the seller and buyer of a particular insurance contract who is not tied to either party

Question 10

Business interruption insurance

Answer 10

Insurance cover for financial loss arising following damage (e.g. fire) to business premises. It is also referred to as consequential loss insurance, loss of profits and BI insurance.

Question 11

Cancellation

Answer 11

A mid-term cessation of a policy, which may involve a partial return of premium

Question 12

Captive

Answer 12

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

Question 13

Casualty insurance

Answer 13

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

Question 14

Central funds (Lloyds’)

Answer 14

This is a contingency reserve built up from contributions by Lloyd’s Names and held by Lloyd’s as a layer of protection to policyholders. It is used to demonstrate overall solvency to the regulator. This capital is in addition to members’ capital resources held as Funds at Lloyd’s (FAL).

Question 15

Claims handling expenses (CHE)

Answer 15

The expenses incurred in handling and settling claims (ALAE & ULAE)

Question 16

Claims made policy

Answer 16

A policy that covers all claims reported to an insurer within the policy period irrespective of when the incident occurred. The policy will usually only cover claims that took place after a specified retroactive date, typically the date that the policy was first taken out. The type of cover provided by such a policy is known as claims made cover.

Question 17

Claims occurring policy

Answer 17

A policy that covers all claims that occur within the policy period irrespective of when the claim is made

Question 18

Commercial lines

Answer 18

Classes of insurance for commercial and business policyholders

Question 19

Committee of Lloyd’s

Answer 19

A committee that is responsible for administrative matters within Lloyd’s under delegation from the Council of Lloyd’s.

Question 20

Council of Lloyd’s

Answer 20

The governing body responsible for the overall direction of Lloyd’s. It was established as a result of the Lloyd’s Act 1982 and consists of six working members.

Question 21

Composite insurer

Answer 21

A single insurance company that writes both life and non-life business

Question 22

Cover note

Answer 22

A note issued by an insurance company to confirm the existence of insurance cover pending the issue of the formal policy documentation.

Question 23

Deductible

Answer 23

The amount which, in accordance with the terms of the policy, is deducted from the claim amount that would otherwise have been payable and will therefore be borne by the policyholder.

Question 24

Deposit premium

Answer 24

This occurs in cases where all relevant exposure or rating information is not known at the start of the period of cover (adjustment premium follows at the end of the term)

Question 25

Direct business

Answer 25

Two meanings:

1) business acquired without the intervention of an intermediary
2) the cover provided by an insurer to an original policyholder, as opposed to any reinsurance cover provided for the insurer

Question 26

Discovery period

Answer 26

A time limit, usually defined in the policy wording, placed on the period within which claims must be reported.

Question 27

Endorsement

Answer 27

Some change to the policy wording, usually followed by a change in the risk covered, which takes effect during the original period of insurance and is usually accompanied by an alteration in the original premium

Question 28

Escalation clause

Answer 28

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 29

Excess and surplus lines insurance

Answer 29

A segment of the insurance market that allows consumers to buy property and casualty insurance through the state regulated insurance market, where policyholders, agents, brokers and insurance companies all have the ability to design specific insurance coverages and negotiate pricing based on the risks to be secured.

Question 30

Experience rating

Answer 30

A system by which the premium of each individual risk depends, at least in part, on the actual claims experience of that risk (either past of during the current term). In the London Market context, it is a rating based purely on experience of the historical risk presented.

Question 31

Exposure rating

Answer 31

A measure of calculating the premium that is based on external data or benchmarks.

Question 32

First loss

Answer 32

A form of insurance cover in which it is agreed that the sum insured is less that the full value of the insured property, and average will not be applied

Question 33

Franchise

Answer 33

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 (therefore different to deductible/excess).
Note that franchise is also a term to describe the permission given to syndicates to operate within the Lloyd’s market.

Question 34

Funds at Lloyd’s (FAL)

Answer 34

Each member of Lloyd’s is required to provide capital as security to support their total Lloyd’s underwriting business. The level of FAL determines the amount of insurance business that a member can underwrite.

Question 35

Hard premium rates

Answer 35

High, profitable premium rates

Question 36

Principle of indemnity

Answer 36

The principle whereby the insured is restored to the same financial position after a loss as before the loss

Question 37

Insurance cycle

Answer 37

The observed tendency of insurance prices and hence profitability to vary over a period of several years

Question 38

Integrated Lloyd’s Vehicles (ILVs)

Answer 38

Syndicates on which the entire participation has been bought by insurance groups

Question 39

Line slip

Answer 39

A facility under which underwriters delegate auhtority to accept predetermined share of certain co-insured risks on their companies’ behalf. The authority may be exercised by the leading underwriter on behalf of the following underwriters; or it may extend to the broker or some other agent authorised to act for all the underwriters.

Question 40

Lloyd’s managing agent

Answer 40

A company appointed to manage the affairs of an underwriting syndicate, appoint an underwriter, and provide technical and administrative services.