Insurance Terminology

What are these

Every discipline of study has
vocabulary of its own.
Same is with Insurance.
Significance of these terms may vary
from their dictionary meanings.
Use of these terms help visualise
situations

WHAT IS INSURANCE

It is a system to transfer Risk

Risk is transferred to an Insurance company
Insurance company is known as Insurer
Individual/Body corporate transferring Risk is
known as Insured
Insurer reimburses Insured covered loss

How We May Define

Insurance

1.
2.
3.
4.

Insurance is a CONTRACT whereby

A certain sum is charged in consideration ----Premium
A large amount is guaranteed to be paid by the Insurer
The payment is made only upon a CONTINGENCY
The compensation will be made in a certain pre
determined sum

One party (Insurer) agrees to pay to the other party

(Insured) or his beneficiary, a certain sum upon a
given contingency (Risk) against which insurance is
proposed.

Types of Insurance

LIFE INSURANCE Insurance of Human

Life only

NON LIFE INSURANCE----Insurance of pin

to elephants, Motor cars to satellites,
Plantation to non human life, Buildings,
Bridges, Loss of profits due to accidents, loss
of income due to injury, Acidental death of
human lives.

Proposal
It is an application form seeking insurance.--the form is designed by the insurer.
It contains questionnaire asking pertinent
details of the applicant & subject matter of
insurance.
The form is filled in and signed by the
applicant.
Applicant is known as Proposer
Filled in forms are submitted to the insurance
company (Insurer).

Underwriter

Is a person who examines the proposal form.

He/she asses the proposal following co. norms.
Decides:
If Insurance can be accepted or not
If acceptable, then at what price. (Premium)
Terms and condition of acceptance.
Office of the underwriter is known as
Underwriting office.

Underwriting

Underwriting is selection and acceptance

of Risk
It is a skill Insurers develop
It is a skill to decide on depth and spread of
coverage
It is a skill to decide on pricing

Premium
It

is the price insured pays for the

insurance cover.
The amount of premium is decided
by the insurer.
In India the premium is payable in
advance i.e. before the inception of
cover. (Sec. 64VB of the Insurance
Act)

Classification of Premium
Gross

direct Premium: Amount of

business written direct from the
market.
Depending on the nature and size of
the risk---premium as well as risk is
shared with other insurers.---co
insurance.
Similarly co insurance premium is
received from other insurers.

Re insurance
Insurers

transfers risk to specialised

Insurers.
These insurers are known as Reinsurers.
While transferring risk insurers pay
premium to reinsurers.
This is known as Cession.
When premium is received as reinsurer
it is known as acceptance.

Net Premium
It

is the sum total of gross direct

premium+ co insurance premium
received + accepted re insurance
premium amount of premium
ceded.

Policy

It is the documentary evidence of the

insurance contract.
It is issued by the insurer in favour of
the insured.
It is signed by an authorised official of
the insurer.
The insurer is obliged to honour the
commitments as laid down in the policy.

Main contents of the Policy

All the terms & condition of the contract and
warranties
The details of the subject matter of insurance
and the amount of the sum assured.
The tenure of the policy i.e. the period of validity.
Exclusions-----certain losses due to operation of
certain perils remain out of cover.

Conditions
Conditions Precedent----Insured requires
to disclose all material fact to ensure
validity of the cover.
Conditions Subsequent----Insured are to
notify any change in material fact after the
issuance of policy.
Conditions precedent to liability---Insured
is to give notice of an event happening
within a specified period of time

Representations
Customer is obliged to make truthful
statements affecting the risk .
Age of a vehicle, sailing date of a
vessel etc.
If based on belief it must be
substantially true.
Maxim of Utmost Good Faith
applies.

Warranties

An assurance/promise / undertaking
given by the insured to be kept during
the policy period.
In general insurance, breach of
warranty makes the policy voidable.
In certain cases breach of warranty
invites penalty.
Warranties are attached to the policies.

Assignment

Right of the policy holder to transfer the

rights & liabilities of the policy to some one
else.
The policy holder who transfers is known as
assignor.
The person in whose favour the transfer is
made is known as assignee.
In general Insurance assignment is not
allowed except in marine cargo policies.
Life Insurance policies are generally freely
assignable.

Endorsements

Any change required to be made to

the policy conditions /warranties
including premium is documented.
It is issued and signed by the Insurer.
Policy is to be interpreted along with
the endorsement.
It is written separately and attached
to the policy.

Premium reserve

Portion of premium set aside to meet

liabilities.

It is known as Life Fund in Life Insurance.

Known as Policyholders Fund in General

Insurance.

Claim

Policy holders request for compensation .

It must be in terms of the policy.
Person making the claim is known as
claimant.
In non life policies claimant is the policy
holder.( except death cases in P.A and
Mediclaim policies)
In Life Policies nominee in case of death
during tenure of the policy.
Incase of endowment policies the surviving
policy holder.

Few Ratios
Incurred Claim Ratio(Loss Ratio) =
Claim paid during the year+ outstanding claim
at the end of the year outstanding Claim at
the commencement of the year Premium
income
Expenses Ratio = Expenses premium
income
Combined ratio = Loss ratio + Expenses ratio
The ratios indicate the efficiency of an
insurance co.

Incurred but not Reported

(IBNR)
Claims

occurred in a particular year.

Not reported during the year.
Amount is determined by appointed
Actuary.

Other Ratios
Mortality---Average age of death, Ratio of
death at various age group separately for
men and women.
Morbidity ( other than death)
Prepared by National Family Health
Survey, Mortality & Morbidity Investigating
Centre (affiliate of institute of actuaries)
the Life Insurance Council and IRDA.
Prepared on the basis of experience in
India

Important Institutions
Lloyds---oldest and most coveted
institution provide valuable services
to the insuring world. Its members
write business. It itself does not
write business.
Protection &Indemnity Clubs(P&I
Clubs)---Ship owners club to meet
their certain liabilitiesmostly the
claims not entertained by insurers.

Specific to Life Insurance

First Premium----Initial premium to

start the policy.
Renewal Premium---Subsequent
premium to keep the policy valid.
Mode of Payment----periodicity of
payments viz. Annual, Hly, Qtly,mthly.
Limited Payment---premium to be paid
for a period shorter than the policy

Specific to Life Insurance

Single Premium---The entire premium is
paid at one go.
Days of grace---no. of days allowed to pay
premium beyond the stipulated date.
Lapse ---policy benefits lost partially or
wholly for non payment of premium.
Paid up policy----lapsed policy restored
with reduced sum insured and benefit.
Revival---lapsed/paid up policies are
restored to original status after paying
dues as per co. rules

Specific to Life Insurance

Deferred date---a date after the
commencement when risk cover starts. Or
the date when annuity begins.
Deferment period--- period between
commencement and deferred date.
Nomination---identifying a person in
absence of the policy holder to receive the
benefits of the policy.
Surrender value---the value at termination
before the date of maturity.

Life Insurance Policies

Term ----Payable on death onlyto the nominee

the sum insuredno survival benefit.
Endowment ---payable on death or surviving the
policy period.
With profit----policy allowing bonus at a rate
determined every year and payable at maturity/death
over and above the sum insured.
Without profit---only sum insured at maturity /death.

Common Terminologies
Risk----

Probability of monetary loss

Peril----

Damage causing phenomena

Hazard----Conditions

influencing
degree of chance of loss

Terms specific to Non-Life

No renewal---new contract at the end of

the policy period.
Certificate of Insurance---An evidence of
the policy have been issued. To be carried
in the vehicle under M.V.Act.
Bonus---either a discount in premium or
increase in sum insured without additional
premium. This is offered to customer
having no claim experience during
previous year
Malus---loading the premium on policies for
claims made in the previous year/s

Terms specific to Non-Life

Deductible/Excess---the amount which is
to be borne by the customer in the event
of loss.
Franchise---- a specified amount of loss,
beyond which the insurer will entertain the
claim and pay the loss to the extent
allowed by the terms. If the loss remains
within the amount of franchise insurer
does not come into picture.

Non-Life policies
Valued Policy/Agreed value
Policy=The insurer agrees to pay, in
the event of loss, a certain amount
Full value Policy the insured states
that the sum insured is the true
value of the subject matter of
insurance.

Non-Life policies
First loss Policies---- Irrespective of the
total value at risk, a certain value, much
lower to the total is fixed as sum insured.
The liability of insurer is limited to that
value. Popular in Burglary Policies
Floater Policies---Covers risk on stock
located at various locations under one sum
insured. Total value of stock at all
locations have to be declared.

Non-Life policies
Declaration policiesWhen there is
substantial fluctuation of stock at
one location, this policy helps.The
declarations are to be made
periodically by the insured.Premium
is charged provisionally and adjusted
at expiry.

Marine insurance
Terms

Specific Policy--- Issued for a single

consignment.
Open PolicyContract for a specific
period for a total sum insured spread
over a no. of consignments.
Increased Value PolicyProvide to
insure consignments over and above
its true value. This takes care of
various expenses

Marine insurance
Terms

Duty Insurance Policy---Covers custom

duty paid in case of imported cargo.
Time PolicyIssued for hull cover for a
period.
Voyage Policy---Issued to cover hull for a
specific voyage .
Institute Cargo clause---Drafted by the
Institute of London Underwriters. Marine
policies are issued applying these
clauses.

Types of claims---Non-Life
Total

Loss--(i) Actual Total Loss, (ATL)

(ii)Constructive Total Loss (CTL)

Partial

Total Loss--- any loss other

than total loss is partial loss.

Types of claims---Non-Life
Actual

Total Loss
Subject matter insured is
destroyed.
Damaged

as to cease to be a
thing of kind insured.

Assured

is irretrievably deprived

Types of claims---Non-Life
Constructive Total Loss:
Actual Loss appears to be unavoidable

Prevention of actual loss causes

expenditure exceeding agreed value.

Cost of repairing& forwarding to

destination exceed agreed value .

Types of claims---Non-Life
General

Average Loss
Loss caused by a G. A.act directly or
in consequence of.
It includes G.A. expenditure.
It

includes G.A.sacrifice

Follows

York-Antwerp Rules.

Types of claims---Non-Life
General Average---Loss , caused
voluntarily by extra ordinary sacrifice
to save a common adventure, is
shared by all stake holders in the
voyage.
SalvageRecovered portion of a
damaged property. After the claim is
settled the insurer can dispose of the
salvage for value.

Proximate cause
For recovery, the loss must be
caused proximately by an
insured peril.
Does not mean the last cause.
The
most
effective
or
dominant or real cause.

Few other
Terminologies

Solatium Fund : Fund created by

(i) Central Govt., State Govts
and the general insurers
To pay third parties motor claims
In cases of Hit and run accidents
The vehicle causing accident
cannot be traced.

Few other
Terminologies

Arbitration :
When a claim is admissible, but
claim amount is disputed.
This process is followed to avoid
long court cases
It is a less expensive way.
Both the parties appoint arbitrator/s