Cancellable Policy:
A policy which may be cancelled by the company at any time by giving advance notice in compliance with state requirements to the insured citing the reasons such insurance is being cancelled and refunding any unearned premium. (Term is not usually applicable to life or health insurance.)

Cancellation:
The discontinuance of an insurance policy before its normal expiration date.

Capacity:
The supply of insurance available to meet demand. Capacity depends on the industry’s financial ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite based on its financial condition. The adequacy of an insurer’s capital relative to its exposure to loss is an important measure of solvency.
A property/casualty insurer must maintain a certain level of capital and policyholder surplus to underwrite risks. This capital is known as ca­pacity. When the industry is hit by high losses, such as after the World Trade Center terrorist attack, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk and or raising additional capital. When there is excess capac­ity, usually because of a high return on investments, premiums tend to decline as insurers compete for market share. As premiums decline, underwriting losses are likely to grow, reducing capacity and causing insurers to raise rates and tighten conditions and limits in an effort to increase profitability. Policyholder surplus is sometimes used as a measure of capacity.

Capital:
Shareholder’s equity (for publicly-traded insurance companies) and retained earnings (for mutual insurance companies). There is no general measure of capital adequacy for property/casualty insurers. Capital adequacy is linked to the riskiness of an insurer’s business. (See Risk-Based Capital; Surplus; Solvency.)

Capital Markets:
The markets in which equities and debt are traded. (See Securitization of Insurance Risk.)

Capital Stock Insurance Company:
An insurance company which is owned and controlled by stockholders or investors.

Captive Agent:
A person who represents only one insurance company and is restricted by agreement from submitting business to any other company, unless it is first rejected by the agent’s captive company. (See Exclusive Agent.)

Captive Insurer:
Insurers that are created and wholly-owned by one or more non-insurers, to provide owners with coverage. A form of self-insurance.

Cargo Insurance:
A broad classification of marine insurance providing coverage on cargo, as opposed to hulls, to protect shippers by sea from loss or damage to goods for which they would be unlikely to collect from the carriers themselves. Whether cargoes are insured for a particular voyage or under open policies which are in the nature of reporting-form policies depends upon the volume and regularity with which a shipper uses ocean transit. Cargo insurance also can cover goods transported by train or truck.

Carrier:
The insurance company or the one who agrees to pay the losses. The carrier may be organized as a stock or mutual company, a reciprocal exchange, as an association of underwriters or as a state fund.

Car Year:
Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for automobile insurance.

Cash Value:
The cash fund which a life policy develops usually after the first or second year the policy has been in force. It is available when the policy is surrendered or may be borrowed earlier as a policy loan.
Casualty Insurance:
Insurance primarily concerned with the legal liability for losses caused by injury to persons or damage to property of others. Also includes, among other coverages: automobile, Workers’ Compensation, employers’ liability, general liability, plate glass, theft and personal liability. It excludes life, fire and marine insurance.

Catastrophe:
Term used for statistical recording purposes to refer to a single incident or a series of closely related incidents causing severe insured property losses totaling more than a given amount, currently $25 million.

Catastrophe Bonds:
Risk-based securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catas­trophe such as those caused by a major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk. (See Securitization of Insurance Risk.)

Catastrophe Deductible:
A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in when a major natural disaster occurs. These large deductibles limit an insurer’s potential losses in such cases, allowing it to insure more property. A property insurer may not be able to buy reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a certain level.

Catastrophe Factor:
Probability of catastrophic loss, based on the total number of catastrophes in a state over a 40-year period.

Catastrophe Model:
Using computers, a method to mesh long-term disaster information with current demographic, building and other data to determine the po­tential cost of natural disasters and other catastrophic losses for a given geographic area.

Catastrophe Reinsurance:
Reinsurance (insurance for insurers) for catastrophic losses. The insurance industry is able to absorb the multibillion dollar losses caused by natural and man-made disasters such as hurricanes, earthquakes and terrorist attacks because losses are spread among thousands of companies including catastrophe reinsurers who operate on a global basis. Insurers’ ability and willingness to sell insurance fluctuates with the availability and cost of catastrophe reinsurance.
After major disasters, such as Hurricane Andrew and the World Trade Center terrorist attack, the availability of catastrophe reinsurance becomes extremely limited. Claims deplete reinsurers’ capital and, as a result, companies are more selective in the type and amount of risks they assume. In addition, with available supply limited, prices for reinsurance rise. This contributes to an overall increase in prices for property insurance.

Cede:
To transfer all or part of a risk written by an insurer (the ceding, or primary company) to a reinsurer.

Cell Phone Insurance:
Separate insurance provided to cover cell phones for damage or theft. Policies are often sold with the cell phones themselves.

Cession:
The unit of insurance passed to the reinsurer by the ceding company. The unit (cession) may accordingly be the whole or a portion of (a) single risks, (b) defined type or class of policies or (c) defined divisions of a policy as agreed.

Chartered Life Underwriter (CLU):
A designation conferred in recognition of the attainment of certain standards of education and proficiency in the uses of life insurance to satisfy the financial needs of the insured in light of current tax and other laws. A Chartered Life Underwriter is normally an agent or someone responsible for sales or marketing activities.

Chartered Property Casualty Underwriter (CPCU):
A designation conferred in recognition of the attainment of certain standards of education and proficiency in the art and science of property and casualty insurance underwriting.
Claim:
A request for payment for a loss which may come under the terms of an insurance contract. There are two types of claims. A first-party claim is one made by the policyholder for reimbursement by his or her company. A third-party claim is one by a person against a policyholder of another company and the payment, if any, will be made by that company.

Claim Frequency:
The number of claims occurring under a given coverage divided by the number of earned exposures for the given coverage. It is usually expressed as the number of claims paid per 100 of such exposures. Example: For auto bodily injury (BI), the frequency of 2.50% means that bodily injury accidents were incurred at the rate of 2-1/2 for every 100 cars insured for BI for one year.

Claim Severity:
The average cost per claim.

Claims-Made Form:
A type of liability policy which covers claims which occur and are reported while the policy is in effect.

Classification:
The combining of policyholders or properties into groups with the same general characteristics so that the various groups’ inherent differences in exposure to loss can be recognized for rating or underwriting purposes.

Coinsurance (Health Insurance):
A provision in a medical-expense insurance policy which requires that the insured person pay part of the expense and the insurance company will pay the remaining part. (Also see Coinsurance [Property Insurance].)

Coinsurance (Property Insurance):
A provision in a property insurance policy which requires the insured to carry insurance equal to a certain specified percentage of the value of the property for the insured to receive full payment on a loss up to the amount of the policy. Otherwise, payment would be only a percentage of the actual loss, that percentage determined by the amount of insurance carried relative to the amount that is required to be carried by the policy for full protection up to policy limits. (Also see Coinsurance [Health Insurance].)

Collateral:
Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security.)

Collateral Source Rule:
Bars the introduction of information that indicates a person has been compensated or reimbursed by a source other than the defendant in civil actions related to negligence or other liability.

Collision Insurance:
Protection against loss resulting from any damage to the policyholder’s car caused by collision with another vehicle or object, or by upset of the insured car, whether it was the insured’s fault or not (other than his/her own willful act). This does not cover other people’s property. (See Deductible Collision.)

Combined Ratio:
The sum of the ratio of losses incurred to premiums earned and the ratio of commissions and expenses incurred to premiums written.

Combined Single Limit:
A liability coverage limit that combines both bodily injury and property damage into one aggregate amount.

Commercial Blanket Bond:
A fidelity bond for operators of commercial establishments, etc. (See Fidelity Bond.)

Commercial Credit Insurance:
A guarantee to manufacturers, wholesalers and service organizations that they will be paid for goods shipped or services rendered. It is a guarantee of that part of their working capital that is represented by accounts receivable.
Commercial General Liability Policy:
Often referred to as the CGL, this policy provides broad protection against situations in which a business must defend itself against lawsuits or pay damages for personal injury or property damage to third parties.

Commercial Insurance (Coverages):
Definitions of many commercial coverages are listed alphabetically throughout the Glossary. Among these coverages are Aviation Insurance, Cargo Insurance, Commercial Credit Insurance, Commercial Multiple-Line Policy, Crop-Hail Insurance, Employers’ Liability Insurance, General Liability Insurance, Kidnap and Ransom Insurance, Marine Insurance, Products Liability Insurance, Professional Liability Insurance, Public Li­ability Insurance, Rain Insurance, Surplus Lines, Title Insurance and Workers’ Compensation.

Commercial Lines:
The various kinds of insurance which are written for businesses. (Also see Commercial Insurance [Coverages].)

Commercial Multiple-Line Policy:
Package type of policy that includes a wide range of essential property and liability coverages for businesses.

Commission:
A percentage of an insurance premium paid to an agent or broker for producing and servicing the business.

Commissioner of Insurance:
Title of the head of the state insurance department who is responsible for the enforcement of insurance laws and for promulgating regulations dealing with the insurance industry.

Comparative Negligence:
Under this concept a plaintiff (the person bringing suit) may recover damages even though guilty of some negligence. His or her recovery, however, is reduced by the amount or percent of that negligence. There are various forms of comparative negligence, such as: “Pure Com­parative,” in which the plaintiff recovers so long as he or she is not solely at fault; “Less Than,” in which the plaintiff recovers so long as his or her negligence is less than that of the defendant; and “Not Greater Than,” in which the plaintiff recovers so long as his or her negligence is not greater than the defendant’s.

Competitive Replacement Parts:
See Crash Parts; Generic Auto Parts.

Competitive State Fund:
A facility established by a state to sell workers compensation in competition with private insurers.

Complaint Ratio:
A measure used by some state insurance departments to track consumer complaints against insurance companies. Generally, it is written as the number of complaints upheld against an insurance company, as a percentage of premiums written. In some states, complaints from medi­cal providers over the promptness of payments may also be included.

Completed Operations Coverage:
Pays for bodily injury or property damage caused by a completed project or job. Protects a business that sells a service against liability claims.

Comprehensive Automobile Insurance:
Protection against loss resulting from damage to the insured auto, commonly referred to as ”other than collision” coverage. Broad coverage is provided and includes protection from such hazards as fire, theft, glass damage, wind, hail and malicious mischief. This is a first-party cover­age.

Comprehensive Personal Liability Insurance:
Protection for an insured against loss arising out of his or her legal liability to pay money for damage or injury he or she has caused to others. This does not include automobile liability, but includes almost every activity of the insured except “personal injury” and his or her business operations. (See “Personal Injury” Liability Insurance.)

Compulsory Auto Liability Insurance:
Insurance laws in some states require motorists to carry at least certain minimum auto liability coverages for bodily injury and property dam­age.
Concealment:
Normally means the willful withholding of material fact which could affect an insurer’s issuance of a policy or processing of a claim.

Conditions:
Provisions of an insurance policy which state the rights and duties of the insured and insurer.

Condominium Insurance:
A policy designed for the special needs of condominium unit owner-occupants to cover personal property and liability, to complement the insurance normally purchased by the condominium association for the building, structures and liability. Additional coverages are offered unit owners by many insurers.

Consequential Loss:
A loss resulting from, but not caused directly by, another insured loss. A “consequential loss” (spoilage of meat stored in a refrigerated build­ing, for example) usually arises out of a change in temperature resulting from damage to the building (but not directly to the meat) by a covered peril such as fire. “Consequential Loss” coverages are available to protect the insured against this specific indirect loss.

Contingent Liability Insurance:
Covers the insured individual or business in cases of indirect or “contingent” liability, where direct liability for an accident, for example, falls on another, but because of the relationship between the insured and the other party, the insured might still be held indirectly liable. (Example: A business being responsible for the work performed by an independent contractor.)

Contract:
The “Law of Contracts” specifies four requirements for the formation of a single contract: (1) parties of legal capacity; (2) expression of mu­tual consent of the parties to a promise, or set of promises; (3) a valid consideration; and (4) the absence of any statute or other rule declar­ing such agreement void. An insurance policy qualifies as a contract under the above definition.

Contract Bond:
A bond which guarantees faithful performance of a construction contract and payment of all material and labor bills related to that contract. A Performance Bond covers faithful performance only; a Payment Bond guarantees payment of material and labor expenses.

Contractual Liability Insurance:
Provides coverage for claims arising out of liability that has been assumed by the insured under a written or oral contract.

Contributory Negligence:
Carelessness of the injured person that helped cause the accident in which he or she was injured. Some states bar recovery to the plaintiff if the plaintiff was contributorily negligent.

Coverage:
The scope of the protection provided under a contract of insurance; any of several risks covered by a policy.

Covered/Insured Peril:
The perils of loss you are protected against by an insurance policy. Examples of perils include fire, lightning, theft, vandalism and the threat of a lawsuit.

Crash Parts:
Sheet metal parts that are most often damaged in a car crash. (See Generic Auto Parts.)

Credit:
The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.

Credit Derivatives:
A contract that enables a user, such as a bank, to better manage its credit risk. A way of transferring credit risk to another party.
Credit Disability Insurance:
Disability insurance on the borrower, payable to the creditor while the borrower is disabled, to cover the loan payment (usually small loans repayable in installments). This insurance is usually issued through the creditor (a lender or lending agency) and is provided by an insurance company under a group credit disability policy. Credit disability insurance also can be purchased by an individual directly from an insurance company. (Also see Credit Life Insurance.)

Credit Enhancement:
A technique to lower the interest payments on a bond by raising the issue’s credit rating, often through insurance in the form of a financial guarantee or with standby letters of credit issued by a bank.

Credit Insurance (Commercial):
See Commercial Credit Insurance.

Credit Life Insurance:
Term life insurance on the life of a borrower, payable to the creditor, to repay a loan (usually small loans repayable in installments) in case of death. This insurance is usually issued through the creditor (a lender or lending agency) and is provided by a life insurance company under a group credit life insurance policy to insure the lives of those who borrow from the creditor. Credit life insurance also can be purchased by an individual directly from a life insurance company. (Also see Credit Disability Insurance.)

Credit Rating:
See Bond Rating.

Credit Score:
The number produced by an analysis of an individual’s credit history. The use of credit information affects all consumers in many ways, from getting a job, finding a place to live, securing a loan, getting a telephone, and buying insurance. Credit history is routinely reviewed by insur­ers before issuing a commercial policy because businesses in poor financial condition tend to cut back on safety which can lead to more ac­cidents and more claims. Auto and home insurers may use information in a credit history to produce an insurance score. Insurance scores may be used in underwriting and rating insurance policies. (See Insurance Score.)

Crime Insurance:
Term referring to property coverages for the perils of burglary, theft and robbery.

Crop-Hail Insurance:
Protection against hail damage to growing crops. Coverage is often afforded under such policies for crop damage due to fire, windstorm, drought, frost, snow, etc.

Customer Service Representative:
The assistant that supports the sales efforts of the sales agent or producer. Other titles include administrative assistant, agency underwriter and marketing specialist. CSR is also a designation for a certified customer service representative.