Glossary (D-G)

D

DECLARATION
Part of a property or liability insurance policy that states the name and address of policyholder, property insured, its location and description, the policy period, premiums and supplemental information. Referred to as the dec page.

DEDUCTIBLE
The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.

DEFERRED ANNUITY
An annuity contract, also referred to as an investment annuity, that is purchased either with a single tax-deferred premium or with periodic tax-deferred premiums over time. Payments begin at a predetermined point in time, such as retirement. Money contributed to such an annuity is intended primarily to grow tax-deferred for future use.

DEFINED BENEFIT PLAN
A retirement plan under which pension benefits are fixed in advance by a formula based generally on years of service to the company multiplied by a specific percentage of wages, usually average earnings over that period or highest average earnings over the final years with the company.

DEFINED CONTRIBUTION PLAN
An employee benefit plan under which the employer sets up benefit accounts and contributions are made to it by the employer and by the employee. The employer usually matches the employees contribution up to a stated limit.

DEMAND DEPOSIT
Customer assets that are held in a checking account. Funds can be readily withdrawn by check, on demand.

DEMUTUALIZATION
The conversion of insurance companies from mutual companies owned by their policyholders into publicly traded stock companies.

DEPOSITORY INSTITUTION
Financial institutions that obtain their funds mainly through deposits from the public. They include commercial banks, savings and loan associations, savings banks and credit unions.

DEREGULATION
In insurance, reducing regulatory control over insurance rates and forms. Commercial insurance for businesses of a certain size has been deregulated in many states.

DERIVATIVES
Contracts that derive their value from an underlying financial asset, such as publicly traded securities and foreign currencies. Often used as a hedge against changes in value.

DIFFERENCE IN CONDITIONS
Policy designed to fill in gaps in a businesss commercial property insurance coverage. There is no standard policy. Policies are specifically tailored to the policyholders needs.

DIMINUTION OF VALUE
The idea that a vehicle loses value after it has been damaged in an accident and repaired.

DIRECT PREMIUMS
Property/casualty premiums collected by the insurer from policyholders, before reinsurance premiums are deducted. Insurers share some direct premiums and the risk involved with their reinsurers.

DIRECT SALES/ DIRECT RESPONSE
Method of selling insurance directly to the insured through an insurance companys own employees, through the mail, by telephone or via the Internet. This is in lieu of using captive or exclusive agents.

DIRECT WRITERS
Insurance companies that sell directly to the public using exclusive agents or their own employees, through the mail, by telephone or via the Internet. Large insurers, whether predominately direct writers or agency companies, are increasingly using many different channels to sell insurance. In reinsurance, denotes reinsurers that deal directly with the insurance companies they reinsure without using a broker.

DIRECTORS AND OFFICERS LIABILITY INSURANCE/D&O
Directors and officers liability insurance (D&O) covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in suits against the company. There are a variety of D&O coverages. Corporate reimbursement coverage indemnifies directors and officers of the organization. Side-A coverage provides D&O coverage for personal liability when directors and officers are not indemnified by the firm. Entity coverage, for claims made specifically against the company, is also available. D&O policies may be broadened to include coverage for employment practices liability.

DIVIDEND
Money returned to policyholders from an insurance companys earnings. Considered a partial premium refund rather than a taxable distribution, reflecting the difference between the premium charged and actual losses. Many life insurance policies and some property/casualty policies pay dividends to their owners. Life insurance policies that pay dividends are called participating policies.

DOMESTIC INSURANCE COMPANY
Term used by a state to refer to any company incorporated there.

E

EARLY WARNING SYSTEM
A system of measuring insurers financial stability set up by insurance industry regulators. An example is the Insurance Regulatory Information System (IRIS), which uses financial ratios to identify insurers in need of regulatory attention.

EARNED PREMIUM
The portion of premium that applies to the expired part of the policy period. Insurance premiums are payable in advance but the insurance company does not fully earn them until the policy period expires.

EARTHQUAKE INSURANCE
Covers a building and its contents, but includes a large percentage deductible on each. A special policy or endorsement exists because earthquakes are not covered by standard homeowners or most business policies.

ECONOMIC LOSS
Total financial loss resulting from the death or disability of a wage earner, or from the destruction of property. Includes the loss of earnings, medical expenses, funeral expenses, the cost of restoring or replacing property and legal expenses. It does not include noneconomic losses, such as pain caused by an injury.

ELECTRONIC COMMERCE / E-COMMERCE
The sale of products such as insurance over the Internet.

ELIMINATION PERIOD
A kind of deductible or waiting period usually found in disability policies. It is counted in days from the beginning of the illness or injury.

EMPLOYEE DISHONESTY COVERAGE
Covers direct losses and damage to businesses resulting from the dishonest acts of employees. (See <a href='/glossary/F/#203'>Fidelity bond</a> )

EMPLOYEE RETIREMENT INCOME SECURITY ACT / ERISA
Federal legislation that protects employees by establishing minimum standards for private pension and welfare plans.

EMPLOYERS LIABILITY
Part B of the workers compensation policy that provides coverage for lawsuits filed by injured employees who, under certain circumstances, can sue under common law. (See <a href='/glossary/E/#188'>Exclusive remedy</a> )

EMPLOYMENT PRACTICES LIABILITY COVERAGE
Liability insurance for employers that covers wrongful termination, discrimination and other violations of employees legal rights.

ENDORSEMENT
A written form attached to an insurance policy that alters the policys coverage, terms, or conditions. Sometimes called a rider.

ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE
A form of insurance designed to cover losses and liabilities arising from damage to property caused by pollution.

EQUITY
In investments, the ownership interest of shareholders. In a corporation, stocks as opposed to bonds.

EQUITY INDEXED ANNUITY
Nontraditional fixed annuity. The specified rate of interest guarantees a fixed minimum rate of interest like traditional fixed annuities. At the same time, additional interest may be credited to policy values based upon positive changes, if any, in an established index such as the S&P 500. The amount of additional interest depends upon the particular design of the policy. They are sold by licensed insurance agents and regulated by state insurance departments.

ERRORS AND OMISSIONS COVERAGE / E&O
A professional liability policy covering the policyholder for negligent acts and omissions that may harm his or her clients.

ESCROW ACCOUNT
Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and sometimes to pay property taxes.

EXCESS AND SURPLUS LINES
Property/casualty coverage that isnt available from insurers licensed by the state (called admitted insurers) and must be purchased from a nonadmitted carrier.

EXCESS OF LOSS REINSURANCE
A contract between an insurer and a reinsurer, whereby the insurer agrees to pay a specified portion of a claim and the reinsurer to pay all or a part of the claim above that amount.

EXCLUSION
A provision in an insurance policy that eliminates coverage for certain risks, people, property classes, or locations.

EXCLUSIVE AGENT
A captive agent, or 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 agents company. (See <a href='/glossary/C/#85'>Captive agent</a> )

EXCLUSIVE REMEDY
Part of the social contract that forms the basis for workers compensation statutes under which employers are responsible for work-related injury and disease, regardless of whether it was the employees fault and in return the injured employee gives up the right to sue when the employers negligence causes the harm.

EXPENSE RATIO
Percentage of each premium dollar that goes to insurers expenses including overhead, marketing and commissions.

EXPERIENCE
Record of losses.

EXPOSURE
Possibility of loss.

EXTENDED COVERAGE
An endorsement added to an insurance policy, or clause within a policy, that provides additional coverage for risks other than those in a basic policy.

EXTENDED REPLACEMENT COST COVERAGE
Pays a certain amount above the policy limit to replace a damaged home, generally 120 percent or 125 percent. Similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction. (See <a href='/glossary/G/#242'>Guaranteed replacement cost coverage</a> )

F

FACULTATIVE REINSURANCE
A reinsurance policy that provides an insurer with coverage for specific individual risks that are unusual or so large that they arent covered in the insurance companys reinsurance treaties. This can include policies for jumbo jets or oil rigs. Reinsurers have no obligation to take on facultative reinsurance, but can assess each risk individually. By contrast, under treaty reinsurance, the reinsurer agrees to assume a certain percentage of entire classes of business, such as various kinds of auto, up to preset limits.

FAIR ACCESS TO INSURANCE REQUIREMENTS PLANS / FAIR PLANS
Insurance pools that sell property insurance to people who cant buy it in the voluntary market because of high risk over which they may have no control. FAIR Plans, which exist in 28 states and the District of Columbia, insure fire, vandalism, riot and windstorm losses, and some sell homeowners insurance which includes liability. Plans vary by state, but all require property insurers licensed in a state to participate in the pool and share in the profits and losses. (See <a href='/glossary/R/#442'>Residual market</a> )

FARMOWNERS-RANCHOWNERS INSURANCE
Package policy that protects the policyholder against named perils and liabilities and usually covers homes and their contents, along with barns, stables and other structures.

FEDERAL FUNDS
Reserve balances that depository institutions lend each other, usually on an overnight basis. In addition, Federal funds include certain other kinds of borrowing by depository institutions from each other and from federal agencies.

FEDERAL INSURANCE ADMINISTRATION / FIA
Federal agency in charge of administering the National Flood Insurance Program. It does not regulate the insurance industry.

FEDERAL RESERVE BOARD
Seven member board that supervises the banking system by issuing regulations controlling bank holding companies and federal laws over the banking industry. It also controls and oversees the U.S. monetary system and credit supply.

FIDELITY BOND
A form of protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.

FIDUCIARY BOND
A type of surety bond, sometimes called a probate bond, which is required of certain fiduciaries, such as executors and trustees, that guarantees the performance of their responsibilities.

FIDUCIARY LIABILITY
Legal responsibility of a fiduciary to safeguard assets of beneficiaries. A fiduciary, for example a pension fund manager, is required to manage investments held in trust in the best interest of beneficiaries. Fiduciary liability insurance covers breaches of fiduciary duty such as misstatements or misleading statements, errors and omissions.

FILE-AND-USE STATES
States where insurers must file rate changes with their regulators, but dont have to wait for approval to put them into effect.

FINANCIAL GUARANTEE INSURANCE
Covers losses from specific financial transactions and guarantees that investors in debt instruments, such as municipal bonds, receive timely payment of principal and interest if there is a default. Raises the credit rating of debt to which the guarantee is attached. Investment bankers who sell asset-backed securities, securities backed by loan portfolios, use this insurance to enhance marketability. (See <a href='/glossary/M/#342'>Municipal bond insurance</a> )

FINANCIAL RESPONSIBILITY LAW
A state law requiring that all automobile drivers show proof that they can pay damages up to a minimum amount if involved in an auto accident. Varies from state to state but can be met by carrying a minimum amount of auto liability insurance. (See <a href='/glossary/C/#123'>Compulsory auto insurance</a> )

FINITE RISK REINSURANCE
Contract under which the ultimate liability of the reinsurer is capped and on which anticipated investment income is expressly acknowledged as an underwriting component. Also known as financial reinsurance because this type of coverage is often bought to improve the balance sheet effects of statutory accounting principles.

FIRE INSURANCE
Coverage protecting property against losses caused by a fire or lightning that is usually included in homeowners or commercial multiple peril policies.

FIRST-PARTY COVERAGE
Coverage for the policyholders own property or person. In no-fault auto insurance it pays for the cost of injuries. In no-fault states with the broadest coverage, the personal injury protection (PIP) part of the policy pays for medical care, lost income, funeral expenses and, where the injured person is not able to provide services such as child care, for substitute services. (See <a href='/glossary/N/#351'>No-fault</a>, <a href='/glossary/T/#504'>Third-party coverage</a> )

FIXED ANNUITY
An annuity that guarantees a specific rate of return. In the case of a deferred annuity, a minimum rate of interest is guaranteed during the savings phase. During the payment phase, a fixed amount of income, paid on a regular schedule, is guaranteed.

FLOATER
Attached to a homeowners policy, a floater insures movable property, covering losses wherever they may occur. Among the items often insured with a floater are expensive jewelry, musical instruments and furs. It provides broader coverage than a regular homeowners policy for these items.

FLOOD INSURANCE
Coverage for flood damage is available from the federal government under the National Flood Insurance Program but is sold by licensed insurance agents. Flood coverage is excluded under homeowners policies and many commercial property policies. However, flood damage is covered under the comprehensive portion of an auto insurance policy. (See <a href='/glossary/#21'>Adverse selection</a> )

FORCED PLACE INSURANCE
Insurance purchased by a bank or creditor on an uninsured debtors behalf so if the property is damaged, funding is available to repair it.

FOREIGN INSURANCE COMPANY
Name given to an insurance company based in one state by the other states in which it does business.

FRAUD
Intentional lying or concealment by policyholders to obtain payment of an insurance claim that would otherwise not be paid, or lying or misrepresentation by the insurance company managers, employees, agents and brokers for financial gain.

FREE-LOOK PERIOD
A period of up to one month during which the purchaser of an annuity can cancel the contract with no penalty. Rules vary by state.

FREQUENCY
Number of times a loss occurs. One of the criteria used in calculating premium rates.

FRONTING
A procedure in which a primary insurer acts as the insurer of record by issuing a policy, but then passes the entire risk to a reinsurer in exchange for a commission. Often, the fronting insurer is licensed to do business in a state or country where the risk is located, but the reinsurer is not. The reinsurer in this scenario is often a captive or an independent insurance company that cannot sell insurance directly in a particular country.

FUTURES
Agreement to buy a security for a set price at a certain date. Futures contracts usually involve commodities, indexes or financial futures.

G

GAP INSURANCE
An automobile insurance option, available in some states, that covers the difference between a cars actual cash value when it is stolen or wrecked and the amount the consumer owes the leasing or finance company. Mainly used for leased cars. (See <a href='/glossary/A/#13'>Actual cash value</a> )

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES/GAAP
Generally accepted accounting principles (GAAP) accounting is used in financial statements that publicly held companies prepare for the Securities and Exchange Commission. (See <a href='/glossary/S/#480'>Statutory accounting principles/SAP</a> )

GENERIC AUTO PARTS
Auto crash parts produced by firms that are not associated with car manufacturers. Insurers consider these parts, when certified, at least as good as those that come from the original equipment manufacturer (OEM). They are often cheaper than the identical part produced by the OEM. (See <a href='/glossary/C/#129'>Crash parts</a>, <a href='/glossary/A/#23'>Aftermarket parts</a>, <a href='/glossary/C/#118'>Competitive replacement parts</a>, <a href='/glossary/O/#369'>Original equipment manufacturer parts / OEM</a> )

GLASS INSURANCE
Coverage for glass breakage caused by all risks; fire and war are sometimes excluded. Insurance can be bought for windows, structural glass, leaded glass and mirrors. Available with or without a deductible.

GRADUATED DRIVER LICENSES
Licenses for younger drivers that allow them to improve their skills. Regulations vary by state, but often restrict nighttime driving. Young drivers receive a learners permit, followed by a provisional license, before they can receive a standard drivers license.

GRAMM-LEACH-BLILEY ACT
Financial services legislation, passed by Congress in 1999, that removed Depression era prohibitions against the combination of commercial banking and investment banking activities. It allows insurance companies, banks and securities firms to engage in each others activities and own one another.

GROUP INSURANCE
A single policy covering a group of individuals, usually employees of the same company or members of the same association and their dependents. Coverage occurs under a master policy issued to the employer or association.

GUARANTEE PERIOD
Period during which the level of interest specified under a fixed annuity is guaranteed.

GUARANTEED DEATH BENEFIT
Basic death benefits guaranteed under variable annuity contracts.

GUARANTEED INCOME CONTRACT / GIC
Often an option in an employer-sponsored retirement savings plan. Contract between an insurance company and the plan that guarantees a stated rate of return on invested capital over the life of the contract.

GUARANTEED LIVING BENEFIT
A guarantee in a variable annuity that a certain level of annuity payment will be maintained. Serves as a protection against investment risks. Several types exist.

GUARANTEED REPLACEMENT COST COVERAGE
Homeowners policy that pays the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit. (See <a href='/glossary/E/#193'>Extended replacement cost coverage</a> )

GUARANTY FUND
The mechanism by which solvent insurers ensure that some of the policyholder and third-party claims against insurance companies that fail are paid. Such funds are required in all 50 states, the District of Columbia and Puerto Rico, but the type and amount of claim covered by the fund varies from state to state. Some states pay policyholders unearned premiumsthe portion of the premium for which no coverage was provided because the company was insolvent. Some have deductibles. Most states have no limits on workers compensation payments. Guaranty funds are supported by assessments on insurers doing business in the state.

GUN LIABILITY
A legal concept that holds gun manufacturers liable for the cost of injuries caused by guns. Several cities have filed lawsuits based on this concept.

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