glossary of insurance terms
ABI Association of British Insurers. The major insurance trade association in the United Kingdom. All insurance companies who are authorised to transact business in the UK are entitled to become members. The association brings together all member companies to act as a representative body to negotiate on any topical issue which could affect the insurance industry. These could be political, technical or economic developments.
The ABI also acts as an information service. Much research is done on a wide-ranging variety of subjects connected with the insurance industry. Information is passed to member companies and also the media and the public. Statistical information is collected and collated from participating members and then distributed on an anonymous basis.
ABI Code of Practice Introduced in 1981, this Code of Practice applicable to General Insurance aims to ensure that the insurer and intermediary are working together to give the customer the best possible service. It applies to those intermediaries who are not registered under the Insurance Brokers (Registration) Act and who would otherwise not be working within any defined guidelines. The two main points of the act are that the intermediaries will (i) explain all the essential provisions of a policy to the customer and (ii) draw their attention to any restrictions and exclusions. Members of the ABI have undertaken to enforce the Code. This means that it is the insurers not the intermediaries themselves who have to enforce the Code. There is also an ABI Code of Practice for intermediaries who are involved in life assurance.
Ab initio Translates as ‘from the beginning’. A term often used in circumstances where insurers wish to terminate cover from inception of a contract.
Absolute liabilities See Strict liabilities.
Acceptance An absolute and unqualified agreement to all the terms and conditions of an offer made, which leads to the formation of a contract (including an insurance contract).
Acceptance criteria The specific criteria laid down by an insurance company which will determine whether or not a risk is acceptable to them.
Accidental damage See All Risks
Accommodation risk A risk taken on by a Company which would not normally meet acceptance criteria, but which for other reasons e.g., good broker connection, other good-quality business from same Insured, charitable or church connection, is "accommodated’.
Accumulation in risk Defined as ‘the growth of danger of fire and the increase of area of fire, when fire happens, from one degree to another’. Refers to cases where there are more than the accepted number of hazard features. Examples of hazard features which could lead to an accumulation in risk might be timber extensions, storage of flammables, change of use of premises to those involving hazardous processes, construction of premises close by.
Where accumulation in risk exists, the rating should reflect the additional hazard features. The risk management techniques will play an important role in ensuring that the chance of fire or extent of fire when it occurs is minimised.
Additional premium Any extra premium charged over and above the original premium agreed - usually as a result of mid-term amendments to cover or following premium adjustments as a result of declarations submitted.
Adjuster Independent firms of chartered loss adjusters are appointed by insurance companies following a loss. Their duties are:
· To determine the cause of a loss.
· To judge whether the cause falls within the scope of the policy.
· To determine whether sums insured are adequate and, if not, apply any underinsurance penalty.
· To evaluate the total liability under the policy and recommend payment.
· To recommend loss prevention strategies to prevent reoccurrence.
· To mitigate further damage after the initial loss.
Adverse claims experience Unsatisfactory loss history either because of frequency and/or nature of losses.
Agent In legal terms ‘one who is authorised by one party (the principal) to bring that principal into a contractual relationship with another and to stand in place of his principal in the performance of any functions covered or implied by the terms of the agreement’. In insurance the agent normally acts on behalf of the proposer as an independent intermediary, the most common of which are insurance brokers.
Aleatory Depending on chance. Insurance contracts are by nature aleatory.
All other contents A term used to extend cover to include property which would otherwise not be included in the description of property insured or be excluded by specific policy exclusions. Items where the Insured has no insurable interest will also be included (e.g. employees’ pedal cycles and other personal effects). The term is generally used to include the following items (subject of course to the terms, limits etc., as described in the policy):
Documents manuscripts and business books but only for the value of the materials as stationery together with the cost of clerical labour expended in writing up and not for the value to the Insured of the information contained in them.
Computer systems records but only for the value of the materials together with the cost of clerical labour and computer time expended in reproducing such records (excluding any expenses in connection with the production of information to be recorded therein) and not for the value to the Insured of the information contained therein.
Patterns, models, moulds, plans and designs.
Directors’ and employees’ pedal cycles, tools, instruments, and other personal effects so far as not otherwise insured.
"All risks" An extension of the standard fire, perils and theft cover to include accidental loss or damage. The term ‘all risks’ is misleading as it does not actually provide cover for all risks. There will always be a number of exclusions listed in an ‘all risks’ wording, for example gradually operating causes, etc. Forms of ‘all risks’ cover are:
· Personal effects.
· Commercial ‘all risks’.
· Goods in transit.
· Contractor’s ‘all risks’.
· Money insurance.
Alteration of risk A general condition of insurance which allows for the contract to be avoided if there have been any significant changes after the commencement of insurance. Standard definitions of alteration of risk are:
· Closure, vacation, change of occupation or other material change in use of the premises described but workmen are allowed on the premises for effecting repairs minor structural and other alterations and general maintenance.
· By the business being permanently discontinued.
· By removal.
· Whereby the risk of loss damage accident or liability is increased.
· Whereby the Insured’s interest ceases except by will or operation of law.
· Whereby a liquidator or receiver is appointed.
Alternative Dispute Resolution (ADR) Describes the group of recognised procedures which can be followed as alternatives to litigation, for resolving disputes. These include arbitration, negotiation, conciliation and mediation. ADR procedures can be held concurrently with arbitration or litigation until an agreement is reached, or a decision made by an arbitrator or judge.
Alternative trading A business interruption clause which requires that following a loss any revenue the Insured earns from conducting business at premises other than those insured, will be considered in the assessment of the loss.
Amount payable Sets out in the policy the precise amounts/limits that will be paid in the event of a claim.
Annual carryings A rating factor for money insurance which is normally applied to:
(a) The total value of cash, open cheques and open giro cheques paid into the bank or post office giro.
(b) The total value of cash drawn from the bank or post office giro.
(c) The total payment for the purchase of money orders, postal orders, postage stamps, national insurance stamps, national saving stamps and certificates, holiday with pay stamps and luncheon vouchers.
Annual premium The sum of money required by an insurer to accept a risk for one year.
Annual revenue In the context of business interruption cover, applies to the money paid or payable to the Insured for services rendered in the course of the business during the 12 months immediately before the date of a loss.
Annual turnover In the context of consequential loss cover, applies to the money paid or payable to the Insured for services rendered and for goods sold and delivered in the course of the business at the insured premises during the 12 months immediately before the date of a loss.
APB The Arson Prevention Bureau was founded in 1991. It was founded jointly by the Home Office and the ABI to co-ordinate efforts in tackling the growing problem of arson which was recognised as the greatest cause of fire loss in the 1990’s.
The bureau plays a key part in initiating and co-ordinating efforts to reduce arson losses, assessing statistical evidence and providing loss prevention advice.
Arbitration A method of settling claims disputes without the need to take matters through the courts. Policies normally contain an arbitration condition. This means that the parties may appoint an independent arbitrator to investigate the dispute and make a fair judgement. Note the following:
· Insurers put the arbitration clause in as a condition precedent to liability, i.e., in the event of a dispute concerning payment of a claim, the Insured must first go to arbitration.
· Where insurers have agreed to pay a claim, but the amount of the settlement is being disputed, that dispute must be referred to an Arbitrator who must make an aware before the Insured has a right of action against the Insurer.
· When arbitration has completed its course, the policyholder may still go to the courts if he is dissatisfied.
ARP (Annual Renewal Premium) The premium we would charge if a policy were to be renewed today.
The main reasons for the difference between total ARP and GWP for a year are:
i) GWP contains additional premiums or refunds arising from endorsements.
ii) GWP contains single premiums arising from non-renewable policies.
iii) It is normal to adjust the GWP to reflect a discount given for commercial
reasons rather than the ARP.
Assault extension A ‘personal accident’ extension most frequently available under the money section of a policy. Cover is provided for bodily injury or death to an insured person due to assault whilst in charge of money covered.
Assessors A loss assessor will sometimes be appointed by the Insured to prepare and negotiate a claim on his behalf. The assessor’s fees will be paid by the Insured and not form part of the claim.
Authenticated claims experience A full account of the claims history of an Insured, including dates and amounts paid. This will be issued by the insurer who incurred the losses and will verify claims for another insurer, often forming part of a presentation when business is being re-broked.
Automatic reinstatement of sums insured A clause found under a material damage section of a policy which states that if not advised to the contrary (either by the Insured or insurer) within 30 days from the date of a loss the sums insured will be automatically reinstated to the amounts at the date of the loss - the Insured undertaking to pay any additional premium requested.
Average The purpose of the average clause is to protect insurers against under-insurance and to ensure fairness amongst all policyholders. It prevents anyone from gaining advantage by not insuring for the full value of the risk. Anyone who deliberately under-insures will not be contributing fairly into the pool of premiums in relation to the risk he brings - but would without an average clause still enjoy the full benefits of the pool.
The pro rata condition of average operates to ensure that an Insured who is not fully covered bears a rateable proportion of every loss that he suffers. He would only be able to recover a proportion of his loss which would equate directly to the proportion of the total value he had insured. For example if he only insured for a quarter of the total value of the risk, he would only be entitled to recover a quarter of the loss. The average clause applies independently to each item which is declared to be subject to average in the policy. The standard wording for the pro-rata condition of average is as follows:
‘If the property insured shall at the time of destruction or damage be collectively of greater value than the sum insured under that item then the Insured shall be considered as being their own insurer for the difference and shall bear a rateable share of the destruction or damage accordingly’.
A special condition of average applies to agricultural produce. It is acknowledged that the pro-rata condition of average would impose a hardship on the insured because value on agricultural produce diminishes from the time the harvest is brought in until the next harvest time. The special condition of average allows the farmer to avoid being penalised by the application of average provided that the sum insured is not less than 75% of the value at the time of the damage. If the insurance is less than the 75% figure then the normal pro-rata condition of average applies.
Balance of risk extension An extension available under the fire section of a policy to include accidental damage cover. Generally used for buildings, or buildings & contents.
Basis of settlement Sets out within a policy the precise basis on which a claim will be settled i.e. reinstatement, indemnity, day-one etc.
Benefits Generally used to describe the payments which would be made following a successful Personal Accident claim. Benefits will be shown for death, loss of one or more limbs or one or both eyes, permanent total disablement and temporary total disablement.
BINA British Insurance Networking Association.
Blanket policies Insurance policies covering several items under one sum insured.
Book debts A consequential loss type of cover which will provide for the loss of business books and records as a result of insured events. The actual amount paid will be the difference between the outstanding debit balances and any amounts that are received or traced. Cover is also included for the additional amounts involved in tracing customers’ debts and accountant’s fees for producing and certifying any documents required by the insurer. Cover will exclude any losses as a result of misfiling, mislaying or the deliberate falsification of business records. This cover is often given as a ‘free’ extension under the consequential loss section of a policy - with the sum insured limited to a set percentage of the consequential loss sum insured.
Bordereaux Sheets prepared by a ceding company showing reinsurers details of risks ceded. Also used to describe summary sheets prepared for insurers by brokers with delegated authority schemes.
Break-Even ratio The ratio at which a company, when taking all other income into account, meets its profitability targets.
Normally used as a loss ratio that a company wishes to write business at or below, so that when expenses and investment income are allowed for, it should produce the profit which the company requires.
Profitability targets can be set in many different ways.
Broker An individual or firm whose full-time occupation is the placing of insurance with insurance companies. Only individuals/firms who are registered under the Insurance Brokers (Registration) Act 1977 can actually call themselves brokers.
Brokerage The fee paid to a broker who arranged reinsurance cover for a ceding company, or another term to describe the commission payment to an insurance intermediary.
BSST Generally accepted as standard construction, refers to brick, stone slate, tile.
Building works See Contract works.
Burning cost See Burning rate.
Burning rate Also referred to as Burning Cost. This is the rate which is required solely to meet claims and does not include any element of profit or expenses.
The calculation is:
Incurred claims during a period
Exposure in the equivalent period
Bursting and overflowing of water tanks etc. Will generally be included within a comprehensive householders policy and certain package-type contracts. Under the traditional standard fire policy for commercial risks however this is deemed to be a ‘special peril’ for which an additional premium will be charged if included. May also be referred to as ‘escape of water ...’
The following features should be considered:
· Condition and maintenance policy on plumbing and drainage services.
· Age and general condition of property.
· Susceptibility of contents (if required) to damage.
· Previous loss history.
Business description It is important that the business of a risk insured is clearly stated on the schedule of a policy. This is particularly relevant for liability insurance where cover is stated as being ‘in connection with the business.’
Business hours Relevant in money insurance where higher limits of cover will be offered for cover on the premises ‘during business hours’ as occupancy levels are generally higher and people with responsibility for the safekeeping of money will be present. The business hours will normally be defined within the policy wording.
Business interruption See Consequential Loss
Cancellation clause A clause within a contract of insurance which allows an insurer to cancel the contract following due notice to the Insured and allow a return premium. It has usually been more difficult for an Insured to cancel a policy and still be entitled to a return premium. However, the Unfair Contract Terms legislation is aiming to improve this situation for consumers.
Capital additions clause Under the fire section of commercial insurance it is common practice to include a capital additions clause to avoid the constant issue of endorsements noting small increases. This clause will allow for automatic cover of increases up to a specified limit or percentage of the sum insured in any one year. The clause will stipulate that the Insured supply details of such additions as soon as possible (or at specified intervals) and pay any pro-rata additional premium requested by the insurer. The clause will specifically exclude any appreciation in value so that it cannot be used to avoid the application of average in the event of under-insurance.
Captive Insurance Company A method of risk retention whereby firms set up a separate company to handle the insurances of the parent company. Captives can be owned by one parent firm, or sometimes several firms group together to form a captive. The primary reasons for forming captives are:
· Premiums are based on the individual experience of the parent company(ies), which means that the risk-control methods of the Company will have a direct effect on premiums.
· Direct insurers’ overheads are avoided.
· The parent company will have access to a wider and cheaper reinsurance market.
· Profits made by the captive are retained instead of being passed to another insurer.
· Captives can be operated from off-shore ‘tax havens’, where the costs of setting up and operating an insurance company and the tax paid on profits are very low.
Case estimate The estimated ultimate cost of settling a reported claim based on an individual assessment of the available information relating to the claim, generally including external (but not internal) claims handling expenses less any amounts already paid in respect of that claim.
Cash carryings See Annual carryings
Catastrophe A single event occurring during a specified interval of time (often 72 hours) which give rise to an accumulation of losses. The type of event falling into this category include windstorms, rainstorms, earthquakes, floods, severe frosts etc.
Catastrophe reserves Funds put aside by Insurance Companies to provide protection against the possibility of future severe losses arising from catastrophes.
Caveat emptor Translates as ‘let the buyer beware’. Most commercial contracts are based on caveat emptor, which means that there is no onus on either party to disclose information which isn’t requested. It is up to the people involved to seek out the best deal without any deliberate misleading on either side. Insurance contracts are not based on caveat emptor, as there is an obligation for all parties to disclose all material information. Also see Utmost Good Faith.
CDM Regulations Made under the Health & Safety at Work Act, the Construction (Design & Management) Regulations 1994 came into force on 1st April 1995. The object of the regulations is to establish a culture of loss prevention in the construction industry. The key aspects centre around the continual assessment of Health & Safety throughout the cycle of construction, including the appointment of a Planning Supervisor to co-ordinate Health & Safety matters.
Ceding company In the process of reinsurance, an insurance company who transfers risks to a reinsurer. Also known as the reinsured.
Chartered Insurance Institute The main professional body involved with insurance. Education is a key activity of the CII. They provide a wide-ranging syllabus aimed at people working within all sectors of the industry with provisions for specialising in specific areas. Within the UK there are approximately 85 local insurance institutes, and there are associated and affiliated institutes in over 40 countries world-wide. The CII holds annual examinations twice a year and awards recognised professional qualifications to successful candidates.
The Institute is also involved in setting standards for professionalism throughout the industry and providing services that enhance the value of membership.
Civil commotion Often called Riot and Civil Commotion, this is freely available in property insurance. Assessment of the risk is difficult as insurers can exercise no form of control over it. The wording used is wide and generally refers to ‘destruction or damage (by fire or otherwise, including explosion) of or to the property insured directly caused by riot, civil commotion, strikers, locked-out workers or persons taking part in labour disturbances, or malicious persons acting on behalf of or in connection with any political organisation.’
Claim A demand by a policyholder for payment of money due under their contract of insurance for financial compensation following a loss. Under the terms of most policies insurers may meet claims by physically repairing or replacing items, rather than settling by cheque.
There are three broad types of claim with different features:
· Property Damage claims - relatively high frequency, generally reported and settled quickly (6 to 12 months). Consistent in size and distribution, with few total losses.
· Liability claims - long-tailed due to subjective nature. Inconsistent in size and distribution, with a few very large claims. Certain claims may still be outstanding after 10 or 15 years.
· Financial Indemnity claims - cover wide range of risks e.g. consequential loss, fidelity guarantee. Frequency and cost vary by class.
Claim form Notification of a claim, setting out details of the loss or damage incurred including an assessment of the value of the loss.
Claim frequency The claim frequency of a group of insurances is the number of claims arising in a period divided by the exposure for the period.
Claim grouping There are a number of ways of grouping claims. The most common are:
· Year of Accident or Loss - grouped according to year accident occurred.
· Year of Registration or Reporting - grouped according to year reported to
insurer.
· Year of Policy or Underwriting year - grouped according to year when policy
renewed.
Claim-handling expenses These fall into two main categories:
· Direct expenses. These are expenses that you can identify against specific claims (such as assessors’ fees, legal costs, etc.)
· Indirect expenses. You cannot identify these against any particular claim but they form part of the general administration costs (such as claim department costs, etc.)
Claims-cost inflation Inflation of average claims-costs from one to another does not arise solely from general economic inflation as measured by the Retail Price Index. Other specific cost-changes will influence the level of claims, such as:
· Earnings
· Consumer durables
· Rebuilding costs
· Motor repair costs
· Levels of Court awards
· Taxation (e.g. VAT)
· Medical costs
Claims equalisation reserves Funds set aside at the end of a period to be used to prevent exceptional fluctuations in claims experience from one year to another, thereby smoothing insurance profits. The nature of claims experience fluctuates from year to year and this can give rise to variations in insurance profits which may be unwelcome in terms of stable results. Typically, it relates to claims arising from events of an exceptional nature such as natural catastrophes.
It is now a compulsory requirement and transfers into the reserve have to be made every year. Withdrawals can be made only in defined circumstances. There is a maximum reserve allowed and tax relief is available on transfers into this reserve.
Class of business If a company decides it wishes to transact insurance business in the UK they have to state which classes of business they will be offering. The classes of business were defined in the Insurance Companies Act 1982, to ensure uniformity of practice with other members of the EEC. The classes of business for general insurance are:
Class 1 Accident
Class 2 Sickness
Class 3 Land Vehicles
Class 4 Railway Rolling Stock
Class 5 Aircraft
Class 6 Ships
Class 7 Goods in Transit
Class 8 Fire and Natural Forces
Class 9 Damage to Property
Class 10 Motor Vehicle Liability
Class 11 Aircraft Liability
Class 12 Liability for Ships
Class 13 General Liability
Class 14 Credit
Class 15 Suretyship
Class 16 Miscellaneous Financial Loss
Class 17 Legal Expenses
Class 18 Assistance
Co-insurance (i) The division of a risk between several insurers, or coinsurers. Where a coinsurer accepts a larger share of the insurance than the maximum it wants to retain for its own account, it will cede part of the risk to one or more reinsurers. Also see Reinsurance. (ii) The sharing of losses on a proportionate basis between insurer and the Insured (sometimes also known as self-coinsurance).
Collusion A fairly standard exclusion under theft insurance stating that the cover will not include any losses where a member of the Insured’s household or an employee of the Insured is involved as principal or accessory. This exclusion can be removed to widen the cover by payment of an additional premium.
Combined insurance Various forms of insurance are often combined to fulfil all the needs of an Insured within one policy. There can be many advantages to combined insurance:
· Cheaper administration.
· Easier to manage, with only one premium and one renewal date (although each
section is charged for separately by the insurer). .
· Security of knowing that all aspects of insurance for a risk have been included.
· Easier to market one product rather than several different products.
· Can be used to ‘tailor’ cover for many risks.
Combined ratio See Underwriting Ratio.
Compulsory insurance Certain insurances have been made compulsory by Governments in the UK. The most common of these are Motor Third Party and Employers’ Liability. Other classes of compulsory insurance include riding establishments, nuclear risks, oil pollution, solicitors’ professional indemnity and some other smaller cases.
Some reasons why certain types of insurance become compulsory are:
· To ensure that there will be funds available to meet liabilities to injured third parties. The compulsory third party motor insurance was for instance introduced to provide compensation for innocent third party victims of motor accidents.
· Private insurance absolves the State from providing compensation.
· To protect those working in particularly hazardous environments (e.g. nuclear installations).
Commission The payment made to brokers and other agents by the insurer. This is normally deducted from the premium paid by the policyholder and passed onto the agent.
Conditions Part of an insurance contract which must be complied with. These are
usually expressed as ‘conditions precedent to liability’ making it clear that the insurer will not be liable to settle a claim unless the condition has been fully complied with.
Consequential loss Also known as loss of profits, interruption, business interruption or time loss insurance. Whilst a standard fire policy will cover an Insured for compensation against the physical damage to property, it makes no allowances for the loss of earnings that they provided. The purpose of consequential loss insurance is therefore to cover against three main types of loss following damage to a property:
· Loss of profit suffered while a business is unable to operate.
· Costs that must still be met even though there is no revenue being earned to meet such costs (e.g. rent, water charges, wages etc.)
· Any reasonable additional expenses that are incurred in restarting the business.
Consequential loss insurance is normally subject to a material damage proviso which states that for the insurance to operate there must be fire or other relevant property insurance in force under which a claim for material damage must be admitted.
Construction The materials used in the construction of a property play a fundamental part in assessing the risk factors involved - particularly fire. Many different materials are commonly used to construct properties - which will all react differently when exposed to fire.
In 1901 the FOC classified the buildings to reflect the materials and construction techniques used. These could then be used as a guide to the potential fire hazard of a property and the rates adjusted accordingly.
Five standards of construction were formulated - with Standard I being the most fire resistant, and Standard V representing the normal, most traditional building practices. For insurers, a Standard V building represents standard construction. Standards I-IV are referred to as ‘fire resisting’ constructions, and anything less than Standard V is considered to be ‘non-standard’ construction.
The requirements for Standard V (standard construction) are:-
· External walls must be of brickwork, masonry, terracotta, cement concrete, hollow blocks, solid blocks and/or slabs. No specific thicknesses are designated and there are no requirements as to bonding. Timber framing is not allowed.
· Party walls must be of brickwork, masonry, terracotta or cement concrete be not less then 200mm thick of solid material, devoid of cavity and going up to or through the roof. Timber framing is not allowed - but structural iron or steel framework is permitted provided it be covered with not less than 50mm of brickwork, masonry, terracotta, cement and/or cement concrete.
· The standard lists a number of materials which may be used for outer roof coverings - but does not refer to the rafters or framework on which the outer covering is laid. Many of the roofs permitted have little resistance to internal fires, but the outer roof coverings allowed are non-combustible. Roof lights are allowed provided that any one light does not exceed 3.7m and the total area of the lights must not exceed 10% of the total roof area.
Standards I-IV differ from the above in that they demand increasing amounts of fire-resisting material. In fact, Standard I construction buildings are now seldom found because of the impractical and expensive requirements needed to achieve it.
The standards of construction have since been modified to bring them into line with modern building practices. In 1972 they were supplemented with three classes of construction These however never really matched up with the present day requirements and in an effort to move towards specifications which truly reflected current building practices the classes were in 1978 replaced by two grades of construction. At first these were designed for use only with the plastics industry, but in July 1979 the FOC agreed ‘that the grades of construction may be applied to any building erected after 1st March 1978, regardless of occupancy’ and that they had been drawn up to ‘relate the Committee’s construction requirements more closely to Building Regulations, British Standards and Codes of Practice as regards performance standards of fire resistance.’
Grade 1 construction defines a building of fire-resisting construction, and Grade 2 is essentially non-combustible construction. The rules applying to both grades are set out in great detail, but the basic principles of which materials or forms of construction are acceptable are firstly set out in concise terms.
Grades 1 and 2 were reissued in 1994 by the LPC. To avoid confusion the new Grades are known as Grade 1 (1994) and Grade 2 (1994) and are at a level slightly below the old Grades.
Ecclesiastical surveyors report on the basis of the 1994 Grades. Where the buildings are of more traditional design the Standards are continued to be used.
CLMI (Commercial Lines Market Initiative) CLMI started working in August 1993 to implement standards for electronic trading within the commercial insurance market place. The company is owned by a group of insurers and brokers who work together to improve efficiency and reduce the costs of operation of commercial lines business for the benefit of policyholders, brokers and insurers.
Consumer Insurance contracts for consumers are regulated by Directives from the European Community, for example the Unfair Contract Terms Directive. This defines the consumer as ‘any natural person who is acting for purposes which are outside his business.’ Other legislation may provide different definitions of consumer but in every case a personal lines household or motor policy taken out by an individual will constitute a consumer contract.
The general principles for consumer contracts set out by the Directives are:
· Policies are to be written in plain intelligible language.
· Policy terms are to be fair.
· The policyholder should be advised of the scope of the cover (including its limitations/exclusions) before agreeing to commit himself to the contract.
· The complaints procedure and the law applicable to the policy must be advised to the proposer before the proposer is committed to the contract.
Contingency fund Funds put aside by Insurance Companies to pay for unexpected losses.
Contingent liability Cover available under a Public Liability policy to provide an indemnity to the Insured in respect of liabilities he may incur arising out of the use of motor vehicles for the Insured’s business not the property of or provided by the Insured.
Contracting purchaser The purchaser’s interest clause will protect the interest of a contracting purchaser from the date that the contract is signed until the completion date, to the extent that he is not otherwise insured. The clause relates solely to buildings and the purchaser’s right to recovery is completely dependent on the purchase being completed. At that time he must obtain the insurer’s consent to the policy being transferred to his name.
Contractors all risks Insurance to cover building and civil engineering contractors for their insurance duties as stated in their contracts of hire. The most commonly found contracts are the Institution of Civil Engineers (ICE) conditions of Contract and the Standard Form of Buildings Contract (JCT 80). It is usual for these contracts to make the contractor responsible for loss or damage to the works following a wide range of hazards. The contract will also contain clauses making the contractor responsible for insuring the contract works and construction plant against damage from any cause (other than certain specified risks) for the full reinstatement value, and in the joint names of the contractor and the employer. Clauses will also be contained relating to personal injury due to the work, excepting cases where the injury results from the negligence of the employer.
Contribution The right of an insurer to request other insurers who have been similarly liable to the same Insured to share or contribute to the cost of a claim.
Contributory negligence Arises when both the defendant and the plaintiff are found to be negligent. Before 1945, if an injured person was found to be guilty of contributing to their injury through their own negligence, then the defendant escaped liability altogether. However, under the Law Reform (Contributory Negligence) Act 1945 the existence of contributory negligence merely has the effect of reducing any damages awarded. An example of contributory negligence is O’Connell v. Jackson (1971) where following a motorcycle accident it was held that the plaintiff was partly to blame for the additional injury he sustained by not wearing a crash helmet and the damages were reduced by 15%.
Conversion ratio This is:
number of new policies incepted in a period
number of quotes given in the equivalent period
The conversion ratio may not necessarily be derived from the same block of quotes and policies due to delays in receiving instructions and recording new business.
COSHH Made under the Health & Safety at Work Act, the Control of Substances Hazardous to Health Regulations 1988, and reissued 1994, cover nearly all substances which are hazardous to health. Those excluded are asbestos, lead, materials producing ionising radiations and substances below ground in mines, which have their own legislation.
Underlying the COSHH regulations are the fundamental principles of occupational hygiene:
· Assess the risk to health arising from work and what precautions are required
· Implement appropriate measures to prevent or control the risk.
· Control measures must be in place, equipment properly maintained and procedures observed.
· If necessary monitor the exposure of workers and carry out an appropriate form of surveillance of their health.
· Provide information, instruction and training for employees about the risks and precautions to be taken.
Cover-note A document which provides short-term cover until a full policy document can be issued. In motor insurance, the cover note has to incorporate a certificate of insurance.
Cross liabilities A standard extension in liability insurance which states that if any insured person makes a claim against another insured person then for the purposes of that claim, the person making the claim will be treated as if he is not an insured person. This extension could be effected if there were proceedings between two subsidiaries of the same parent company. The cross liabilities extension has the effect of putting each company in the same position as if separate contracts were issued for each.
CUE Claims and Underwriting Exchange. In November 1993, the ABI announced the launch of CUE, a computer database which holds details of claims records notified by participating insurers and provides the opportunity to match an insurers experience of a customers claims activity with that of other insurers. Initially the scheme will only apply to household insurance, but will be extended to include motor business during the course of 1997.
The CUE database is managed on behalf of the industry by Insurance Database Services Ltd (IDSL) and insurers are entitled to participate in the database when they become members. The software used has been developed and is operated by Equifax Europe UK Ltd. Early indications are that 80% of the UK Insurance market have become members of CUE, including Ecclesiastical.
DAC’s (Deferred Acquisition Costs) In general insurance the bulk of the policy expenses (other than claims handling) consists of commission and administrative expenses incurred at the inception of the policy. These acquisition expenses are immediately charged in full to the current year’s revenue account. Logically, therefore the calculation of unearned premiums at the end of the year should be based upon an apportionment of written premiums after deduction of the acquisition expenses. However, accounting convention requires that acquisition expenses, despite being charged in full to the revenue account, are treated for reserving purposes as being incurred over the whole policy period. This view requires the calculation of unearned premiums to be based upon the full written premiums without deduction. In order to present a realistic accounting result this apparent deferment of the acquisition costs must therefore be balanced by treating them as an asset. In effect this leads to the same outcome as the first approach described above.
D & O Insurance Directors and Officers Insurance. There has recently been an increasing tendency for courts to find directors and officers of companies, personally responsible for their negligence in operating a company. Legislation has also made directors liable for the behaviour of a company. This means that shareholders, creditors, customers, employees and others can now take action against directors as individuals. The directors and officers policy will provide cover for defence costs as well as the amount of compensation for which a director may be liable to pay.
Day-one cover A form of inflation protection offered by insurers. The sum insured is uplifted by an agreed percentage during the reinstatement period, provided that the sum insured declared by the Insured is adequate for average purposes at day one of the loss. Cover can be on an adjustable or non-adjustable basis and an extra premium charge is usually made.
Days of grace An agreed period of insurance cover extended after the expiry date - usually for not more than 15 days, to allow the Insured to pay the renewal premium. Days of grace are not provided where the Insured has expressed his intention not to renew the contract.
Debris removal A common extension on a standard fire policy to provide against any extra building costs which may be incurred following damage for the removal of debris, demolition etc.
Declaration A signed statement by the Insured on a proposal form which certifies the accuracy of information provided. Usually found at the end of the proposal form.
Declaration policies Insurance based on estimates of sums insured etc., and which are then subject to regular declarations or accurate figures, to enable the adjustment of premiums.
Declinature A case which an insurer declines to provide a premium quotation for - usually because the risk fails to meet the insurer’s acceptance criteria.
Deductible The term applied to the initial amount which the Insured offers to pay towards each loss (generally under commercial insurance) in return for a reduction in premium. In effect the Insured is limiting the cover to very large claims and is agreeing to be his own insurer for claims at the lower end. This differs from an excess, which is generally imposed by the Insurer. See also Excess.
Defective Premises Act 1972 Came into force in 1974 in an attempt to impose certain duties in connection with the provision of dwellings, and to see an end to the common law rule which held that the sellers and lessees of land or property could not be held responsible for any injury or damage caused to persons through defects in the condition of the premises.
Denial of access (May also be referred to as prevention of access) an extension under consequential loss insurance to provide against loss of revenue following damage to a neighbouring property (by any of the risks insured) which results in the insured premises being inaccessible.
Designation A general clause included to avoid misunderstandings about where items should be accounted for within a policy. For example, one Insured may include a crane within their sum insured on plant, where another may include it within the building sum insured. The insurer will elect to follow the Insureds allocation of items. This will be stated within the policy under the designation clause, which usually reads:
‘For the purpose of determining where necessary the heading under which any property is insured the insurers agree to accept the designation under which such property has been entered in the Insured’s books.’
Deterioration of stock An extension available under household insurance providing cover for loss of the contents of a deep freezer following accidental failure of the power supply, breakdown of the deep-freezer or contamination by refrigerant fumes.
Direct insurer An insurer in direct contact with insuring members of the public or organisations, transacting their business without going through an intermediary.
Discretionary discount A discount in premium which is offered purely at the discretion of the insurer.
Domiciliary care See Home care services
Dry perils A collective term for the special perils of riot, malicious damage, explosion, aircraft, earthquake and impact which are normally grouped together for rating purposes.
Duty of care To succeed in an action for negligence a plaintiff must show that the defendant owes him a duty of care. It is understood that a duty of care is owed to all persons who are closely and directly affected by your actions subject to reasonable forseeability and proximity.
Earned premiums The portion of the premium written in a specific period which is attributable to the cover provided in that period. Earned premiums are usually calculated on the basis of a number of days, often known as 365ths basis.
The balance is carried forward as unearned premium.
Example: If a premium is incepted on the first day of June and it covers a twelve month period, then it will be 7/12ths earned by 31 December.
Earthquake A special peril which can be added to a standard fire policy to extend the cover to include the risk of fire caused by earthquake or the risk of earthquake shock damage other than by fire. The extension is commonly found under household risks, and will be included within package type commercial or industrial policies with other special perils. Apart from these instances in this country there is little demand for earthquake cover, as the risk of major damage is considered small.
EDI Electronic Data Interchange, which is the automatic exchange of business transactions from computer to computer between organisations for electronic trading.
EDIA Electronic Data Interchange Association.
Effect of Future Inflation on Claims Most claims are subject to inflationary pressures until they are settled - this can be both general inflation within the economy, and inflation specific to the class of business involved. The effect can be particularly significant for those claims which take longest to settle e.g. Liability claims.
Electronic trading Using electronic systems to transact business. This includes EDI but also extends to such things as EMail.
Email Electronic Mail is a facility for sending information to a colleague or a group of people in the same or a different organisation. The mail may consist of a simple message or it could include images, a voice mail message or even video clips. Recipients can recover the message from an electron in-tray at their workstation.
Employers’ liability The Employers’ Liability (Compulsory Insurance) Act 1969 made it compulsory for most employers in the UK to effect employers’ liability insurance with an insurance company authorised to transact liability insurance. This cover protects employers from claims for damages brought against them by employees for bodily injury or illness arising out of and in the course of their employment. A copy of the certificate of insurance must be displayed at each place of business as proof that the compulsory insurance is in force.
Endorsement A document confirming an alteration to the original terms of a policy.
Engineering insurance The Boiler Explosion Act 1882 and the Factories Act 1961 made safety inspections of boilers by a competent person compulsory. It is generally accepted that the inspection services provided by engineering insurers fulfil this obligation. Engineering insurers offer a wide range of other cover for many types of product, including plant and machinery, lifts, cranes, engines, computers and other electrical equipment.
Escalator clause An inflation protection available under a fire policy whereby an Insured chooses a fixed percentage uplift and the sum insured is then increased progressively throughout the period of insurance to reach the agreed percentage increase at the end of the period.
Escape of oil A special peril which is now included as standard under household and most package type insurance. Provides for loss or damage caused by the escape of oil from any fixed oil-fired heating system, including the resultant loss of oil.
Estimated maximum loss (EML) Also sometimes referred to as maximum probable loss (MPL) is the maximum probable amount insurers believe could be the subject of a loss. May also be referred to as EMPL - estimated maximum probable loss. The ABI recommended definition of EML is:
An estimation of the maximum loss which could reasonably be sustained from the contingencies under consideration, as a result of a single incident considered to be within the realms of probability taking into account all factors likely to increase or lessen the extent of the loss, but excluding such coincidences and catastrophes which may be possible but remain unlikely.
Exceptions Details of risks or losses not covered by a policy.
Excess The initial amount of a loss which the Insurer requires the policyholder to pay. Excesses are generally imposed by the Insurer and are frequently used as an underwriting tool to improve loss experience. The Insured can often agree to a higher excess (generally in motor/household insurance) in return for a reduction in premium. Also see deductible.
Excess of loss reinsurance A type of insurance whereby the reinsurer pays to the insurer any losses over and above a fixed amount. Cover is normally arranged in layers and on a treaty basis thus providing cover for very large losses and is typically used for liability claims.
Exclusions Details of risks or losses which are specifically excluded from the policy.
Ex gratia payment Payments made out of goodwill - not based on any contractual or legal obligation.
Expense ratio This is equal to Expenses divided by written premiums. By allocating expenses back to product or class of business level it enables the cost of administering the business to be identified, and allows for assessment of profitability. An important element of a rating formula is the loading for expenses. This is required to ensure premiums are sufficient not only to pay claims but also cover costs related to administration and claims handling.
Exposure A measure of the extent of cover provided which is appropriate to the type of cover.
Examples: Vehicle years on motor; Wageroll, number of employees or turnover on Employers’ Liability; Sum insured or policy volumes on property insurance.
Extended cover See ‘All risks’.
Extensions Clauses or memoranda providing extra cover to the standard policy - either for an additional charge or included free. Free extensions of cover are particularly common under package-type contracts where they are often used as selling features.
Facultative reinsurance Reinsurances arranged on an individual basis. The ceding company is free to decide whether to offer the risk to the reinsurer, who in turn can decide whether to accept the risk and at what terms and conditions. This was the original kind of reinsurance, but due to the high administrative costs involved in arranging each risk separately was soon replaced by the now widespread treaty arrangements.
Falling trees A now fairly standard extra peril to provide cover for loss or damage as a result of falling trees - other than as a result of lopping. On household contracts the cover also extends to include falling telegraph poles and lighting standards.
Fees Under property insurance, cover on the building can be extended to include indemnity against fees incurred through the employment of professional architects, surveyors and consulting engineers in making good the property following damage by an insured peril.
Fidelity guarantee or surety insurance Provides against losses caused by the dishonesty of people in positions of trust.
Fire Brigade Costs Levy paid, based on fire sum insured for risks in the Inner London Area.
Fire Offices’ Committee Fire insurance developed in a rather ad-hoc fashion, but the need for more sophisticated forms of insurance became obvious as British industry developed. A need was recognised for insurers to work together on fire-fighting tactics and the pricing and classifying of fire risks. Common fire brigades were established in the early nineteenth century and after many years of negotiations, an association of English and Scottish fire offices was formed in 1860, which in 1868 became the Fire Offices’ Committee.
By pooling their knowledge, skills and experience the FOC were able to draw up rules and regulations regarding minimum rates to be applied. This practice of restricting price competition was known as tariff rating. In the past there were tariff agreements affecting many classes of insurance (fire and interruption insurance, household, motor, engineering and employers liability). Many insurers, however, including Lloyd’s underwriters remained outside the tariff associations and competed with the tariff companies.
As the result of increasing competition from non tariff insurers and growing opposition to the whole system of tariff rating, most were abandoned at the end of the 1960’s. The industrial fire insurance tariff however, lasted until the Fire Offices’ Committee was incorporated into the Association of British Insurers in 1985.
First loss Under a first loss policy, the insurer will agree to pay all losses up to an agreed limit, with the Insured agreeing to meet any losses in excess of this limit.
First premium The annual premium charged for a policy to cover the first period of insurance.
Floating policies Policies covering marine and aviation cargo where the sum insured covers a sequence of events, being reduced as each event occurs. The term ‘floating sum insured’ is also often used to describe a situation where a sum insured for an item applies across more than one location.
Flood Cover in respect of flood is only granted in conjunction with storm and tempest. Together with the special perils of storm & tempest and escape of water (or bursting and overflowing) comes under the term ‘wet perils’, which for rating purposes are normally grouped together.
Fortuitous events For an event to be insurable it must be fortuitous i.e. there must be no certainty over it happening so that the transfer of risk can take place. The one exception is death, which is of course certain, yet insurable (life assurance). However, the timing of death is fortuitous, and it is with this that life assurance is mainly concerned.
Franchise If a loss exceeds a set amount (the franchise) the insurer will pay in full, or none of the loss if it does not reach the amount of the franchise.
FRS Financial Referencing System. Developed in 1993 and operated by Equifax Europe UK Ltd, FRS is the most widely used automated method of checking the financial status of prospective policyholders. The knowledge base within the FRS examines a number of financial indicators from the databases to build up a complete picture of the risk status. The system analyses the last three years accounts, County Court Judgements, Winding Up Orders and Creditors Petitions of a business or company. Directors and principals may also be automatically searched at their home address depending on the size and financial strength of the company. This ‘financial stress’ examination takes an average of between 15 and 30 seconds depending on the amount of date being retrieved and analysed by the FRS.
Fund A collection of premiums from which losses can be paid.
General conditions Parts of the policy which must be complied with by the Insured. Failure to comply with General Conditions may allow the Insurer to cancel the policy. Failure to comply with ‘Conditions Precedent to Liability’ on the other hand give the insurer the right not to pay the claim - but not the right to cancel the policy.
General exclusions Exclusions in cover which relate to the whole policy.
GEP Gross earned premium. See Earned premiums.
GIC Gross incurred claims. See Incurred claims.
Glass insurance Often forms part of package policies, providing cover for the accidental damage to exterior and interior glass and often sanitary fixtures and signs as well. Cover can also be bought separately.
Goods in transit Provides compensation to the owner of goods if the goods are damaged or lost whilst in transit. Policies will vary depending on whether the goods are carried by the Insured’s own vehicles or by a professional carrying company. The cover is particularly common in the insurance of industrial-type risks.
Gross premium Premium income without deduction for reinsurance premiums. Also refers to premium income without deduction for broker commission.
Group insurance Insurance cover provided for groups of people as opposed to individuals.
GWP Gross written premium. See Written premium.
Hazard A factor which could influence the likelihood or outcome of a loss. The hazard can be either physical or moral. Physical hazards relate to the purely physical characteristics of a risk.
Home-care services An extension available under the Ecclesiastical Care Home Plan to provide liability cover for care in the community (also known as domiciliary care).
Hotel Proprietors Act 1956 Relates to guests’ effects. With regards the hotel package policy - cover is provided by the public liability section and also optionally under the Fire and Theft sections.
Household insurance The early form of household insurance was restricted to fire, burglary, and employers’ liability cover in respect of domestic servants. Around the time of the First World War some insurers extended their household policies to include other covers such as storm, burst pipes, public liability and other risks.
In 1922, the tariff companies (see Fire Offices’ Committee) introduced their comprehensive houseowners’ and householders’ policies. This offered standard policy covers, wordings and rates, though all insurers (both tariff and independent) competed with each other for business by adding more and more new extensions. In 1970 with the abandonment of the tariff, insurers were free to offer whatever cover they wished, for whatever premium they wished.
The cover now offered by insurers is very wide and flexible, though the term comprehensive is no longer used as it was felt that this may mislead the insured into thinking that they have all-inclusive cover to provide against any loss.
Cover can be provided for just buildings, just contents or more commonly one contract will be issued with a range of optional extensions. There may also be provisions for all risks cover on valuables, caravans, pets, boats, deterioration of frozen foods and personal accident.
IBNER reserve (Incurred but not enough reported) The initial estimate of the cost of a claim (or group of claims) will rarely, if ever, equal the actual emerging cost. As new information becomes available the original estimate will be revised, upwards or downwards. The most usual way of dealing with this development is to incorporate it, as it emerges, implicitly in the estimates of the reserve for reported outstanding claims. An alternative treatment is to include the anticipated development (plus or minus) in the IBNR reserve or as a separate statistical adjustment.
However, in the case of a reinsurer the development information may not be readily available from the direct insurer. The reinsurer may therefore regard it as prudent to maintain an additional reserve explicitly to cover a possible short-fall in the original estimates provided by the direct insurer. This is known as a reserve for claims incurred but not enough reported (IBNER).
IBNR reserve (Incurred but not reported) At the end of a period incidents will have already occurred giving rise to claims which, because of reporting delays, will not yet have been notified to the insurer. This situation gives rise to the need for a reserve at the end of the period to provide for claims incurred but not yet reported (IBNR) and for which a portion of the premium will already have been earned.
Impact A special peril providing cover for damage following impact of the property insured by any road vehicle or animal. A lower premium is generally charged if the words ‘not belonging to or under the control of the Insured or their employees’ are added. This is because if the vehicles or animals are not owned by the Insured they will be the responsibility of a third party against whom the Insured will generally have a right of recovery.
Inception date The date on which a contract of insurance commences.
Incurred claims Consists of:
i) Cost of all claims paid during a period
ii) PLUS outstanding claims at the end of the period
iii) LESS outstanding claims at the start of the period
In simpler terms Incurred claims represent payments made in the period (irrespective of the year of origin of the claims), plus or minus the change in value of outstanding claims in the period.
Indemnity ‘Compensation for loss incurred’. The placing of the Insured in the same financial position after the loss as he was in before.
Indemnity clause Places an obligation on one party to indemnify the other for losses, however caused, that arise out of the performance of the contract.
Indemnity period Refers to the length of time protection is allowed following a business interruption type loss. In many package style policies a maximum twelve month indemnity period is provided as standard - though the Insured may elect to choose a longer period which will of course affect the premium The normal wording is:-
‘the period beginning with the occurrence of the damage and ending not later than ... months thereafter during which the results of the business shall be affected in consequence of the damage.’
Indemnity to other persons A standard clause in public liability insurances which usually states that the insurer will indemnify:-
‘1. in the event of death of the Insured, the Insured’s personal representatives in
respect of liability incurred by the Insured;
2. at the request of the Insured:
a) any director, partner or employee of the Insured in respect of any claims for which the Insured would be entitled to indemnify under the policy if claims were made against the Insured;
b) any director, partner or employee of the Insured, for whom with the consent of the Insured an employee is undertaking private work.
Provided that any person specified above shall, as though they were the Insured, observe, fulfil, and be subject to the terms exceptions and conditions of the policy in so far as they can apply.’
The first paragraph is the result of the Law Reform (Miscellaneous Provisions) Act 1934. Before this Act the general rule was that a personal action at law ceased with the death of either party to it. The Act however states that if either party to an action dies the action survives for the benefit of or against the deceased’s estate. Continuation of the policy is automatic in the event of death of the Insured. Without this clause the policy would become inoperative as it is a personal contract between the Insured and the insurer. The clause will only operate where the Insured is an individual, as a corporate body’s life is unaffected by the death of one of the members. Where the Insured is a corporate body, the clause could in fact be deleted, but in practice never is.
The second paragraph is really more appropriate to the public liability section of a combined policy, as it is unusual for claims to be made direct against employees. However, the clause does emphasise that if there are circumstances where an employee might be sued, the policy will offer an indemnity.
Indemnity to principal An extension is often added to Public and Employers liability insurance under which if any contract or agreement so requires, the benefits of the policy apply jointly to the Insured and the principal. In this context the ‘principal’ can be defined as any person company firm or public authority with whom the Insured has entered into a contract with for work or services. It is important to note that the principal receives an indemnity on the same basis as the insured - against legal liability in respect of which the Insured would have been entitled to indemnity for under the policy if the claim had been made against the Insured.
Index linking A method of allowing for the effects of inflation on property insurance. It can be applied to buildings and contents and to indemnity and reinstatement bases. Sums insured are increased monthly or quarterly according to movements in the chosen index and no charge is made for the facility until renewal when the computer will incorporate the years indexed increases into the renewal premium and sum insured. Index linking is administratively simple and is particularly suitable for package policies processed by the computer, but because it does not provide extra cover immediately damage occurs, it cannot be recommended for those cases where there may be considerable delay between damage and completion of repairs.
Inspection insurance Insurance which provides an inspection service for escalators, lifts, boilers or other plant or machinery in order to comply with legislation and policy conditions. British Engine provide engineering insurance for Ecclesiastical.
Insurable interest A contract of insurance is valid in law only if the Insured has an insurable interest - i.e. he/she must have a legally recognised financial relationship with the subject matter of the insurance and stand to lose out if that subject is lost, damaged etc.
Insurable risks No hard and fast rules can be applied to determine whether a risk is insurable or not. There are however recognised characteristics of insurable risks which can be summarised as follows:-
i) Fortuitous risks
An insurable risk must be completely fortuitous. A risk which will definitely occur is not generally insurable, because there is no transfer of risk taking place. The obvious exception here is life assurance, which insures against an inevitable event....here it is the ‘timing of’ the event which is unknown.
ii) Financial value
An insurable risk must result in a loss which is capable of being measured in financial terms.
iii) Insurable interest
There must be a relationship between the Insured and any resultant financial loss.
iv) Homogeneous exposures
If an insurer experiences a sufficient number of exposures to the same risks, he is better placed to forecast the expected extent of losses and can then calculate a fair premium which bears a direct relationship to the risk factor. If the insurer doesn’t have the experience of a large number of homogeneous exposures the task of risk assessment and setting fair premiums obviously becomes more difficult. Whilst having a large number of similar exposures is a characteristic of an insurable risk, examples can be found where this is not the case. Particularly in the Lloyd’s market more unusual risks can be found (e.g. pianists’ fingers, dancers’ legs etc.) and new technology will also bring new risks (space satellites etc.) which though increasing will still not be common enough for any statistical data to have been produced.
v) Pure risks
Insurable risks must be pure risks. This means that the unknown future of the risk can only place the Insured in a worse position than they were in before a loss, or at least they must only break even. There can be no element of gain or profit from the loss, or it then becomes speculative. Insurers will normally refuse to insure speculative risks.
vi) Particular risks
Insurable risks must be particular. This means that they must arise from individual causes and affect individuals in their consequences (e.g. fire, theft, malicious damage). If a risk is not particular it is said to be fundamental. A fundamental risk is normally completely outside the control of individuals and will affect a large number of people - natural disasters are the most obvious example. Particular risks are insurable whilst fundamental risks are not.
vii) Public policy
A contract of insurance must not be contrary to what society in general would consider to be lawful and morally acceptable. For instance, to insure against incurring a fine would not be possible, as it would be considered to be against public policy.
Insurance Brokers (Registration) Act 1977 From 1 December 1981 it has been illegal for anyone to describe himself as an insurance broker if he is not registered under the Act. Anyone who does not apply and qualify for registration cannot call himself a broker - though they may use the terms consultant or adviser. This obviously provides the public with an indication as to whether or not the person is complying with the strict operating conditions which are required to become a registered broker.
Insurance A system for transferring the responsibility for paying losses from one party to another.
Insurance Brokers’ Registration Council Under the 1977 Act, the Insurance Brokers’ Registration Council (IBRC) was established to oversee the registration and regulation of insurance brokers. The council is a legal body, which acts completely independently from the BIIBA which is a voluntary trade association. It consists of twelve persons elected by registered brokers. An additional five people are nominated by the Secretary of State. The register for applications was opened at the end of 1978. It is the council’s duty to maintain the register and to draw up codes of conduct for registered members to ensure high standards of professionalism, accounting, discipline etc., are upheld.
Insurance Ombudsman Bureau A way of dealing with disputes for personal insurances only which was set up by a group of insurers in 1981. If complaints are directed to the Ombudsman he first ensures that the matter has been referred at Senior Management level of the insurance company concerned. If the Insured is not satisfied with the management decision, he may pass the case to the Ombudsman provided he acts within six months. This ensures that all possible steps have been taken to resolve the matter before reaching the Ombudsman. The Insured is under no obligation to accept the decision of the Ombudsman, but if he does the insurer must pay the amount of the award up to a monetary limit, as the scheme is binding on the insurer. The scheme can only be used by an Insured where the insurer is a member.
Insurance premium tax(IPT) The Government announced in the November 1993 budget that an insurance premium tax would be levied on all UK General Insurance business (subject to a few minor exceptions) with effect from 1st October 1994. The tax is currently levied at 2.5%, and is charged on the gross premium paid by the policyholder. With effect from 1st April 1997 the standard rate increases to 4%, with a special rate of 17.5% applicable to certain insurances (including insurance provided by Travel Agents and Tour Operators and those involved in the selling of cars and light vans).
Insurance result The insurance result (profit/loss) is equal to the underwriting result plus that part of investment income attributable to the technical reserves.
Insured The person, body of people, Company, firm, organisation etc., purchasing insurance.
Insured’s duties In an insurance contract the insurer will set out the duties of the Insured which they require to be followed in the event of a loss which might give rise to a claim. These are to ensure good faith and honesty from the Insured towards the Insurer.
Insurer The person or body of people authorised to provide insurance.
Insurers’ rights At common law the insurer has the right to take all reasonable measures to minimise losses and salvage property. They may therefore enter and take possession of property for these purposes. The exact details of these rights will be made clear in the insurance contract.
Intermediary Someone who brings a potential policyholder into contact with the insurers for the purpose of effecting an insurance contract and who is not solely employed by one insurer. There are various types of insurance intermediaries, including brokers, agents and consultants.
Internet The internet is an international network of powerful computers that all communicate with each other, receiving and browsing through information and also sending information.
Interruption insurance See Consequential loss
JCT Joint Contracts Tribunal standard form is the standard form of building contract issued by The Royal Institute of British Architects (RIBA). The contract may be in respect of the erection of new buildings, the extension of existing properties, or more specialised sub-contract work such as heating, ventilation or electrical installations or process plant.
Joint Insured Used to describe a situation where on a contract of insurance there is more than one individual or body as policyholder.
Jury service cover A small extension of cover normally only found under household insurances which provides a nominal amount to compensate for financial loss incurred as a result of the Insured being called for Jury Service.
Keys warranty Found under money cover this warrants that safe keys are removed from the premises out of business hours and not hidden in drawers.
Key worker A person on whom depends the continued successful operation of a business and whose death or illness would have a damaging effect on the profits of that business.
Landslip Usually provided alongside subsidence cover, landslip is most likely to occur following heavy rains on a sloping site.
Lapse The termination of an insurance contract through non-renewal.
Lapse ratio Provides an indication as to the success of a portfolio of policies by calculating the ratio of lapses to gross written premium. The calculations are:
Lapsed policy written premium in a period
written renewal premium generated in the equivalent period
or
number of policies lapsed in a period
number of policies renewed in the equivalent period
There are delays in reporting lapses and therefore lapse and renewal figures do not necessarily arise from the same block of policies.
Larceny The dictionary definition is ‘The unlawful taking away of another’s personal goods with intent to convert them for one’s own use, theft.’ Larceny, in insurance terms refers to the theft of property unaccompanied by the breaking into premises, such as theft by employees, theft of hotel property or during transit.
Leading office In co-insurance the insurer with the greatest proportion of cover or the one heading the slip. The leading office carries out the survey, prepares the policy on behalf of all co-insurers and deals with claims.
Legal expenses This insurance is bought by the Insured to cover any unexpected legal fees they may have to meet.
Liability This insurance comprises those risks where the loss suffered by the person insuring is either an amount of money he is legally obliged to pay by way of compensation to a third party, or some loss of his own money due to legal costs and expenses he has to pay in defending a third party claim. Cover will fall under one of two headings - Public, or Employers Liability.
Libel and slander A separate policy, or an extension to a professional indemnity policy can be provided to cover the Insured against liability at law for damages and claimant’s costs and expenses in respect of claims made against the Insured for libel, slander and infringement of trademark, registered design or copyright. The Insured will usually be expected to bear a fixed percentage of every claim and the limit of indemnity will be fixed - but all costs and expenses incurred with the Insurer’s consent will be payable in addition. The claim has to be made during the period of insurance - it being immaterial when the cause of action arose.
Libel and slander are both forms of defamation, which is the publication of a statement likely to lower a person’s reputation in the eyes of right thinking members of the community by exposing that person to hatred, ridicule or contempt.
Libel has to be in lasting form, which is generally written information about a person but can also include radio and TV broadcasts and even cartoons or effigies. Slander is not in lasting form but is transient and is normally the spoken word but could be just a gesture.
Limit of liability The maximum amount that an insurer will pay for any one ‘event’, ‘occurrence’, or ‘accident’ in contracts which do not have a sum insured.
LIMNET London Insurance Market Network.
Lloyd’s of London Originated in the seventeenth century, when a Mr William Lloyd opened one of the many coffee-houses where London merchants would meet to transact business. Lloyd started to publish a news-sheet which contained detailed shipping information. He hoped that this would attract the individual merchants who provided insurance cover for shipowners into his coffee shop. This venture was so successful that by 1770 Lloyd’s had become the recognised centre for transacting marine insurance. In 1771 the corporation of Lloyd’s formally came into existence when a group of brokers and underwriters were brought together to buy and manage larger premises.
Since then the basic organisation of Lloyd’s has remained largely unchanged though several Acts of Parliament have amended its regulation.
The membership of Lloyd’s is divided between broking members (intermediaries) and underwriting members (insurers). The conditions for acceptance as Lloyd’s underwriting members (or ‘names’) are based on wealth and character; all members being separately liable to the full extent of their personal fortunes for all debts in respect of insurance contracts to which they have subscribed.
The underwriting members are grouped into about 400 syndicates, which are managed by professional underwriting agents and will be either marine or non-marine.
The Corporation of Lloyd’s itself does not transact insurance business. It provides the central accommodation and services that members require to transact their business i.e. a policy-signing and accounting department, and information and training services. It also oversees the central guarantee fund (to which underwriting members make an annual contribution) held to meet the claims which any members are unable to meet in full. It is responsible for ensuring that an annual audit is carried out and for making returns to the Department of Trade and Industry.
Local authorities clause Also known as Public Authorities clause, this extension which is now fairly standard across property insurance applies mainly to buildings, and covers ‘such additional cost of reinstatement .. as may be incurred solely by reason of the necessity to comply with Building or other Regulations under or formed in pursuance of any Act of Parliament or with Bye-Laws of any Municipal or Local Authority.’
A very valuable clause which would operate, for example, where a property owner whose property seriously damaged by fire, is forced by the local authority to rebuild on a different site or in a different way. Street widening, development plans and clearance of buildings from specific areas are other examples where the clause may operate.
Long-term undertakings Also known as a Long Term Agreement, this is an arrangement where the Insured agrees to offer to renew a policy for a period of normally three years for which they benefit from a set discount (normally 5%) from their renewal premium. The Insured is then under an obligation to offer their insurances to the insurer for the agreed amount of time, but the Insurer is under no obligation to accept the business. If the insurer intimates to the Insured that the terms at renewal are going to be less favourable, the Insured is not obliged to renew - even if there is a Long Term Undertaking in force. It is difficult to give definitive examples of breaches of an agreement, especially as no LTU dispute has ever completed a court action. The ABI are in the process of producing a market agreement to assist insurers.
Loss adjuster SeeAdjuster
Loss assessor See Assessor
Loss of profits See Consequential loss.
Loss prevention Measures undertaken to prevent losses from occurring.
Loss prevention council (LPC) Established in 1986 by UK insurers to co-ordinate research, training, and advice on risk reduction.
Loss ratio The ratio of claims to premiums. Used to measure the profitability/success of a policy. The calculation is:
Incurred Claims in a period
Earned Premiums in the equivalent period
This produces a fraction or decimal which is typically expressed as a percentage.
Malicious damage Cover against damage (other than fire which will be covered under the standard fire policy) caused by malicious acts of any sort can be provided only where riot and civil commotion cover is in force. Care must be taken where properties are unoccupied as the risk of vandalism is increased and malicious damage cover can very rarely be provided in such cases.
Malpractice Liability insurance to provide against damages following errors or omissions in the provision of professional services.
Material damage proviso Before interruption insurance can be operative, a material damage claim under other property insurances must have been admitted by the insurer.
Material fact Any fact which would influence the judgement of a prudent underwriter in determining a premium or acceptability of a risk.
Maximum indemnity period See Indemnity period
Minimum premium The minimum premium required by an insurer for acceptance of a policy - or section of a policy.
Misrepresentation/misdescription A general policy condition which allows the insurer to make a policy void in the event of misrepresentation, misdescription or non-disclosure.
Money insurance A form of ‘all risks’ insurance which provides compensation to the Insured for loss of business money from the business premises, his own home or whilst in transit. May also incorporate a degree of personal accident cover to provide compensation to employees who may be injured or suffer property damage if assaulted whilst in charge of insured money.
Moral hazard Behaviour by the Insured which influences the chance or size of an insured loss. Moral hazard can be said to be ‘good’ or ‘poor’.
Mortgagees protection clause Most property insurances will contain a general clause noting the interest of any mortgagees, lessors of freeholders - who by law have an insurable interest in the property to the extent of their loan.
Motor contingent liability See Contingent liability.
Motor insurance The term used to describe all forms of insurance covering motor vehicles. In general, separate specialised contracts are issued for each type of vehicle (private cars, commercial vehicles, motor cycles and other ‘special types’) and the contract will normally take one of four forms being:
· Compulsory minimum cover.
· Third party cover.
· Third party, fire and theft.
· Comprehensive cover.
Motor Insurers’ Bureau (MIB) This was set up in 1946 by UK Motor Insurers to guarantee compensation for injuries caused by any motorist (traced or untraced) whose actions would be judged negligent by the courts. The EC Directive on Third Party Motor Insurance extends the obligation of the MIB to compensate third parties for damage to their property caused by traced but uninsured drivers, subject to an excess of £150.
Motor Insurance Bureau Levy The 1974 road Traffic Act requires all insurers who write motor insurance in the UK to be members of the Motor Insurers’ Bureau and pay a levy in proportion to their motor premium income. G Motor Insurers’ Bureau.
Movement on Prior Years At the end of any period, there will be an amount of claims outstanding in respect of claims already reported. The actual amount required to settle these claims is often different from this outstanding amount, and this difference gives rise to movement on old claims in subsequent periods. The amount of this relating to any specific period is known as ‘movement on prior years claims’.
Multi-risk policies Policies which provide cover for more than one risk.
NACOSS The National Approval Council for Security Systems was formed in January 1991 by the merger of the NSCIA (National Supervisory Council for Intruder Alarms) and the SSI (Security Systems Inspectorate). It is the UK independent regulatory and certification body responsible for the approval of security system companies involved in the installation and maintenance of:
· Intruder alarms
· Access control systems
· Closed-circuit television
and in the operation of:
· Central monitoring stations
and for the undertaking of security related:
· Project Management
NACOSS work closely with the Loss Prevention Council and insurance industry, and following consultation with leading insurance surveyors have drawn up a Code of Practice which NACOSS Recognised firms must comply with. Ecclesiastical will only accept alarm installations provided by NACOSS Recognised firms.
Negligence The failure to do something which a reasonable man would do, or doing something a reasonable man would not do. Whether a claim against that person will succeed will depend upon a duty of care being owed and there being a breach of that duty of care.
NEP Net earned premium. See Earned premium.
Net claims Claims after recoveries from reinsurers.
Net premium Refers to the premium either i) less the reinsurance premium or
ii) less commission.
Networks Systems that send and receive data and messages, typically over a cable. A network enables a group of computers to communicate with each other, share peripherals (such as hard disks and printers), and access remote hosts and other networks.
New for old See Reinstatement
NIC Net Incurred Claims. See Incurred claims.
No claims discount A reduction in the premium for motor insurance in recognition of the Insured’s good claims experience. Some insurers also allow this under household policies.
Non-invalidation A clause added to property insurance to ensure normal cover is maintained in the event of a breach of policy conditions - where the Insured is not actually responsible and was unaware of the breach. For example, this situation could arise where tenants of an Insured’s premises fail to observe policy conditions.
Non-negotiable money Most loss of money cover will provide a fixed and fairly high limit for non-negotiable money which is basically any money which does not fall within the policy description of cash. This should include all money which is non-transferable and cannot be readily converted into cash.
NSCIA The National Supervisory Council for Intruder Alarms was formed in 1971. The principal aims of the council were to establish and maintain a list of approved installers of intruder alarm systems, to carry out inspections of installations and to investigate technical complaints. They had an overall objective of improving the standard of service, equipment and maintenance in the intruder alarm installation business. In 1991 the NSCIA merged with the SSI (Security Systems Inspectorate) to form NACOSS. G NACOSS
Nuisance Can be defined as a wrong done by unlawfully disturbing a person in the enjoyment of his property. For example, where householders are affected by fumes or other pollutants emitted from a nearby factory.
NWP Net written premium. H Written premium.
Obsolete buildings A method of insuring buildings which, if destroyed would not be rebuilt in the existing style. The property will be insured for either i) the cost of erecting a modern building or ii) the cost of acquiring a building similar to the existing structure. This method of insuring is only ever used for the occasional problem case, where it has been established that there are grounds for insuring for less than the rebuilding cost and even then a realistic insurance value must be ensured. A special scale of discounts is available for insuring obsolete buildings.
Occupiers Liability Act 1957 This act brought together and simplified the extensive case law which had developed regarding occupiers liability. It defines the categories of persons entering the premises as either visitors or trespassers. The occupier owes a common duty of care towards visitors. This common duty of care is defined in the Act as being a duty ‘to take such care as in all circumstances of the case is reasonable to see that the visitor will be reasonably safe in using the premises for the purposes for which he is invited or permitted by the occupier to be there’. An occupier owes no duty of care to an adult trespasser (this is however modified in the case of child trespassers) though he is liable if he deliberately creates a danger with intent to cause injury to a trespasser.
Off-shore installations The Piper Alpha disaster identified major problems associated with workers employed on off-shore installations. The possible extent of unknown exposures and the substantial numbers of employees from a variety of UK contractors are the main concerns. Because of the reluctance of UK reinsurers to provide unlimited unknown exposure facilities, off-shore liability (EL & PL) was excluded from all new EIG contracts with effect from 1st January 1993 (existing business 1st March 1993).
Operating Ratio SeeUnderwriting Ratio.
Other insurances See Multiple insurances
Package policies Several classes of business (e.g. fire, theft, consequential loss, liabilities etc.) combined under one policy, with cover standardised to reduce administration costs. One premium is usually charged for the inclusions with policies directed towards a specific group of policyholders (e.g. Hotels Package, Clubs Package etc.). Package policies cannot be tailored to suit individual requirements but are aimed at providing the most usually required cover under one policy to suit the majority of policyholders.
Peril A fortuitous happening or event which could cause a loss.
Perimeter security Physical methods and techniques of securing the outer boundary of premises to prevent unauthorised access.
Personal accident Insurance to provide compensation to the Insured person in the event of accidental bodily injury or death. Written on an annual basis, personal accident cover is intended to provide only short-term cover against loss of earnings caused by accidental injury - usually by one lump sum payment and does not provide for long-term protection.
Personal effects/possessions Most household policies will provide the option of taking up ‘all risks’ cover on personal effects. Cover will normally be taken up on expensive items such as jewellery, cameras and furs, and can also be provided for unspecified goods for a lump sum and single article limit. This provides the Insured with the assurance that their personal possessions are covered for the whole range of accidental loss or damage and will do so wherever the goods happen to be at the time of the loss.
Personal liability It is usual for a household contents policy to include personal liability. The personal liability cover is intended to protect the Insured and his family who normally live with him in respect of their legal liability to compensate third parties for any injury, illness, loss of or damage to property arising out of their private activities.
Physical hazard A hazard attaching to the physical characteristics of the subject matter of insurance. For example, the construction of a property would be an aspect of physical hazard, a wooden or thatched roof property representing a high level of hazard - whilst a brick built property would be considered a good physical hazard.
Physical security Techniques and physical operations designed to reduce the size and frequency of possible losses by making it more difficult to break into protected premises. Examples of physical security are the fitting of locks to doors and windows, window bars and grilles etc.
Pipeline premiums Premium in respect of risks underwritten and incepted prior to the end of the accounting period which are not recorded in the accounting records until a subsequent accounting period.
POLARIS Polaris UK Ltd is an independent company sponsored by seven major UK Insurers which was formed to implement industry wide electronic trading for the personal lines market. The prime objectives of POLARIS are:
· To develop and introduce the technology required for full EDI trading.
· To agree and introduce market-wide standards of exchanging processing and maintaining information.
· To reduce costs so that Intermediary and Direct channels are competing on a ‘level playing field’.
Policy A document setting down in writing the agreement between the Insured and the insurer.
Policyholder See Insured
Policyholder Protection Board Levy The Policyholders Protection Act 1975 introduced scrutiny of Insurance companies with regard to solvency, to protect policyholders by ensuring that Companies are able to pay claims when they fall due. It also requires that all Insurance Companies contribute to a fund (based on GWP), which pays 100% of claims arising from compulsory insurance and 90% for other types of insurance, when an Insurer is in liquidation or financial difficulties.
Pool re The government-backed reinsurance company set up to provide reinsurance of ‘Acts of Terrorism’ insurances underwritten by a member in excess of retentions.
Precedents to liability One of the general conditions of a contract which relates to the conditions which must be fulfilled by the Insured if there is to be a valid claim.
Premium inflation This can occur through automatic indexation or resurveys or by policyholders asking to have values increased.
Pre-Tax Profits The is the Insurance Result PLUS the balance of investment income (i.e. from shareholders funds). It is equivalent to the Underwriting Result plus all investment income.
Products liability Covers the Insured against liabilities arising out of any injuries to third parties or damage to their property caused by goods supplied, sold, tested, serviced or repaired by the Insured.
Professional indemnity Provides professional people (e.g. lawyers, surveyors, doctors, accountants etc.) with protection against any liabilities incurred as a result of their professional negligence. In order for a claim to be paid under a professional indemnity insurance, the claimant must show that the Insured failed to exercise the reasonable skill and care that could be expected from a member of his profession.
Proportional reinsurance A type of reinsurance whereby the reinsurer accepts an agreed share of the risks ceded, takes the same proportion of the original premium (less a reinsurance commission) and pays the same proportion of any losses incurred. The KGEN screen (on Ecclesiastical’s mainframe computer) holds the percentage of claims reinsured and is used to calculate recoveries for statistical information purposes. The amount of incurred recovery is also shown on this screen.
Proposal form An application for insurance completed by the Insured. Usually takes the form of a questionnaire used to elicit information for assessment of the proposed risk.
Prospectus A form which summarises the insurance cover available under a policy - sometimes incorporated with the proposal form.
Proximate cause In insurance terms defined as ‘the active and efficient cause of loss that starts a sequence of events which brings about a result without the intervention of any force started and working actively from a new and independent source.’ If there is interruption in the sequence, so that the event results from the cause in question because of the intervention of a fresh cause, the event is the accidental consequence of the first cause - which then becomes regarded as the remote cause. It is the proximate cause that is used to determine whether or not a claim is covered by the insurance policy.
Public policy One of the characteristics of an insurable risk is that it must not be against public policy, i.e. it must not be contrary to what society would consider to be the right and moral thing to do.
Public liability Insurance protects the Insured against legal liability incurred for bodily injury to third parties or damage to their properties. It is available for both individuals and businesses.
Quotation An indication of premium and terms provided by the insurer based on the information provided by the proposer. The quotation is the legal offer by the insurer and will normally be subject to a satisfactorily completed proposal form if accepted.
Rate The amount charged per unit of exposure by which the premium is calculated. G Burning rate.
Rating factors Details of the risk required in order to calculate a premium.
Reasonable care For negligence to be proved, a duty of care must exist and a breach of that duty must have taken place. In common law every person is obliged to conduct himself with reasonable care so as not to cause injury or damage to others. This is enforced in insurance contracts under the Reasonable Care clause - which normally appears as a general condition.
Reinstatement The restoration of damaged property to its original condition or, in some cases, replacement by a new property.
Reinstatement average An average clause applicable in reinstatement policies.
Reinstatement of sum insured The restoration of the sum insured after it has been reduced through the payment of a claim. See also automatic reinstatement of sums insured.
Reinsurance A form of insurance whereby an insurance company can transfer to another insurer (the reinsurer) all or part of its liabilities in respect of claims arising under the contracts of insurance that it writes. This provides the insurance company (known as the reinsured or the ceding company or the direct insurer) with protection against the possibility that its total claims in a year could wipe out its profits and possibly drive it into insolvency. It is a method of enabling insured risks to be spread more widely among a large number of insurers and reinsurers and at the same time increases the market’s capacity to absorb risks.
Renewal notice A notice issued by the insurer to remind a policyholder that their contract of insurance is due to expire and providing details of the premium and terms required to renew the contract.
Renewal premium The annual premium required to renew a contract of insurance.
Replacement cost/value The value of property as the purchase price of a similar article. Sometimes also known as current purchase price.
Res ipsa loquitur Translated means ‘ the thing speaks for itself’. An allegation used where the precise circumstances are unknown but the event itself indicates negligence. The burden of proof reverses to the defendant who will lose if he cannot prove he was not negligent.
Retention The part of an insurance risk which an insurer retains for his own account, as opposed to that which is reinsured. G Reinsurance
Rights and responsibilities See Insurer’s rights.
Risk The subject matter of an insurance contract.
Risk assessment The process of identifying and quantifying all possible events or activities that could cause or increase losses.
Risk identification The process of identifying all possible events or activities that could cause or increase losses.
Risk management The process of identifying, quantifying and controlling risk.
Risk reduction Measures taken to reduce the chance of risks occurring or the size of such losses.
Risk retention The retention of responsibility for paying losses to another person.
Risk transfer The transferral of responsibility for unknown financial risk to another organisation in exchange for a known premium.
Road Traffic Act cover The minimum motor insurance cover required in the United Kingdom under the Road Traffic Acts.
Running IBNR An amount set aside each month to smooth uneven IBNR claims experience, or to ensure the provision reflects business volumes and/or inflationary changes. See IBNR.
Rylands v. Fletcher One of the most important cases in the tort of nuisance the rule in Rylands v. Fletcher (1868) relates to strict liability and now natural usage of land. It is described as:
‘The occupier of land who brings and keeps upon it anything likely to do damage if it escapes is under a strict obligation to prevent its escape, and is liable for any damage caused as a result of its escape, even if he has been guilty of no negligence.’
The actual details of the case concerned the flooding of the plaintiff’s coal mine. The defendant had constructed a reservoir to supply water to his mill. During the construction, the Contractor employed by the defendant had come across shafts under the land. These had been part of an old mine, which was abandoned years before. After completion of the work, one of these old shafts collapsed and caused water to flood into the plaintiff’s colliery. The defendant was personally unaware of the old mines underneath his reservoir. However the defendant was held liable, and the consequences of this case have since become known as the ‘rule’ of Rylands v. Fletcher.
Salvage Property which is saved following a loss.
Schedule The part of the policy which lists those details which relate specifically to the subject matter of the insurance. These would normally include:-
· Name of the Insured.
· Address of the Insured.
· Nature of the business.
· Period of insurance.
· Premium.
· Policy number.
· Any special terms/conditions.
Self-insurance A system whereby non-insurance companies set up their own fund to which they contribute in order to cover their own losses.
Short-term insurance Cover provided (usually in the form of a cover-note) for short periods of cover where an annual contract is not required.
Solvency margin An insurer’s balance sheet should provide a statement of:
(a) on one side its assets, net of current liabilities and
(b) on the other side its liabilities comprising
(i) technical reserves
(ii) shareholders’ capital
(iii) general reserves
the two sides being necessarily equal.
The excess of the assets (a) over the technical reserves (b)(i) constitute the free reserves which provide a long-stop protection against insolvency...this excess is the solvency margin. The size of the solvency margin depends upon the strength of the valuation of both the assets and the technical reserves. For this reason the amount of the solvency margin revealed in the published company accounts may differ from the statutory solvency margin in the DTI returns, because the regulations may restrict the admissibility of assets and inhibit the bases on which they are valued.
The solvency margin is often expressed as a ratio to written premiums as a quick measure of financial strength.
Specification Details of large risks - usually appended at the end of the policy.
Spontaneous combustion Proposals for this cover are infrequent, but the storage of property in bulk which is prone to spontaneous combustion occasionally gives rise to a request for cover. Care must be taken if cover is provided to ensure that the Insured still take the same care in the storage and stacking. In practical terms, cover is normally confined only to coal and to vegetable seeds in bulk. Cover under the Commercial Combined policy provides for the spontaneous combustion of coal, coke or wood blocks whilst the Farms Combined contract includes spontaneous fermentation.
Sprinkler leakage Cover provides for property destroyed or damaged by water accidentally discharged or leaked from an automatic sprinkler installation. Cover is provided by a special endorsement for an additional rate.
Standard estimate A figure usually based on an average cost for each claim type. Typically, the standard estimate is used when a claim is first advised until more details are known, when it is replaced by the case estimate.
Statistical claims reserving Reserves for outstanding claims may be calculated for groups of claims of a particular class and category using statistical methods. The simplest approach involves the use of average claims costs. At the other extreme relatively complex mathematical models can be fitted to the run-off data of associated claims.
The essence of statistical methods is that they produce answers for groups of claims as distinct from case estimation where each claim is assessed individually.
In Ecclesiastical the difference between the statistical claims reserve and the sum of the case estimates plus IBNR provision is known as the "Statistical Adjustment".
Stop loss reinsurance A form of reinsurance whereby the reinsurer’s liability is based on the total retained claims incurred by the ceding company during a year which exceed either a specified sum of money, or a specified loss ratio.
Storm A special peril providing cover against damage or destruction as a result of some form of atmospheric disturbance, such as wind, rain or snowstorms. Insurers do not stick to the strict definition of a storm under the Beaufort Scale of wind strengths, though they would check that abnormal winds/heavy rains had occurred.
Strict liabilities At one time referred to as absolute liabilities, refers to cases where a defendant can be held liable even if he has exercised reasonable care.
G Rylands v. Fletcher.
Subrogation The literal meaning is ‘to stand in the place of’. In law the term means the right of one person to stand in the legal place of another and avail himself of all the rights and remedies of that other person, whether enforced or not.
In insurance subrogation exists to ensure that the principle of indemnity operates fairly. The leading case which provides the best example of an insurer exercising their subrogation rights is Castellain v. Preston (1883) . Mr Preston was in the process of selling his house, but before the sale was completed the house burned down and the loss was recovered from his insurers. However, Mr Preston also managed to obtain the full purchase price upon completion of the sale and had therefore received the value of the house twice. The Insurers sued - that is they stood in the place of Mr Preston, and were able to recover their money.
The three main implications of subrogation are:
· That the Insured cannot make a profit.
· That the insurer has a right to proceed against third parties.
· That subrogation only applies to contracts of indemnity.
Insurers will on occasions waive their rights to subrogation. An example of this is the various motor claims agreements such as ‘knock-for-knock’ , whereby the insurers will pay for damages to their own policyholders’ vehicles following a collision rather than taking up their subrogation rights against each other’s policyholders.
Subsidence This cover is always given careful consideration by insurers as there can be an element of selection against them. Various causes could give rise to subsidence:
· ‘Made-up’ ground which later settles unevenly.
· Underground workings such as coal mining or tunnels.
· The building foundations resting on two different types of soil, such as sand and clay, which have differential movements.
· Removal of moisture from clay soils, particularly by tree roots in drought conditions.
· Landslip may occur following heavy rains on a sloping site.
Subsidence will only be provided following a declaration by the Insured that their property is not located in a known subsidence area and that there has been no previous damage caused by movement. Often a detailed subsidence questionnaire will require completion prior to cover being agreed. The normal excess for this cover is £1000.
Subterranean fire Intended to refer to a volcanic fire, but could also include a fire in a coal mine or oil well, or spontaneous over-heating and consequent combustion of in ‘made-up’ ground. The cover is now quite frequently provided as an extra peril, at no additional charge.
Suppliers extension An extension available under business interruption insurance which allows the Insured to extend his cover to include business interruption loss following damage at the premises of named suppliers for an agreed percentage of the profit sum insured, for an additional charge. If the Insured has several small suppliers, he may wish to opt for an unnamed suppliers extension - though insurers will be reluctant to do this without a specified supplier first being included, and a higher premium would be charged for a fairly small percentage of the gross profit.
Sum insured The limit of liability of the insurer to pay under a policy.
Surety insurance See Fidelity guarantee
Surplus In reinsurance the amount left over after the ceding company have decided upon their retention.
Tariff A joint agreement between insurance companies to regulate prices and control the market. Also see Fire Offices’ Committee.
Tariff rating The agreement by members of a tariff to calculate and charge the same premiums for a specific risk.
Technical reserves The technical reserves of a general insurance company refer to the accounting entries in the balance sheet which represent the insurer’s liabilities from the business which has been written. These can be divided into the following component reserves:
· Unearned premiums
· Unexpired risks
· Outstanding claims reported
· Claims incurred but not reported (IBNR)
· Claims incurred but not enough reported (IBNER)
· Reopened claims
· Claims handling expenses
· Catastrophes
· Claims equalisation
Insurers have to make suitable allowance for future inflation on the values involved. This is because, in most cases, the value of claims and related expenses can continue to rise until they are settled. The inflationary effect (and therefore the uncertainty involved) will be the most acute for the longer-tailed classes.
Temporary removal clause A clause under property insurance which allows for the temporary removal of items from the Insured premises within limits. It is accepted that certain property will occasionally be removed from the premises for valid reasons (such as cleaning, repair, holidays etc.) and this clause saves the Insured notifying their insurers on each occasion, and the extra administration which would be involved if endorsements had to be issued every time. The normal limit for this extension is 10% of the total sum insured on contents.
Temporary protection note TPNs are issued prior to issue of a formal policy as documentary evidence that cover is in force.
Tenants’ improvements Covers property or improvements which a tenant has added to the property (e.g. panelling, linings, signs, partitions, shop fronts).
Tenants’ liability Tenants have a liability for damage to their premises caused by their negligence, and the consequences of fire damage in particular could be very serious. Even though the landlord may insure the buildings, the tenant is still responsible for his own acts of negligence, and has no automatic right to any indemnity under the landlord’s policy. In the event of a fire, the landlord could claim under his own fire policy, but the insurers may seek an indemnity from the tenant if negligence was apparent.
Terrorism From January 1993 terrorism cover was restricted to limited sums insured only, with a facility for top-up cover available from Pool re, the government-backed reinsurance company set up for this purpose.
Theft One of the most common forms of property loss is theft. It was not until 1887 that the first policy including theft cover was issued, and widespread issue of theft policies did not start until 1889. The term used at this time was burglary, the word ‘theft’ only came into use following the Theft Act 1968. Since 1st January 1969, the legal definition of theft has been widened to include losses not associated with the use of force of violence. Insurers however still prefer to confine themselves to theft following forcible and/or violent entry to an Insured’s premises.
Third party A person who is not party to a contract.
Third party cover Motor insurance providing compensation for injury to third parties and damage to their property.
Third party fire and theft cover Third party cover plus cover for fire damage and theft of the Insured’s own vehicle.
Time on risk charge A premium charge which is directly related to the amount of time for which cover has been provided.
Tort The most commonly used definition of tort is:
‘Tortious liability arises from the breach of a duty primarily fixed by the law; such duty is towards persons generally and its breach is redressable by an action of unliquidated damages.’
The essence of tort is that it is a breach of a civil duty. It entitles a person who has suffered injury or damage to compensation (usually financial), with the intention that the plaintiff (the person who suffered the damage) is placed in the same position he/she was in before the tort occurred. These civil wrongs include nuisance, negligence, trespass and defamation.
Total loss Where the subject matter of the insurance is totally destroyed. A constructive total loss refers to situations in marine insurance where the damage may not be complete but the cost of recovery would be more that the value of the ship. In these instances the insurer treats it as if there has been a total loss and takes over ownership. This is similar to the treatment of ‘write-offs’ in motor insurance.
Treaty A contract between a ceding company and reinsurer where the former agrees to cede and the reinsurer agrees to accept reinsurances for all risks which fall within the terms of the treaty.
Uberrimae fidei See ‘Utmost good faith’.
Ultra vires Translates as ‘beyond the powers’. This is a rule adopted by the courts to ensure that any legislative powers conferred on persons or bodies are not abused.
Underinsurance Where the sum insured is less that the value at risk.
Underwriter An insurer, or a person who makes decisions on whether to accept a risk.
Underwriting factors Factors which will be considered by an underwriter when deciding whether or not to accept a risk.
Underwriting ratio (Also known as Operating or Combined ratio). This is the sum of the loss ratio and the expense ratio. Relevant calculations are:
Loss Ratio = Incurred Claims (incl. claims handling expenses)
Earned Premiums
PLUS
Expense Ratio = Expenses
Written Premiums
The Underwriting Ratio is used as an indicator of the underwriting performance of an insurance portfolio.
Underwriting result The difference between the premiums earned and the sum of claims and expenses incurred in a given year. Can be expressed as a percentage of written premiums to give a measure of profitability
Unearned premium reserves(UPR) Money set aside by insurers for cover yet to be provided on policies still in force at the end of an accounting period.
Example: If a premium is incepted on the first day of June and it covers a twelve month period, then 5/12ths will be unearned at 31 December.
Unexpired risk reserves (URR) A fund established to cover any anticipated shortfall in unearned premium reserves compared with the expected actual cost of providing cover in the unexpired period. The reserve is used to meet future claims and related expenses on business in force at the end of the period.
Utilities An extension available under Interruption insurance whereby cover can be granted for losses resulting from damage at any electricity station or sub-station, gas works or waterworks of any public supply undertaking from which the Insured obtains electricity, gas or water. It is now quite common for this extension to be provided automatically with Business Interruption insurance.
Utmost good faith ‘Uberrimae fidei’ - a duty imposed on both parties to an insurance contract to disclose all facts material to the contract.
Valuation A document showing values allocated to either an individual property or list of properties for use as the basis of the insurance.
Vicarious liability Arises when someone has to assume responsibility for the consequences of the negligence of another as well as his own. These liabilities generally arise from business and other special relationships, which give one party a degree of control over the other, and thus carries with it responsibility for a wrongful act of neglect. Examples of such relationships are employer/employee, principal/agent.
Void contract A contract that cannot be enforced by either party.
Voidable contract If a contract is voidable it is binding, but one party to it has the option to set it aside. For example, any breach of utmost good faith or warranty allows the insurer to cancel the contract, and the policy holder is then entitled to a return of premiums.
Volenti non fit injuria Translates literally as ‘to him who is willing there can be no injury’. What this means in practice is that a person cannot normally sue where he/she voluntarily ran the risk of injury (e.g. sports injuries where rules of play were observed). There are two exceptions:
· Where a plaintiff acts as a hero out of duty to save others.
· Where the plaintiff agrees to run the risk, not out of free will but as a condition of employment or fear of losing his/her job.
Warranty A condition which must be complied with literally. In insurance, a breach of warranty entitles the insurer to void the policy from the date of the breach.
Written premium Premiums debited during a specific period. The premiums do not have to be paid to be included as ‘written’. Premiums where the inception date is after the end of that period will be included in the next period. Whilst the ‘period ‘ does not have to be the financial year to date...it usually is. The time delay in recording lapses and new business means that GWP is never an exact figure in growing or shrinking accounts. This effect of lapses and new business on GWP can be taken into account using pipeline premiums.
