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Life Insurance Glossary


life insurance glossary

Life Insurance Glossary (Health Insurance Glossary)

A | B | C | D | E | F | G | H | I | J | K | L | M
N | O | P | Q | R | S | T | U | V | W | X | Y | Z

A

Accident < Health Operations - Disability Income, Major Medical and Medicare Supplement business.

Acquisition Expenses - Expense incurred by a company acquiring new business, including commissions, underwriting and medical expenses, and administrative and general sales support expenses. They usually exceed the initial premiums received by the company.

Admitted Assets - All assets less items (such as furniture and computer systems), which are not included because of Statutory Accounting principals.

Agency Distribution System - A career sales force that is obligated to place most of its business through a sponsoring company. In return, it typically receives non-cash compensation and support services.

Anti - Selection - A decision by an insured to gain an advantage over an insurance company by deliberately misstating health or other underwriting data, or by using the policy to gain an advantage that the insurance company did not intend.

Asset/Liability Management - Investment management attempting to invest assets in investments so that the cash from a line of business can be met by the cash flow from the assets, and so the company does not suffer losses from the salary investments.

Assumed Premiums - Premiums paid to an insurance company by another insurer. In return, the "assuming" company accepts some of the "ceding" company's contract risks.

Assumption Reinsurance - The sale of a block of in-force policies to another company. The assuming company pays the ceding company a figure representing a discounted present value of future profits, and acquires liability to pay. This practice has been criticized because the transfer may occur without approval by the policyowner, or in some states, without the approval of the state insurance department.

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B

Below Investment - Grade Assets - Defined by Moody's all bonds owned which require a contribution of the 10% or 20% Securities Valuation Reserve, and all real estate owned which was acquired by foreclosure, is overdue in payment, or in foreclosure.



C

Capital - The Net Worth of a company, consisting of the difference between Assets and Liabilities. This is either Stockholders' Equity in a Stock Life Insurance Company, or Policyowners' Surplus in a Mutual Life Insurance Company. Capital is usually reported according to a conservative method of accounting called "Statutory Accounting" which understates capital in relation to Generally Accepted Accounting Principles.

Capital Gains Or ( Losses ) - The profit or loss derived in the sale of an Invested Asset. Capital Gains are not reported in the Statutory Net Yield reported in the company's annual statement. Capital Gains are added to Surplus.

Capital Strain - Statutory loss resulting from the acquisition of new extent that acquisition costs exceed the premiums received, the difference is temporarily withdrawn from Capital.

Capitalization Ratio - One of several calculations that demonstrate the ratio of Net Worth to Obligations or Assets. Common ratios include the ratios:
  • Capital plus Securities Reserves as a percentage of Assets (or Liabilities).
  • Capital as a percentage of Assets (or Liabilities).
  • Adjusted Capitalization Ratios, which remove policy loans from Assets.
Ceded Premiums - Premiums paid to a company by another insurer. In company accepts some of the "ceding" company's contract risks.

Claims Paying Ability - A term used by rating services, such as Moody's or Standard < Poor's, to describe a company's relative ability to pay guaranteed benefits, such as death claims or guaranteed cash values.

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D

Default - An asset is in default when payments under the obligation were not made.

Delinquent Mortgages - A real estate mortgage on which a scheduled payment has not been made.

Direct Premiums - Premiums paid on the portion of a life insurance contract that has not been reinsured.

Direct Recognition - Allocation of dividends in an individual life insurance policy according to a formula that recognizes the extent and timing of policy loans. The same principle applies to universal life and variable life interest crediting.

Disintermediation - This occurs when policyholders request for cash forces the insurance company to sell assets at depressed prices.

Distribution Systems - A sales force.

Dividends - A non-guaranteed payment of life insurance contract, representing a distribution of gains. These gains can consist of investment income in excess of the policy guarantee, realized capital gains, return of mortality costs collected but not used in paying claims, less a charge for expenses.



E

Economic Capital - Used by Moody's, a restatement of capital and surplus to reflect GAAP, rather than Statutory Accounting principles.



F

Financial Reinsurance - Reinsurance that provides capital relief by allowing the ceding company to alleviate Surplus strain. This type of reinsurance does not involve an insurance risk, but rather a transfer of capital.

Foreclosure - A procedure by which a financial institution reclaims an asset from a delinquent debtor.

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G

Generally Accepted Accounting Principles (" Gaap ") - Those accounting principles that differ from Statutory Accounting because, under GAAP, the Surplus Strain associated with acquisition of new business does not show as an immediate loss; instead it is amortized over the life of the policy.

Gain Or ( Loss ) From Operations - Change in Surplus on a yearly basis, excluding unusually non-recurring events, such as changes in reserve basis or corrections to prior Statutory Statements.

General Account Assets - All assets not tied to contracts.

General Expense And Commissions - All the expenses of the company, other than those connected with investments.

Gross Investment Yield - All investment income, including policy loan interest and excluding realized Capital Gains or Losses, before investment expenses and Federal Income Taxes, divided by Invested Assets. (Also see Net Investment Yield)

Guaranteed Investment Contract ( Gic ) - A contract (without any insurance element) promising a guaranteed rate of interest and principal payable on a stipulated date. Interest and principal are guaranteed and backed by the assets of the insurance company. GIC's appear as Liabilities on the balance sheet.



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I

Imbedded Earnings - Earnings that are likely to continue in the future on a business that is already in force.

Insolvency - Technically, when Net worth is less than zero. A company can also be considered Insolvent earlier, if State Regulators assume control of the company.

Insurance Revenues - All premiums received, net of reinsurance ceded.

Interest Margin - The relation of Net Investment Income to Interest Guaranteed by the contract. A higher ratio is better than a lower ratio.

Interest - Sensitive - A contract where performance varies significantly due to changes in market interest rates.

Internal Replacement - The replacing of an existing insurance contract with a new contract by the same insurer, typically with new first year compensation paid to the agent. The replacement typically requires evidence of health and re-triggers fresh contestable/suicide clauses.

Invested Assets - All Admitted Assets exclusive of Assets such as premiums due but not collected, tax refunds due, computer equipment, etc.

Investment Expense Ratio - Ratio of Investment Expense (including depreciation, real estate taxes, etc.) to Invested Assets.

Investment Year Method - The allocation of interest paid to policyowners according to market interest rates available to the company in the year a premium is paid to the company. (Also see Portfolio Aggregate Method)


J

Junk Bonds - Debt instruments rated "B" or weaker by Standard < Poor's.



L

Lapse Ratio - The percentage of last year's policies that did not renew into the next year.

Leveraged Buy - Out - Use of borrowed money to purchase an asset.

Liabilities - Obligations guaranteed by the insurance company. This includes Reserves of all types.

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M

Mandatory Securities Valuation Reserve ( Msvr ) - A Reserve intended to cover default risks in bonds and price fluctuations in the value of common and preferred stocks

Margin - The difference between what is guaranteed and what the company actually experiences. In a sense, this is profit, which may be distributed to policyowners or stockholders. (Also see Mortality Margin; Interest Margin)

Morbidity - The incidence of claims due to sickness, accidental injury or disability.

Mortality - The incidence of claims due to deaths.

Mortality Margin - A ratio that shows the company's actual composite mortality (including all lines of business and reinsurance assumed) in relation to the morality underlying guaranteed cash values and gross premiums. A margin of zero would mean that the insurance company's mortality was as high as that guaranteed by statutory tables and a margin of 100 would mean no one died during that year. Hence, a higher margin is better than a low margin.

Mortality Table - One of several statistical compilations of the number of lives at a given age that will die at any point.

Mutual Life Insurance Company - A company whose charter vests ownership with policyowners, rather than stockholders. (Also, see Stock Life Insurance Company)



N

Net Investment Income - Total Investment Income less Investment Expenses. Does not include Realized Capital Gains or Losses.

Net Investment Yield - A standardized calculation applied to US life insurance companies. (Canadian companies use a different method that includes a portion of realized capital gains or losses.) The formula is all investment income, including policy loan interest and excluding realized Capital Gains or Losses, after investment expenses but before taxes, divided by Invested Assets. (Also see Gross Investment Yield)

New Money - Same as Investment Year Method.

Non - Participating - A policy issued by a Stock Life Insurance Company that does not credit dividends. Experience better than that guaranteed can be credited in other ways, such as excess interest or lower-than-guaranteed mortality charges.

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P

Participating - A policy on which the company pays dividends if mortality or investment experience is better than guaranteed.

Persistency Ratio - A ratio showing the percentage of policies that continue paying premiums rather than cancel policies. A higher ratio is better than a lower ratio.

Policyowner Obligations - Describes benefits guaranteed by contract, such as death benefits and guaranteed cash values.

Portfolio Aggregate Method - A method of crediting investment income in which investments made at different times is combined in determining a composite yield. (See Investment Year Method)

Private Placements - A debt arrangement agreed to between a life insurer and a borrowing party. While similar to a bond, no Securities Valuation contribution is required. Private placements are often used to fund GIC's.


R

Reinsurance - A financial instrument used to transfer all or some mortality or morbidity risk to another company. The reinsurer assumes the risk and uses its Capital to establish Reserves. In return, the company assuming the reinsured risk receives a fee.

Reinsurance Assumed Or Ceded - Ceded Reinsurance is acquired by an Assuming company.

Renewal Premium Persistency - Total Persistency of all business excluding new business. (Also, see Persistency)

Required Interest - Total interest a company assumes will be credited on a guaranteed basis.

Reserves - A Liability account set aside for the expected payment of claims and guaranteed values, and other losses.

Retention - The amount of risk retained by a company. Excess risk may be ceded to reinsurance.

Risk Adjusted Capitalization Ratio - A formula used by Moody's Investor Services, which is designed to measure capital adequacy according to the nature of a particular company's assets and liabilities.

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S

Securitization - Conversion of a non-balance sheet item into cash by sale to a third party.

Separate Accounts - Assets segregated to cover Variable Contracts. (Opposite of General Account Assets.)

Single Premium Group Annuity (" Spga ") - An annuity without life contingencies generally sold as a funding vehicle for large pension plans.

Single Premium Life (" Spl ") - A life insurance product with only one premium due. A popular "investment oriented" life insurance product, which had relatively adverse tax treatment applied as a result of the Tax And Miscellaneous Revenue Act of 1988.

Statutory Accounting - Very conservative accounting principles reflected in the Annual Statement of a United States Domiciled life insurance company. As contrasted to GAAP, Acquisition Expenses are shown as an immediate loss. This method is mandated by State Regulators to assure an extra margin of solvency. Canadian domiciled insurers use a different type of accounting, which more resembles GAAP.

Statutory Annual Statement - Annual report prepared according to a format (i.e., Statutory Basis) proscribed by the National Association of Insurance Commissioners. The report must be filed annually in the company's state of incorporation (i.e., "state of domicile") as well as all states in which the company does business.

Stock Life Insurance Company - A life insurance owned by stockholders, which share in the company's profit. (Also, see Mutual Life Insurance Company)

Subordinated Debt - Debt securities that are "junior" to "senior" securities. Junior debt would be paid after senior debt, in case of the issuing company's financial distress.

Surplus Relief - See Financial Reinsurance

Survival Ratio - Two ratios used by Moody's Investors Services to describe how long a company would be able to pay its current level of benefits assuming all unaffiliated investments were liquidated and no additional premium income was received.

Total Investment Return - Net Investment Yield plus Realized Capital Gains or Losses.

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U

Underwriting - The process of reviewing a proposed insured's qualifications for insurance documented in evidence of current health, finances, etc.

Universal Life - A life insurance product with explicit charges for mortality and expense, and explicit earnings credit procedures. Typical designs are earnings sensitive and allow for flexible premium deposits that can be varied by the policyowner at will.

Update Program - A program offered by a life insurance company that changes the benefits provided by the original policy. Typically, the change offers an improvement in most policies but does not require evidence of insurability. Typically, little or no agent's compensation is paid.



V

Variable Life - A Whole Life or Universal Life policy, where cash values vary according to the performance of equity-based investment accounts selected by the policyowner.



W

Whole Life - A fixed premium life insurance product, which develops guaranteed cash value equal to the original face amount at some age, such as age 95 or 100.

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