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GLOSSARY OF INSURANCE TERMS

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Term Definition
C-SHARE VARIABLE ANNUITIES

A form of variable annuity contract where the contract holder pays no sales fee up front or surrender charges. Owners can claim full liquidity at any time.

CAPACITY

The supply of insurance available to meet demand. Capacity depends on the industry’s financial ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite based on its financial condition. The adequacy of an insurer’s capital relative to its exposure to loss is an important measure of solvency.

A property/casualty insurer must maintain a certain level of capital and policyholder surplus to underwrite risks. This capital is known as capacity. When the industry is hit by high losses, such as after the World Trade Center terrorist attack, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk and or raising additional capital. When there is excess capacity, usually because of a high return on investments, premiums tend to decline as insurers compete for market share. As premiums decline, underwriting losses are likely to grow, reducing capacity and causing insurers to raise rates and tighten conditions and limits in an effort to increase profitability. Policyholder surplus is sometimes used as a measure of capacity.

CAPITAL

Shareholder’s equity (for publicly traded insurance companies) and retained earnings (for mutual insurance companies). There is no general measure of capital adequacy for property/casualty insurers. Capital adequacy is linked to the riskiness of an insurer’s business. A company underwriting medical device manufacturers needs a larger cushion of capital than a company writing Main Street business, for example. (See Risk-based capital; Solvency; Surplus)

CAPITAL MARKETS

The markets in which equities and debt are traded. (See Securitization of insurance risk)

CAPTIVE AGENT

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

CAPTIVES

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

CAR YEAR

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

CASE MANAGEMENT

A system of coordinating medical services to treat a patient, improve care and reduce cost. A case manager coordinates health care delivery for patients.

CASH DIVIDEND OPTION

When the insurer sends the policy owner money in the amount of the policy dividend.

CASH PAYMENT OPTION

Gives the policy owner the option to receive the cash surrender value of an insurance policy or annuity contract in one payment. Also known as cash surrender option. (See Cash Surrender Value; Nonforfeiture Options)

CASH SURRENDER VALUE

The value available to the policy owner upon surrender of the policy.

CASH VALUE

The value in a life insurance policy. Due to surrender charges imposed by some policies, it could be more than the cash surrender value.

CATASTROPHE

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

CATASTROPHE BONDS

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

CATASTROPHE DEDUCTIBLE

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

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