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GLOSSARY OF INSURANCE TERMS

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Term Definition
RATE

(1)The cost of a unit of insurance, usually per $1,000. Rates are based on historical loss experience for similar risks and may be regulated by state insurance offices. (2)The cost of a unit of insurance as determined by insurance companies and state regulators. The rate serves as the basis for the premium. **

RATE REGULATION

The process by which states monitor insurance companies’ rate changes, done either through prior approval or open competition models. (See Open competition states; Prior approval states)

RATING AGENCIES

Six major credit agencies determine insurers’ financial strength and viability to meet claims obligations. They are A.M. Best Co.; Duff & Phelps Inc.; Fitch, Inc.; Moody’s Investors Services; Standard & Poor’s Corp.; and Weiss Ratings, Inc. Factors considered include company earnings, capital adequacy, operating leverage, liquidity, investment performance, reinsurance programs, and management ability, integrity and experience. A high financial rating is not the same as a high consumer satisfaction rating.

RATING BUREAU

The insurance business is based on the spread of risk. The more widely risk is spread, the more accurately loss can be estimated. An insurance company can more accurately estimate the probability of loss on 100,000 homes than on ten. Years ago, insurers were required to use standardized forms and rates developed by rating agencies. Today, large insurers use their own statistical loss data to develop rates. But small insurers, or insurers focusing on special lines of business, with insufficiently broad loss data to make them actuarially reliable depend on pooled industry data collected by such organizations as the Insurance Services Office (ISO) which provides information to help develop rates such as estimates of future losses and loss adjustment expenses like legal defense costs.

REAL ESTATE INVESTMENTS

Investments generally owned by life insurers that include commercial mortgage loans and real property.

REAL PROPERTY

Land and most things attached to the land such as buildings and vegetation.

RECEIVABLES

Amounts owed to a business for goods or services provided.

RECIPROCAL EXCHANGE

Unincorporated association organized to write insurance for its members, each of whom assumes a share of the risks covered.

REDLINING

Literally means to draw a red line on a map around areas to receive special treatment. Refusal to issue insurance based solely on where applicants live is illegal in all states. Denial of insurance must be risk-based.

REDUCED PAID-UP INSURANCE OPTION

Enables the owner of the policy t cancel premium payments and uses the value of the policy’s net cash to buy paid-up insurance.

REGULATION

Insurance is a state-regulated business. State insurance laws are administered by insurance departments, whose job includes approval of rates and policy forms, licensing of insurance companies and insurance agents, investigation of company practices, review of annual financial statements, periodic examination of books, and liquidation of insolvent insurers.**

REINSTATEMENT

When an insurer reactivates an already terminated policy due to non-payment of premiums.

REINSURANCE

Insurance bought by insurers. A reinsurer assumes part of the risk and part of the premium originally taken by the insurer, known as the primary company. Reinsurance effectively increases an insurer's capital and therefore its capacity to sell more coverage. The business is global and some of the largest reinsurers are based abroad. Reinsurers have their own reinsurers, called retrocessionaires. Reinsurers don’t pay policyholder claims. Instead, they reimburse insurers for claims paid. (See Treaty reinsurance; Facultative reinsurance)

RELATION OF EARNINGS TO INSURANCE CLAUSE

A clause included in some individual disability policies that limit the amount of benefits that an insurer will pay when the total amount of disability benefits from all insurers xceeds the individual’s usual earnings.

RENEWABLE TERM INSURANCE POLICY

Gives the owner of the policy the opportunity to continue the coverage at the end of the stated term without needing to present evidence of the insurability.

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