Glossary of Insurance Terms:
Admitted Company
An insurance company licensed and authorized to do business in a particular state.
Annual Aggregate Limit.
For claims-made carriers, the annual aggregate limit is the maximum amount the carrier will pay for all claims arising from incidents that occurred and were reported during a given policy year. For occurrence carriers, the annual aggregate limit refers to the maximum amount the carrier will pay for all claims arising from incidents that occurred during a given year of insurance.
Assessability.
An obligation of policyholders to pay additional money in excess of premium amounts to cover past company losses for which reserves have proven to be inadequate.
Claim.
A written notice, demand, lawsuit, arbitration proceeding, or screening panel in which a demand is made for money or a bill reduction, and which alleges injury, disability, sickness, disease or death of a patient arising from the physician's rendering or failing to render professional services.
Claims-Made Policy.
A type of policy in which coverage is limited to liability only for those claims that arise from incidents or events that both happen and are reported to the insurance company while the policy is in force. As premiums for claims-made insurance reflect ongoing claims experience, they can be readily adjusted up or down as experience changes.
Consent to Settle
A policy provision that requires an insured's consent before the insurer is allowed to settle a claim. Since a settlement can affect the reputation and earning ability of the insured, this type of clause is an important consideration in selecting a policy. Some policies issued by other carriers include a "hammer clause." In many cases, this clause requires the insured to pay out of their own pocket the difference between a judgment awarded by a jury and the amount for which the insurer unsuccessfully attempted to settle the claim. That is, if an insured refused to consent to a settlement and then a jury found the physician guilty of negligence, that insurer can refuse to pay the amount of the award, which was over and above the settlement figure discussed.
Declaration.
Also called "Declarations Page," this portion of the policy states such information as the name and address of the insured, the policy period, the amount of insurance coverage, premiums due for the policy period, and any coverage restrictions.
Deductible.
A voluntary deductible allows the insured to pay an amount of the "first dollars" of a claim payment and to pay a lower premium for assuming this risk.
Earned Premium.
The portion of premium that applies to an actual coverage period. Insureds usually pay a calendar quarter or more in advance of the actual coverage period; the advance payment is initially unearned and becomes earned incrementally during the ensuing coverage period.
Loss Ratio.
Losses incurred (indemnity and ALAE) divided by net earned premium.
Loss Reserves.
Amount set aside to pay for reported and unreported claims. For an individual claim, a case reserve of estimate of the expected loss is set aside.
Malpractice.
Professional negligence: An abrogation of a duty owed by a health care provider to the patient; the failure to exercise the degree of care used by reasonably careful practitioners of like qualifications in the same or similar circumstances. For a plaintiff to collect damages in a court of law, the plaintiff's attorney must show that the provider owed the patient a duty and that the provider's violation of the standards of practice caused the patient's injury.
Nonassessable.
A condition under which an insurance company is sufficiently sound so that policyholders are not obligated to pay additional money for past losses for which reserves are inadequate
Occurrence Policy.
A type of policy in which the insured is covered for any incident that occurs (or occurred) while the policy is (or was) in force, regardless of when the incident is reported or when it becomes a claim. Occurrence insurance for medical liability coverage is rarely offered today because of the difficulty in projecting long-term claims costs under this type of policy.
Policy.
The contract between an insurance company and its insured. The policy defines what the company agrees to cover for what period of time and describes the obligations and responsibilities of the insured.
Policy Term.
The length of time for which a policy is written.
Premium.
The amount of money a policyholder pays for insurance protection. The amount deemed necessary to pay current losses, to set aside reserves for anticipated losses, and to pay expenses and taxes necessary to operate the company during the time period for which the policies are in force. Premiums allow the company to generate a reasonable profit that reinforces future solvency and contributes to the company's growth. In the case of a reciprocal insurer, the premiums allow the company to offer insurance to new applicants without the need for additional capital contributions.
Premium Credits.
A credit included in the premium computation that recognizes a reduction in hazard, which make the account a better risk.
Premium-to-Surplus Ratio (P/S).
The ratio of net written premium to surplus. This ratio reflects a company's financial strength and future solvency. The ratio should not exceed 3:1.
Reinsurance.
An agreement between insurance companies under which one accepts all or part of the risk or loss of the other. Most primary companies insure only part of the risk on any given policy. The amount varies among carriers. The remainder of the policy limits are covered by reinsurance entities. The less primary risk that the company insures, the more premium it has to pay to the reinsurer to cover the remaining policy limits. In general, smaller companies are able to cover only a relatively small proportion of the liability limit. This results in large premium payments to reinsurers. Larger companies can cover a large proportion safely, thus reducing the payments they must cede to insurers, which indirectly reduces the cost of insurance to their policyholders.
Reserve-to-Surplus Ratio (R/S).
A ratio that measures a company's financial ability to pay claims if reserves prove to be inadequate. Such payments must come from the insurer's surplus. This ratio should not exceed 4:1.
Retroactive (Prior Acts) Coverage.
Under a claims-made policy, this coverage provides insurance for claims arising from incidents that occurred while a previous claims-made policy or policies were in effect, but were not reported until that policy (or the last in a succession of policies) was terminated. With retroactive coverage, the new policy covers such claims, and purchase of tail coverage from the previous carrier is not required. (See also "Tail Coverage.")
Risk Management.
A systematic approach used to identify, evaluate, and reduce or eliminate the possibility of an unfavorable deviation from the expected outcome of medical treatment, and thus prevent the injury of patients due to negligence and the loss of financial assets resulting from such injury.
Surplus.
The amount by which a company's assets exceed its liabilities. A company's surplus allows it to take on risk and serves as a cushion in the event that the losses from that risk exceed the premiums intended to cover the risk. Stated another way, surplus can be used to make up for deficiencies in loss reserves that were set aside from earned premiums. Thus, surplus serves to provide strength and to maintain fiscal integrity in the face of adverse loss experience that was not actuarially anticipated.
Tail Coverage (Extended Reporting Coverage).
Coverage that protects the physicians against all claims arising from professional services performed while the claims-made policy was in effect but reported after termination of the policy. Some insurers offer this feature free of charge for retiring doctors who meet certain requirements.
Vicarious Liability.
Liability for the acts of someone else.