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Insurance Glossary (I - O)

Increase in Cost of Working - See Additional Cost of Working
Incurred But Not Reported (IBNR) - An allowance or factor made for claims which are predicted to have occurred, but have not yet been reported.
Incurred Losses - The total amount of losses that have occurred during a specific period of time, irrespective of whether they have been completely assessed or paid at the time. (Ultimate Incurred Losses include IBNR amounts, whilst Reported Incurred Losses do not.)
Incurred Loss Ratio - Incurred losses expressed as a percentage of earned premium.
Indemnity - The process or undertaking where the insurer provides financial compensation for loss insured under the policy. The principle of indemnity is based on the insured being returned to a position no better or no worse than they were in prior to the loss.
Insolvency Clause - A provision in a reinsurance contract which stipulates that irrespective of the fact that an insurer may have become insolvent and/or ceased paying losses to its claimants, that the reinsurer must continue to make payments to the reinsured or to its receiver as if the insolvency had not occurred. (Similar to the Cut Through Clause which provides for payments directly to the original insured, particularly where a captive is merely using the original insurer as a fronting vehicle to access the reinsurer.)
Insurable Interest - A person or entities interest in the subject matter of an insurance contract, which can be proven to be pecuniary or economic.
Insurance - A contract under which an insurer agrees to indemnify an insured under certain circumstances, after being paid a premium to do so.
Insured - The individual or organisation which is the beneficiary of the indemnity provided by an insurer under the insurance contract.
Insurer - The organisation which agrees to provide indemnity under an insurance contract.
ISR - An industrial special risks insurance coverage. (Also known as IAR - Industrial All Risks coverage.)
Intermediary - A person or organisation that arranges insurance on behalf of an insured. The intermediary can be either an agent or broker.
Jurisdiction Clause - A clause in a contract of insurance which defines the laws under which any dispute will be resolved.
Knock for Knock Agreement - An arrangement between motor insurers designed to eliminate inefficiency and/or "dollar swapping" in claims due to the relative market shares of each insurer. Each insurer agrees not to pursue recovery of claim costs against other insurers who signatories of the Knock for Knock agreement.
Lapse - The termination or discontinuance of any insurance policy, generally through non- payment of premium, or absence of instructions to renew.
Lapsed Policy - A contract of insurance which has been allowed to expire.
Layer of Insurance - Where a significant amount of insurance cover is required, it may be necessary to arrange insurance with more than one insurer. The first insurer provides a "primary layer" of coverage. The next insurer's policy is an "excess layer". This policy only provides indemnity in the event that a loss exceeds a specific amount (the level of cover provided under the primary layer).
Lead Insurer / Lead Underwriter - The Lead insurer concept arises where a risk is shared by a number of insurance companies, usually on a proportionate basis. Generally (but not always) the lead insurer accepts the largest percentage of the risk, then sets the premium and terms of coverage by which the remaining insurers will follow. (In hard market cycles, the following insurers may seek to change the terms set by the lead, or even negotiate separate terms and conditions which only apply for their proportions.)
Limit of Indemnity - The maximum amount that an insurer will provide indemnity for in respect of any one claim, and /or in any one policy year.
Liquidated Damages - An amount of damages, set forth in a contract, to be paid by a party breaching the contract. These are normally in the form of a predetermined estimate of actual damages caused from a breach.
Line - The amount of business that an insurer or reinsurer accepts on either a class of risk, or single account (i.e. their proportion of the risk). A class of insurance such as property, liability, marine etc may also be referred to as a "line of business".
Long Tail Business - Description for types of insurance which have an extended period between when the premium is agreed and paid, and the final amount of incurred losses are known. Generally liability type risks such as general and products liability, medical malpractice, auto liability etc. Opposite of Short Tail Business.
Loss Adjuster - An individual or firm who is appointed to determine liability or assess loss in the event of a claim. See also Adjustor and Assessor
Loss Adjustment Expenses - Additional costs expended to negotiate and settle insurance claims including legal fees, loss adjuster costs, experts etc.
Loss Control - Actions taken by an organisation to reduce or mitigate the potential for future losses.
Loss Development - The measurement of changes in the amount of estimated loss reserves based on a policy or accident year. Calculated on the difference between paid losses and estimated outstanding losses at the beginning of the period, and those at the end of the designated period. May also include IBNR factors.
Loss Ratio - A measurement for calculating profitability, by dividing the amount of claims into the amount of premiums. Depending upon what the loss ratio measurement will be used for, losses may be either total incurred losses or only paid amounts, and premiums measured could be total premium paid, or only earned premium.
Material Fact - A matter or fact that is known by the insured, and should be advised to the insurer to enable it to decide whether to accept an insurance risk and /or an appropriate premium to charge.
Maximum Foreseeable Loss (MFL) - One of the terms used in property insurance to describe an estimation of the worst possible loss that is expected to occur from a single event, considering any unusual or worst case scenarios including the inoperability of protective controls.
Great care needs to be taken when interpreting any assessment report as the terms for the same meaning can vary greatly between insurers and in different countries. Other terminology that can be used to describe this estimation include Possible Maximum Loss (PML), Maximum Possible Loss (MPL), Maximum Probable Loss (MPL), Probable Maximum Loss (PML) and MAS (Maximum Amount Subject). Estimated Maximum Loss (EML) usually adapts the estimation on the basis that minor protective controls do not work, but major controls operate effectively.
Misrepresentation - If an insured does not comply with its duty of disclosure and does not disclose all material facts, then the insurer is given certain rights to deny claims or cancel the policy.
Moral Hazard - Perceived hazard arising from any non physical, personal characteristic of a risk that increases the likelihood or magnitude of a loss.
Mutual Insurer - An insurance company whose policyholders are the owners of the organisation.
Named Perils - Specific events which are insured under a policy.
Negligence - At its simplest, a failure to exercise an appropriate degree of care, which is measured against the actions of a reasonable person given the same situation or set of circumstances. A professional may face higher standards than the reasonable person test.
Net Line - The actual amount of insurance that an insurance company is accepting on an individual risk or portfolio of risks, after deducting reinsurance from the amount which is shown as insured on a "gross basis". Also referred to as the net loss retention.
Net Written Premium - The amount of written premium less deduction for commissions and reinsurance.
Non Admitted Insurer - An insurer who is not licensed or authorised to carry out insurance in a particular country, state or jurisdiction.
Non Proportional Reinsurance - Generic description for those reinsurance contracts where the reinsurer agrees to provide coverage based on premiums and claims which are not proportionate to those of the original risks taken on by the insurer. The contracts may be arranged as treaty reinsurance or on a facultative basis. Types of non proportional reinsurance include first loss, excess of loss, catastrophe loss or aggregate excess of loss, spread loss, and clash cover.
Normal Loss Expectancy (NLE) - This is an estimate of loss similar to Maximum Foreseeable Loss (MFL) or Probable Maximum Possible Loss (MPL) which is based on a single risk and single event, and assumes that all available means of protection, both site based and public, operate as intended.
Occurrence - Many general and products liability wordings are arranged on what is known as an "occurrence wording". This means that the policy responds to circumstances or an event which occur during the period of insurance, irrespective of when a claim or an action is brought against the insured.
Open Policy - A term used for a contract of insurance where coverage is provided based on pre agreed terms and conditions but the actual sums insured and premiums are calculated on a progressive basis as each individual risk is disclosed. Commonly used in marine insurance for specifically nominated shipments, and in construction insurance for particular projects.
Operating Ratio - A performance measurement for insurers which shows the sum of expenses and losses expressed as a percentage of premium.
Operating Clause - Also referred to as the "insuring clause" in a contract of insurance, it sets out the coverage provided.
Original Gross Premium - The total amount of premium paid before deduction of commissions, taxes and other expenses.
Over Line - An expression for the amount of insurance provided which exceeds an insurers stated capacity or "line".
Implied Condition - A condition not contained within a policy, but which a court would determine is implied to have been part of normal contract negotiations (e.g. the Duty of Good Faith).
Overriding Commission / Overrider - A fee or percentage of premium which is paid by an insurer to an agent or broker, based on premium volume generated.

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Insurance Glossary (I - O)

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