AIO key terms

The chance of loss or harm arising from uncertainty about outcomes. In insurance, it refers to the possibility that an insured event occurs and creates a financial cost.

A situation that offers only the possibility of loss or no change, with no chance of gain. Most insurable risks, such as fire or theft, fall into this category.

A situation involving the possibility of either gain or loss, such as investing in a business or buying stock. These risks are generally not insurable because the chance of gain is intentional.

The specific cause of a possible loss, such as fire, windstorm, collision, or theft. A policy lists covered perils to define what events can trigger a payout.

A condition that increases the likelihood or severity of a loss from a peril. Examples include oily rags in a garage or a poorly maintained roof.

A tendency for people to behave less carefully or to act dishonestly because they are protected by insurance. It reflects a change in attitude or intent after coverage is obtained.

Carelessness or indifference toward loss because insurance exists, without any intent to deceive. A homeowner who leaves doors unlocked is an example.

A financial stake in the subject of insurance such that a loss would cause genuine economic harm. It must exist at policy inception and, for property, at the time of loss.

The principle that insurance should restore the insured to roughly the same financial position as before a loss, not create a profit. It guides how claim payments are calculated.

A valuation method equal to replacement cost minus depreciation. It reflects what the damaged property was worth just before the loss.

The amount needed to repair or rebuild property with new materials of similar kind and quality, without deducting for depreciation. Often used when a policy provides broader coverage.

The decline in an asset's value over time due to age, wear and tear, or obsolescence. It is subtracted from replacement cost to arrive at actual cash value.

A property insurance requirement that the insured carry coverage equal to a stated percentage of property value, or claim payments are reduced proportionally.

The amount of a loss the insured must pay out of pocket before the insurer pays. Higher deductibles typically lower the premium.

A statistical principle holding that as the number of similar exposure units increases, actual results tend to approach expected results. It underpins accurate rate-setting and risk pooling.

Combining many similar exposure units so that losses of the few are shared among the group. This spreading of risk makes insurance economically feasible.

The tendency for people with higher-than-average risk to seek or retain insurance more eagerly than lower-risk people. It can distort pricing and threaten insurer solvency.

The process of evaluating an applicant's risk, deciding whether to accept it, and setting terms and price. It protects the insurer from adverse selection.

Grouping applicants with similar expected loss characteristics so each group can be charged a rate reflecting its own risk level. It supports fairness and financial soundness in pricing.

The amount an insured pays, usually periodically, in exchange for insurance coverage. It funds expected claims, expenses, and a margin for profit and contingencies.

The written contract between an insurer and an insured that sets out coverage, conditions, exclusions, limits, and obligations of both parties.

A written amendment attached to a policy that adds, removes, or changes coverage or terms. It takes precedence over the original policy language it modifies.

An attachment to a policy, often used in life and health insurance, that adds or modifies benefits. It functions similarly to an endorsement in property and casualty lines.

A provision in a policy stating that certain perils, losses, property, or persons are not covered. Exclusions help define the boundary of the insurer's promise.

The protection an insurance policy provides, including the types of loss covered, the persons or property protected, and the limits that apply.

The maximum amount an insurer will pay for a covered loss under a policy or a particular coverage part. Amounts above the limit are the insured's responsibility.

A request by an insured or a third party for payment under an insurance policy following a loss. It triggers the insurer's investigation and settlement process.

The process of investigating a claim, determining whether it is covered, and calculating the amount payable. Adjusters may be employees of the insurer or independent professionals.

Money an insurer sets aside to pay claims that have been reported but not yet settled, and claims incurred but not yet reported. Reserves are a key liability on the balance sheet.

The insurer's right, after paying a claim, to pursue the party who caused the loss to recover the amount paid. It prevents the insured from collecting twice.

Incurred losses divided by earned premium over a period, expressed as a percentage. It measures how much of premium dollars goes to paying claims.

Underwriting expenses divided by written premium, showing the share of premium consumed by operating costs. It is often combined with the loss ratio to assess profitability.

The sum of the loss ratio and the expense ratio. A result below 100 percent indicates an underwriting profit; above 100 percent indicates an underwriting loss.

An insurer's ability to meet its obligations to policyholders as they come due. Regulators monitor capital, reserves, and investments to protect this capacity.

Insurance purchased by an insurer to transfer part of its risk to another insurer, called a reinsurer. It protects against large or catastrophic losses and supports solvency.

The amount of risk an insurer or insured keeps on its own rather than transferring it. For an insurer, it is the portion of a risk not ceded to reinsurers.

The principle that both parties to an insurance contract must deal honestly and disclose material facts. Breach can allow the other party to void the contract.