CPCU key terms

A situation that offers only two outcomes: loss or no loss. There is no chance of gain, which is why pure risks such as fire, liability claims, or employee injury are the exposures insurers customarily cover.

A situation that can produce a gain, a loss, or no change, such as launching a new product or buying stock. Because the upside is intentional, speculative risks are generally not insurable.

Techniques that reduce either the frequency or the severity of losses before they occur, such as safety training, sprinkler systems, quality control, and fire-resistive construction. Risk control differs from risk financing, which funds losses after they happen.

Shifting the financial consequences of a loss to another party, most commonly by buying insurance but also through contracts, leases, and hold-harmless agreements. The underlying activity that creates the exposure usually continues unchanged.

The tendency for people or businesses with the greatest likelihood of loss to seek insurance most eagerly. Insurers counter it with underwriting questions, exclusions, waiting periods, and pricing that reflects each applicant's expected loss costs.

A loss exposure created by the insured's attitude or behavior rather than by physical conditions, for example carelessness because insurance will pay. Insurers respond with deductibles, coinsurance, policy conditions, and claims investigation.

A financial stake in the subject of insurance such that the insured benefits from its continued existence and suffers a measurable loss if it is damaged or destroyed. For property coverage it must exist at the time of loss.

The rule that an insured should be restored to roughly the same financial position after a loss as before it, no better and no worse. It underlies limits, deductibles, actual cash value, and the ban on profiting from loss.

The mutual duty of applicant and insurer to deal honestly and disclose material facts. Breach may let the other party void the contract; the principle supports application questions, representations, warranties, and concealment rules.

A company-wide process for identifying, assessing, and treating all major risks, hazard, financial, operational, and strategic, in one coordinated framework rather than separate silos. It links risk tolerance to strategy and capital decisions.

The process of evaluating an applicant's loss exposures, deciding whether to accept or reject the risk, and setting the terms, conditions, and price. Good underwriting builds a book whose premiums cover expected losses and expenses.

The process of investigating a reported loss, deciding whether the policy covers it, measuring the amount owed, and settling with the claimant. Adjusters may be company employees, independent adjusters, or public adjusters acting for the insured.

The insurer's right, after paying a claim, to step into the insured's shoes and pursue the responsible third party for recovery. It helps hold wrongdoers accountable and keeps premiums lower by reducing net claim costs.

A licensed individual or firm that sells and services insurance, typically an agent or a broker. Agents represent insurers, brokers represent buyers, and producers are usually paid commission and are central to distribution.

A commercial property provision requiring the insured to carry a limit of at least a stated percentage of the property's value, commonly 80 or 90 percent, or share in partial losses. It discourages underinsurance and penalizes inadequate limits.

Property coverage that replaces the income a business would have earned during the period needed to restore operations after a covered loss, plus continuing expenses. It usually carries a waiting period and a defined period of restoration.

The standard policy insuring a business against third-party claims for bodily injury, property damage, and personal and advertising injury. It provides occurrence-based coverage plus medical payments and supplementary payments, subject to limits and exclusions.

A liability policy that covers claims first made against the insured during the policy period, whenever the injury or damage occurred, subject to a retroactive date. It contrasts with occurrence forms and is often paired with an extended reporting period.

A property valuation method that pays replacement cost less depreciation, reflecting the used value of the damaged item at the time of loss. It is the default in many policies and supports the principle of indemnity.

A valuation that pays what it costs today to repair or rebuild with new materials of like kind and quality, with no deduction for depreciation. Because it can leave the insured better off than before, insurers attach limits and conditions.

A package policy for owner-occupied dwellings combining property coverage on the home and contents with personal liability and medical payments. Standard forms differ mainly in whether contents are insured for replacement cost or actual cash value.

The standard policy covering private passenger autos for liability, medical payments, uninsured motorists, and physical damage to the insured vehicle. Auto liability follows the named insured into temporary substitute and newly acquired autos.

Coverage that pays an insured's bodily injury damages caused by a driver with no liability insurance or by a hit-and-run driver. Underinsured motorists coverage handles at-fault drivers whose limits are too low to pay the loss.

Incurred losses and loss adjustment expenses divided by earned premium for a period. It measures how much of each premium dollar goes to claims; a ratio above expectations suggests underpricing or adverse claim experience.

The loss ratio plus the expense ratio. A combined ratio under 100 percent means the insurer earned an underwriting profit before investment income; over 100 percent means underwriting operations ran at a loss.

An insurer's estimate of the amount it will eventually pay for claims that have occurred but are not yet fully settled, including known claims and those not yet reported. Reserving involves the largest judgment in insurer financial reporting.

Incurred but not reported: the portion of loss reserves set aside for claims that have happened but have not yet been reported to the insurer. It is estimated actuarially and is critical to accurate financial statements.

The portion of written premium not yet earned because the policy period has not elapsed. It is a liability representing the insurer's remaining obligation to provide coverage for the balance of the term.

An insurer's assets minus its liabilities, the accounting equivalent of net worth. Surplus absorbs unexpected losses, supports growth in written premium, and is the basis for regulators' solvency and capacity tests.

Insurance bought by an insurer to transfer part of its risk to another insurer, the reinsurer. It protects surplus against large or numerous losses, supplies capacity to write more business, and stabilizes results.

The portion of a risk that a primary insurer, the ceding company, transfers to a reinsurer. The ceding company keeps its net retention and pays reinsurance premium based on the ceded amount and terms.

A reinsurance agreement under which the reinsurer automatically accepts all risks falling within the treaty's defined class and terms. The reinsurer shares in favorable and unfavorable experience over the treaty period.

Reinsurance arranged case by case, giving the reinsurer the right to accept or decline each individual risk. It suits unusual, large, or substandard exposures that do not fit within treaty terms.

A formal risk financing plan in which an organization sets aside funds and administers its own losses instead of buying insurance. It works best for predictable, high-frequency exposures and usually relies on excess insurance for catastrophes.

The process by which an insurer sets long-term direction: analyzing markets and capabilities, choosing goals and strategies, and allocating resources. It aligns underwriting appetite, distribution, capital, and technology decisions with the organization's mission.

The shared values, beliefs, and behavioral norms that shape how employees actually make decisions and treat customers and colleagues. Culture influences risk-taking, compliance, and whether stated strategy and ethics are carried out in practice.

The legal obligation to act solely in another party's best interest, with loyalty, care, and candor. Producers and others who handle customer funds or advice owe fiduciary duties that can create liability beyond contract terms.

A situation in which a person's financial or personal interests could improperly influence professional judgment, such as commissions that vary by product. Ethical practice requires the conflict to be avoided, disclosed, or managed.

A formal set of standards adopted by an industry or professional body stating the conduct expected of members, such as honesty, competence, confidentiality, and fair dealing. Enforcement may include discipline, and codes guide judgment where rules are silent.