KEY TERMS | C81 General Insurance Essentials – Part 1

STUDY KEY TERM DEFINITION

Study 1 insurance A contract in which one party, the insurer, for monetary consideration agrees to reimburse
another, the insured, for loss or liability for a loss on a defined subject caused by specified
hazards or perils.

Study 1 risk The chance of loss. Specifically, the possible loss or destruction of property or the possible
incurring of a liability. Sometimes referred to as the subject of an insurance contract.

Study 1 speculative risk An insurance term for a situation where the possibility of either a financial loss or a financial
gain exists, such as in purchasing shares, or betting on horses. Speculative risk is usually not
insurable, unlike pure risk.

Study 1 pure risk A situation involving a chance of a loss, or no loss but no chance of gain.

Study 1 insurer The insurance company that undertakes to indemnify for losses and perform other insurance-
related operations.

Study 1 peril The event that caused a loss covered by the policy; for example, fire, windstorm.

Study 1 burglary Unlawful removal of property from premises involving visible forcible entry.

Study 1 robbery Unlawfully taking another’s property, in the person’s presence, by violence or the threat of
violence.

Study 1 theft The wrongful taking of the property of another. It is a broad term and includes larceny,
pilfering, holdup, robbery, and pickpocketing.

Study 1 fire Combustion manifested in light, flame, and heat for useful purposes (friendly fire) or
destructive purposes (hostile fire).

Study 1 negligence Failure to use the degree of care expected from a reasonable and prudent person.

Study 1 hazard (1) A risk or probability that the event insured against might occur. (2) A condition that
engenders or increases the chance of a loss.

Study 1 physical hazard A hazard arising from the physical condition or characteristics of the object that is insured.

Study 1 moral hazard A hazard arising from the character, interest, habits, and lack of integrity of the insured or
person concerned.

Study 1 underwriter (1) The insurance company or group that underwrites or insures a particular risk. (2) The
individual within an insurance company whose responsibility it is to accept or reject business in
the particular line in which she specializes and, in this way, choose the risks her principals are
prepared to underwrite.

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STUDY KEY TERM DEFINITION

Study 1 morale hazard A hazard that is based on the insured’s attitude toward the insured belongings. This hazard
exists when the insured no longer cares about the possessions because they are insured.

Study 1 proximate cause A cause that, in a natural and continuous sequence unbroken by any new and independent
cause, produces an event and without which the event would not have happened.

Study 1 remote cause A cause that is not the proximate cause of loss and is separate from the proximate cause in a
chain of events leading to a loss.

Study 1 immediate cause A cause that is not the proximate cause of loss but is the last link in a chain of events leading to
a loss.

Study 2 indemnify To provide compensation for loss or expenses incurred

Study 2 premium The price of insurance protection for a specified risk for a specified period of time.

Study 2 contract An agreement or promise between two or more parties that is intended to be legally
enforceable and is constituted by the acceptance by one party of an offer made by another
party, to do or to abstain from doing a specific act. The offer and acceptance may either be
expressed or be inferred through the conduct of the parties.

Study 2 agent A person licensed and authorized or employed to act on behalf of another.

Study 2 broker A licensed independent person or firm who acts on behalf of an insured in placing business with
insurance companies.

Study 2 adjuster One who investigates insurance claims, makes recommendations regarding the payment of
benefits from insurance policies, and negotiates payments and settlements.

Study 2 independent adjuster One who adjusts losses on behalf of the insurance companies but is not employed by any one
insurance company.

Study 2 public adjuster An insurance claims adjuster representing an insured on a fee basis in a claims settlement.

Study 2 telematics An interdisciplinary field with telecommunications vehicular technologies, road transportation
road safety electrical engineering (sensors, instrumentation, wireless communications), and
computer science (multimedia, Internet, GPS).

Study 2 loss reserve An amount carried as a liability in an insurer’s balance sheet representing, in respect of each
claim, an amount equal to the estimated final settlement cost less any amounts already paid.

Study 2 incurred but not reported An estimate of the amount of an insurer’s (or self-insurer’s) liability for claim-generating events
(IBNR) losses that have taken place but have not yet been reported to the insurer or self-insurer. The sum of
IBNR losses plus incurred losses provide an estimate of the insurer’s eventual liabilities for
losses during a given period.

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 KEY TERMS | C81 General Insurance Essentials – Part 1

STUDY KEY TERM DEFINITION

Study 2 unearned premium The part of the premium that has not been used or earned; premium representing the
unexpired portion of a policy.

Study 2 earned premium (1) That portion of premium earned or charged for the period of time a policy remained
effective. For example, an annual policy paid for in advance would be one-twelfth “earned” at
the end of the first full month of its term. (2) An amount calculated by taking the earned
premium reserve at the beginning of the period plus the premium written during the period,
less the unearned premium reserve at the end of the period. (3) Premium actually exposed to
loss.

Study 2 unearned premium A reserve fund of an insurance company or reinsurance company, representing the unearned
reserve premiums.

Study 2 property insurance First-party insurance that indemnifies the owner or user of property for its loss, or the loss of its
income-producing ability, when the loss or damage is caused by a covered peril, such as fire or
explosion.

Study 2 casualty insurance Loosely used to describe an area of insurance not particularly or directly concerned with life
insurance, fire insurance, or automobile insurance. Most frequently refers to liability, burglary,
and plate glass insurance but may include fidelity and surety.

Study 3 paid-up capital Represents that part of subscribed capital that has been paid in full by shareholders.

Study 3 outstanding loss reserves Funds set aside to pay for losses that have been incurred but not yet paid.

Study 3 mutual insurance An insurance company that is owned and operated by its policy holders, who assume the risks
company of profit and loss and establish a corporation for the purposes of insuring one another against
the possibility of fortuitous loss. Each policyholder pays a premium for his or her own insurance
policy. If at the end of the fiscal year the mutual insurance company declares a profit, the profit
is shared amongst all the policyholders. If the company declares a loss, there is also provision
for the policyholders to be assessed a levy to make up for this shortfall.

Study 3 factory mutual Insurance companies of the mutual type (as distinct from stock companies) that specialize in
industrial risks and loss prevention.

Study 3 captive insurance An insurance company that provides insurance to, and is controlled by, its owners.
company

Study 3 Lloyd’s A London-based insurance and reinsurance market structured as a corporation, that provides
the facilities, including physical location, policy issuance, and accounting, for multiple financial
backers grouped in syndicates to pool and spread risk.

Study 3 capacity The measure of an insurer’s ability to issue contracts of insurance. Measured usually by the
largest amount it will accept on a given risk or, in certain situations, by the maximum volume of
business that the company is prepared to accept.

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STUDY KEY TERM DEFINITION

Study 3 syndicate A group of companies or underwriters organized to insure risk in the Lloyd’s insurance market.

Study 3 coverholder An individual or company that has the authority to bind coverage for a specific line of business
as outlined in a contract with an insurer.

Study 3 reserves Funds that are set aside by an insurance company for the purpose of meeting obligations as
they fall due. Such obligations would include liabilities for unearned premiums and the
estimated costs of unpaid claims.

Study 3 commission Compensation based upon the amount of production; for example, independent insurance
agents are compensated on the basis of a percentage of the premium. The percentage varies
with different lines of insurance.

Study 3 actuary One who specializes in the mathematics of insurance, mortality rates, and the like.

Study 3 ratemaking The process of compiling and analyzing data to establish rates that accurately reflect the level
of risk. Usually performed by actuaries.

Study 3 producer A broker or an agent who sells insurance.

Study 3 underwrite To insure. More commonly, to scrutinize a risk and then decide on its eligibility for insurance.

Study 3 claim The assertion of a demand made by one party against another for indemnity or restitution for
personal injury or property damage arising out of negligence or a contractual right.

Study 3 law of large numbers The mathematical premise that states that the degree of uncertainty is reduced as the number
of events increases.

Study 3 reinsurance Insurance purchased by an insurance company from another insurance company (reinsurer) to
provide it protection against large losses on cases it has already insured. Essentially, insurance
for insurance companies. A transaction in which one party, the “reinsurer,” in consideration of
a premium paid to it, agrees to indemnify another party, the “reinsured,” for part or all of the
liability assumed by the reinsured under a policy of insurance that it has issued. The reinsured
may also be referred to as the “original” or “primary” insurer or the “ceding company.”

Study 3 exposure The hazard threatening a risk because of external or internal physical conditions.

Study 3 solvency A business entity’s ability to meet its long-term financial commitments.

Study 3 treaty An agreement between an insurance company and a reinsurer. The reinsurer automatically
accepts a portion of the ceding company’s liability for a specified class or classes of business.
Terms of the agreement are set forth therein; for example, premium payment, loss limits, etc.

Study 3 facultative reinsurance Reinsurance of risks on an individual case-by-case basis subject to acceptance or rejection by
the insurer.

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STUDY KEY TERM DEFINITION

Study 4 intermediary (1) The agent/broker negotiating insurance or reinsurance contracts for another. (2) Any party
representing another party in negotiation with a third party.

Study 4 independent brokerage A system in which independent insurance professionals, licensed as insurance brokers, are
system contracted to sell insurance on behalf of an insurer or multiple insurers.

Study 4 independent agency A system of marketing insurance through independent contractors (agents) who sell insurance
system on a commission or fee basis with one or more insurers.

Study 4 exclusive agency system A system of marketing insurance through licensed agents who represent only one company or a
group of companies under similar management.

Study 4 direct writer Insurance company selling directly to the public and not through independent agents or
brokers.

Study 4 general agent One who is appointed by a company in a specific territory. He or she is usually given an
exclusive territory and may appoint sub-agents in that territory.

Study 4 law of agency Applies when an agent is authorized to do something on behalf of a principal. The principal is
the person or entity for whom the agent or broker acts.

Study 4 express contract One in which the terms of the arrangement have been specifically stated and agreed to by both
parties either orally or in writing.

Study 4 implied contract One in which the parties have acted in such a way that it is understood that a principal-agent
relationship exists, even though no expressed statement may have been made by either.

Study 4 binding authority The capacity to confirm to people who have submitted insurance applications that they have
insurance coverage. It gives agents or brokers the power to make decisions that enter insurers
into contracts of insurance.

Study 4 interim receipt A temporary measure to insure in an agreed manner while waiting for the completed policy to
be issued. Also known as a “binder”.

Study 4 binder A written or oral agreement given by an insurer to insure a risk, pending the issuance of a
formal policy. A binder is deemed to be the policy and must be cancelled in the same manner.

Study 4 cover note A document with insurance, or the insurance protection provided.

Study 4 rapport Confirms a common bond in a relationship between people that often leads to agreement and
harmony, occurring naturally as people spend time together and share common experiences or
growing out of shared interests, heritage, background, or common behaviours.

Study 4 risk management Analyzing a risk to quantify the potential for losses in a specific investment and to decide what
is the appropriate action to take (or whether not to take action).

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Study 5 agreement Where two or more persons come to a mutual understanding with respect to their rights and
duties.

Study 5 void contract An illegal contract. In the law, a contract that was never made or never existed. For example,
one cannot enter into a contract to commit an illegal act like theft and have it stand up in court.
Such a contract is considered a void contract.

Study 5 consideration The value received to bind a contract. It is an essential part of a binding contract. Consideration
is either expressed or implied. The money, or whatever is being used in substitution of money,
paid for the article or contract is “the consideration.”

Study 5 capacity to contract Parties must be legally able to enter into contracts. This means that the person must be able to
enter into a legal agreement and perform some act. The person must be of sound mind.

Study 5 tutor (or curator) Person who is the legal guardian of another person.

Study 5 lesion Occurs when the minor cannot financially afford the object of the contract even though the
price is fair, or when the minor can afford it but the object is overvalued, or when the minor
cannot afford an overvalued object. The challenge can only be raised by the minor; it is binding
on the other party, who cannot cancel at his or her own discretion. There are some instances
where the minor cannot use this defence.

Study 5 insured Any person (including a corporation) covered by an insurance policy. In some policies, the term
may be defined exhaustively to limit the coverage or defined broadly to expand coverage.

Study 5 bailee In contract and property law, one to whom goods or property are entrusted for a stated
purpose. Can be either gratuitous (for no consideration) or for hire (for consideration).

Study 5 indemnity A contract, expressed or implied, to repay in the event of a loss. The insured neither gains nor
loses.

Study 5 deductible An agreed specified amount that the insured must pay on a claim before the insurance
company will cover the rest of the claim. This amount is agreed upon by both the insurer and
the insured. An insured’s obligation to pay a deductible is not based on whether the insured is
at fault.

Study 5 coinsurance clause A distinct section or provision in an insurance policy that requires an insured (property owner)
to carry separate insurance for a specified amount stated in the policy to be eligible for full
coverage. If there is insufficient coverage, the insured must pay part of the loss.

Study 5 actual cash value (ACV) The fair market value of property, taking into account factors that might augment or reduce the
value of the property in question. Actual cash value (ACV) is usually calculated in one of three
ways: (1) cost to repair or replace less depreciation; (2) fair market value; or (3) consideration
of all relevant evidence of the value of the damaged property.

Study 5 replacement value The current market value of the cost to replace the lost or damaged insured property.

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Study 5 depreciation The reduction in value of property through use, aging, deterioration, or obsolescence.

Study 5 like, kind, and quality Refers to replacement of damaged, destroyed, or lost property with used property of similar
(LKQ) type and condition.

Study 5 guaranteed replacement An undertaking by the insurer to pay the cost of repairs to or replace the dwelling building even
cost if it is more than the amount of insurance on the dwelling building, provided certain conditions
are met in addition to those that normally govern settlement at replacement cost. Called
enhanced replacement cost in Quebec.

Study 5 salvage The remaining value of property after severe damage by fire or other peril. The overall loss is
reduced by the salvage value. Undamaged property may be quite saleable, and some property
may be only partially damaged thus repairable and then saleable.

Study 5 subrogation Legal process by which an insurance company, after the payment of a loss, is assigned the
rights of the insured to recover the amount of the loss from those who are legally liable for it.

Study 5 contribution When more than one policy has been issued to insure a given risk, a loss must be divided
equitably among the various policies. According to their amount and terms, each “contributes”
its share of the loss.

Study 5 excess insurance Insurance that does not participate until all other similar insurance on the same subject is
exhausted, or until the loss exceeds a previously agreed-up amount. Where there are two
policies on a risk and both contain a provision that they are “excess to all other insurance,” the
problem is resolved by the general “guiding principles.” This is usually interpreted so that each
insurer contributes pro rata to the loss.

Study 5 utmost good faith A legal principle calling for the highest standards of integrity on the part of the insured and the
insurer.

Study 5 uberrimae fidei Of the utmost good faith. The basis of all insurance and reinsurance contracts. Both parties to
the contract are bound to exercise good faith and do so by a full disclosure of all information
material to the proposed contract.

Study 5 good faith Most ordinary contracts are good faith contracts. Insurance contracts are agreements made in
the utmost good faith. This implies a standard of honesty greater than that usually required in
most ordinary commercial contracts.

Study 5 material fact A fact that would affect a contract of insurance enough to influence an insurer’s decision
regarding whether to accept or reject the risk or the premium to be set. Material facts must be
disclosed by the applicant if asked about.

Study 5 misrepresentation Incorrect or missing information about a material fact that is offered, or not, by an applicant or
insured with or without the intent to mislead.

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Study 5 non-disclosure A contract of insurance is based on utmost good faith. An applicant for insurance is required to
disclose to the company all material facts that are necessary to underwrite a policy. If the
applicant does not disclose all these facts, the applicant is guilty of non-disclosure and may risk
having coverage voided from inception.

Study 5 concealment As applied to insurance the intentional withholding from an insurance company of information
pertinent to a risk.

Study 5 insurance policy A written contract of insurance that provides evidence that a contract exists. It states in detail
the terms of the contract; that is, the terms of the agreement between insurer and insured.

Study 5 standard forms Any insurance form worded identically by all insurance companies, generally to meet the
requirements of local legislation.

Study 5 manuscript working Policy wording that does not conform to the standard wording in general use within the
insurance industry and that is unique to the policy involved.

Study 5 certificate of insurance Written document stating that insurance is in effect. Includes general statement of policy’s
coverage.

Study 5 renewal certificate A short-form certificate issued at renewal, referring to the expiring policy and stating that its
provisions, clauses, and exceptions continue for another term.

Study 5 endorsement An amendment added to a written document, particularly an agreement between parties,
altering its provisions.

Study 5 statutory conditions Special prescribed and standardized conditions that the provincial and territorial insurance acts
require to be included in insurance policies.

Study 5 general conditions Conditions of a contract that set the minimum performance requirements for the contractor.
These conditions also include the rights and responsibilities of the parties involved.

Study 5 declarations Statements included in a policy that are agreed to by the insured and form the basis of the
contract of insurance.

Study 5 policy conditions Provisions that state the rights and duties of the insured or insurer.

Study 5 subscription policy A single policy covering a risk that is divided among a number of insurers; the policy is issued by
the “lead” company (usually the one with the largest percentage) and signed by all participating
companies.

Study 5 chattel Any property other than freehold land and leasehold interests in land.

Study 5 pro rata cancellation Cancellation of an insurance policy or a bond with the return premium credit being the full
proportion of premium for the unexpired term of the policy.

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Study 5 short-rate cancellation The cancellation by the insured of a policy before its natural expiration; the insurer pays a
return premium that is less than the proportionate part that remains unearned.

Study 5 renewal receipt A certificate attesting that an insurance policy has been extended for another term.

Study 6 application A request by an insured for insurance. Applications may be done verbally in writing, or online.
The insured provides information relating to the subject for insurance. The insurer then
assesses this information and decides whether to accept the risk for insurance and on the
terms of such acceptance.

Study 6 applicant The person or firm requesting insurance. That party answers oral questions or completes and
signs written forms that contain information to assess the risk.

Study 6 broker of record The broker currently receiving a commission to handle a policy.

Study 6 disclosure (1) General – The process of revealing all relevant facts. (2) Law – The requirement that parties
to a litigation disclose relevant information, or the material documents that a party intends to
rely on to support his or her case, to the opposing side.

Study 6 representation A statement or conduct made to influence an insurer to decide on a risk. The decision includes
declining or accepting the risk and deciding the rate and premium to be charged. In insurance,
these statements are said to be “material to the risk” and are enough to void a policy ab initio
(Latin term meaning “from the beginning”).

Study 6 named insured The person or party designated in the policy as the insured, who has certain rights under the
policy as opposed to someone who may be covered by the policy but is not specifically named
and does not have the same rights as the named insured.

Study 6 effective date The date of inception of an insured policy, or the date additional coverages become effective.

Study 6 expiry End of the policy period.

Study 6 loss payee A person or an entity other than the named insured to whom the proceeds of insurance will be
paid.

Study 6 mortgagee A special class of loss payee that has a registered interest on real property offered as security
for the money that the mortgagee has loaned the property owner.

Study 6 mortgage clause A clause in an insurance policy that stipulates the rights and obligations of the insurer and the
mortgagee.

Study 6 rate Amount charged to an insured that reflects the expectation of loss for a covered risk, insurance
company expenses, and profit. In other words, it is the basis of premium calculation for the
insurance provided for the exposure.

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Study 6 loss probability The likelihood of a risk resulting in a loss, taking into account all its various hazards and
protections.

Study 6 pure premium Portion of the total premium that is needed to pay expected losses. It does not take into
account money needed for company expenses.

Study 6 loading An additional charge included in an insurance rate to reflect a hazard not contemplated in the
basic rate for the class.

Study 6 expense loading The part of a premium rate that represents the cost to the insurer of producing and
maintaining the policy.

Study 6 acquisition cost The cost of putting business on the books and acquiring the premium. The items involved are
not standard with all insurers but generally may include such items as agents’/brokers’
commissions, field representatives’ costs, premium tax, and perhaps some of the relevant head
office acquisition costs of operation.

Study 6 manuscript policies Policies composed of unique wordings drafted to accommodate the needs of a particular risk.

Study 6 frequency of loss This is a measure of how often losses are likely to occur in the future. Assuming the average
size of loss is constant, the higher the loss frequency, the worse the loss experience.

Study 6 severity of loss This is the average size of the losses. The larger the average loss, the higher the loss severity is
said to be. And assuming the loss frequency is constant, the higher the loss severity, the worse
the loss experience.

Study 6 special hazards Foreseen hazards/risks common to certain types of businesses that are not covered in an
ordinary policy. For example, woodworking plants and paint shops.

Study 6 underwriting rules The rules used by insurance companies to assess the insurability of a particular risk. These rules
are set individually by insurance companies and may differ for each class of business.

Study 6 retention (1) The amount of liability the ceding company (primary insurer) retains for its own account. It
may be a percentage or a dollar amount of each risk. (2) Also refers to the part of the risk
retained by clients without insuring it (either because insurance is deemed too expensive, or
the loss is not insurable).

Study 6 manual rating A pricing method in which an insurer uses rates that are based on its own experience rather
than on that of a specific group for which it is calculating a premium.

Study 7 loss A word often used in place of the word “claim.” It refers to the amount an insurer must pay
because one of the possibilities of loss insured against under a policy has happened.

Study 7 direct loss (or damage) Damage to property by direct action of a peril insured against, as distinguished from contingent
or indirect damage.

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Study 7 indirect loss Loss resulting from direct damage to property; for example, income and expense loss resulting
from the inability to use damaged property.

Study 7 occurrence (1) A happening or event. (2) The continual or repeated exposure to an unfavourable situation
neither intended nor expected to cause injury or damage. (3) The grouping of related losses
into a single loss situation.

Study 7 accident (1) An unusual, fortuitous, unexpected, or unforeseen event or occurrence. (2) A mishap that is
not expected or designed.

Study 7 claims-made basis A provision in some insurance and reinsurance contracts covering only claims made during the
term of the contract.

Study 7 forfeiture The loss of a right as a result of the non-performance of some obligation or condition.

Study 7 prescription (1) In law, a limitation of time within which legal action can be taken by a claimant. (2) In
insurance the period of time in which a claim may be brought by the policyholder.

Study 7 statute of limitations A law that determines the time period within which parties can take a specific legal action to
enforce their rights. This time period usually begins to run when the injury or damage occurs or
was discovered.

Study 7 attest To swear or declare, either verbally or in writing, that a particular document or testimony about
an event is a true and accurate representation of the facts. The witnessing of signatures. Where
a document is signed, a witness who has seen the document signed before her may “attest”
that the signatures on the document are genuine.

Study 7 sworn statement Oral or written assertion of fact(s) stated under oath. An affidavit for example, is a sworn
statement.

Study 7 claims examiner An employee of an insurance company who directs the investigations of staff adjusters and
independent adjusters, reviews their reports, and approves claim settlements.

Study 8 trust The transference of property to an individual or a corporation, known as the “trustee,” who
holds the property for the benefit of an individual, known as the “beneficiary.”

Study 8 trust account An account managed by an individual or a corporation for the benefit of another, known as the
“beneficiary.”

Study 8 operating account An account used to hold funds for the day-to-day operation of a business.

Study 8 direct billing A system for collecting premiums whereby an insurer bills and collects the premium directly
from the insured as opposed to the agent or broker being a middleperson. Premiums are
usually collected monthly by direct debit from the insured’s bank account.

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Study 9 order of commencement A document, issued by the superintendent of financial institutions giving a company approval to
commence and carry on the business of insurance.

Study 9 warranty Statement or stipulation or promise in an insurance contract, the breach of which may nullify
the contract.

Study 9 Personal Information A federal statute that governs the collection and use of personal information. It states that
Protection and Electronic personal information to be collected must be relevant, and that all information that has been
Documents Act (PIPEDA) collected, is being collected, or will be collected must be held in the strictest of confidence.

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