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Lost in the terminology insurance companies use? Our quick-reference insurance glossary provides easy-to-understand definitions and examples of the terms insurance professionals use.

Rate

A Rate, in insurance parlance, refers to how much a unit of insurance will cost.

Premiums rates charged by the insurance company for coverage is computed based on the loss experience the insurance company had for that risk.

Several factors also come into play. These include the age of the proposed insured, his health condition and occupation. The insurance premium rate is computed by the insurance company's actuarial team, who makes use of mortality and morbidity tables (for life and health insurance policies).

To get the best rate, it is best to get quotes from different insurance companies, as the rate for the same coverage of risk varies from company to company.

Rate Regulation

Rate Regulation refers to the process where the state insurance commission regulates the premiums being charged by insurance companies.

Rate regulation is usually performed either through open competition or prior approval.

In an open competition state, the state leaves market forces to control premium rates, as long as these premium rates are not considerably prohibitive. In a prior approval state, the insurance company has to submit its new rates and wait for the state to give approval of it.

The state and the federal government have the authority to regulate the rates used by insurance companies that fall under their jurisdiction. They may regulate insurance provided for the individual market and fully funded employer-based plans, among others. But, private and self-funded employer-based plans fall outside of their authority to regulate.

Rated Policy

A Rated Policy is a policy that covers a risk that has a more-than-average possibility of loss.

Premium rates for a rated policy are higher than those who present average likelihoods of loss. The insurance company asses the application and checks whether it is a standard risk, or a rated risk. For life and health insurance products, this may mean reviewing the proposed insured's health condition, occupation, lifestyle, hobbies, health habits, as well as one's financial situation.

There are more than one classes of rated policies, based on the level of likelihood of the risk happening. The higher the rating, the higher the premiums.

For example, a smoker will have a higher rating that a non-smoker, but a smoker who's working as a lumberjack will have an even higher rating than a smoker who works in the office.

Rating Agencies

Rating Agencies are agencies that provide ratings on the insurance companies' financial standing. It also provides an indication of how stable and solvent a company is - how it is able to meet claims obligations. A high rating means that the company is stable and can be expected to have the ability to pay all policyholder claims.

Rating agencies base their finding on several company performance indicators. These include capital adequacy, company earnings, loss ratios, operating leverage, management ability, experience and integrity, liquidity, investment performance and reinsurance programs.

Currently, there are six major credit agencies. These are Standard & Poor's Corp., Moody's Investors Services, A.M. Best Co., Duff & Phelps Inc., Fitch, Inc and Weiss Ratings, Inc.

Rating Bureau

The Rating Bureau is an organization that provides pooled industry data that insurance companies can use in developing premium rates and to also help in providing key information such as approximations of future losses and the expenses the company stand to incur in relation to claims adjustment, as well as legal defense costs. The Rating Bureau collects these loss experiences and collates it based on line of business and specific geographical areas.

The Rating Bureau also works to prepare new insurance forms for insurance companies' applications and policies, in compliance to regulations and guidelines outlined by the state insurance department.

Real Estate Investments

Real Estate Investments are real property, commercial mortgage loans and other real estate assets that are owned by life insurance companies. Real estate pertains to immovable property - the land, as well as the buildings and structures that are permanently attached to it.

Real estate investment may obtain income through lease payments or rentals or through the sale of property that appreciated in value.

Life insurance companies are allowed to invest a certain percentage of their capital for real estate investments in their efforts to obtain investment earnings so that they could provide attractive rates of returns for their policyholders. Investments on real estate are limited for insurance companies, since it is a long-term investment, are not assets that you can easily sell to pay for claims, and the market can also be unpredictable.

Receivables

Receivables are assets that a business still has to collect for goods or services they provided their customers on credit.

Receivables include unsettled transactions, debts and other monetary obligations. They are expected to be received in cash. The receivables are included in the balance sheets as assets, since the company expects to receive payment for these receivables when they become due. Receivables that are short-term are listed under the company's current assets while long-term receivable (those that are not due for a considerable length of time) are part of the long-term assets.

Receivables also include interest receivable, advances to employees, loans made to officers of the company, as well as income taxes that are to be refunded.

Reciprocal Exchange

Reciprocal Exchange refers to an association where insurance companies agree to assume one another's risks or a portion of the risks covered.

This exchange is unincorporated and administers the "exchange" in assumption of risks. The administrator of the exchange is the attorney-in-fact. The attorney-in-fact has several roles. He recruits new members, undertakes the underwriting tasks for new business and renewals, invests the premiums that come into the exchange, as well as receiving the premiums and swapping reinsurance contracts.

The members are insurance companies, with each company assuming the role as insured and insurer. They also share the losses and profits based on how much that member bought from the exchange.

Redlining

Redlining refers to the term when a map is encircled with a red line. The area enclosed with the red line (or circle) means that applicants living in that area are denied a certain kind of insurance coverage.

The practice of redlining is illegal since risk and the probability of that happening should be the basis for denying insurance coverage to someone. Redlining was practiced in the United States during the 1970s but was later banned since it has the tendency to hurt communities and its residents. These people are affected since they are discriminated against with regards to getting insurance, and taking out loans.

Reduced Paid-Up Insurance Option

The Reduced Paid-Up Insurance Option is one of the nonforfeiture options available in life insurance policies and it enables the policyowner to use the cash value of the policy to buy insurance coverage that is all paid up.

This enables the policyowner to stop paying premiums but still be covered. However, the value of the coverage is limited by just how much the cash value could buy, so the insured person will remain covered, but only for lower face amount.

The insurance company will recompute for the premiums and provide the policyowner with the same plan as the original policy.

Registered Principal

A Registered Principal is licensed securities dealer who is responsible for the operations of the securities business.

For someone to become a registered principal, he must be employed as a manager or officer of a company who is a member of the National Association of Securities Dealers (NASD). The registered principal should also be registered and qualified under the NASD Series 24 or 26. He should also have the basic securities license.

The registered principal is in charge of the daily operations of a securities business, including manpower, advertising, trading and sales. He also makes sure that the business complies with all related regulations.

Registered Representative

A Registered Representative is a broker or a dealer who is registered under the National Association of Securities Dealers (NASD). He should also passed the examinations given by NASD in order to qualify to be a registered representative and should have given his application, complete with all the necessary background information. He should have passed the Series 7, which is the General Securities Registered Representative Examination.

As a registered representative of the NASD, he is able to engage in dealing with securities and represent a company (that is also a NASD member) in its sales activities. He is also allowed to sell securities to the public, as well as provide training to securities salespeople under that company.

Reinstatement

Reinstatement is the process where the insurance company agrees to resume coverage for a policy that has either elapsed been terminated or been continued either as reduced paid-up or extended term coverage.

Sometimes when the policy lapses because of failure to pay for premiums, the policyowner can make a request to be reinstated. The insurance company may reinstate if he makes the policy's premiums up to date and pays the necessary penalties. There may also be a holding period where the insurance company will only provide limited cover before it allows the policy to take full effect. There will be limited coverage depending on new health history.

There may also be times when a policyowner took up a nonforfeiture option on the policy - either using the paid-up or extended term coverage option. Later on, he may change his mind and request that the original coverage and terms be applied.

The insurance company can provide reinstatement under certain conditions.

Reinsurance

Reinsurance refers to the coverage that the insurance company passes on to other insurance companies. In other words, insurance purchased by insurance companies.

Insurance companies would like to limit their exposure to any one risk. For example, the insurance company who issues a $10 million policy on the life of an individual will be reluctant to take on the full risk, so what it tries to do is to pass on a portion of the risk to other insurers. In return, the reinsurer gets part of the premium received by the insurance company and will reimburse the insurance company for their portion of the claims paid to the policyholder.

In this case, the insurance that passes on the risk is called the primary company. Reinsurance is important since an insurance company effectively increases its capital by reinsuring, thus increasing its capacity to sell coverage.

Relation of Earnings to Insurance Clause

Relation of Earnings to Insurance Clause refers to a clause that says that the insurance company will pay income benefit amounts that are equal to or approximately equal to the insured person's earning before he was disabled.

It is important to note that insurance is not designed for the insured to benefit from it. It is designed to restore the person to the same standing he used to be prior to the injury or disability.

If an insured person is disabled, he loses income because he is unable to work or find employment that pays the same amount that he used to receive from his previous job. Insurance companies will then pay for income benefits (according to the coverage of the policy). However, its income payments should not exceed the insured person's lost income.

If, for example, a policy states that it will pay $3,000 in monthly income payments in the event of the person's disability, and the insured person's monthly income at the time of the injury is $2,500, the insurance company will just pay $2,500 and will refund the premium for the extra $500 that is not payable.

Renewable Term Insurance Policy

Renewable Term Insurance Policy refers to a policy for term life insurance where the policyowner has the option to continue with the coverage even when the specified term has ended.

The insured person does not need to prove that he is currently insurable, meaning he does not have to undergo a medical exam, complete medical forms and so on. The insurance company is obligated to renew his term insurance, although it is allowed to raise the premiums depending on the insured person's attained age. The old evidences of insurability that were used to issue the policy would apply to the premiums charged.

Renters Insurance

Renters Insurance provides protection to the insured person who is renting a piece of real estate. It protects against risks such as explosion, riots, fire, theft, vandalism, explosion, hail and windstorm.

Renters insurance can also cover the insured person's liability arising from injury or damage to third parties, injuries that occurred in the rented location, and was caused by the policyholder or his dependents.

Also, in the case that the rented house is destroyed by a covered cause of loss, the insurance company will pay for additional living expenses while the insured person is waiting for the rented house to be repaired.

It's basically a homeowners insurance policy, but this time for renters. The homeowners insurance policy is for the landlord, and it is the landlord that will be paid for the claims he filed. So when one is renting, it is also best to be covered with a renters insurance.

Replacement Cost

Replacement Cost refers to how much is currently needed to buy a specific asset or to replace it with a similar asset.

The insurance company will appraise replacement cost in the event that it needs to pay the insured person for something he has lost or something that was damaged. Of course, that thing or asset should be covered by the policy. Replacement cost is not about how much was paid for the original asset; rather, it looks at how it can replace the lost item using the current market value.

The computation of replacement cost is government by the policy's terms and conditions, including the assessment of the asset's current conditions and whether it can still be repaired or not.

Repurchase Agreement / Repo

A Repurchase Agreement or a Repo is an agreement where the seller will buy the same security he sold at a specified price and date. This enables the seller, who is actually a borrower, to use a financial instrument such as a security for collateral. The agreed upon price would have a fixed rate of interest and the agreed upon repurchase date signifies the length of the loan.

A repurchase agreement is like a cash transaction that uses a forward contract. Money is exchanged between the seller and buyer as the security is legally transferred to the buyer. The forward contract pertains to the legal agreement that obligates the seller to repurchase the security and thus repay the loan and recover the collateral.

A repurchase agreement is a money-market instrument and is used when the seller needs some short-term capital.

Reserves

Reserves are what the insurance company sets aside in order to pay for its claims.

Insurance companies set aside a portion of their funds to meet policyholder obligations when they mature or when a claim comes up, based on a particular mortality table. These include obligations for policies that are currently in force.

Calculations for reserves are also based on net premiums, which is looked as the difference between the present value of both the total insurance and all expected future premiums on the insurance.

At the end of every year, the reserves refer to the balance left at the end of the year and are called the terminal reserve. At the beginning of the year, the initial reserve includes the net premiums plus the previous year's terminal reserves.

Residual Disability Insurance

Residual Disability Insurance provides income payments in the event of the insured person's residual disability. This involves monthly payouts aimed to replace the lost income of the insured person. The benefit payouts are computed using a percentage of the policyholder's present income.

This kind of insurance is used for life and health insurance products, as well as for protection for creditors that issue credit cards, mortgages and car loans. In the case of financial agreements for loans, the payouts will be given to the lender. Residual Disability Insurance may also be used to protect a policy itself, so that in event of the person's residual disability, the insurance will kick in to pay for the premiums.

It is also called income protection insurance.

Residual Disability

Residual Disability refers to the condition where the insured person is not suffering from total disability. However, the insured person still cannot function 100% - he cannot perform the functions that he used to do prior to his injury or sickness. Or, he can do all the functions but not only on a part-time basis.

This is contrasted with total disability, where the injured person is unable to completely and continuously perform the necessary functions that are expected for him to do.

Residual disability will most commonly result in a decrease in a person's income. This can be protected against with the use of residual disability insurance.

Residual Market

The Residual Market refers to the facilities or programs, which provide insurance coverage for products that are not readily available in the regular market, or for those who cannot get insurance coverage otherwise.

Examples of a residual market include FAIR plans, the Joint Underwriting Associations and assigned risk plans. The residual market is also called a shared market since this involves the pooling together of insurance companies. Residual markets are usually state-sponsored, where insurance companies licensed to operate in a certain state is mandated to provide coverage to these "undesirable risks". Their assigned coverage is in proportion to the insurance company's share in the total voluntary market premiums.

Retention

Retention refers to the amount of risk that the insurance company assumes or does not reinsure.

The insurance company would also like to limit its exposure to any one risk. Thus, it will pass on a portion of the risk to a reinsurance company, who will assume the portion in exchange for the proportional premiums.

Retention is what is left to the insurance company after it has ceded part of the insurance coverage to a reinsurer.

For example, if an insurance company issues a life insurance policy for $50,000. The insurance company decides to cede $20,000 to a reinsurer. The insurance company's retention for that policy is $30,000.

Retrocession

Retrocession refers to the portion of reinsurance that the reinsurer also reinsures.

When insurance companies sell a policy, they will pass on part of the policy coverage to a reinsurer. In retrocession, the reinsurer again gets reinsurance for a portion of what they took on.

In the same principle that insurance companies reinsure to protect their financial stability, reinsurers also do the same since risk is spread out further.

For instance, an insurance company issues a life insurance policy for $1,000.000. The insurance company retains $400,000 of the risk, and reinsures the $600,000. The reinsurance company that accepts the $600,000 coverage passes on half of that. That means that the exposure of the reinsurance company is only $300,000 and not $600,000. If the insured person dies, the reinsurance company only stands to pay $300,000 of the claims.

Retrospective Rating

Retrospective Rating refers to the method where insurance premiums are adjusted at the end of the policy year. There is an agreement (with set minimum and maximum premium limits) that premiums will be adjusted based on the actual loss experience of the account or policy. That means if there are a lot of claims, premiums will be adjusted to reflect that.

This is attractive for some clients, as they will stand to have premium savings if there were no claims for that year. The "extra" premiums will be refunded to the client. However, retrospective rating is only sold to large commercial buyers.

The coverage for this policy lasts for 12 months. When the end of the year is nearly up, the insurance company calculated for the retrospective premium. Claims that are considered would be claims within the coverage period.

Return on Equity

Return on Equity refers to the income that the company generated divided by shareholders' equity. The income stated here is on a net basis.

Return on Equity is a measurement tool that indicates how well the capital invested is being utilized by the company. This is a way to make comparisons between two or more companies with regards to its profitability.

There are also other ways return on equity is computed. Return in common equity is computed by getting the net income and subtracting common equity, then dividing by preferred dividends.

Computing for return on equity helps investors evaluate a company's performance and look at trends.

Revocable Beneficiary

A Revocable Beneficiary is a beneficiary to a life insurance policy or annuity, whose status as beneficiary can be cancelled or changed depending on the preference of the policyowner.

The policyowner has control over the policy, as well as the revocable beneficiaries. He can change the details (such as how much a beneficiary will receive or who are the beneficiaries) at any time before the death of the insured persons. The policyowner can also cancel the policy or take up any of the nonforfeiture options available without needing the revocable beneficiary's approval.

This is contrasted with an irrevocable beneficiary, who has to provide approval before the policyowner can remove him from the beneficiaries list or make any changes as to the percentage of the death benefit is allocated.

Rider

A Rider, in insurance parlance, pertains to an amendment or attachment to an insurance policy that changes the terms of the policy. Examples of what a rider can do will include the addition of previously excluded risks, the addition of a benefit or coverage, as well as providing for a regular increases in the face value to protect for inflation.

Riders usually provide an additional service or coverage - and as such, will oftentimes require additional premium payments. Since it is a "rider", the contents of the policy do not change, except for the ones that are directly affected.

Riders are used when the policyowner wants to make changes to the policy and these changes are not too major as to warrant the issuance of a new policy.

Risk

Risk, in insurance terms, refers to something that may happen and will cause a loss on the part of the person or entity that insured against the loss.

Risks may either be looked into based on hazards or perils. Hazards are conditions which add to the possibility of a risk happening or which may worsen its effects. For example, smoking is a hazard that is looked into when evaluating whether to insure a person's life or not. Peril, on the other hand, refers to a potential cause of loss. This are usually characterized by its being unexpected, accidental or outside of the control of the person applying for insurance.

Risk is what insurance policies protect against. Instead of the person bearing the economic consequences when that risk occurs, the insurance company agrees to take on the risk in exchange for premium payments.

Risk Management

Risk Management refer to how risk is analyzed and anticipated, in such a way that a person or entity can either avoid them, minimize its impact or know what measures to take when it does happen.

Risk management is about analyzing the risks involved and covering for the risk by implementing safety measures, by self-insurance or by passing the risk on to insurance company.

First, the risk manager looks at what risks a life, property or business might face. Then, it looks at the risks that will cause the greatest economic impact to the individual or entity. Then, these risks are evaluated based on their possible effect on the business' bottom line. And lastly, risk management will involve creating a plan as to what should be done to manage each individual listed risk.

Risk Retention Groups

Risk Retention Groups and groups made up of insurance companies who form a pool (as self-insurers) that will assume liability insurance and other big-ticket insurance. The risk retention group is incorporated, chartered and licensed to provide insurance products.

By forming risk retention groups, insurance companies do away with the need to comply with state licensing and filing requirements for each and every company - they do it all in one go under the risk retention group. The group is able to do away with market residuals (by offering insurance to individuals and groups who otherwise may not be able to buy a particular line of insurance protection), as well as offer bundled services and establish a steady market for a particular line (with accompanying rates and coverages). Member companies still retain control over its operations.

Risked-Based Capital

Risked-Based Capital refers to the necessity for insurance companies to look at the level of risk inherent in the lines of insurance sold and capitalize the company accordingly. This means that the company will need less capital if its lines of insurance products are of the low-risk variety (such as property lines). On the other hand, if they cover high-risk insurance products (such as liability), they will need increased levels of capital.

The insurance company has to know this in order for it to prepare and know what capital it needs to raise in order to support its operations.

When assessing risks, four aspects are evaluated. These include credit risk (the risk vis-a-vis the company's obligations to policyholders, creditor, suppliers and reinsurers), asset risk (the risk that an asset will depreciate or default in its payments), off-balance sheet risk (the risk caused by contingent liabilities or disproportionate rates of growth, among others) and underwriting risk (the risk of setting the wrong premium rates or underestimating current liabilities).

Rollover

A Rollover can mean a lot of things: it can mean transferring the funds from one retirement plan into another (particularly an individual retirement arrangement) or reinvesting the funds obtained because a security has matured into the same security or one that is similar.

When the individual rolls over his retirement fund to another similar fund, there are no tax consequences for his move. The individual may only do a rollover once per annum for every retirement fund he has. The transfer should be completed and the funds deposited to the "new" account within two months after the individual receives the assets from the "old" account.

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