Glossary of Insurance Terms
Glossary of Insurance Terms
-ARAP: Assigned Risk Adjustment Program — An additional adjustment to the experience modification factor, used in some states to adjust premium for assigned risk policies. Although NCCI includes this adjustment on all their modification worksheets, not all states use the ARAP program. Illinois, for instance, charges higher rates for assigned risk policies, and thus does not use the ARAP adjustment to the experience modification.
-Audited premium: The final premium for the policy term, produced by auditing actual payroll exposures.
-Auditor’s work papers: Worksheet prepared by the premium auditor, can be either handwritten or computerized, showing how the auditor arrived at the payroll numbers used to determine the audited premium.
-Dividend: A return of premium, calculated after policy expiration, based on the overall performance of the insurance company or of a group of insureds. Dividends cannot be guaranteed in advance, although they are often shown on proposals for insurance.
-Excess losses:In the experience modification factor, the amount of any single claim that exceeds $5,000.
-Experience modification factor: An adjustment to manual premium, calculated by a rating bureau such as NCCI, based on historic loss and payroll data of a particular insured.
-Manual premium:Workers’ compensation premium calculated by multiplying payrolls by appropriate rates, before application of experience modifier, schedule credit, or premium discount.
-Medical-only claims:Claims for which the only cost is medical care, without any lost-time benefits being paid.
-Modified premium:Workers’ compensation premium calculated after application of experience modification factor. Similar to standard premium, but does not reflect any schedule credits or debits.
-NCCI:The National Council on Compensation Insurance — the organization responsible in many states for determining proper workers’ compensation classifications, experience modification factors, and collecting data used for rate making. NCCI also writes the manuals used in many states to calculate workers’ compensation premiums, and also administers the assigned risk plan in many jurisdictions. NCCI is a private organization, not connected with government, although it is often mistakenly thought to be a governmental agency.
-Premium auditor:The premium auditor determines actual exposure (remuneration) for a policy period, in order to determine the final audited premium. The auditor typically works either directly for the insurance company or for a third-party company retained by the insurance company.
-Premium discount:A premium credit, based on size of the premium paid. It is normally given automatically on voluntary market policies, although many retrospective rating or sliding scale dividend policies do away with it.
-Primary losses:In the experience modification factor, the first $5,000 of any single loss.
-Rating bureau:See NCCI. Some states maintain their own separate rating bureau, although these often follow NCCI rules and use NCCI manuals. There are notable exceptions to this, though, such as California.
-Remuneration:The basis for calculating workers’ compensation premium. Remuneration includes payroll, but may also include other forms of employee compensation. Workers’ compensation premium is computed by applying varying rates (for different classifications) to remuneration (per $100 of remuneration).
-Residual market:Workers’ compensation written through an assigned risk plan.
-Retrospective rating:A workers’ compensation insurance policy that makes a subsequent adjustment to premium, after policy expiration, based on losses generated during the policy period. The adjustment can go up or down, within set parameters, based on the losses generated during the policy period.
-Schedule credit/debit:A discretionary premium adjustment based on underwriter’s evaluation of special characteristics of a risk not reflected in the experience modifier.
-Sliding scale dividend:A return of premium, after policy expiration, based on the actual loss experience of the insured business. The size of the dividend varies with the actual loss ratio of the insured business.
-Standard premium: Premium after application of experience modifier and schedule credit or debit, but before premium discount.
-Voluntary market: Workers’ compensation insurance written outside of the assigned risk plan.
Source: Edward J. Priz, Advanced Insurance Management, Riverside, IL.
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