Insurance Terms Part 3
Cut through the insurance jargon
Find out the meaning of some technical insurance terms here.
Peril
Peril is something or a situation that might cause harm or loss, for example a bushfire, flood or cyclone.
Payout
Sometimes the insurance company will give you money as part or full settlement for your insurance claim. Also see benefit and settlement.
Policy
This is the binding legal contract that documents your insurance cover. You should read the details of your policy that is outlined in your Product Disclosure Statement and the policy schedule, and make sure it covers the risks you want to cover.
Pooling risk/premiums
The insurance premiums paid by customers are ‘pooled’, effectively distributing the risk across thousands of customers with similar risks. These ‘pooled’ funds are invested for security and growth.
Premium
A premium is the amount of money you pay to your insurance company for your insurance policy, in return for the insurance company’s promise to cover you if something that is covered by your policy, goes wrong.
Pricing risk
Insurance prices the likelihood of damage or loss, and this cost is reflected in the price of the premium. The cost is generally determined by assessing a customer’s exposure to risks, the likelihood of those risks causing damage or loss, and the amount it would cost to repair, replace or rebuild something as a result of that damage or loss. There are other costs that are also covered by the price of the premium, and these include reinsurance (insurance for insurers), business costs like staff and buildings, and taxes.
Product Disclosure Statement (PDS)
A Product Disclosure Statement or ‘PDS’ is a document that insurance companies must give you by law, which describes in clear terms the terms and conditions of your policy. It’s important to take the time to read and understand it.
Proposal
When it comes to insurance, a proposal is the application form that you complete when you want to take out an insurance policy. A completed proposal form is an offer by you to enter into an insurance contract, and it might be accepted, varied or declined by the insurance company.
Public liability
Public liability is insurance that covers a person or organisation’s liability to another person or organisation for causing injury or property damage.
Policyholder
A policyholder, also known as the insured, is a person or entity who has entered into a contract with an insurer and holds an insurance policy.
Qualifying event
A qualifying event is something that happens which is covered by your insurance policy.
Reinsurance
Reinsurance is insurance for insurers. Insurers may use reinsurance to make sure they can pay a large number of claims if there is a big disaster, such as a cyclone or flood.
Insurers may use reinsurance if claims from policyholders are higher than a certain value, the value has been agreed beforehand with the reinsurer.
Reinsurance is purchased on a global market and involves a number of insurers, often from different geographic regions, pooling together to share their exposure to risk.
Renewal
Renewal is when you agree to continue your existing insurance policy for a further period. Usually you will do this each year when your insurance company sends you a renewal notice. You should review your renewal notice to check if anything has changed, and consider if you need to alter your coverage or list specific items.
Replacement cost
Replacement cost is the amount you need to replace damaged, stolen or lost property by buying new items.
Risk
Risk has a few meanings in insurance, such as:
- The likelihood of something happening that might cause injury or financial loss. Insurance helps the policyholder manage the risks and recover from the financial hardship that an unexpected loss might cause
- The exposure to a specific threat, hazard or peril
- The subject matter of an active insurance policy (risk in force)
- Uncertainty as to the outcome of an event
Risk management
Risk management is the way that you manage losses you might experience. Sometimes you might change something in your behaviour or environment to reduce risk, for example installing a burglar alarm. Other times you will transfer the risk by taking out an insurance policy.
Risk pricing
Premiums that insurers calculate to reflect the relative risk of each policyholder. A policyholder that is considered higher risk than another policyholder may pay a proportionally higher premium. Risk pricing provides an incentive to the policyholder to manage risks and avoid losses where possible.
Settlement
This is what you receive from your insurer when your claim is agreed and processed. You may have the damage to your property repaired, or the insurer may give you the money. It’s often called a settlement or payout.
Sum insured
The sum insured is the maximum amount that your insurer will pay for a claim in a particular policy.
Self-insurance
Choosing not to insure an asset or risk through an insurer, and instead having money set aside or a strategy in place to cover unexpected losses.
Stamp Duty
State and territory governments impose a charge on certain documents and transactions. For example, an insurance policy may attract stamp duty. These taxes vary across states and territories, and can be called stamp duty, transfer duty or general duty.
Supplementary costs
These are additional costs that may be incurred during repairs or rebuilding to a damaged property. They could include demolition and site clearing costs, council and architects’ fees, and additional expenses caused by changes to building codes.
Total loss
Total loss occurs when an asset (such as your home) is so badly damaged that it is beyond economic repair. Depending on the terms of the insurance policy, a total loss will usually attract the maximum sum-insured as a settlement.
Third party
Third party is not the after-after party, but rather refers to a person apart from those that are parties to a contract. For example, third party motor insurance provides protection to an insured against the risks of causing damage to another person’s (or third party) vehicle or property.
Total replacement
Total replacement cover pays out the full amount required to replace damaged property with new property, without taking into account the depreciated value of the property over time. This is opposed to sum insured policies that provide cover to an agreed sum or value, usually nominated by the policyholder.
Underwriting
Underwriting is how insurers work out how much to charge for each risk they cover for each person who buys an insurance policy and under what terms.
When preparing a policy, insurance underwriters calculate:
- How much they will agree to pay for a loss
- Under what circumstances they will make a payment
- How much the premium will cost
Underwriters consider a number of things when working out the price of a particular risk for insurance. For example, car insurance premiums may vary depending on the age, sex and driving record of the main drivers, as well as the location, type and age of the car.
In some cases, one insurer may decide it won’t cover a particular risk while other insurers may offer cover.
Underwriting involves working out a premium that is low enough to attract a number of buyers, and high enough so that there will be enough money in the pooled funds to pay all the claims that might be made, plus make a profit for the insurer’s shareholders.
Underinsurance
Underinsurance is when you don’t have enough sum insured in your policy to cover the value of the items you are insuring. Read more.
Workers’ compensation insurance
This type of insurance is mandatory for employers in each Australian state and territory. Workers compensation schemes vary from state and territory in Australia but all generally pay for medical treatment and provide compensation for loss of income for an employee who suffers an injury while working.
Withhold
To withhold something means that you keep something back – this may be money, which an insurer does not immediately pay on a claim, or it may be information, which the policyholder has not disclosed.
Insurance Terms and their meanings from https://insurancecouncil.com.au/resource/abcs-of-general-insurance-2/
