Definitions of frequently asked insurance terms in alphabetical order.

We created this document in August 2002 and will add entries periodically. For some definitions that are related to Indiana law, here's a link to the Indiana Code which is available on the State of Indiana website at this address:

Association for Cooperative Operations Research and Development

Anniversary Rating Date
The date that governs the application of rates and experience rating modifiers when a prior policy has been cancelled midterm. The intent of the rule is to prevent the insured or insurer from cancelling a policy midterm to take advantage of a more favorable rate structure. The ICRB and most rating organizations establish the next anniversary rating date as the date upon expiration of a full one year policy. Also see the "Anniversary Rating Date" document.

A legal agreement issued by
      • an agent (producer),
      • insurer, or
      • for Indiana assigned risk policies, by the ICRB,
that provides temporary evidence of insurance until the insurer can issue the insurance policy.

Combined Ratio
An indication of an insurance company's health. The combined ratio is the percentage of each premium dollar an insurance company has to spend on claims and expenses. When a combined ratio is more than 100 percent, the insurer has an underwriting loss. So, a combined ratio above 100 indicates that a carrier is paying out more in claims and expenses than it is taking in premiums.

Direct Written Premium
The total amount of an insurer's written premiums without any allowance for premiums ceded to reinsurers. (source: IRMI Glossary, 8th edition)

Discount Ratio (D-ratio)
Used in the calculation of an employers Experience Rating Modification, the D-ratio is applied to Expected Losses to determine the percentage of Expected Losses consider to be Primary Expected Loss.  In the experience rating calculation you multiply the D-ratio times the expected losses for each classification code.
The Indiana WC statute defines an employee as follows:
"Employee means every person, including a minor, in the service of another, under any contract of hire or apprenticeship, written or implied, except one whose employment is both casual and not in the usual course of the trade, business, occupation, or profession of the employer.” Reference IC 22-3-6-1 (b)

The statute goes on to describe particular situations for executive officer, sole proprietor, partner, LLC member, real estate agent, owner-operator truck driver, independent contractor in the construction trades, and school to work students.

An addendum to an insurance policy that changes the original policy provisions. It can serve a number of purposes such as:
      • broaden or restrict coverage
      • clarify a unique exposure
      • add or excluded other entities as insureds
      • add or restrict locations.

Expected Loss
An estimate of total loss during the policy or experience period. In the experience rating calculation, you multiply the expected loss ratio by payroll and divide by 100 to arrive at expected losses for each code.

Expected Loss Rate (ELR)
The ELR is used in the calculation of an employers Experience Rating Modification.  The ELR isbased off of the filed Loss Costs for each classification code.  The ELR is multipled times the payroll for each classification code to determine total Expected Losses.

Ex-med Ratio
Coverage that excludes medical benefits, meaning the employer would be responsible for paying the medical portion. The Ex-med ratio is an abbreviation for "Exclude medical benefits ratio". This is a ratio that reflects the medical portion of an advisory rate. An ex-med ratio is published for each class code in the annual rate filing, Exhibit III. The full advisory rate includes a portion for medical expenses and a portion for indemnity (lost wages) expenses. Example, code 8833 advisory rate effective 1/1/98 is $0.65. Ex medical coverage was discontinued on a National basis effective 1/1/12.
Fronting Arrangement
An agreement between two insurance companies. As an example, insurance company A will actually write the insurance policy, but it cedes all losses to insurance company B. Company A which writes the policy is paid a fee from company B. It is company B that services the policy and has the relationship with the policyholder. So, company A "fronts" the policy for company B.

This kind of arrangement is used in situations where company B:
      • is not an admitted or licensed company in a particular state
      • does not write certain types of exposures
      • does not have a rating from AM Best or other rating service

However, it desires to service its policyholder. So, to meet statutory requirements, company B finds an admitted or licensed insurance company A to "front" the policy.
Gross Premium
Pure premium adjusted upward to include insurer expenses. (source: IRMI Glossary, 8th edition)

Gross Written Premium
The premium paid by the original insured, or the premium that is received by a captive. (source: IRMI Glossary, 8th edition)


Financially impaired companies are not necessarily insolvent. They fall into a category defined by A.M. Best as insurers that have been subject to a state insurance department’s first regulatory action. Regulatory actions range from mandatory supervision or rehabilitation to liquidation or license revocation, depending on the circumstances. As in other years, the primary causes of impairment were a combination of deficient loss reserves and inadequate pricing, A.M. Best says.



Source: III website, September 2012, an explanation of impairment; 

Pure Premium
Also called "loss costs," the actual or expected cost to an insurer of indemnity payments and allocated loss adjustment expenses (also known as defense and cost containment expense). Loss costs do not include overhead costs or profit loadings.
The assumption by a third party (as a second creditor or an insurance company) of another's legal right to collect a debt or damages.


Insurance underwriting is the process of classification, rating, and selection of risks. This selection process consists of evaluating information and resources to determine how an employer will be classified. After this classification procedure is completed, the policy is rated in terms of the premium that the applicant will be charged. The binder or policy is then issued and subsequently delivered to the insured by the producer (more commonly known as the insurance agent).

Workers Compensation Insurance

The NAIC defines workers compensation insurance as insurance that "covers an employer's liability for injuries, disability or death to persons in their employment, without regard to fault, as prescribed by state or Federal workers' compensation laws and other statutes. Includes coverage against the common law liability for injuries to employees (as distinguished from the liability imposed by Workers' Compensation Laws). Excludes excess workers' compensation."

For more information, please see page on The Basics of Underwriting Insurance.




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