ABCs of general insurance

Actuary
Actuaries use mathematics and statistics to evaluate the risk of something happening, how much it costs to finance that risk, and how much your premium should cost. They help insurance companies design insurance cover, and advise them on the level of financial reserves needed to meet claims.

Assessor
Also known as a loss adjuster. When you lodge your claim, the assessor who is acting for the insurer, helps approve the claim by checking the details to see if it’s valid and meets the terms and conditions of your policy. Sometimes the assessor will need to ask more questions, inspect the property, or talk to whoever else is involved in the claim, such as another driver, a neighbour, or police.

APRA
The Australian Prudential Regulatory Authority is the prudential regulator of Australia’s financial services industry. It oversees insurers and other financial services businesses such as banks, life insurers and superannuation funds. It regulates these companies to make sure they manage their risks in a way that ensures they can pay policyholder claims and minimise the likelihood of financial losses. To learn more visit www.apra.gov.au.

ASIC
The Australian Securities and Investments Commission is the corporate, markets and financial services regulator. It ensures financial markets are fair and transparent, supported by confident and informed investors and consumers. It also enforces the law, including the Insurance Contracts Act 1984. ASIC’s consumer website is: www.moneysmart.gov.au.

Accidental damage
This form of insurance cover is for an unintentional one-off incident that causes damage to your property or its contents. For example, accidentally spilling red wine over your new white carpet. It doesn’t cover general wear and tear, or damage that occurs over a long time.

Agreed value
The amount for which you and your insurer agree to insure your motor vehicle. You might choose this if your vehicle is fairly new, has modifications, is in better-than-normal condition or has extras not factored into its normal market value. Agreed value policies are usually more expensive than market value policies. Deciding between them depends on your financial circumstances, the value you place on your car, the level of risk you’re willing to accept and the certainty you need, and other factors such as whether your vehicle is under finance.

Asset
An asset in insurance terms is something with monetary value that is covered by an insurance policy, such as a car or a property. Under that policy, the insurer must compensate the policyholder (in accordance with the policy’s terms and conditions) if the asset is damaged or destroyed and the policyholder makes a claim.

Australian Financial Complaints Authority (AFCA)
This is the independent Ombudsman service. AFCA provides free, fair and impartial dispute resolution services to consumers who have a complaint about their financial service provider such as an insurer. Consumers can seek assistance from AFCA when they are unable to directly resolve their dispute with the insurerer.  

Broker
An insurance broker is a specialist who works for you to find the most appropriate insurance products to suit your needs. Brokers know the market well, so on your behalf they get the quotes, read the fine print, negotiate deals and explain what it means for you. They’re especially useful if you are in the market for a few insurance products or have more complex requirements. You can find a broker near you at www.needabroker.com.au. 

Business days
The official working days of a week, excluding public holidays.

Claim
A claim is the request you make for compensation from your insurer if you suffer a loss that is covered by your insurance policy.

Compensation
Compensation is what you receive for a loss or as a result of a loss. It could be in the form of money, services, a replacement item or repairs. To receive compensation from your insurer for your loss, the assessor must decide it is a valid claim that falls under your policy.

Coverage
Coverage is what’s included in your insurance policy. In property insurance, coverage includes the risks that you are insured against, the properties covered, the locations covered, the people insured, and the limits of compensation.

Capital
Insurance companies have to set aside sufficient amounts of money so they can pay all of their liabilities including claims. APRA requires insurance companies to meet prudential capital requirements. Capital is usually comprised of insurance premiums and shares, and the company’s investments and other assets.

Cooling-off period
Allows you to cancel your policy if you change your mind about your purchase and have any money you have paid refunded. You have a minimum 14-day cooling-off period for most general insurance products.

Certificate of Insurance
A formal document providing evidence that an insurance policy has been issued by an insurer containing the details of the type of insurance cover, its value, any exclusion or excess limits, the premium and the period of the insurance cover (how long it is in force).

Cash settlement
The amount an insurer may offer you to settle and close your claim instead of repairing or rebuilding your insured asset.

Duty of disclosure
When you apply for an insurance policy, or renew or extend your existing policy, you have to tell the insurer everything about you and your situation that is relevant or could reasonably be expected to be relevant to the insurer’s decision to insure you. You don’t need to disclose something you don’t know, that reduces the insurer’s risk, that is common knowledge, that the insurer knows or ought to know, or something that’s not relevant or the insurer has told you that you don’t need to disclose. With insurance, honesty is the best policy.

Discount
A reduction in your premium that an insurer may offer in certain circumstances, such as having linked policies, more than one policy with the same company, customer loyalty or a history of not making claims. Any discount will be shown on your current Certificate of Insurance.

Defined events
Also known as insured events and refers to a policy that specifically lists the events that you are covered for. These sorts of events could include fire, storm and damage by burglars among other events. Anything not listed as a defined event will not be covered under this type of policy.

Duty of Utmost Good Faith
Each party to the insurance contract – the policyholder, the insurer and a third party beneficiary (a person who is entitled to the benefits of the insurance policy) – must act with fairness and honesty in their dealings with one another. An example of this would be insured policyholder’s obligation to make full disclosure of all relevant facts when taking out the insurance in line with their duty of disclosure. An example for an insurer would be to respond to a claim made under a policy in a timely fashion.

Excess
Excess (also called deductible) is the amount of any loss or damage that you must pay before your insurance policy starts to kick in. In effect, you are accepting a small part of the financial risk yourself. Your excess is stated on your certificate of insurance. You can often negotiate a cheaper premium if you accept a higher excess. 

Embargo
Insurers may place embargoes on the purchase of new insurance policies to prevent people buying insurance when risk is elevated or a natural disaster is imminent like bushfire, flood or cyclone and then cancelling the insurance policy after the risk passes. 

If an insured risk is imminent, the probability of that risk occurring and therefore a claim being lodged is high. Insurers would need to calculate a premium that reflects this elevated risk, rather than averaging the risk over an entire year.

However, not all insurers impose embargoes, there may be insurers who have not placed an embargo, and property owners may be able to find cover.

Financial hardship
Financial hardship means a reasonable inability to meet debts, contracted payments, bills or daily living expenses due to life circumstances, such as losing your job or suffering from an illness. In relation to insurance it means you are unable to meet your obligations to pay your premium to an insurer.

Financial loss
Financial loss is;
a) the damage or destruction of an asset that has a financial value.
b) a type of insurance that covers liability claims from a loss that is solely financial – that is, it does not cause injury or property damage. For example, professional liability insurance.

Fraud
Fraud is when someone deliberately lies or exaggerates details in a claim to get money or compensation dishonestly.

General insurance
General insurance includes insurance policies that protect your property and your financial risk, including motor vehicle, home building and contents and travel insurance. It excludes life insurance and health insurance products.

Grace period
If you haven’t paid your premium on time, your insurance company will usually allow a period of up to 28 days during which it will continue the policy. If you pay the premium during the grace period, your insurance company treats it as though it was paid on time. If you do not pay you premium in this period, the policy may lapse soon after and leave you without any cover.

General Insurance Code of Practice
The General Insurance Code of Practice sets out the standards that general insurers must meet when interacting with customers at different stages of the customer experience journey. These different stages of the customer experience journey include when buying or renewing insurance, when making a claim or complaint, when supporting customers experiencing vulnerability. The performance of the industry and each general insurer who subscribes to the General Insurance Code of Practice is monitored and enforced by the General Insurance Code Governance Committee.

Hazard
A hazard is something that makes your situation more risky. For example, if you store explosives in your house, that’s a hazard that increases the risk of an explosion.

Hydrology
Hydrology is the field of study and expertise that can determine how a home or property was inundated. Insurers will arrange a hydrology report in cases where they need to determine the primary cause of water inundation to make a claim decision.

Indemnity

Indemnity under an insurance policy is the security or coverage that is provided to you to protect against loss, damage or injury. Legal indemnity means someone promises they won’t sue you if a certain event happens, or they promise to protect you by paying your damages if an event occurs.

Insurance
Insurance helps you to manage a risk if something happens to you or your property and helps you recover from the difficulties and financial hardship caused by unexpected events that cause injury and/or a financial loss. The person who buys the policy is known as the policyholder or the insured. In return, the insurance company who issues the policy to you promises it will compensate you under certain loss or damage circumstances as set out in the policy.

Insurer
This is the insurance company that issues a policy to you to help protect against certain risks. See also ‘Underwriting’.

Insurance Council of Australia
The Insurance Council of Australia is the representative body of the general insurance industry in Australia. Read more about us.

Liability
When a person or organisation is responsible for something, especially in law, that’s liability. Liability insurance can cover you for legal costs and compensation costs that you might have to pay if you are proved to be the cause of harm to another person or business.

Loss
You can make a claim only if you have incurred a loss that meets the terms and conditions of your policy. This means looking at the impact on your assets, for example when your property is lost or damaged. It’s much more serious than your footy team losing a game.

Levy
An additional impost added to an insurance premium for the purposes of raising funds for a specific government objective. For example, in NSW, insurers apply to each household policy an Emergency Service Levy for the purposes of fire and emergency services funding. The NSW levy is applied before any other taxes and typically adds 20 per cent to the base premium, though it can vary according to the insurer. Tasmania applies a statutory fire levy to some forms of commercial insurance policies.

Liability
When a person or organisation is responsible for something, especially in law, that’s liability. Liability insurance can cover you for legal costs and compensation costs that you might have to pay if you are proved to be the cause of harm to another person or business.

Mitigation
This is things you might be able to do to lessen the impact of something happening to you or your property, for example taking action in terms of upgrading your building before the next natural disaster to reduce the consequences of damage.  On a larger scale, federal and state government can help protect entire communities by investing in mitigation  that can improve the resilience of the nation’s homes and businesses to cyclone, flood and bushfire, as well as projects that protect the community, like levees, floodways, and fuel reduction.

Market value
Market value means the amount of money that your property is worth, or would be worth if you sold it in its current state. For motor insurance, it’s the amount the insurer will pay out if your car is written off, based on the state of the car immediately before the collision or accident. This will be different to the agreed value.

No claim bonus
If you don’t make any claims on your insurance for a few years, your insurer may decide you are a lower risk and may decrease your premium by giving you a no-claim bonus. See also discount.

Non-insurance
Non-insurance is having no insurance to cover your exposure to a risk. 

Negligent
Negligent or negligence is when you don’t use reasonable care in a situation where you have an obligation to another person. It is usually referred to when something goes wrong, such as an injury to another person, and this may lead to a liability claim. For example, if driving a car, you have a duty to take reasonable care of your passengers and other road users and to avoid causing accidents and acting carelessly. If you do not act with such care, you may well be found to be negligent and therefore responsible for the damages you have caused.

Non-disclosure
Non-disclosure means that a person has not told their insurer all of the information that should have been given, if the person had complied with their duty of disclosure when they applied for an insurance policy. This may result in your insurer not being obliged to pay all or a portion of a claim being entitled to avoid your policy so that it was never effective in the first place. With insurance, honesty is the best policy.

New for old
New for old is a term used in an insurance policy that allows older items to be replaced with new items, without any discount for the depreciation in value of the old items.

Occurrence
An occurrence is something that happens that results in a loss. It might be an accident, a burglary, a natural disaster or a recurring event that results in liability.

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.