Insurance Premium Finance Terms & Definitions

The following is a list of terms and definitions of the property and casualty insurance as well as the insurance premium finance industry.

  • A

  • Account Current The means by which an agent settles his accounts with the insurance company each month, based upon a statement that includes all debits and credits. Account current allows agents and insureds to pay the net due, or request a check if the net is a credit (money owed the insured). Balances due are usually due at the end of the month following the month in which the business was written.
  • Accounts Receivable aka Trade Receivables In premium finance, accounts receivable is an asset account comprised of the total of debit balances owed the premium finance company, whether current or not. Due to the short-term nature of premium finance contracts, normally 6 or 12 months, rapid pay-down of balances holds accounts receivable to about one-third of production, assuming that most contracts are the typical 9 month term. See Production.
  • Actuarial Earning Actuarial earning is a means of earning interest on a financed contract. It is much more complicated than the Rule of 78 and requires sophisticated software to do it properly. In the premium finance context, it requires that interest be determined on a daily rate basis, much like a mortgage, then earned on the day that the next installment is paid.
  • Add-on Rate In finance, it is a means to determine the appropriate finance charge for a given amount financed over a given term using rate tables. If the rate is known and the term is known, a table (Regulation Z, Volume 1) can be used to determine the dollar charge.
    • Agency Bill - A type of billing system for insurance policies in which the policy is purchased from an independent or captive agent, after which the bill appears on the agent’s Account Current. The agent then contacts the insured and either collects the premium in cash or obtains a down payment and a signed premium finance agreement. The policy is subsequently paid on the following month’s Agent Statement.
    • Agent - An individual appointed by an insurance company who receives a commission on the policies sold and serviced. Based upon compensation, agents work for insurance companies in one of two classifications:
      • Independent Agents - Independent agents represents at lease one insurance company and (at least in theory) services clients by searching the market for the most advantageous price for the most coverage. The agent's commission is a percentage of each premium paid.
      • Captive Agents - Captive agents represent only one company and sells only its policies. This agent is paid on a commission basis in much the same manner as the independent agent.
    • Agent Statement - A document sent each month by an insurance company listing all debits and credits for a given insurance agency. If the business is agency billed, the agent will settle his account each month based upon this statement. (See “Account Current”.) If the business is direct billed, it informs the agent of debit and credit activity between his clients and the company.
    • Aging aka Aging Report In premium finance, aging report brakdown all contracts in a portfolio of receivables into those that are “Current”, “30 days past due”, “31-60 days past due”, “61 to 90 days past due”, “91 to 120 days past due”, “121 to 150 days past due” and “151 to 180 days past due”. Many states require any balance 181 days or more past due to be written-off. The report is used to determine the effectiveness of the company’s collection efforts.
    • Amount Financed In premium finance, the amount to be advanced by the premium finance company to the insurance company after the down payment has been deducted from the total premium.
    • Annual Percentage Rate (APR) The cost of credit as computed as a percentage at a yearly rate. The APR can be used to compare the costs of different kinds of credit since it reduces interest rates to a common yearly rate, regardless of term.
    • Asset-Based Lending (ABL) A specialized form of secured lending whereby a company uses its current assets (accounts receivable and inventory) as collateral for a loan. ABL is how insurance premium fianance companies rais cash to increase their account receivables.
    • Risk Retention Groups (RRG) Indicates companies operating under the Federal Products Liability Risk Retention Act of 1981 and the Liability Risk Retention Act of 1986. By large, RRGs are not financialy rated.

    • B

    • Best’s Ratings – A.M. Best is a benchmark financial service which rates the financial strength of both property-casualty and life insurance companies. Criteria are proprietary and delve into every aspect of company operations. Ratings range from A++ down to E. Other services also rate insurance companies, including Standard & Poor, Duff & Phelps and others.
    • Broker Insurance salesperson who searches the marketplace in the interest of clients, not insurance companies. Not appointed by an insurance company and thus cannot bind coverage. Brokers are compensated through fees charged to the policyholder.
    • Broker-Agent Independent insurance salesperson who represents particular insurers but may also function as a broker by searching the entire insurance market to place an applicant's coverage to maximize protection and minimize cost. This person is licensed as an agent and broker by different companies (but not the same company).

    • C

    • Cancellation The process of terminating coverage under a policy of insurance. Cancellation may be requested by the insurer (in certain circumstances), the insured or by a lender for non-payment of premium if the policy is premium financed. See pro-rata and short rate for determination of earned and unearned premium.
    • Captive Agent Representative of a single insurer(s) who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights when selling a policy. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as an extensive list of employee benefits such as pensions, life insurance, health insurance, and credit unions.
    • Casualty Liability or loss resulting from an accident.
    • Casualty Insurance That type of insurance that is primarily concerned with losses caused by injuries to persons and legal liability imposed upon the insured for such injury or for damage to property of others. It also includes such diverse forms as Plate Glass, insurance against crime, such as robbery, burglary and forgery, Boiler and Machinery insurance and Aviation insurance. Many casualty companies also write surety business.
    • Claim The demand for benefits as provided by the policy.
    • Collateral What a lender accepts as security for a loan. In premium finance, it is the unearned portion of the insurance policy.
    • Commercial Lines Insurance coverages designed and marketed to business and professional customers. They can be written as monoline (one type of coverage) or multiline policies that combine property, liability, inland marine and other coverages into one package.
    • Contract aka Finance Agreement A legally binding agreement between two or more parties. In premium finance it is commonly called a “premium finance agreement” or PFA. See also Premium Finance Agreement.

    • D

    • Direct Bill A type of billing system for insurance policies where the insured receives monthly invoices directly from the insurance company, and all remittances are made directly to the insurance company. Premiums are collected as they are earned.
    • Disclosure Statement The section of the premium finance agreement which illustrates the total premium, fees, amount financed, finance charge, annual percentage rate, total of payments and amount of each payment.
    • Down Payment The portion of a policy collected by the agent to bind coverage when createing a premium finance agreement.

    • E

    • Earned Premium Earned premium is the premium used for the time period in which the insurance policy was in effect. Insurance companies can record earned premiums as revenue after the premium's coverage period expires.
    • Effective Date
    • Excess and Surplus Lines Excess and surplus lines (E&S) insurance is a market that protects high-risk businesses and individuals that standard insurers won't cover. This market is also known as surplus lines or non-admitted insurance. Companies with unusual or elevated risks often need E&S insurance because the admitted market considers them too risky to cover.

    • F

    • Finance Charge The amount charged by the premium finance company for advancing the amount financed to the insurance company on behalf of the insured.
    • Flat Cancellation Cancellation of an insurance policy as of the effective date without charge.

    • G

    • General Agent (GA) General agents are insurance agents who sell insurance products to other insurance agents or brokers. The other insurance agents and brokers then sell these products to the people or companies who will be using the insurance. In this way, general agents act as insurance wholesalers as opposed to insurance retailers.

    • H

    • I

    • J

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