Glossary

Similar to an insurance policy limit, the penal sum represents the maximum amount a surety company will pay under a bond. The amount of the penal sum is typically stated as a percentage of the underlying contract price. The required percentage will vary based on the type of the bond.

A pension is an arrangement in which employees are provided with an income during retirement, usually in the form of monthly payments once they are no longer working. Most often, pensions are funded during a person's working years by means of joint contributions from both workers and their employers. Pensions are operated by private employers or by government (i.e., federal, state, or local) employers. The three major types of pensions are (1) defined benefit plans, in which the monthly benefit is determined by formula (based on earnings and years of service); (2) defined contribution plans, in which the contributions are paid into the individual account of each employee and whose monthly benefit is a function of the amounts of and the investment returns on those contributions (e.g., 401(k) accounts); and (3) cash balance plans, which are also known as "hybrid plans," since they combine features of both defined benefit and defined contribution plans (i.e., the employer promises a specific rate of return on the employer's contribution, for which the employee retains an individual account).

The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the federal government that was established in 1974 as part of the Employee Retirement Income Security Act (ERISA). The purpose of the PBGC is to ensure that corporate pension obligations will be honored. In the event that a company's pension plan encounters financial difficulty in paying pension benefits to former employees, such as when a company declares bankruptcy, the PBGC will make the payments promised by the plans. However, these payments are subject to certain maximum monthly amounts per employee, based on age and years of service. The PBGC is funded by premiums paid from pension plans.

The Pension Protection Act of 2006 is a federal law affecting major aspects of the Pension Benefit Guaranty Corporation (PBGC) and defined contribution (i.e., 401(k)) plans. The intent of the Act was twofold: (1) to ensure the solvency of defined benefit pension plans and (2) to encourage employee participation in defined contribution/401(k) plans by making it easier for employees to increase their retirement plan balances. Among the key provisions are (1) a requirement that a company must have in its defined benefit pension fund 92 percent of the money needed to meet its pension obligations in 2008, 94 percent in 2009, 96 percent in 2010, and 100 percent by 2011; (2) allowance of higher dollar contribution amounts for 401(k) savings plans, including "catch-up" contributions for older (i.e., 50 and up) workers; and (3) provisions allowing automatic enrollment of workers in 401(k) plans, whereby every new employee is automatically enrolled in the company's plan, unless the employee specifically opts out of enrollment. In December of 2008, however, defined benefit plan funding requirements (item 1) were relaxed considerably, given the fact that the stock market had suffered severe losses during the preceding year. This circumstance vastly reduced the assets of nearly every pension fund in the United States, thereby making it nearly impossible for such plans to comply with the more stringent funding requirements originally mandated by the Act.

A per-loss deductible specifies the amount of first-dollar loss paid by the insured for each loss.

Percentage participation refers to a provision in a health insurance contract stipulating that the insurer and insured will share covered losses in agreed proportions. For example, the insurer may be required to pay 80 percent of the insured's hospital costs with the insured responsible for the remainder.

A perfect hedge is an investment vehicle designed to mitigate the financial risk inherent in a portfolio of investments and/or in the normal course of business. Financial risk hedges are usually derivatives designed to counteract the price risk associated with normal business activities, such as the purchase of raw materials. Derivative hedges, however, are usually not perfectly correlated with the risk against which they are supposed to hedge; thus, a degree of risk remains. A perfect hedge, however, correlates perfectly with the risk. When insurance contracts are used to hedge these risks, a perfect hedge is possible due to the fact that insurance is a zero-sum transaction—that is, the contract either pays off or does not pay off based on the policy claims trigger.

A performance bond guarantees that the contractor will perform the work in accordance with the construction contract and related documents, thus protecting the owner from financial loss up to the bond limit (called the penal sum) in the event the contractor fails to fulfill its contractual obligations.

A performance ratio is a test of an insurer's or reinsurer's financial strength—for example, Standard & Poor's solvency ratios, which track net premium to adjusted shareholder funds, and liquidity ratio, which looks at technical reserves to liquid assets.

A peril is a cause of loss—for example, fire, windstorm, collision.