Glossary

Index-based insurance is coverage under which an entity assuming risk (the "insurer") agrees to pay the indemnitee (the "insured") an agreed amount upon the occurrence of a specified event, such as an earthquake or hurricane of specified intensity. The event, or "parameter," is often indicated by an established and authoritative index for that type of event, such as the Richter scale for earthquake intensity or the Saffir-Simpson scale for hurricanes. For that reason, index-based insurance is also referred to as "parametric insurance." Parameters can be defined by other objective factors, such as the extent of physical damage, and are typically delimited to certain time periods and geographic areas. The parties may also develop customized risk parameters based on wind speeds, storm surge, rainfall (or lack thereof), and other factors, both natural and human-driven, or alone or in combination.

An index is a database used to standardize the trading prices of a commodity and act as the "underlying asset" for the creation of a derivative. For example, the Guy Carpenter Catastrophe Index (GCCI) is used by the Bermuda Commodities Exchange (BME) as the underlying basis (or asset) for setting a value on its catastrophe options.

An indexed deductible is the amount deducted from each loss payment that is not fixed in relation to the policy limit but determined by variables (the index) affecting the insured's retention ability.

Indexed universal life refers to a universal life policy where the cash accumulation is credited with interest based on an index such as the S&P's index. If the index goes up, you get interest; if it goes down, you do not. Some policies have a limitation on how high the interest can go and a floor that ensures the interest rate will not be negative. There are many limitations and provisions that should be understood by the buyer and the agent selling these policies.

Indexing or indexation refers to the adjustment of a cedent's retention and the reinsurance limit by a measure of economic activity such as the consumer price index (CPI). Under indexation, the cedent's original retention and the reinsurance limit are multiplied by the result of dividing the index on the settlement date by the index as of the effective date of the reinsurance agreement.

An index bureau is a clearinghouse where insurers and self-insured companies file reports of claims. A search is done for matches based on the claimant's name and Social Security number, and the reporting party is notified when a match is located.

An index clause, also referred to as an inflation clause, a stability clause, or an indexation clause, redistributes inflation-related increases in the costs of claims between the ceding insurer and its reinsurer. In most excess-of-loss contracts, the ceding insurer's retention and the reinsurance limit amounts are fixed dollar (or other currency) amounts, and the reinsurer's liability triggers at the point the retention is met. If neither the retention nor the limit is indexed, claim inflation can cause a loss to reach the retention amount sooner and more frequently than anticipated. Further, if there is greater inflation after the claim reaches the retention amount, the reinsurer's liability will not increase with the rising cost of the claim. The index clause achieves redistribution of these inflation-related increases by adjusting the retention and limit amounts of a reinsurance contract in accordance with an inflation index.

Indirect damage loss is loss that results from direct damage to property—for example, loss of income and increased expenses resulting from the insured's inability to use the damaged property while it is being repaired or replaced.

Individual health insurance refers to a health insurance policy covering one person, as opposed to a group of people. An individual health insurance policy can include specified members of the insured's family.

Individual life insurance refers to a life insurance policy covering a single life, in contrast to group life insurance, which covers many lives.