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Insurance Terms

Actual cash value: The value of a policyholder's property, based on the current cost to replace it minus depreciation.

Approved alternative policy: These "custom" policies take a more smorgasbord approach to the coverage available to policyholders. What is covered may vary from region to region, or even from customer to customer. The alternative policies must be approved by the Texas Department of Insurance commissioner in advance.

Comprehensive policy: Generally refers to a policy that pays for the replacement value of losses, minus whatever deductible the policyholder has.

File-and-Use: Under this system, insurance companies file their residential property rates with the TDI but do not need prior approval to implement new rates. If TDI determines that a company's rates are excessive, the company can be ordered to refund the policyholders it overcharged. Companies can appeal adverse rate decisions. Under some circumstances, TDI can require insurers to submit rates for prior approval.

Float: This is the practice of investing the money from collected premiums. Returns on the investments potentially can make an insurance company profitable even when its combined loss ratio exceeds 100 percent, that is when payouts and expenses exceed premium collections.

HO-A policy: These cash-value, "bare-bones" policies provide basic coverage for the actual value of policyholders' losses, less depreciation and their deductible. Only damages specifically listed in the policies are covered.

HO-A amended policy: This type of policy provides more extensive coverage than the basic HO-A. Coverage in these amended policies varies from company to company.

HO-B policy: These policies provide replacement cost coverage for most types of damage, except for those specifically excluded in the policy. Some companies do not offer the HO-B policy.

HO-C policy: Provides the most extensive coverage, but it is more expensive than other types of policies.

Loss Ratio: Measures the percentage of premiums received by insurers that are paid out in claims. A "combined loss ratio" measures income from premiums against claims and expenses, such as commissions paid to agents and overhead. A combined loss ratio of 100 percent means that income from premiums equals what's paid out on claims and expenses. A ratio above 100 percent indicates that claims and expenses are exceeding premiums.

Premium: The amount paid by an insured to an insurance company to obtain or maintain a policy. It is possible for premiums to rise even if rates go down if, for example, construction costs for repairing or replacing damage increase and homeowners insure for the increased replacement value.

Rate: What insurers charge for a specific dollar amount of coverage. It is possible for rates to go down but for premiums to stay roughly the same or go up if construction costs for repairing or replacing damage increase.