It means that the math on computing interest is dependent on legal language. (In the U.S. at least, that legal language is informed by a history of actual practice going back hundreds of years.) To get a detailed understanding of what would happen in real life about interest over 2/5ths of a year, you would have to look at an actual contract and know how to interpret it.
In practice, a bank (and I suspect an insurance company) uses compound interest formulas only as very good approximations. Those formulas apply to an ideal world, rather than the messy world of day-to-day practice. Interest in the real world is almost always computed using simple interest.
Compound interest is the result of applying simple interest on a periodically increasing balance. If the balance doesn't increase, simple interest applies.