Cpcu 555 Ch.1

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Property Loss Exposure

Back 1

All property is subject to property loss exposure (condition that presents the possibility that a loss to property will be sustained).

Property loss exposure elements: Assets exposed to loss - real or personal, Causes of loss - perils (fire, tornado), Financial consequences of loss.

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Assets Exposed to loss

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Assets exposed to loss are any items of property that have value

Real property (tangible only) - land, buildings and other structures attached to the land. E.x. Garage, tree in the ground.

Personal property (tangible and intangible) - all property other than real property. E.x. Car (tangible, car itself has the value) Home furnishings (tangible), Stock Certificate or life insurance policy (intangible, piece of paper itself doesn't have any value but what it represents does hold the value. If you lose life insurance policy the company can just send a new one, haven't lost anything of value).

Front 3

Causes of loss

Back 3

Many causes of loss (or perils) can damage or destroy both real and personal property.

Perils are causes of loss.

Real property perils - fire damage to a dwelling, lightning damage to a tree, earthquake damage to a swimming pool.

Personal property perils - theft of or damage to a car, loss of a diamond ring.

Perils such as fire, earthquake or hurricane can cause damage to both real and personal property.

Front 4

Financial Consequences of loss

Back 4

When property is damaged, individuals sustain certain financial consequences including:

Reduction in value of property - pre loss value less post loss value (take value of property before loss and compare to value after the loss, difference is the reduction in value)

Increased expenses - expenses in addition to normal living expenses due to a loss. Home has fire damage, need to live in hotel for a month, this is increased expense resulting from loss.

Lost income - loss of income that results if property is damaged (damage to rental property, during repair period you can't collect rent)

Front 5

Liability Loss Exposures

Back 5

Individuals face a reduction in assets as a result of lawsuits or being responsible for injury. Condition that presents the possibility of a claim alleging legal responsibility for injury. E.x. homeowner has someone over who slips and falls causing injury, this person could potentially sue the homeowner.

Liability loss exposure elements (same elements as property loss exposures): Assets exposed to loss, Causes of loss, Financial consequences of loss.

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Assets exposed to loss (Liability Loss Exposures)

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Assets exposed to liability loss include money or other financial assets (if judgement is against homeowner, the homeowner may have to sell assets to satisfy the judgement). Loss can result from property ownership or from the actions of individuals (e.x. person hits and injures another driver, if liable will owe other driver for injury).

Damages are money claimed by, or a monetary award to , a party who has suffered bodily injury or personal damage for which another party is legally responsible.

Damages awarded include:

Special damages (compensatory) - specific, measurable, damages such as medical expenses

General damages (compensatory) - pain and suffering, not as measurable

Punitive or exemplary damages - punishment for reckless or malicious conduct, punish wrongdoer.

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Causes of loss (Liability loss exposures)

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The cause of loss is the claim of liability or the filing of a lawsuit.

Civil law involves settlement of disputes between individuals (cause of loss is usually some violation of civil law). Provides legal foundation of insurance. Most common claims under civil law involves tort liability.

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Causes of loss (Liability loss exposures) pt.2

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Primary cause of liability loss is tort liability.

Tort liability - a wrongful act or an omission, other than a crime or breach of contract, which invades a legally protected right. Includes negligence (child leave ball on porch of house, careless, friend comes over and trips on ball), intentional torts (slander (an oral untrue statement that damages a person's reputation), assault (intentional and unlawful threat of bodily harm), battery (unlawful physical contact with another person), libel (written or printed untrue statement that damages a person's reputation), nuisance (violation of a person's right to enjoy use of property without disruption from outside sources), trespass (unauthorized possession or use of land)) and absolute liability (someone keeps alligator in backyard, person has a duty to keep their home safe).

Contractual liability - arises when an individual enters into a contract or an agreement. Tenant may assume liability for injury in apartment. E.x. person is renting an apartment and friend is injured in apartment, need to review lease for terms but in most cases the tenant assumes liability in this case.

Statutory liability - exists because of the passage of a statue or law.

Front 9

Financial Consequenses of loss (liability loss exposures)

Back 9

Financial consequences of liability loss: Costs of investigation and defense, Money damages - awarded if the defense is not successful or if claim settled out of court (most claims do not reach court, too time consuming and expensive, most claims are either dropped or settled out of court).

Financial consequences of a liability loss exposure are theoretically limitless. Some jurisdictions limit the amount that can be taken in a claim.

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Risk management process

Back 10

The risk management process should be used to determine the bast technique for manging loss exposures, 6 steps in the following order: Identifying loss exposures (what assets do you own?), Analyzing loss exposures, Examine feasibility of risk management techniques (should you get insurance, should you do nothing, try alt techniques), Selecting appropriate techniques, Implementing techniques and Monitor results

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Identify loss exposures

Back 11

Many sources can help identify loss exposures. Some large companies have large risk management teams to identify exposures but individuals don't have those resources. Friends and family can help share their own loss histories and experience. Insurance agent may provide checklists that focus on common sources of loss exposures. For individuals process of identifying loss exposures is less formal than a large business.

Most common loss exposures are connected to home and automobile ownership. Liability loss exposures also exist, such as liability resulting from work-related altercation.

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Analyzing loss exposures

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Analyzing loss exposures entails estimating the likely significance of possible losses (if you have a house, there could be a fire, need to analuze potential loss that could occur due to fire). First two steps of process constitute the process of assessing loss exposures.

When organizations analyze loss exposures, they focus on four dimensions: Loss frequency (number of losses within a specific time period), Loss severity (dollar amount of loss for a specific occurrence), Total dollar losses
(amount of all losses during a period of time from all occurrences) and Timing (how long it takes to get an insurance reocvery).

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Examining feasablility of techniques

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Loss exposures can be addressed through risk management techniques: Risk control - reduces frequency and/or severity of loss (sprinkler system, burglar bars), Risk financing - generates funds to pay for losses (insurance).

Individuals should typically apply at least one risk control and one risk financing technique to each significant loss exposure. E.x. if you have a house and want insurance you will also want alarm system.

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Selecting appropriate techniques

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Selecting the most appropriate techniques is usually based on quantitative and qualitative considerations. Most households choose risk management techniques by using financial criteria (whats your potential loss? how much is premium for insurance?). Must compare the costs of untreated loss exposures with the costs of possible risk management techniques.

E.x. Insured conducts examination of feasibility of techniques and determines HO insurance would be the most suitable product for their needs. Next step is to select the appropriate risk management technique.

Non-financial benefits such as peace of mind, may outweigh technique's financial cost. E.x. may wind up costing a little more to have alarm system in home than premium reduction you will get on insurance for having alarm system, even though it costs more financially, peace of mind must be considered, benefits of peace of mind probably outweigh additional financial cost.

Front 15

Implementing selected techniques

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Implementing risk management techniques may involve the following measures: Purchasing loss reduction devices (sprinkler system), Contracting for loss prevention services (security service), Funding retention programs (setting up emergency fund), Implementing and reinforcing loss control programs (keeping flammable items away from heater).

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Implementing selected techniques pt.2

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Implementing risk management techniques may involve the following measures: Selecting producers who can suggest ways to deal with specific loss exposures (having a good agent that can bring up specialized coverage for things like jewelry,collectibles, etc.), Requesting insurance policies and paying premiums, Creating and updating a list of possessions that may be subject to loss(inventory of possessions, photos of possessions).

Front 17

Monitoring results

Back 17

Risk management program must be periodically reviewed and revised. Program should be adjusted to accommodate changes in loss exposures and techniques. Program should be adjusted when a life changing event occurs (have a child that just turned 16 and got DL). If individuals engage in new hobbies with significant loss exposures, they should adopt additional risk management techniques (coin collection).

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Risk management techniques

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Risk management techniques fall into two categories: Risk control - aim to reduce the loss frequency or loss severity or make losses more predictable, Risk financing - help individuals recover from loss.

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Risk control

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Risk control techniques fall into one of six broad categories:

Avoidance - eliminating possibility of loss (may be impractical, if not impossible)

Loss prevention - reducing frequency of loss. Breaking sequence of events leading to a particular loss. May reduce frequency of losses from one exposure but increase frequency or severity of other loss exposures. E.x. a loss prevention technique is burglar bars, will reduce frequency or people breaking in but makes harder for you to get out if there's a fire. E.x. Insured's daughter wants to get her driver's license but they are worried she's too immature to handle it so they allow her to get a driver's permit that requires a parent is there when she's driving, this is loss prevention because the adult supervision will decrease the frequency of reckless driving.

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Risk control pt.2

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Loss reduction - reducing severity loss (sprinkler system). Some techniques accomplish both loss reduction and loss prevention (alarm system reduces severity b/c when someone breaks in they hear it and leave, also could act as deterrent for break ins).

Separation - isolating loss exposures (putting half of fine jewelry in safe deposit box and keeping half at home). Reduces severity or loss at single location. May increase loss frequency, because there are multiple locations (2 places to worry about).

Duplication - creating backups.

Diversification - spreading loss exposures over numerous projects or markets (when investing put into diversified portfolio). Reduces loss severity and can make losses more predictable. E.x. insured invests savings based on asset allocation: equities mutual fund - 40% fixed income mutual fund - 25% cash equivalents - 15% ect.

Front 21

Risk financing

Back 21

Risk financing measures are categorized as either risk retention or risk transfer.

Retention (losses are retained by generating funds to pay for the losses). Default risk financing technique if a risk is not identified or transferred (if you don't have insurance on a piece of property you will pay for the loss out of pocket (retention)). Can be planned (you know item isn't worth much so you don't insure it) or unplanned (person doesn't know they have loss exposure so they end up retaining it unintentionally); complete or partial; funded or unfunded. Most families and individuals do not retain losses on a pre-planned, structured basis.

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Risk financing pt.2

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Insurance is most common form of risk transfer. Insured substitute certain premium for the possibility of a large, uncertain financial loss. Insurance is frequently the only method of risk transfer available to individuals and families. Some risk transfer techniques do not involve insurance (hold harmless agreement (non-insurance, risk transfer technique in which one of the parties to the contract assumes the legal liability of another party)) or hedging (technique in which money is paid to offset the risk associated with another asset)).