Chapter 10: Risk Management and Property/Liability Insurance

Chapter 10:
Risk Management and Property/Liability
Insurance
Objectives

Define risk and apply the riskmanagement process to personal
financial affairs.

Define insurance terminology and explain
the relationship between risk and
insurance.
Objectives

Design a homeowner’s insurance
program to meet your needs and keep the
cost of the plan to a minimum.

Design an automobile insurance program
to meet your needs and keep the cost of
the plan to a minimum.
Objectives

Describe property and liability insurance
policies designed to meet needs other
than those related to housing and
automobiles.

Outline the steps to make a claim against
a property or liability insurance policy.
Risk Management
CONSIDER…
A
plan to protect accumulated resources
and assets from the possibility of financial
loss.
Coverage and Type of Risk

Pure Risk
 Insurable
 Accidental, unintentional
 Always results in a loss
 Can be personal, property
or liability risk.

Speculative Risk
 Loss or gain possible
 Uninsurable
 Such as investing in stocks or gambling
Risk
Avoidance
Risk
Shifting
Ways to
Manage
Risk
Risk
Assumption
Risk
Reduction
Risk and Risk Management
RISK MANAGEMENT PROCESS:
 Gather information
 Evaluate risk and potential losses
 Choose mechanisms
 Administer program
 Evaluate and adjust
Decision Making Matrix
Risk and Risk Management

CHOOSE MECHANISMS:

Risk avoidance

Risk retention

Loss control

Transferring risk

Risk reduction
What is Insurance?
Insurance is strange. It's a product that most consumers buy, but few want to use. And many people find insurance confusing. It's
unlike any other consumer product on the market. You can't see it, touch it, smell it, hear it or taste it. But without it, the world would
be a much different place.
Just think about it. Would you casually drive to the grocery store knowing that everything you ever worked for could be at risk if you
were involved in an accident? How much would you be willing to spend on a home without insurance to cover it? Who would dare
start a new business without the safety net of insurance? Insurance allows people to take risks, make investments, protect their hardearned assets and provides peace of mind.
Insurance and other risk management techniques have been around in some form for thousands of years. Insurance has its roots in
ancient China. Shipping merchants in 2500 B.C. were the first to introduce a concept vital to the role and purpose of insurance -spreading the risk of loss from the individual to a group of individuals. Before sailing through dangerous waters, merchants gathered
and divided their goods so that each boat carried some of the contents of the others. That way no one merchant shouldered the risk
alone, protecting themselves from a potential total loss of goods.
Today's insurance business still bases its practices on this simple concept of spreading risk.
Through a wide array of products and services, insurance companies provide citizens and businesses with the economic security
necessary to survive the unpredictable and sometimes devastating events of modern everyday life.
The Insurance Institute of America defines insurance as three things. First, insurance is a transfer technique whereby the insured
transfers the risk of financial loss to another party, the insurance company or insurer. Second, it is a contract between the policyholder
and the insurer that states what financial consequences of loss are transferred and expresses the insurer's promise to pay for those
consequences. Third, insurance is a business and, as such, needs to be conducted in a way that earns a reasonable profit for its
owners.
The money a policyholder pays an insurer is small compared to the potential for loss. If a family's house were to burn down, they
probably could not afford to replace it without insurance. The insurance system enables someone to transfer the financial
consequences of this loss to an insurance company.
The insurance company, in turn, pays for covered losses and distributes the costs among all of its policyholders. In that way, your
fellow policyholders share the cost of your loss, as you share in theirs.
What is Insurance? (cont.)
Private companies and state and federal governments provide insurance.
There are three major types of private property/casualty insurers: mutual, stock and reciprocal exchanges. The
primary difference among these types of insurers is in who owns them.
A stock company is a corporation owned by individuals or stockholders who contribute capital in the hope of
earning a profit through the sale of insurance. The stockholders direct the company's operations and share in any
profits earned.
A mutual insurance company is a corporation owned by its policyholders, who may receive dividends if the firm is
profitable.
A reciprocal insurance exchange is similar to a mutual company in that the policyholders are both the insurers and
the insured. The exchange is a collection of individuals, firms and/or corporations that exchange insurance
coverage on one another. Each member pays for a portion of the coverage on every other member.
One of the most critical decisions any consumer must make when purchasing a product or service is how they will
purchase the product. When buying insurance, consumers have several choices. They can work with an
independent agent, an exclusive agent, an insurance broker or deal directly with a company.
An independent insurance agent is a self-employed businessperson who typically represents a number of different
insurance companies through contractual relationships and is paid on a commission basis.
An exclusive agent represents only one insurance company and may be a salaried employee or work on a
commission basis.
An insurance broker is an intermediary between a customer and an insurance company. A broker typically searches
the market for coverage appropriate to their clients' needs.
While purchasing insurance through an independent or exclusive agent are the most popular methods of buying
insurance, consumers also have the option of direct purchase. A number of companies sell their insurance products
directly to customers through the use of a toll-free telephone service or the Internet.
What is Insurance?

HAZARDS:
 Physical
 Morale
 Moral
What is Insurance?
FINANCIAL LOSS:

Fortuitous

Financial

Personal
What is Insurance?

Insurable interest

Principle of indemnity

Factors that affect cost
 Deductibles
 Co-insurance
Reimbursement Formula
What is Insurance?

Types of insurers
 Stock
 Mutual

Essence of insurance
Homeowner’s Insurance

Coverages
 Property
 Liability

Types

Buying
Homeowner’s Insurance
BUYING:
 Dwelling coverage
 Personal property coverage
 Liability losses
 Homeowner’s insurance pricing
Types of Home Insurance Policies








Basic form (HO-1)
Broad form (HO-2)
Special form (HO-3)
Tenant’s form (HO-4)
Comprehensive form HO-5)
Condominium form (HO-6)
Country home form (HO-7)
Modified coverage form (HO-8)
How Much Coverage Do You Need?

Look for a policy with full coverage rather
than a coinsurance clause
 What would it cost to replace your home?
 Have sufficient liability coverage
 Include protection for specific items such
as collections, cameras, and jewelry
 Determine the value of the contents of
your home
Items Covered in a Renter’s Policy



Personal property
Personal liability
Additional living
expenses
A landlord’s insurance usually won’t cover
your personal belongings! Only 40% of
renters have renter’s Insurance
Replacement Cost vs.
Actual Cash Value


Actual cash value coverage
 Insurer will cover the cost of what the
burned or stolen item would cost at a
garage sale or if you sold it through a
newspaper ad.
Replacement cost coverage
 Insurer will cover what ever it costs you
to replace the burned or stolen item with
a new one.
Actual Cash Value Reimbursement
Calculation
Value of a Home Inventory

Proof of belongings and their value

Helps you remember

Helps you determine needed coverage
What Affects the Cost of
Homeowner’s or Renter’s Policies?

Location of home or apartment
 Type and age of the structure
 Amount of coverage and deductibles
 Discounts - alarm system, smoke detector
 Varies company to company - compare
 If you also insure your car with the same
company
Automobile Insurance


Financial responsibility law
 40 states have one
 Utah limits are 25/50/15
Requires you to carry certain minimum
coverage if you damage someone’s
person or property
Automobile Insurance
LOSSES COVERED:
 Liability
 Medical
 Uninsured/underinsured
 Physical damage
 Other
Auto Liability Coverage
100/300/50
$100,000 limit that
will be paid to one
person in an accident
$300,000 limit that
will be paid to all
persons in an accident
bodily injury liability
$50,000 limit for
payment for damage
to property of others
property damage
liability
Auto Insurance Coverages
Bodily injury coverages
 Bodily injury liability -
covers people in other cars
 Medical payments -
covers people in your car
Auto Insurance Coverages
(continued)

Uninsured motorist
 Your vehicle is hit by one of the many
people who don’t have car insurance

Underinsured motorist
 Your car is hit by a person who doesn’t
have enough insurance to cover the
damage they did to you and your car
Property Damage Liability Coverage
Covers damage to others person’s car when
you are at fault
 during a snow storm you might
accidentally slide your vehicle into a
neighbor’s mailbox
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Collision Coverage
When your car is in an accident, collision
insurance pays for damage to your
automobile, regardless of who is at fault.
However, if you are not at fault they will try
and collect from the other driver’s property
damage liability first.
Comprehensive Physical Damage
Covers damage to your car that is not
caused by a collision, such as
 theft
 vandalism
 glass breakage
 hail, sand, or wind storm
 your car rolls downhill into a tree
No-Fault Insurance



Each driver collects from their own
insurance company
 medical expenses
 lost wages
 related injury costs
Intent is to reduce time and costs
No-fault systems vary from state to state
Auto Insurance Premium Factors

Automobile type
 year, make and model
 Rating territory
 accident, theft, and vandalism rates
 Driver classification
 age, sex, marital status
 driving record
 Assigned risk pool
Other Property/Liability Loss
Exposures

Floater policies

Antique/specialty cars

Professional liability

Comprehensive personal liability

Umbrella liability
To Lower Your Auto Premium




Find out how much it will cost to insure a car
before you buy it
Compare companies
Have larger deductibles
Look for discounts
 non-smoker
 good driving record
 airbags
 car alarm or other security
Umbrella Policy

$1,000,000 in
liability coverage

Covers you in
your home, car,
office etc.
Collecting on Property/Liability
Losses

Document loss

File claim

Sign release
Make Sense of an
Insurance Policy

Perils covered

Locations covered

Property covered

Time period of coverage

Types of losses

Loss control

People covered

Amount of coverage
Save on Property
or Liability Insurance

Shop around

Select appropriate coverages/limits

Assume affordable risk

Take advantage of discounts

Engage in loss control

Be properly classified