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1 Presentation Allied World Business of Insurance Days 1 and 3 St. John’s University Center for Professional Education.

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1 1 Presentation Allied World Business of Insurance Days 1 and 3 St. John’s University Center for Professional Education

2 Topics 2 Day 1 1. Insurable Risk. 2. Insurance Principles. 3. Risk Management Process 4. Legal Environment of Insurance. Center for Professional Education

3 Topics 3 Day 3 9. 4 Pillars 10. Insurance Underwriting. 11. Property Insurance. 12. Legal and Contractual Liability. Center for Professional Education

4 Presentation Session 1 Insurable Risk 4Center for Professional Education

5 Question Suppose someone offered you: $1 million if you would climb Mount Everest and reach the top. $500,000 if you stopped at the base camp at 24,000 feet. Expenses would be covered in either case. Would you accept the offer? Center for Professional Education5

6 Sources of Risk Exposure. A condition that can cause a downside loss. Uncertainty. A negative variance from expectations. Missed Opportunity. The failure to accept risk when we have the chance to improve a situation or condition. 6Center for Professional Education

7 Question Assume that twenty-five people are gathered in a room. What is the probability that two of them will have the same birthday? 7Center for Professional Education

8 Answer Over 50 percent. Calculation starts with 1/365 or.00274. It builds quickly 1 - (364/365)(363/365)... (341/365) > 50%. 8Center for Professional Education

9 Speculative and Pure Risk We can identify two broad categories of risk:  Speculative Risk. The chance where both loss and gain are possible.  Pure Risk. The chance of an unexpected or unplanned loss without the accompanying chance of a gain. 9Center for Professional Education

10 Question Which of the following are pure risks? Placing a bet on a horse at a racetrack. An explosion in a power plant. A decline in the value of a nation’s currency. A microwave oven emitting harmful messages from the devil. 10Center for Professional Education

11 Answer Race Track Bet. Not a pure risk. Upside possibility. Explosion. A pure risk. Only a downside. Currency Decline. Not pure risk. Currencies rise and decline in value. Microwave Devil Message. What do you believe? 11Center for Professional Education

12 Dimensions of Pure Risk Likelihood of Loss. A high probability of the occurrence of a loss may be considered to be a higher degree of risk. Size of Loss. A large potential loss may be perceived as possessing a high degree of risk. 12Center for Professional Education

13 Severity and Frequency Individuals and companies are concerned primarily with insuring important risks measured by either:  Severity. The intensity of a peril.  Frequency. The likelihood of the occurrence. Risks can be graphed, as shown on the next slide. As we move up and to the right, we move into the area of critical risks. 13Center for Professional Education

14 Graphing Risk High | | SEVERITY Increasing | Risk | Low |_____________________________ Low FREQUENCY High 14Center for Professional Education

15 Question Black Beauty (BB) is twice as likely to win a horse race Charley’s Child (CC). Charley’s Child is twice as likely to win as Desert Dawn (DD). These are the only horses in a race. A $2 bet on Black Beauty will pay $5. Is this a good risk to accept? 15Center for Professional Education

16 Answer Yes. Start with the probability of DD winning at 1. Then CC is 2, and BB is 4. Total likelihood is 7. BB has 4 chances out of seven to win. The upside is $3, the downside is $2. 16Center for Professional Education

17 Tests of Insurable Risk Financial Loss. possibility of a decrease in money or a decline in monetary value. Definite Loss. We must know conclusively that a loss took place. Fortuitous Loss. The loss must occur as a result of chance from the perspective of the insured. This is also called a contingent loss. 17Center for Professional Education

18 Question An individual wants to purchase fire insurance to cover a house located in a dense forest. Is this an insurable risk under the following conditions:  If forest fires are common in the area?  If a fire is approaching the house?  If a child of the owner sets a fire? 18Center for Professional Education

19 Answer Insurable if loss is contingent.  Yes if forest fires are common in the area. May have a high premium  No if a fire is approaching the house (not a contingent loss).  Yes if relative of owner sets a fire as long as owner is not an accomplice. (contingent from point of view of owner) 19Center for Professional Education

20 History of Risk Two events hundreds of years apart cleared the way for a better understanding of risk:  Hindu-Arabic Numbering System. It came to the West in 1202 when the Book of the Abacus appeared in Italy. It added the concept of “zero.” Previously, the abacus was the only tool for arithmetic calculations.  Protestant Reformation. It weakened the idea that the future was in the hands of God. 20Center for Professional Education

21 Question In the Roman numbering system, numbers were: I = 1 V = 5 X = 10 L = 50 C = 100 D = 500 M = 1000 How much is CXVI + XXIV? 21Center for Professional Education

22 Answer CXVI + XXIV = 1 Convert IV → IIII 2 Link together (concatenate!) CXVI + XXIIII → CXVIXXIIII 3 Sequence high to low CXVIXXIIII → CXXXVIIIII 4 Simplify by summation of internal numerals IIIII → V; VV → X; CXXXVIIIII → CXXXX 5 Subtract XXXX → XL 6 Solution CXL 22Center for Professional Education

23 Contribution of Paccioli In 1494, Luca Paccioli published a book: Algebra. The principles. Accounting. Double-entry bookkeeping. Arithmetic. Multiplication tables up to 60 x 60. Probability. A puzzle of how to divide an unfinished game started new thinking. 23Center for Professional Education

24 Question Paccioli set up a game. A score of 60 wins $1,000. One person has 50 and the other has 20. The game cannot be finished. How do they share the money? 24Center for Professional Education

25 Answer It depends on who you ask. Luca Paccioli. Total points are 70. One person gets 50/70ths or 5/7ths. Grace Amend (13 years old). Nobody gets the money. Game is not over. Hope Amend. (9 years old). Nobody gets the money. Person with 20 points has a chance to catch up. 25Center for Professional Education

26 Question One of our goals is to remove as much unnecessary risk as possible from our lives. Either you believe in God or you do not. It is a 50-50 proposition. Can you believe in God and remove all risk from having the wrong belief? 26Center for Professional Education

27 Answer This is Pascal's Wager. Risk still exists: The wager fails to distinguish among the Gods of Catholicism, Mormonism or Islam. Making the wrong choice could be bad. It also fails to consider whether it would annoy God if you believe in Her based on a mercenary expected value calculation. 27Center for Professional Education

28 Exposure, Peril, and Hazard An insurable risk can cause a financial loss and/or disrupt the operations of a business. Three terms help dimension it:  Exposure. A condition where risk could cause a loss.  Peril. Immediate cause of a loss.  Hazard. A condition increasing the likelihood of a loss from a peril. 28Center for Professional Education

29 Question A company purchases a building. With respect to the possibility of fire, what is:  An exposure?  A peril?  A hazard? 29Center for Professional Education

30 Answer Fire in a building.  Exposure. Purchase of the building.  Peril. Electrical fire.  Hazard. Storing gasoline in the building. 30Center for Professional Education

31 Hazard Categories We can identify four kinds of hazards:  Physical. A condition of the real world that creates a danger.  Moral. A tendency of a person to lack integrity or be dishonest.  Behavioral. A tendency of a person to be careless. (also called morale hazard)  Legal. Characteristics of legal system that increase frequency or severity of losses. 31Center for Professional Education

32 Question Identify each as physical, moral, behavioral, or legal.  A workman leaving a ladder propped against a house.  A witness to a bus crash who hops on the bus and later claims an injury.  An individual who rides to work on a motorcycle even on rainy days.  A business person who rents a low-cost office in a building with antiquated electricity wiring. 32Center for Professional Education

33 Answer Ladder Against House. Behavioral. Physical. Witness Files Claim. Moral. Motorcycle to Work. Physical but behavioral on rainy days. Bad Rental. Physical but partly behavioral. 33Center for Professional Education

34 34 Question In violation of company policy, an employee entered a company at night and took a truck without permission to move some furniture. The regular driver never checked the brake fluid. The brakes failed. The truck hit a car. The employee and car driver were injured. Identify any risks, exposures, perils, or hazards. Center for Professional Education

35 35 Answer Risks. Injury: personal risk. Vehicle damage: property risk. Lawsuit: liability risk. Exposure. Availability of truck. Peril. Accident. Hazards. Employee taking truck without permission: Moral hazard. Absence of brake fluid: physical and behavioral hazard. Center for Professional Education

36 Question What have been the largest insured losses in the world in the period from 1963 to 2012?  Floods.  Hurricanes (typhoons).  Volcanoes.  Earthquakes.  Other. 36Center for Professional Education

37 Answer Rank Year Source of Loss Insured Losses 12001WTC Terrorist attack $70 billion 22005Hurricane Katrina $64 billion 32011Japan Tsunami $62 billion 42012Hurricane Sandy $28 billion 51992Hurricane Andrew $22 billion 62008Hurricane Ike $19 billion 72011Thailand Floods $18 billion 81994Northridge Earthquake$17 billion 92005Hurricane Wilma $11 billion 102004Hurricane Charley $ 8 billion 37Center for Professional Education

38 38 Presentation Climbing Mount Everest Center for Professional Education

39 Question Name an exposure, peril, and hazard associated with climbing Mount Everest. 39Center for Professional Education

40 Answer Exposure. Climb it. Perils. Snow blindness. Freezing conditions. Death. Hypothermia. Hypoxia. Weight loss. Severe injury. High altitude cerebral edema (HACE). High altitude pulmonary edema (HAPE). Hazard. Carry no oxygen. Do not train in advance. 40Center for Professional Education

41 41 Question When did someone first climb Mount Everest? Center for Professional Education

42 Answer First to climb Mount Everest:  George Mallory 1921.  Lost on the mountain 1924.  Body discovered 1999. Center for Professional Education42

43 Question Who was the first to reach the peak and return safely? Center for Professional Education43

44 Answer First to reach the peak and return safely. Sir Edmund Hilary (1953) Center for Professional Education44

45 45 Question How many people reached the peak between the first ascent and 2012? Center for Professional Education

46 46 Answer Successful 1953-1996: 615 (43 years) Successful 1953-2006 3,000 (53 years) Successful climbers by different routes. Year NepalChinaOther Success 1990 40 201218% 2000 85 55 524% 2012409138 056% Center for Professional Education

47 47 Altitudes The journey from Nepal: Base Camp17,000 ft5.300M Camp I20,000 ft6,000M Camp II21,000 ft6,500M Camp III23,500 ft7,000M Camp IV26,000 ft7,900M Peak29,000 ft8,900M Center for Professional Education

48 48 May 19, 2012 At the bottleneck just below the peak: Hillary Step: 40-foot rock wall. Hillary Step Delay2 hours Reached the Top: 234 climbers. Died: 4 climbers. Center for Professional Education

49 49 Deaths 1921-2013 Fall65 Avalanche48 Exhaustion18 Altitude Sickness24 Ground collapse24 Exposure26 Other35 Total240 Center for Professional Education

50 Deaths 2014 April 2014. Avalanche in the Khumbu Ice Fall. 16 Sherpas dead or missing. Season ended with 6 weeks remaining of good climbing weather. Claudio Tessarolo: "We made Everest a circus. This year the Sherpas decided that the show will not go on.” 50Center for Professional Education

51 51 Question Risk and the risk appetite are framed by people’s attitudes. What happened to David Sharp and Lincoln Hall while climbing Mount Everest in 2006? Center for Professional Education

52 52 Answer (1) David Sharp.  34 years of age.  Froze to death under a rocky overhang just below the peak. Center for Professional Education

53 53 Answer (2) David Sharp.  34 years of age.  Froze to death under a rocky overhang just below the peak.  40 climbers walked past him while he was still alive. Center for Professional Education

54 54 Answer (3) Lincoln Hall.  50 years of age,  Left for dead by his climbing party.  Survived the night. Center for Professional Education

55 55 Answer (4) Lincoln Hall.  50 years of age,  Left for dead by his climbing party.  Survived the night.  The next morning, Dan Mazur abandoned his own climb to help rescue Mr. Hall. Center for Professional Education

56 Answer (5) John Delaney, founder and CEO of Intrade, a prediction market which allows individuals to take positions (‘trade 'contracts') on whether future events will or will not occur. Did you hear about what happened to him? 56Center for Professional Education

57 Answer (6) John Delaney died while trying to climb Mt. Everest in May 2011:  He was less than 50 meters from the top.  He was 42  It was his second attempt to climb Everest.  He never heard the news that his wife had just given birth to a baby daughter, Hope. 57Center for Professional Education

58 Presentation Session 2 Insurance Principles 58Center for Professional Education

59 Indemnification Indemnity refers to a reimbursement that compensates exactly for a loss. After a loss, an insured is returned to the approximate financial position prior to the loss. The insurer avoids allowing an insured to make a profit from a claim. 59Center for Professional Education

60 Indemnity Calculation Direct Costs. Damage or harm in its basic and most visible context. The money to repair or replace the asset. Indirect Costs. Financial damages that are not so obvious or visible. Example is loss of use until an asset is repaired. Consequential Expenses. Extra costs as the result of a loss. 60Center for Professional Education

61 Question An owner keeps a Ferrari in a wooden barn behind his house. The Ferrari cost $200,000 five years ago. It is worth $300,000 today. The owner has asked Lloyd’s of London to insure it for $400,000. Is Lloyd’s likely to offer this insurance? 61Center for Professional Education

62 62 Center for Professional Education Question Three Christian women requested an insurance policy to cover expenses they would incur if one of them immaculately conceived a baby and could prove that it was the child of God. The women, who were in the age range of 50 years, were members of a Christian group. Would an insurance company issue such a policy?

63 63 Center for Professional Education Answer One did. issued a policy in 2000 with a payout of one million pounds. The premium was 100 pounds year. In 2006, the company cancelled the policy after it was flooded with complaints from Catholics when the story appeared in a newspaper. Scottish Record & Sunday Mail Limited, June 23, 2006

64 Insurable Loss Risks are insurable when the loss has the following characteristics: Arises from a Pure Risk. Speculative risks are not insurable. Loss not Trivial. The administrative costs make it too expensive to insure minor losses. Affordable Premiums. Acceptable Policy Limit. 64Center for Professional Education

65 Question If a homeowner snaps under pressure and sets fire to his house. A court-appointed psychiatrist certified that the person suffered from temporary insanity. Would damages to the house be covered by fire insurance? 65Center for Professional Education

66 Question A company wanted to purchase insurance to send employees to a restful resort if they suffered serious depression for more than 60 days. The insurance would cover travel and living expenses. Is this an insurable risk? 66Center for Professional Education

67 Answer Not likely. It might be hard to prove that the loss is definite. Depression may be fortuitous but a claim of depression is not. 67Center for Professional Education

68 68 Answer -- News Release (1) Copyright 2005 News Limited --Where there's smoke there's fire A Charlotte, North Carolina, lawyer purchased a box of rare and expensive cigars, then insured them against fire and theft. Within a month, having smoked his entire stockpile of the cigars and without yet having made even his first premium payment on the policy, the lawyer filed a claim against the insurance company. In his claim, the lawyer stated the cigars were lost `in a series of small fires'. The insurance company refused to pay, citing the obvious reason: that the man had consumed the cigars in the normal fashion. The lawyer sued and won. Center for Professional Education

69 69 Answer -- News Release (2) In delivering the ruling, the judge agreed with the insurance company that the claim was frivolous. The judge stated, nevertheless, the lawyer held a policy from the company in which it had warranted that the cigars were insurable and also guaranteed it would insure them against fire, without defining what is considered to be unacceptable fire. The insurer was obligated to pay the claim. Rather than endure a lengthy and costly appeal process, the insurance company accepted the ruling and paid $15,000 to the lawyer for his loss of the rare cigars lost in the `fires'. Center for Professional Education

70 70 Answer -- News Release (3) After the lawyer cashed the check, the insurance company had him arrested on 24 counts of arson. With his insurance claim and testimony from the previous case being used against him, the lawyer was convicted of intentionally burning his insured property and was sentenced to 24 months in jail and a $24,000 fine. This true story was the first place winner in the recent National Association of Criminal Defense Lawyers Contest. Center for Professional Education

71 71 Answer (4) The previous story was a hoax. Some media outlets ran it. If a person knows the rules of insurance, the loss was not fortuitous.  Risk Transfer. Yes  Pooling of Losses. All fire, not all cigars  Indemnification. Yes, if for cost  Fortuitous Loss. No. Intentional. Therefore, no collection of damages is possible. Center for Professional Education

72 Risk Strategies Organizations use a mixture of four strategies to deal with frequency and severity of risk. They always use:  Reduction. Lower the frequency or severity. The other strategies are:  Avoidance. Do not accept it.  Retention. Keep it.  Transfer. Shift the financial burden to another party. 72Center for Professional Education

73 Question Of the risk strategies (1) avoid, (20 retain, and (3) transfer, which one is used for each of the following?  Low frequency, high severity.  Low frequency, low severity.  High frequency, high severity.  High frequency, low severity. 73Center for Professional Education

74 Answer Reduce for all. Also: Low frequency, high severity. Transfer Low frequency, low severity. Retain High frequency, high severity. Avoid High frequency, low severity. Retain 74Center for Professional Education

75 Layering of Insurance A layer refers to a level of retention or transfer of an insurable exposure when coverage occurs above a lower level of insurance. Each layer is the responsibility of a different party. Insurance layers provide higher levels of coverage that might be obtainable without multiple parties. 75Center for Professional Education

76 Policy Layering Insured Retention. The insured pays the first portion of any loss. This is the deductible. Primary Insurance. All losses from the retention to the policy limit are in this layer. Excess Insurance. The insured can buy coverage above the primary limit. Umbrella Insurance. An insured can buy broad coverage above all limits to protect against catastrophic loss. 76Center for Professional Education

77 Single Policy Layering 77Center for Professional Education

78 Insurance Company Layering Insured Deductible. This is the level retained by the insured. Primary Insurance. This is the first layer retained by the insurer. Reinsurance. The insurance company can reinsure a portion of the primary layer. Excess Insurance. This level covers accumulated large above reinsurance. Umbrella Insurance. This protect broadly against unforeseen catastrophes. 78Center for Professional Education

79 Insurer Layering 79Center for Professional Education

80 Question An insured had insurance coverage for a major office complex. Is it a good structure? $39 million market value of property. $25 million replacement cost. $8 million primary coverage with a $2 million deductible. $5 million secondary above loss of $11 million. $9 million excess above loss of $20 million. 80Center for Professional Education

81 Answer Excess5 mm Gap4 mm Secondary5 mm Gap3 mm Primary6 mm Retention_____2 mm Coverage16 mm Retention9 mm 81Center for Professional Education

82 Question A city has 500 buses serving residents. 40 passengers per bus in rush hour. 6 passengers per bus in mid-day. 22 passengers per bus in a mid-day accident in one industrial section of the city. Many injured parties file claims for injuries. How should the city handle this risk? 82Center for Professional Education

83 Question A company unloads ships transferring electronic products into a public warehouse in a port. In the past year, theft and missing items equaled 5% of all shipments. How should the company handle this risk? 83Center for Professional Education

84 Question A construction company must pay medical costs for workers injured on the job and salary during any period of disability. Statistics show that 95% of injured workers return to the job within 21 days, even after serious injury. The local laws occasionally require employers to provide lifetime total pay and medical costs for injured workers. How should the company handle this risk? 84Center for Professional Education

85 Presentation Session 3 Risk Management Process 85Center for Professional Education

86 86 Evolution of Risk Management 1950s. In this decade, companies examined hazard risks in the context of insurance. 1960s. First signs of serious risk management can be detected. 1970s to 1990s. Risk management rapidly expanded into loss control, safety, and strategies to avoid, reduce, or transfer risk. 2000 to Today. Hazard risk management was incorporated into enterprise risk management. Center for Professional Education

87 Hazard Risk Management Identify Risks. Exposures confronting the entity. Evaluate Risks. Assesses the level of danger. Develop Plan. To avoid, reduce, or transfer a hazard risk. Implement Program. Deal with the threat. Monitor Results. Evaluate success or failure. 87Center for Professional Education

88 What is a Risk Manager? A person who practices the profession of risk management. Identifies risks. Mitigates their impact. Douglas Barlow (1907-1998) was first to hold the title in 1962. Position has evolved. 88Center for Professional Education

89 89 Morgan Stanley Risk Manager In 1993 a truck bomb was detonated below the North Tower of the World Trade Center. It killed 7 people. Rick Rescorla was security chief for Morgan Stanley.  After 1993, he began conducting regular emergency evacuations.  Employees complained about having to walk down dozens of flights of stairs. Center for Professional Education

90 Rick Rescorla On September 11, 2001, Rescorla ignored building officials' advice to stay put. 3,700 Morgan Stanley employees from 20 floors in the South Tower evacuated. Rescorla went back in one last time to make sure everybody got out. He was lost when the tower collapsed. 90Center for Professional Education

91 91 Grocery Acquisition An upscale grocery chain that was negotiating the acquisition of another grocery chain. The business model was to upgrade the acquisition and convert the acquired locations to the company’s own stores. The CEO added the risk manager to the negotiating team. What role can a risk manager play in that capacity? Center for Professional Education

92 Answer (1) The risk manager visited store and observed the intention to “gut” the interiors.  A scanning for possible risks led to knowledge that the stores had been built during a period of time when asbestos was used as insulation.  The risk manager confirmed all stores contained asbestos in the walls. 92Center for Professional Education

93 Answer (2) State law provided the guidelines for asbestos abatement.  Asbestos did not have to removed from closed walls.  If a wall is opened, asbestos abatement must be performed on the entire building by a licensed asbestos abatement contractor.  No renovation or demolition activities may commence that disturb any asbestos- containing materials. 93Center for Professional Education

94 Answer (3) The finding changed the deal.  Acquisition costs including asbestos abatement changed the project return on the acquisition.  The final acquisition price was lowered as a result of the revised analysis. 94Center for Professional Education

95 Presentation Lance Ewing, Risk Manager 95Center for Professional Education

96 96 Meet Lance Ewing Lance Ewing is hardly an unknown individual in the world of risk management:  High profile vice president of risk management of Harrah’s Entertainment.  Former president of the Risk and Insurance Management Society (RIMS).  Instructor for Austin-based National Alliance for Insurance Education & Research.  Two master’s degrees: Law & Justice and Occupational Safety. Center for Professional Education

97 97 Question Lance started his career working for an insurance company assessing risks in high hazardous industries such as sawmills, logging companies, hospitals, trucking companies and mobile home manufacturers:  Noted that clients did not want insurance.  Goal was to bring down losses. Is fire much of a problem in a sawmill? Center for Professional Education

98 98 Answer According to Lance:  “In the case of sawmills, it is not a question of if it will burn but when it will burn.” Center for Professional Education

99 99 Question Lance took the position of risk manager of the Philadelphia School District with 300 schools and facilities. He implemented a roof top to boiler room inspection of every building. What did he find? Center for Professional Education

100 100 Answer Lance discovered:  Unknown assets that needed to be secured.  Unknown exposures, such as storage tanks without overflow shut off valves.  Rotten electrical systems.  Collapsing water towers on roof tops. Center for Professional Education

101 101 Question Lance moved to become Senior Director of Risk, GES Exposition Services. The company provided logistical support to conferences and exhibitions. Was this a risky business? Center for Professional Education

102 102 Answer Logistical support to conferences and exhibitions had dangers everywhere. Lance handled:  Trucks, and people operating in tight spaces.  Forklifts racing around convention centers.  Environmental hazards, contract reviews, and compliance. He sought ways to say “yes” when conditions seemed to say “no.” Center for Professional Education

103 103 Question GES downsized Lance. He interviewed with Park Place Entertainment (later Caesar’s Entertainment). Did he get the position of Director of Risk Management? Center for Professional Education

104 104 Answer No. The story is:  October 2002. Offered position as Director of Risk Management?  November 2002. Pressed for the title of Executive Director and got it.  Nov 2002 to June 2003. Implemented real risk management. Saved millions.  July 2003. Promoted to Vice President of Risk Management. Center for Professional Education

105 105 Question Harrah’s bought Caesar’s in 2005. Harrah’s already had a risk manager. Lance was offered a severance package. Did he take it? Center for Professional Education

106 106 Answer Lance did not get a chance to accept the package. After Harrah’s learned of his work at Caesar’s, the company created the position of Vice President Risk Management. It was created for Lance. He accepted it. Center for Professional Education

107 107 Question Four weeks after Lance arrived at Harrah’s, Hurricane Katrina hit the Gulf coast.  Result was mass destruction of 3 Harrah’s casinos. Thirty days later, hurricane Rita hit Louisiana.  Major damage to a fourth casino. What did Lance do? Center for Professional Education

108 108 Answer Lance did a wide range of risk and crisis management for: Employees. Guests. Clients. Local Gulf coast communities. His philosophy about the crisis? “Whatever does not kill you only makes you stronger.” Center for Professional Education

109 Enterprise Risk Management (ERM) ERM broadens the role of the risk manager. ERM takes two viewpoints: Variability. ERM expects results from operations or decisions to vary from forecasts because of uncertainty. Upside of Risk. ERM the upside of risk as the reason for accepting exposures and opportunities. 109Center for Professional Education

110 Components of Enterprise Risk Business Risk. The possibility that an organization will not compete successfully in its operations. Financial Risk. The possibility that an entity will not have adequate funds for its operations. Hazard Risk. The exposures that can cause loss without the possibility of gain. These are insurable exposures with no upside. 110Center for Professional Education

111 Risk Manager Roles Strategic Player. Works with the CEO and board to design risk management programs. Competent Risk Manager. Reduces hazard risks, buys insurance and advises managers on risk mitigation strategies. Risk Specialist. Performs a technical risk management function in insurance, claims, employee safety, or physical security. 111Center for Professional Education

112 Strategic Player A strategic player is likely to have:  Significant responsibilities for activities with a major impact on bottom line.  Broad experience in production, marketing, finance, or other areas outside of risk management.  The confidence of the CEO and board and personal chemistry with C-level executives.  Senior management interaction and clout. 112Center for Professional Education

113 Competent Risk Manager A competent risk manager is likely to have:  Significant insurance and risk management experience.  Skills in risk identification, assessment, and mitigation.  Organizational buy in from managers in other units including production, finance, human resources, and legal. 113Center for Professional Education

114 Risk Specialist A risk specialist is likely to have:  Technical skills in an area of responsibility.  Prior experience in an insurance, brokerage, or engineering environment.  Knowledge of best practices for managing risks in the area of responsibility.  Good analytical skills and the ability to prepare detailed management reports. 114Center for Professional Education

115 Risk Manager Backgrounds Educational Credentials. More than half have graduate degrees. Work Experience. 60% with insurance carriers, brokers, or service providers. 20% consulting, government, legal, or financial areas. Reporting Lines. To individuals in finance. Years of Experience. Stay as risk managers once they enter the field. 115Center for Professional Education

116 Presentation Session 3a Northeast Hospital Case Study 116Center for Professional Education

117 Background Janet Saunders, 43, had a physical examination by Frank Lee at Northeast Hospital. Her doctor agreed her only recurring health problem involved swollen sinuses. They caused severe headaches over the prior 15 years. He suggested surgery. She declined 117Center for Professional Education

118 An Incident A few weeks later Mrs. Saunders fell on the ice. She had a severe headache all day. Two days later, Dr. Lee gave her a powerful pain medication. The headache continued. Mrs. Saunders saw the doctor every week for the next month. 118Center for Professional Education

119 Collapse and Paralysis On the 36th day after the fall, Mrs. Saunders collapsed. She was diagnosed with a burst aneurysm in an artery in the brain. She was completely paralyzed. She went to a long-term rehabilitative care center where she recovered only slightly. 119Center for Professional Education

120 Alleged Negligence Janet Saunders filed a lawsuit alleging negligence against Northeast Hospital and Dr. Frank Lee. It alleged they failed to recognize a “sentinel bleed.” Surgery could have avoided the aneurysm. The lawsuit argued the defendant’s failure caused life-long paralysis. Depositions were taken in advance of the trial. 120Center for Professional Education

121 Deposition Depositions First Deposition. A retired doctor said the hospital should recognize signs of an aneurysm. Second Deposition. A specialist stated that the doctor did not deviate from accepted medical practice. Third Deposition. Mrs. Saunders’ husband said she was in constant pain after the fall. He did not think about taking his wife to a hospital or doctor’s office. 121Center for Professional Education

122 Defendant Depositions First Deposition A neurologist stated that patients who have recurring sinus headaches would experience more pain after a fall. Second Deposition. A neurosurgeon maintained through intensive questioning that there was no negligence by the hospital or doctor. 122Center for Professional Education

123 Other Depositions Dr. Lee Deposition. He said he saw Mrs. Saunders four times after her fall. She reported the headache pain was easing but the back pain was constant. Other Depositions. Six other witnesses were questioned on various aspects of the case. 123Center for Professional Education

124 Plaintiff Motion Mrs. Saunders’ lawyers made a motion for the jury to visit Mrs. Saunders in the long-term care facility if the case goes to trial. The judge has not yet ruled on the motion. 124Center for Professional Education

125 Question The medical staff at Northeast reviewed the case and concluded Dr. Lee followed standard medical procedures. The hospital had a liability policy with a $12 million occurrence limit. The plaintiff offered to settle the case for $5 million. What should the Hospital, Dr. Lee, and the insurance company do? 125Center for Professional Education

126 Presentation Session 4 Legal Environment of Insurance 126Center for Professional Education

127 127 Basic Requirements of Contracts All contracts require the following:  Offer and Acceptance. One party must make an offer. Another must accept it.  Consideration. An inducement to enter into an agreement. Value to each party.  Competent Parties. Must have legal capacity to enter binding contract.  Legal Purpose. Cannot violate a law or be contrary to public interest. Center for Professional Education

128 128 Material Fact This is an aspect of a risk that is significant when assessing the exposure in an insurance policy. The risk can be:  Sufficient to affect the terms of an insurance policy.  Sufficient to cause an insurer to deny coverage. Center for Professional Education

129 129 Representation Utmost good faith requires the insurer and insured to disclose material facts affecting insurance coverage. Representation is:  A statement concerning a material fact made by an applicant in the process of obtaining an insurance policy.  Made to induce the insurer to provide coverage.  Oral or written, it must be true to the best knowledge of applicant. Center for Professional Education

130 130 Misrepresentation This is a statement that is false with respect to a material fact. If intentional, it can be the basis for an insurer to void a policy at a future time. Center for Professional Education

131 131 Concealment This is the failure to voluntarily disclose a material fact.  It goes beyond simply answering questions that are asked.  Insured has affirmative burden to disclose material facts that can affect coverage.  Concealment is basis for voiding policy. Center for Professional Education

132 132 Warranty This is a statement made to secure insurance coverage that must be absolutely and strictly true.  It is not enough to be true to the best knowledge of the insured.  It does not have to involve material fact. Center for Professional Education

133 133 Fraud This is an intentional deception to cause a party to give up property or a lawful right:  Fraud exists when an insured makes willful false representation, concealment, or deliberate action to harm the insurer.  It is the basis to void a policy.  If a serious harm is possible, fraud may violate criminal as well as civil law. Center for Professional Education

134 134 Utmost Good Faith Contracts may have two different legal standards for disclosure:  Let the Buyer Beware. Each party to a contract should investigate the situation and be responsible for knowing all terms and conditions.  Utmost Good Faith. Both parties must make a full and fair disclosure of all facts affecting a contract. This is the requirement for insurance policies. Center for Professional Education

135 135 Question A company has refineries in Kuwait and Qatar. It applied for insurance on the Qatar facility and completed a form provided by the insurer. The form did not ask about the safety record of other refineries. The company did not report the suspension of Kuwait refinery due to poor safety practices. An explosion resulting from apparent employee negligence damaged the Qatar refinery. Is the policy voidable?. Center for Professional Education

136 136 Answer Maybe. Issues are:  Is the information a material fact related to the Qatar refinery?  Is it concealment to be silent on the Kuwait situation?  Is a failure to add to the questions on the form a violation of utmost good faith required for insurance contracts? Center for Professional Education

137 Adverse Selection This refers to the tendency of persons with high chances of loss to seek insurance at average rates. Insurers investigate whether a party fits the criteria for coverage. It seeks to exclude adverse selection. 137Center for Professional Education

138 Question A woman had sharp pains for a full year. She went to a hospital for medical tests. She received a phone call but did not answer. She increased her life insurance. She did not tell the insurer she had visited the hospital. A month later, she died. Does the insurer have to pay the death benefit? 138Center for Professional Education

139 Answer It depends upon state law and a jury interpretation of how concealment would be an issue with the facts in this situation. 139Center for Professional Education

140 140 Assignment An insurance policy is a personal contract:  Assignment. The right of a party to transfer a claim, right, or property to another party. Consent. Permission to assign a contractual right.  Personal Contract. Assignment of the rights under an insurance policy requires consent of other party. Center for Professional Education

141 Waiver The relinquishing of a known right. Two forms: Intentional. An individual or organization can consciously surrender a right to which it is entitled. Unintentional. By taking actions that the law or a court would consider the failure to protect a right, a party can waive the right without a conscious decision to do so. 141Center for Professional Education

142 Void and Voidable Contracts Void. An agreement that has no legal force. Voidable. An agreement that can be made void At the option of one of the parties. When circumstances make it impossible to perform the contract. 142Center for Professional Education

143 Question How do we determine whether a contract is voidable? Whether it is void? 143Center for Professional Education

144 Answer Voiding is always at the option of one of the parties. Contingency Occurs. If a party is unable to perform, it may declare a contract to be void and a court may agree. Permitted in Contract. If a court agrees that the contractual condition occurred, the court will void of the contract. 144Center for Professional Education

145 Question Prudential provided financing for eight ships owned by United States Lines. The individual who processed the agreement wrote down $92,885 instead of $92,885,000. USL went bankrupt and sold the ships for $67 million. How much of the $67 million could be claimed by Prudential based on the contract. 145Center for Professional Education

146 Answer The shipping company eventually agreed to give Prudential the proceeds, but deducted $11 million. Time, January 2, 1989 146Center for Professional Education

147 Contract of Adhesion An agreement prepared by one party and accepted or rejected by another party without modification. An agreement not reached by negotiation. As insurance companies draw up the insurance policy, it will be treated as a contract of adhesion. 147Center for Professional Education

148 Expectations Principle Refers to the interpreting of a contract of adhesion to meet the expectations of the party that did not draw it up. Impact. Fine print or tricky language will not invalidate insurance coverage. 148Center for Professional Education

149 Question A city buys $500,000 of standard fire coverage. On page 19, the policy contains the wording “Coverage will not be provided if the employer hires anyone with a prior criminal conviction.” A fire occurs. It was started by a convicted felon who was employed by the city. Will the insurance company have to pay for the loss? 149Center for Professional Education

150 Answer Yes. The city expects insurance coverage separately from having to audit all its hiring practices. 150Center for Professional Education

151 Question A hotel had labor problems and locked out employees. Union members picketed the hotel and engaged in aggressive actions with guests, security guards, and local police. After 23 days, an employee tossed a bottle of gasoline into the kitchen. A fire destroyed the restaurant. The insurer denied coverage because the loss was caused by intentional behavior of an employee of the insured. Does the policy covers the loss? 151Center for Professional Education

152 Answer The policy covers the loss. The insured does not benefit from a renegade employee committing a criminal act. It is not a moral hazard where an insured can intentionally cause a loss and benefit from it. 152Center for Professional Education

153 Subrogation Refers to the right of an insurance company to be reimbursed for payments when a loss is caused by a third party. 153Center for Professional Education

154 Presentation Session 9a Commercial General Liability 154Center for Professional Education

155 General Liability Policy In the United States, a commercial general liability (CGL) insurance policy covers:  Damages. Insures companies from losses from general liability exposures.  Duty to Defend. Pays the costs of defending the company against liability claims and legal fees. 155Center for Professional Education

156 CGL Liability Damages The CGL policy covers three categories of lawsuits:  Bodily Injury. Individuals harmed by the organization. Includes sickness and disease.  Property Damage. To tangible assets of other parties.  Personal or Advertising Injury. Malicious prosecution, libel, slander, copyright violations. 156Center for Professional Education

157 CGL Coverages (1) The CGL policy covers lawsuits from: Premises. A person’s physical presence on property owned or operated by the insured. Operations. Business activities on or off the premises. Products. Alleged harm from faulty products produced or sold by the insured. 157Center for Professional Education

158 CGL Coverages (2) Contractual Liability. Allegations of breach of contract. Completed Operations. Allegations that work done in past periods is faulty. Contingent Liability. Allegations from a relationship with the insured. 158Center for Professional Education

159 CGL Coverage Forms A CGL policy can be issued using two forms: Occurrence. A single event that causes a loss. Covers injury or damage that occurs during the policy period even if a claim is not made during the period. Claims-made. Covers claims made during the policy period regardless of when the injury occurred. 159Center for Professional Education

160 Occurrence Definition Dealing with occurrence and claims-made forms can be tricky. The definition varies widely. Time Period. The term can refer to all losses in a fixed period, such as 72 hours. Single Source. An occurrence of loss can be defined as coming from a single event. Silence. Sometimes policies are silent on the definition. 160Center for Professional Education

161 World Trade Center The World Trade Center lessee insured the twin towers for $3.6 billion, half of the replacement cost. On 9/11 no policy had yet been written. Two property forms were under consideration. Form #1. Occurrence as any loss from a single cause within a specified time period. Form #2. Occurrence not defined in this form. Was the loss of the twin towers one or two occurrences? 161Center for Professional Education

162 Answer The parties were not able to agree on the form that would eventually have been used. The developer took the matter to court twice. After many years, some insurers paid for one occurrence while others paid for two. Total reimbursement was $4.6 billion. 162Center for Professional Education

163 Claims-made Policy A problem can arise with the renewal of a claims- made policy. Suppose an insured had a bad loss when it had a claims-made policy. If the claim is not filed, it is not covered. Insurers may not be willing to cover it when the policy is renewed or replaced. 163Center for Professional Education

164 CGL Claims-made Time Periods Three periods for claims-made CGL policy. Basic Period. Start and end time when a policy provides coverage for claims made. Extended Period. Up to 5 years after the basic period when claims may be filed for losses during the basic period. Supplemental Period. An unlimited period after the extended period converts claims-made into occurrence coverage. 164Center for Professional Education

165 Question A visitor to a car dealership was hurt when the ceiling fell on him in September 2012. He left and sought treatment at a hospital. In April 2013 he filed a lawsuit. The dealer had a claims-made policy in 2012. It had an occurrence policy in 2013. Which policy covers the loss? 165Center for Professional Education

166 Answer Neither. The claim was not filed during the period of claims-made coverage. The occurrence did not occur during the time period of the occurrence policy. 166Center for Professional Education

167 Question An equipment company had a CGL policy in 2013 from United Insurance and in 2014 from Northern Insurance. It sold a boiler on November 15, 2013. Six months later the boiler caught fire. The purchaser won damages of $80,000. Which policy covers the damage? 167Center for Professional Education

168 Answer The Northern Insurance policy.  The key is operations coverage, not product liability.  The date of the occurrence of the damage will apply.  A defective boiler would be covered as completed operations under the manufacturer’s CGL policy. 168Center for Professional Education

169 Policy Trigger An insurance policy trigger is an event that activates insurance coverage. Different courts accept:  Injury in Fact. Date when injury occurs.  Exposure. When an injured person is exposed to the cause of the injury.  Manifestation. When symptoms appear or the injury is diagnosed.  Injurious Process. All of the three (triple trigger). 169Center for Professional Education

170 Premises Liability Premises liability exposure varies with the category of individual who enters property:  Trespasser. Without permission.  Licensee. With permission but not for the benefit of the party who controls the property.  Invitee. With permission and for the benefit of the inviter.  Child. Lacks capacity to protect self from danger. 170Center for Professional Education

171 Status of Visitor The degree of care varies with the status of visitor:  Trespasser. Avoid actions that cause injury.  Licensee. Warn the visitor of danger.  Invitee. Make the premises safe for the visitor.  Child. Separate the visitor from any danger. 171Center for Professional Education

172 Question (1) A night watchman worked in a factory that had five burglaries in the past year. A clerk accidentally stumbled upon two burglars and was stabbed. The watchman spent his own money to buy bear traps, which he set by the three back entrances to the factory. The entrances were locked at night. An apparent burglar broke the lock on a back door, entered the building, and stepped into a trap. 172Center for Professional Education

173 Question (2) The watchman called the police and emergency medical team. A medical technician accidentally stepped into a second trap. A woman who was passing by was curious and walked into the factory. She stepped into the third trap. The burglar, medical technician, and passing woman each had serious leg damage, pain, and medical expenses. All three parties sued the factory and watchman. Who is likely to win? 173Center for Professional Education

174 Answer Burglar is trespasser. Avoid actions that cause injury. Watchman was afraid. Was the trap self defense? Medical technician is invitee. Premises had to be safe. They were not. Likely to win. Woman is licensee. She should have been warned. Does the excitement and time frame waive this requirement? 174Center for Professional Education

175 175 Presentation Session 9b Professional Liability Center for Professional Education

176 Sources of Professional Liability A profession is a unique form of liability for several reasons:  Defined knowledge and skills. People know what to expect from professionals.  Formal training or education. It qualifies an individual to perform at a high level.  Performance Expectation. A failure to meet the expectation can produce a lawsuit. 176Center for Professional Education

177 Professional Liability Insurance Professional liability covers: Medical Professionals. Doctors, Nurses, Dentists, Hospitals. Errors and Omissions. Lawyers, Accountants, Financial Planners. Directors and Officers. Corporate officers and board members. 177Center for Professional Education

178 Question A patient received medical treatment and incurred no improvement or decline in his condition. Subsequently he learned the doctor:  Made the wrong diagnosis.  Failed to treat the ailment.  Prescribed the wrong drug. Which are examples of medical malpractice? 178 Center for Professional Education

179 Answer None of the above. In order to be medical malpractice, the patient must be harmed or suffer a worsened condition. 179 Center for Professional Education

180 Question In spite of efforts to reduce medical losses, they occur. Do many people die each year while undergoing medical treatment or medication? 180 Center for Professional Education

181 Answer Estimates are Cause of DeathAnnual Deaths Unnecessary surgery: 2,000 Medication errors: 7,000 Hospital non-medication errors: 20,000 Infections in hospitals: 80,000 Adverse effects of medications106,000 Total215,000 181 Center for Professional Education

182 Question The health care industry can purchase professional liability insurance. Who are the buyers of medical malpractice insurance? 182 Center for Professional Education

183 Answer Three groups of buyers can be identified:  Health Care Facilities. Hospitals, clinics, skilled nursing centers, and rehabilitation centers.  Medical Professionals. Physicians, surgeons, dentists, and nurses.  Facilities and Professionals. Single policy covering the facility and the medical professionals that work in or with it. 183 Center for Professional Education

184 184 Question Dentist Robert Woo used anesthesia to make a patient unconscious. He inserted fake boar tusks into her mouth and took pictures. She sued for damages. The medical malpractice insurer refused to defend him in the lawsuit. Woo sued the insurer. Should he win the lawsuit? 184Center for Professional Education

185 185 Answer The lower court awarded dentist Robert Woo $750,000 from Fireman's Fund Insurance. A Washington state appeals court overturned a decision. Putting fake boar tusks in a patient's mouth as a joke "could not conceivably be considered" covered under Woo's professional liability insurance policy. 185Center for Professional Education

186 186 Presentation Session 9c Business Owners Insurance Center for Professional Education

187 BOP Bundled insurance: CGL. Property damage and bodily injury. Completed operations, contract, and liquor Liabilities. Property Insurance. Replacement cost basis. Business Interruption. Lost income and extra expense. Business Umbrella. 187Center for Professional Education

188 Businesses not Qualified for BOP Highly specialized operations High-risk operations Large premises Business interruption coverage in excess of one year. High limits of liability. 188Center for Professional Education

189 189 Presentation Session 9d Workers Compensation Center for Professional Education

190 190 Scope of Employer Liability Safe Workplace and Equipment. Employer to provide a safe area free of perils and tools, vehicles, and machinery that can be operated safely. Sane Workforce and Third Parties. Employer to protect employees from irrational actions of fellow workers and visitors. Warnings. Employer to identify dangers and train employees to be careful. Center for Professional Education

191 191 Three Stages of Employer Liability Prehire, Preloss. In the hiring process, an employer can select employees partly based on their safety attitudes and prior injury records. Posthire, Preloss. After hiring, the employer can train employees to exercise care and avoid injuries. Posthire, Postloss. After a loss, an employer can respond quickly to mitigating an injury and returning an employee to work. Center for Professional Education

192 192 Principles of Employer Liability No Fault Benefits. Injuries occur in the workplace. Fault and negligence are not issues. Employer Paid Benefits. Employers treat the cost of injuries as an ordinary business expense. Limited Benefits. Employees receive financial benefits. Final Benefits. Employees cannot sue for additional money. Center for Professional Education

193 193 Limited but Certain Benefits Employer pays: Medical Expenses. To repair the injury. Death Benefit. Burial costs and survivor’s benefits to dependents. Disability Reimbursement. Significant portion of lost income while the employee is unable to work. Financing of Rehabilitation. For therapy and other costs to prepare employee to return to work. Center for Professional Education

194 194 Disability Categories Temporary. Injured worker is expected to recover and return to the workplace. Permanent and Partial. Injured worker is not expected to recover fully but is expected to return to work with a disability. Permanent and Total. Injured worker is not expected to return to any work. Center for Professional Education

195 195 Question (1) A demolition company tears down large buildings. It requires all workers to wear hard hats. The company has posted warnings on danger of falling objects. In the middle of a half-demolished building, a worker took off his hard hat to make it easier to drink a beer.

196 196 Question (2) Just as the employee was finishing the beer, a piece of falling concrete hit him on the head. He fell unconscious. Afterwards, he suffered from dizzy spells. Now, he can no longer work. The employer is responsible for paying medical and other expenses related to this injury. Do you agree, disagree, or neither? Explain.

197 197 Answer Agree. It is a workplace injury. Does fault matter? Does employee negligence matter?

198 Presentation Session 10 Underwriting and Ratemaking 198Center for Professional Education

199 199 Goals in Underwriting Insurers seek to achieve the following:  Simplicity. Easy to understand coverage and rates.  Consistency. Stable rates over time.  Flexibility. Can adjust to changing conditions.  Loss Control. Encourage mitigation of losses.  Profitability. Earn a return on capital. Center for Professional Education

200 200 Steps in Underwriting The process followed by an underwriter includes:  Evaluate the Exposure. Evaluate the perils presented by the application and the hazards that can increase the change of loss.  Compare the Exposure with Guidelines. The company may prohibit some exposures, restrict others, or limit coverages.  Recommend or Deny Coverage. After assessing situation, accept or reject application. Center for Professional Education

201 Insurance Ratemaking Historical Data. What is the history of prior losses and costs? Frequency. What is the likelihood of r partial or total losses? Severity. What is the likely size of major claims? 201Center for Professional Education

202 Approaches to Ratemaking Class. This effort does not involve merit rating. Schedule. An indirect and partial approach to merit rating. Experience. Solidly based on merit rating. Judgment. Largely based on merit rating. Retrospective. Solidly merit rating. 202Center for Professional Education

203 Class Rating Base Rate. This is a single rate per $1,000 of coverage for similar exposures. Average Experience. Reflects average losses and claims for the class. 203Center for Professional Education

204 Schedule Rating Base Rate. Starts with a class rate. Adjustment. Upward or downward based on the factors in the pool compared to the general population. Example. Male driver under the age of 25. 204Center for Professional Education

205 Question Dallas has 30,000 employees covered by a health plan. This includes 3,000 fire fighters. An insurance company is bidding for the medical plan contract. Should it use a class rating or schedule rating to recognize the increased health exposure represented by the fire fighters? 205Center for Professional Education

206 Answer Whatever the answer, we must consider: Historical experience and current efforts to protect the health and safety of fire fighters. New regulations to protect buildings and other property from hazards to first responders. Is the city is facing a deterioration in the care and maintenance of property? 206Center for Professional Education

207 Experience Rating Base Rate. Starts with a class rate. Historical. What is the claims experience? Example: Male driver with 3 accidents. 207Center for Professional Education

208 Question Would an underwriter approve the following request for insurance? Auto coverage for an 18 year old male with two accidents in the past two years. 208Center for Professional Education

209 Answer An 18 year old male who already has two accidents? The individual is likely to be both careless and immature. He fails the tests for both schedule and experience. The underwriter would write the coverage only if required by state law. 209Center for Professional Education

210 Question Would an underwriter approve the following request for insurance? Homeowners and flood insurance for an ocean- front clapboard home in Panama City, Florida. 210Center for Professional Education

211 Answer Exposed to both wind damage and storm surge. The underwriter might accept wind risk at a high premium. Flood damage is highly unlikely only if the home being built upon pilings. U.S. private insurers sell flood coverage only because the federal government reimburses the loss. 211Center for Professional Education

212 Question Would an underwriter approve the following request for insurance? Liability insurance for a pet owner with two Komodo dragons in an outside pen. 212Center for Professional Education

213 Answer The underwriter has to recognize that the Komodo dragons sound like the real possibility of liability exposure. An underwriter would check on the circumstances of the captivity of the lizard. Only a specialty insurer like Lloyd’s of London would be likely to issue a policy. 213Center for Professional Education

214 Judgment Rating When: Difficult to determine a class rate. No experience with prior losses. Unique exposures. 214Center for Professional Education

215 Question An insurer has different policies to rate an insurance request. What is each of the following?  10 percent discount for no losses in past five years.  25 percent increase for a driver under the age of 20.  Rates for a line of business are set based on the reputation of the company. 215Center for Professional Education

216 Answer Discount no losses in five years:Experience Increase under age of 20:Schedule. Reputation of company:Judgment 216Center for Professional Education

217 Question Peabody Coal Company is the largest private- sector coal company in the world. An insurer is designing a liability plan for its environmental exposures. One insurer proposed an experience plan based on industry statistics while another offered only a judgment based on forecasted policies of the Environmental Protection Agency (EPA). What would you recommend? 217Center for Professional Education

218 Answer You may need both for coal mining operations. The company will have data on past problems. The company can evaluate changes in working conditions. The risk manager should point out any management efforts to avoid environmental liability. 218Center for Professional Education

219 Retrospective Rating Provisional Rate. A rate set initially based upon class, schedule, or experience rating. Final Rate. After all costs are known, a final rate is calculated. Basis for the Rate. The final rate rewards the insured or charges additional premiums. Minimum and Maximum Rate. The insurer and organization agree to a floor and ceiling on the rate. 219Center for Professional Education

220 Role Of The Senior Underwriter While property and liability insurers have thousands of underwriters, the role of the senior underwriter is critical to the success of an insurance company’s solvency. This individual plays a key management role across all lines of business for the company. 220Center for Professional Education

221 Financial Issues in Underwriting Adequate Cash Flows. An insurance product must cover losses, adjusting and operating expenses, and provide a return on capital. Adequate Equity. A product must have sufficient contributed capital and surplus to support the level of underwriting. Adequate Profits. The product must generate an appropriate after-tax reported income. 221Center for Professional Education

222 Desirable Product Lines Sound Underwriting Practices. Premiums and other income should provide adequate funds to pay claims. Sound Investments. Insurer should invest funds in a balanced relationship of risk and return. Cost Control. Departments need processes to control marketing and other costs. Internal Auditing. The insurer should monitors payments and claims. 222Center for Professional Education

223 Underwriting Risks Underwriting Itself. The act of issuing an insurance policy involves costs and claims in an uncertain world. Investment Risks. Premiums are invested with variable expected earnings. Changing Circumstances. What will happen with economic levels, climate, pollution, and other factors. Changing Legal Conditions. Legislation and regulation pose risks. 223Center for Professional Education

224 Financial Risks Liquidity. This viewpoint seeks highly safe and liquid assets to cover claims, and meet other obligations for issuing and serving policyholders and paying or otherwise resolving claims. Profitability. This viewpoint encourages the insurance company to monitor its ability to achieve adequate returns for accepting risks. 224Center for Professional Education

225 Senior Underwriter Background Work AreaPercent Insurance carrier 60% Insurance broker 10% Other insurance services 10% Consultant 10% Finance 10% 225Center for Professional Education

226 Senior Underwriter Mobility Years at Current Firm Percent Up to 5 years 15% 5 to 10 years 30% 11 to 20 years 20% Over 20 years 35% 226Center for Professional Education

227 Senior Underwriter Education Credential Percent Undergraduate Degree 100% Graduate Degree 70% Professional Designation 90% Took continuing education seminars in past 3 years 80% 227Center for Professional Education

228 Question What is the significance of the estimates on the educational credentials of senior underwriters? 228Center for Professional Education

229 Answer Educational Credentials. Successful underwriters have them. Continuing Education. They try to keep up with new developments. Graduate Degrees. Many have them. 229Center for Professional Education

230 Advanced Underwriting Skills Financial Qualifications. Cash flow management, profit planning, and the investment of capital in a risk and return framework. Technical Skills. Role of probability and statistics. Broad Business Skills. Understanding of management, marketing, and business operations. 230Center for Professional Education

231 Question What is the significance of the statistics on the compensation of underwriters after 10 years and 25 years of underwriting experience? 231Center for Professional Education

232 Answer Compensation for underwriters is relatively good at earlier ages and advances, but does not seem to advance rapidly after reaching a certain level. 232Center for Professional Education

233 Question What do large insurance companies seek when they hire entry-level underwriters? 233Center for Professional Education

234 Answer Large insurers may seek college graduates with a strong work ethic. An MBA is a plus. So is experience in the insurance field. 234Center for Professional Education

235 Presentation Lloyd’s of London, A Premier Insurance Marketplace 235Center for Professional Education

236 236 Presentation Session 11 Property Insurance Center for Professional Education

237 237 Property Risk Property contracts cover two categories of risk:  Direct Loss. This occurs when the property suffers the loss. A fire that damages a building is a direct loss.  Indirect Loss. This occurs when the loss results from the consequences of property loss. A factory is damaged and the company suffers a loss because it is unable to manufacture and ship goods. Center for Professional Education

238 238 Disruption Risk Disruption risk refers to losses that arise from an interruption to normal business activity. It takes two forms:  Lost Profits. The company cannot deliver products or services and suffers a drop in earnings.  Extra Expenses. The company must pay additional costs to operate after a loss. Center for Professional Education

239 239 Managing Property Risk The most common risk management approach to property risk has the following components:  Loss Control. Take steps to make the property safe for employees, others, and the asset itself.  Deductible. A requirement under an insurance policy that limits coverage to a loss above a specified minimum level. Also called a retention.  Insurance. Transfer large exposures. Center for Professional Education

240 Real and Personal Property Real Property. Rights, interests, and benefits inherent in the ownership of land or buildings, including houses, sheds, fences, landscaping, air rights and easements. Personal Property. Other property such as furniture, machinery, vehicles, inventory, and movable assets. 240Center for Professional Education

241 Question A policy insures real and personal property at an insured location. The owner rented a bulldozer to repair the parking lot. He knocked down a wall of the building. The accident destroyed a computer owned by a tenant in the building. The bulldozer was also damaged. What damage is covered by the policy? 241Center for Professional Education

242 Answer Building. Covered as real property. Computer. Not covered, as personal property neither owned by or in the care of the insured nor owned by an employee. Bulldozer. Covered as personal property in the care of the insured. 242Center for Professional Education

243 243 Commercial Property Broad categories of assets: Buildings. Structures and their permanently installed contents. Fixtures. Assets firmly attached to a building as a permanent structural part. High-cost fixtures may or may not be covered. Business Personal Property. Individual items owned by or in the control of the company. Center for Professional Education

244 244 Buildings Completed Building. Structures that are occupied or ready for occupancy. Partial Building. A structure under construction. Center for Professional Education

245 245 Business Personal Property Furniture. For use in the business. Equipment. For use in the business. Removable Fixture. Not permanently attached to the building. Controlled Property. Assets owned by others but in the control of the property owner. Center for Professional Education

246 246 Question Identify each of the following as “building” or “business personal property:” Built-in bookcase. Owned computer. Leased computer. Central air conditioning unit. Cubicle. Sign in front of office. Center for Professional Education

247 247 Answer Built-in bookcase.Building Owned computer.Personal Leased computer.Personal Central air conditioning unit.Building Cubicle.Is it attached? Sign in front of officeIs it attached? Center for Professional Education

248 248 Question A company is located next door to a college that offers evening courses. The company allows students to park their vehicles in its garage after office hours. No charge is made to the students. The roof collapsed and damaged six cars. Are they likely to be covered by the company’s insurance? Center for Professional Education

249 249 Answer Not likely. Since the cars are not business personal property under the control of the company, it is not likely that they qualify for coverage. Center for Professional Education

250 Question A factory has a crane that is attached to the ceiling and can move components among different assembly lines. It can serve assembly lines that are movable in flexible configurations. Are the crane and assembly lines covered as part of the completed building? 250Center for Professional Education

251 Answer The crane is covered as a permanent fixture. Movable equipment sitting on the floor of a factory is not part of the building. 251Center for Professional Education

252 252 Property Insurance Forms All-risk. All losses to the identified property are covered, unless excluded. Named Perils. Limits coverage to losses from specified causes. Center for Professional Education

253 253 Question A named perils policy covers weight of objects that cause the collapse to a dwelling. During a freak arctic storm, 28 inches of snow was dumped on a covered roof. Four days later, the roof collapsed. Is the loss covered?

254 254 Answer Yes. The property owner is under no obligation to remove the heavy weight.

255 255 Question A policy covers fire, lightning, windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, smoke, vandalism, malicious mischief, theft, falling objects, weight of ice, snow, or sleet, some equipment failures that cause damage, and volcanic eruption. The office of a movie agent has a large southern exposure with four glass sliding doors, 2 French doors, and 4 plate glass windows. Is this a good policy for this house?

256 256 Answer No glass breakage coverage?

257 257 Question A policy covers all perils except losses from freezing in unheated spaces, theft during construction, mold, fungus, or rot, rust, discharge or seepage, pollutants, settling, shrinking or bulging, insects, rodents, or pets. The overflow of a river flooded a warehouse. It damaged a neighbor’s tractor on the lawn, a computer in the basement, and a nearby storage shed. Mud and tree branches covered most of the property. Are these losses likely to be covered?

258 258 Answer Tractor. Neighbor’s?. Computer. Business personal property. Mud and Trees. Only if an extra debris removal endorsement has been purchased. Shed. Fully enclosed structure? Nearby?

259 Question An insurance contract protects a construction warehouse from fire and other perils. A separate flood policy covers water damage. Both policies exclude earth movement. Hurricane Sandy caused mud to slide down a hill and damage the warehouse. The insurer denied the claim based on the earth movement exclusion. Would a court uphold the exclusion? 259Center for Professional Education

260 Answer Apparently a lawyer thought so. Upon advice from counsel, the company accepted a settlement that did not cover full damage. 260Center for Professional Education

261 261 Center for Professional Education Property Insurance Coverage Property insurance coverage can be:  Specific Coverage. A policy may apply to a single property.  Blanket Coverage. Applies to multiple units.

262 Question Insurance covered 280 Oak Street and its 12 units with a policy limit of $600,000. units were identified as units 1A, 1B, 1C, 1D, 2A, 2B, 2C, 2D, 3A, 3B, 3C, AND 3D. A storm caused damage of $250,000 to unit 1C, $300,000 to unit 2B, $150,000 to unit 2D, and $400,000 of damage to unit 3A. How much can the owner collect from the insurer? 262Center for Professional Education

263 Answer The owner appears to be entitled to collect the full loss from each unit. Since the units were identified individually, a court would be likely to rule that the $600,000 limit applied to each property. Listing the assets indicates that the insurer intended to provide a separate coverage for each unit. 263Center for Professional Education

264 Question An insurance policy covers the contents of a warehouse identified as lawnmowers and gardening equipment. The contents changed to snowmobiles and snow throwers. Three months later the building burned down. The insurer denied the claim. Will a court uphold the denial? 264Center for Professional Education

265 Answer Probably not. The policy is a blanket coverage for items in a specific location. As long as the contents were not the source of destruction, the blanket policy is likely to apply. 265Center for Professional Education

266 Property Indemnification Actual Cash Value. Replacement cost minus ordinary wear and tear. Replacement Value. Cost of replacing a damaged asset with a comparable asset. Agreed Upon Value. Amount of insurance coverage when the insured and insurer agree on a reasonable amount for the coverage. 266Center for Professional Education

267 Weaknesses of Actual Cash Value Actual cash value method is not recommended. Indemnity Principle. It may not restore the pre-loss condition. Calculation. The insured does not know in advance the post-loss position. Settle of Claim. It set up a possible disagreement with an insurer after a loss. 267Center for Professional Education

268 Question A computer system is destroyed by a power surge. It is insured for its actual cash value. It was purchased for $3 million 5 years ago when it had an estimated service life of 15 years. Replacement cost today will be $6 million including upgrades. What is the actual cash value? 268Center for Professional Education

269 Answer Maybe Straight-line depreciation would result in $2 million ($3 million times 10/15). Policy does not cover upgrades unless they are included in an endorsement. Lesson Learned. Never buy an actual cash value policy. 269Center for Professional Education

270 Question A painting by a 16th century Italian artisan was purchased 12 years ago for $1.2 million plus a 10% auction commission. Three works by the same painter recently sold at auction for $2.6, $3.2, and $6.5 million. The company wants $7 million in insurance coverage. Is it likely than an insurer would provide it? 270Center for Professional Education

271 Answer It is possible. The insurer would probably appraise the painting. If the market indicates that prices for the painter’s work are rising, $7 million could be an agreed upon value. 271Center for Professional Education

272 Policy Limits The policy limit for a property insurance policy may be expressed two ways: Per Occurrence. The policy limit applies separately to each cause of loss. Aggregate Policy Limit. The policy limit applies to the total of all losses within the policy period. 272Center for Professional Education

273 Question (1) An insurance policy covers 15 hotels in 6 cities: $600,000 limit of liability in single occurrence. $1.2 million annual aggregate limit of liability. $200,000 deductible per occurrence. 273Center for Professional Education

274 Question (2) A windstorm in Brazil causes the following damage covered by the policy: Hotel #1: $400,000.Hotel #2: $500,000 A tidal wave in Argentina causes the following damage covered by the policy: Hotel #3: $800,000.Hotel #4: $350,000. What is the likely reimbursement from the policy? 274Center for Professional Education

275 Answer #1: $200,000 ($400 loss - $200 deductible) #2: $400,000 (No deductible same occurrence) #3: $600,000 ($800 – $200 deductible) #4: Zero (already at $1.2 limit) 275Center for Professional Education

276 Question A full-year policy covers a building with a limit of $200,000 and a deductible of $25,000. In May, a fire causes damage of $150,000. In October, a second fire causes additional damage of $250,000. How much will the policy reimburse? 276Center for Professional Education

277 Answer On an aggregate basis, reimbursement is the $200,000 policy limit. If per occurrence, the reimbursement is $300,000: May fire: $125,000 (150,000 – 25,000) October fire:$175,000 (200,000 – 25,000) Total:$300,000 277Center for Professional Education

278 278 Center for Professional Education Property Excluded Common exclusions : Liquid Assets. Securities, and precious metals. Unimproved Land. Living Objects. Animals, trees, crops. Mobile Units. Vehicles, watercraft, and aircraft. Separate Risks. Mines, shafts, dams. Transit Property. Passing through or temporarily stored on the premises.

279 279 Center for Professional Education Question The owner of an insured location drove his car into the parking lot of the location. He was pulling a boat on a trailer. In the cabin on the boat was a rare and threatened species of parrot and a Rolex watch valued at $7,000. A gas line explosion destroyed the boat, bird, and watch. Are the items covered?

280 280 Center for Professional Education Answer Boat. Excluded as a mobile unit. Parrot. Excluded as a living object. Watch. A transit item excluded. May also be a jewelry exclusion. If owned by others but in the control of the property owner, it could be included as business personal property.

281 281 Center for Professional Education Debris and Demolition Insurance Additional coverages in property insurance policies:  Debris Removal. Transporting and disposing of damaged property.  Contamination. Restoring property to a safe condition.  Demolition. Destroying parts or all of the property prior to rebuilding it.  Mandated Upgrades. Improving the property to meet new laws or government regulations.

282 282 Center for Professional Education Question An insurance policy on a refinery covers removing debris and decontamination of from an insured loss at the insured location. A fire caused debris in the refinery and also on a pier owned by the port administration. Burning chemicals polluted the refinery and two ocean-going ships docked at the refinery. Does the policy cover these losses?

283 283 Center for Professional Education Answer The policy covers only the property at the insured location. Damage to the pier and ships owned by others are liability exposures.

284 284 Center for Professional Education Business Interruption Insurance A consequential loss refers to an indirect economic loss resulting from a different and direct loss. Business interruption is an example. Insurance can cover two indirect losses:  Loss of Income. A portion of income while property is being repaired.  Extra Expense. Additional costs as a result of the consequential loss.

285 285 Question A company lost $3.5 million last year. It hopes for a profit of $7-10 million this year. It suffered a fire on its main manufacturing plant. The company calculates its lost income at $1.2 million and its extra expenses at $500,000. The company has a business interruption policy with a limit of $3 million per occurrence. How much should the insurer pay? Center for Professional Education

286 286 Answer Not able to tell from the information given. A loss in the prior year is a problem. If the current year loss is larger than it would otherwise be, collection may be possible. $500,000 if it can document the extra expenses, separately from the loss. Center for Professional Education

287 287 Center for Professional Education Contingent Interruption Consequential damage from loss to property not owned or controlled by the insured. Categories:  Supplier. Damage stops a supplier from providing goods to be sold by the insured.  Customer. Damage stops a customer from buying goods or services from the insured.  Other. Damage to a related business that attracts customers to the insured.

288 288 Question A manufacturer of souvenirs has an inventory of $2 million for a sporting event. Likely sales should exceed $3 million. A labor strike delayed the event. Then, a fire caused it to be cancelled. The manufacturer has a contingent interruption policy with a limit of $1 million per occurrence. Is the loss covered by the policy? Center for Professional Education

289 289 Answer Yes. The issue is one or two occurrences. Obligation is to liquidate the goods as best possible. After liquidation, calculate the loss. Coverage could be $1 or $2 million. Center for Professional Education

290 Question In October 2010, a New Jersey company experienced a crash of the hard drive of its primary business computer. The files were totally backed up at an off-location site. The company contacted Dell and ordered a rush shipment of a new drive. What was the promised delivery date for the computer component? 290Center for Professional Education

291 Answer April 2, 2011, five months later. Floods in Thailand seriously damaged the factory that made the hard drives. Dell did not have adequate inventory from other locations to fill the order on an emergency basis. 291Center for Professional Education

292 Presentation Session 12 Legal and Contractual Liability 292Center for Professional Education

293 Legal Liability An exposure to compensate another party for a loss or damage: General Liability. Facing everyone from individual agreements and business operations. Professional Liability. Exposures that arise from possessing unique skills and training. D&O Liability. Facing officers and board members of organizations. Employer Liability. Created by the employer and employee relationship. 293Center for Professional Education

294 General Liability Contractual Liability. Covers oral and written agreements that can be enforced in the courts. Party that fails to perform is exposed to the payment of damages or requirement to perform. Tort Liability. Covers alleged wrongful act or omission that violates another party’s rights or causes that party damage. The aggrieved party can sue for compensation. 294Center for Professional Education

295 Contractual Liability Failure to adhere to the terms of a contract. Agreement. Two parties mutually agreed to engage together. Consideration. They exchange assets or other elements that have value. Performance. A disagreement arises. Enforcement. One party sues for compensation or performance. 295Center for Professional Education

296 Breach of Contract A breach of contract occurs when one party does not fulfill obligations under a contract. Minor Breach. This level of failure to perform can be remedied in various ways while the bulk of the contractual commitments remain in place. Material Breach. This is more significant. If upheld by a court, it allows one party to compel performance or collect damages. 296Center for Professional Education

297 297 Remedies for Breach of Contract Monetary Damages.  If possible, the judicial remedy is to award money. Specific Performance.  When money is not sufficient, a court may order the breaching party to perform a specific act. Center for Professional Education

298 Question A contractor was building a home for a man who just lost his mother. The owner gave him $1,000 and an urn that contained his mother’s ashes. “She loves this property. I want her ashes buried in the concrete.” The contractor agreed but forgot to do it. He gave the ashes back to the owner. The owner sued for breach of contract. How will a court rule? 298Center for Professional Education

299 Question In the previous question, could the court also award additional money because the contractual violation caused emotional distress? 299Center for Professional Education

300 300 Discharge of Contracts Discharge refers to the point at which all contractual obligations end. It arises from:  Operations of Conditions. A change in the situation.  Performance. Task is finished.  Breach. One party fails to perform.  Impossibility. Cannot be performed.  Agreement. Parties change their minds.  Operation of Law. Legal stoppage. Center for Professional Education

301 Question Following Hurricane Katrina, an insurer received thousands of claims for storm damage. The policies required insurers to begin adjusting claims within 30 days. The company failed to comply. 18,000 insureds filed for immediate payment. Should the court require immediate payment of all claims without verifying the losses? 301Center for Professional Education

302 Answer A trial court awarded $104 million to be paid immediately. The state and U.S. supreme courts agreed. 302Center for Professional Education

303 Legal Fees The legal fees involved with settling insurance claims can be prohibitive. As a result, many lawsuits are settled before they proceed to court even when the claim is not likely to produce a positive result for the Deposition. 303Center for Professional Education

304 Question Two twin sister faculty members caused so much trouble the college suspended them with one year left on their contract. The college offered to pay each of them for the full contract year. They refused the money and sued. Dozens of depositions were taken. The case went to a jury verdict. What happened? 304Center for Professional Education

305 Answer The jury awarded the Depositions the salary remaining in the contract. The jury took three hours to reach a verdict. No damages were awarded. The college paid $460,000 in legal fees and deposition costs. 305Center for Professional Education

306 Question A Deposition filed a lawsuit alleging bad faith because the defendant’s insurer spent nearly $1 million on attorney’s fees defending the claim for less than $100,000. The Deposition argued that the insurer pursued a “bad faith litigation strategy” seeking to discourage the filing of small value claims. Will the court agree? 306Center for Professional Education

307 Answer It did not agree. The insurer is allowed to verify the extent of loss and the remedy to indemnify the insured and insist upon proper documentation to support all claims. 307Center for Professional Education

308 Question Police raided a medical marijuana greenhouse and seized 15 large marijuana plants. The landscaper filed an insurance claim alleging “theft” of inventory. The insurer denied the claim. The landscaper filed a bad faith claim against the insurer. What happened? 308Center for Professional Education

309 Answer The court upheld the insurer. The’ seizure pursuant to a search warrant was not a “theft.” It was not bad faith deny the claim prior to possible criminal action. 309Center for Professional Education

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