Dr. James Kallman, ARM 7-1 Advanced PowerPoint Presentation ©2009 The National Underwriter Company

Dr. James Kallman, ARM 7-2 This Advanced PowerPoint Presentation accompanies the “Tools & Techniques of Risk Management & Insurance” textbook. Each of the 28 chapters in the textbook are presented here in the following sections:  Outline  Key concepts  Major sections  Chapter summary ©2009 The National Underwriter Company

Dr. James Kallman, ARM 7-3 Contents Techniques of Risk Management & Insurance Ch 1 Introduction to Traditional Risk Management……………1-5 Ch 2 Enterprise Risk Management…………………………….2-1 Ch 3 Risk Assessment: Identification…………………………..3-1 Ch 4 Risk Assessment: Quantification…………………………4-1 Ch 5 Overview of Risk Treatment Alternatives………………. 5-1 Ch 6 Non-insurance Transfer of Risk…………………………. 6-1 Ch 7 Insurance as a Risk Transfer Mechanism……………….7-1 Ch 8 Overview of Alternative Risk Transfer Techniques……..8-1 Ch 9 Global Risk Management…………………………………9-1 Ch 10 Loss Control Techniques……………………………… Ch 11 Emergency Response Planning……………………… Ch 12 Business Continuity Planning………………………… Ch 13 Claims Management…………………………………… Ch 14 Monitoring Claims for Financial Accuracy…………… Ch 15 Insurance Companies and Risk Management……… Ch 16 Working with an Agent or Broker……………………….16-1

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-4 Contents Tools of Risk Management & Insurance Ch 17 Commercial General Liability Insurance……………….17-1 Ch 18 The Workers’ Compensation System………………….18-1 Ch 19 Commercial Property Insurance……………………… Ch 20 Directors and Officers’ Liability Insurance…………… Ch 21 Employment-Related Practices Liability Insurance… Ch 22 Business Automobile Insurance……………………… Ch 23 Crime Insurance………………………………………….23-1 Ch 24 Capital Markets Risk Transfer Tools………………… Ch 25 Loss Control Tools……………………………………….25-1 Ch 26 The Certificate of Insurance…………………………….26-1 Ch 27 Surety Bonds…………………………………………… Ch 28 Claim Reviews……………………………………………28-1

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-5 Chapter 7 Insurance as a Risk Transfer Mechanism Outline What is it? Steps to Implement Step One: Beginning the Process Step Two: Choosing an Intermediary Step Three: Binders of Insurance Step Four: Receiving and Reviewing Policies Advantages Disadvantages Chapter Summary

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-6 Chapter 7 Insurance as a Risk Transfer Mechanism What is it? Insurance is a transfer of the financing of risk One party agrees to indemnify another for the financial consequences of the other party’s loss An exchange of a known, small amount (the premium) for an uncertain, potentially catastrophic future amount (the loss) Insurance combines a large number of homogeneous, independent exposure units into a pool The losses of a few are shared by the many The law of large numbers enables actuaries to predict an expected outcome, loss distributions, and calculate premiums

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-7 Chapter 7 Insurance as a Risk Transfer Mechanism Steps to Implement 1.Identify the exposures 2.Choose an Intermediary 3.Get Binders of Insurance 4.Receiving and Reviewing Policies

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-8 Chapter 7 Insurance as a Risk Transfer Mechanism Step One: Beginning the Process Use a risk exposure survey (and other tools) to identify exposures e.g., Property, Liability, Human Resources, Net Income Interview intermediaries (producer, agent, broker) to solicit insurance proposals Give intermediary a broker-of-record letter Mid-term broker-of-record letters may cause the underwriter to cancel, re-underwrite, and re-write coverages Broker-of-record letters may restrict brokers to specified carriers – this enables multiple brokers to go to the market and market an account without approaching the same insurers

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-9 Chapter 7 Insurance as a Risk Transfer Mechanism Step Two: Choosing an Intermediary Types of Intermediaries independent agents exclusive agents employee agents direct-writers brokers surplus lines brokers Independent Agents An independent business person Represents multiple insurers Agent owns the expirations Agent’s legal duty is to insurer Agent may have binding authority Agent usually compensated by commission

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-10 Exclusive agent An independent business person Represents only one insurer Agent might not own the expirations Agent’s legal duty is to insurer Agent may have binding authority Agent usually compensated by commission Employee agent Licensed agents Employees of an insurer Agent does not own expirations Agents are compensated by salary Chapter 7 Insurance as a Risk Transfer Mechanism Step Two: Choosing an Intermediary

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-11 Direct-writer agent Licensed agents Employees of an insurer Agents solicit by mail, telephone, or internet Agent does not own expirations Agents are compensated by salary Brokers Represents the insured Usually used for large commercial accounts May have a service agreement and be compensated by service fees and/or commissions Chapter 7 Insurance as a Risk Transfer Mechanism Step Two: Choosing an Intermediary

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-12 Surplus Lines agent Licensed with non-admitted insurers Not subject to rate and form regulations Not protected by state guarantee funds Can write custom (manuscript) coverages Write coverage for non-standard exposures Agent paid a commission Chapter 7 Insurance as a Risk Transfer Mechanism Step Two: Choosing an Intermediary

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-13 Chapter 7 Insurance as a Risk Transfer Mechanism Step Three: Binders of Insurance Factors in choosing coverage: Level of service Insurance coverage Policy exclusions Insurer’s financial condition Rate credits Total premium Intermediary issues binder of temporary coverage Names of insured, insurer, and intermediary Policy forms that apply Effective and expiration date (30 days) Exposures covered Limits of insurance May be an ACORD form Special coverage must be clearly indicated on the binder

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-14 Chapter 7 Insurance as a Risk Transfer Mechanism Step Three: Binders of Insurance Supplement Additional documents provided by insurer Evidence of insurance Certificate of insurance Supplied at time of binding coverage or to verify renewal or as snapshot of coverage These documents do not provide insurance coverage

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-15 Chapter 7 Insurance as a Risk Transfer Mechanism Step Four: Receiving and Reviewing Policies Receiving the policy The policy is the contract – it overrides any binders, oral agreements, or applications Discrepancies should be immediately addressed Contract of adhesion Standard contracts are offered as take-it-or-leave-it Courts may rule any ambiguous conditions in favor of the personal lines consumer Commercial consumers are expected to read their policies and may not be protected by this precedent Many conditions are established by state statutes Insurance contracts are matters of public policy

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-16 Chapter 7 Insurance as a Risk Transfer Mechanism Step Four: Receiving and Reviewing Policies Reviewing the Insurance Policy Read the policy forms and attachments Check to be sure all policy forms are appropriate Are the right exposures covered? For the desired perils? At the desired limits? Declarations Page The information page (may be an ISO form) Named insured Mailing address Insured locations Forms and endorsements Policy period (inception and expiration – 12:01 a.m.) Intermediary’s name and address Insurer and address Premium

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-17 Chapter 7 Insurance as a Risk Transfer Mechanism Step Four: Receiving and Reviewing Policies Supplement Declarations Page may also indicate: State-specific taxes and fees How to contact regulators to log a complaint Audit or inspection intervals

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-18 Chapter 7 Insurance as a Risk Transfer Mechanism Step Four: Receiving and Reviewing Policies Insurance Policy Coverage Parts Insuring Agreement Definitions Exclusions Conditions Attachments (endorsements or riders) Deductibles Insured retains and pays losses up to a limit; insurer pays after that retention amount to the policy limit. Enables lower premiums Qualified self-insured retention (SIR) for state approved workers’ compensation, excess, or umbrella liability policies Higher deductibles may yield lower premiums

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-19 Chapter 7 Insurance as a Risk Transfer Mechanism Step Four: Receiving and Reviewing Policies Deductibles Types of deductibles: Flat – usually applied per each claim Straight - usually applied per occurrence Percentage - proportion of exposure value Policy Forms Bureau filed form – standard form (e.g., ISO) ISO promulgates insurance forms and rates for insurers to file with state regulators Independently filed form – company designed forms filed with state regulators

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-20 Chapter 7 Insurance as a Risk Transfer Mechanism Step Four: Receiving and Reviewing Policies Surplus Lines Market (non-admitted market) A licensed insurer is admitted if the state regulator approves their forms, rate filings, and financial strength and the insurer pays a premium tax to the state guarantee fund. A non-admitted insurer is licensed to sell in the state Used for hard to place exposures FAIR plans State Fair Access to Insurance Requirements For writing property coverage in urban areas where standard market insurers prefer not to write

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-21 Chapter 7 Insurance as a Risk Transfer Mechanism Advantages + Exchange of small known cost for potential large cost + May satisfy a contractual responsibility + May satisfy loan requirements + Insurer handles the loss settlement procedures + May satisfy statutory or regulatory requirements

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-22 Chapter 7 Insurance as a Risk Transfer Mechanism Disadvantages – Opportunity costs – money used for insurance not invested in business operations – Not all losses may be covered – exclusions apply – Intermediary fees must be paid – Insurance contract terms may be challenging to interpret

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-23 Chapter 7 Insurance as a Risk Transfer Mechanism Chapter Summary What is insurance: a risk financing tool Steps to Implement Step One: Beginning the Process – identify exposures, broker-of-record letters Step Two: Choosing an Intermediary – independent, exclusive, employee, direct-writer, broker, surplus lines agent Step Three: Binders of Insurance – temporary coverage Step Four: Receiving and Reviewing Policies – contract of adhesion, review the contract, declarations, coverage parts, deductibles, policy forms, surplus lines policies, FAIR plan Advantages – exchanges uncertain large loss for a premium, satisfies obligations, insurer settles claims Disadvantages – opportunity cost, exclusions, fees, terms