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Hazard Risk. Chapter 3. Hazard Risk Defined. No universal definition, but typically described as Pure Risk The type of risk that may result in only a negative outcome Three categories: Personnel risk – uncertainty related to losses to a firm due to death or incapacity of key employee;

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hazard risk

Hazard Risk

Chapter 3

hazard risk defined
Hazard Risk Defined
  • No universal definition, but typically described as Pure Risk
  • The type of risk that may result in only a negative outcome
  • Three categories:
    • Personnel risk – uncertainty related to losses to a firm due to death or incapacity of key employee;
    • Property risk – uncertainty related to loss of wealth due to damage to property;
    • Liability risk – uncertainty related to the financial responsibility from injury or damages to third party
measuring hazard risk
Measuring Hazard Risk
  • It is very important to categorize risks to analyze them accurately.
  • Measuring the Frequency and the severity of the potential loss
    • Loss Prevention reduces the frequency of losses
    • Loss reduction reduces the severity of a loss
risk management techniques
Risk Management Techniques
  • Avoidance – Reduce the probability of loss to zero
  • Separation – disperse a particular activities over several locations
  • Duplication – involves relying on backup copies, etc., if primary asset is lost
  • Diversification – involves providing a range of products to be used by a variety of customers
  • Risk Control
    • Hazard Reduction
    • Loss Reduction
  • Transferring of Risk
    • Insurance, hedging or other transfer mechanism
how is insurance involved with rm
How is Insurance Involved with RM?
  • Insurance is only one of several risk management techniques;
  • Insurance is a device for sharing, transferring, and reducing risk that combines a sufficient number of exposure units to make individual losses collectively predictable.
insurance terminology
Insurance Terminology
  • Peril – the cause of a loss
  • Hazard – a condition that causes a peril;
    • A condition that increases the frequency or severity of a loss;
    • Four types:
      • Physical – a tangible characteristic that impacts the frequency or severity
      • Morale – carelessness or indifference to a loss
      • Moral – intentionally causing or exaggerating a loss
      • Legal – a condition in the legal environment that impacts the frequency or severity of a loss
  • Liability – a legally enforceable obligation to pay damages to a third party
types of loss exposures
Types of Loss Exposures
  • Property Loss Exposures
  • Liability Loss Exposures
  • Personnel Loss Exposures
  • Net Income Loss Exposures
  • Must also consider (not listed in this chapter)
  • Management Liability Exposures
  • Corporate Governance Liability Exposures
three ways to examine losses elements of loss exposures
Three Ways to Examine Losses:Elements of Loss Exposures
  • Asset Exposes to Loss
  • Cause of Loss
  • Financial Consequences of Loss
property assets exposed to loss
Property Assets Exposed to Loss
  • Tangible property
  • Real Property
  • Personal Property
  • Intangible Property
property causes of loss
Property Causes of Loss
  • Physical Perils
  • Natural
  • Human
  • Economic
financial consequences of loss
Financial Consequences of loss
  • Loss of Use
  • Loss of income derived from the property
  • Extra expenses incurred to continue operations
  • Example in personal scenario: Extra living expenses
  • May be total or partial
  • May be temporary or permanent
liability exposures
Liability Exposures
  • Asset exposed - the financial payment that must be made including:
    • Economic and Non-economic damages
    • Settlement costs
    • Litigation costs
    • Legal fees
  • Cause of loss – filing of claim or notice of lawsuit
  • Financial Consequences of Loss
    • Potentially unlimited or limited to the assets or earnings potential of the organization or person
personnel loss exposures
Personnel Loss Exposures
  • Asset Exposed to Loss – the value a person adds to a organization
  • Cause of Loss – the loss of the person’s contribution through
    • Death
    • Disability
    • Retirement
    • Voluntary separation including resignation
    • Involuntary separation, including firing or layoff
  • Financial consequences of Loss
    • Contingent on wither permanent or temporary, total or partial (death or disability)
net income loss exposures
Net Income Loss Exposures
  • Asset Exposed – the future cash flows into the entity
  • Cause of loss – the outcome that may cause a decline in the potential future cash inflows:
    • Damage to property
    • Liability losses
    • Personnel Losses
    • Business risk such as losing market share, loss of good will, failure to anticipate growth potential or failure of product to perform or failure of contractor to perform as scheduled.
  • Financial Consequences of Loss – degree of loss varies by cause of loss but may involve
    • A decline in revenues
    • An increase in expenses
    • Both a decline in revenues and an increases in expenses
classification of commercial insurance table on p 3 17
Classification of Commercial Insurance (Table on p. 3.17)
  • Property Coverage
    • Commercial Property – Building and Personal Property (BPP)
    • Business Income - called Consequential Loss insurance, also called time element coverage and business interruption coverage; covers loss of income and extra expenses.
  • Key Terms
    • Monoline vs.. package policy (e.g., fire vs. package commercial package policy)
    • Named perils vs. all-risks (now called direct physical loss coverage)
    • Replacement cost vs. actual cash value
    • Insurance-to-value provisions with coinsurance provision
      • E.g.., 80% coinsurance clause on homeowners policy
    • Industrial All-risk (Special Risk) policies – perils and coverages are tailored to individual needs
commercial coverage cont
Commercial Coverage (cont.)
  • Builders’ Risk coverage – unique risk of buildings under construction
    • Limits increase as project progresses
    • Addresses the myriad of different insurable interests involved in buildings under construction such as
      • Building owner
      • Contractor
      • Subcontractor
    • Provides additional coverage for unique perils such as increased likelihood of theft, windstorm and fire to materials left in the open
      • E.g., copper wiring - http://articles.latimes.com/2013/aug/18/local/la-me-0819-copper-thefts-20130819
  • Equipment Breakdown coverage, including Boiler and Machinery, electrical and mechanical equipment
  • Fidelity and Crime Insurance – for perils such as employee dishonesty, computer fraud, extortion, forgery, theft and robbery
commercial coverage cont1
Commercial Coverage (cont.)
  • Surety Bonds – guarantees to one party (the obligee) that the principal will fulfill an obligation or promise to perform
    • Different from insurance in that surety bonds are three-party agreements involving a principal, surety, and an obligee;
    • Surety is answerable to the obligee if the principal defaults; surety does not expect a loss.
    • Insurer is responsible to the insured; insurer expects losses in aggregate
general liability insurance
General Liability Insurance
  • Provides coverage when the insured becomes legally obligated to pay damages
  • The insured may become legally obligated to pay damages due to a legal wrong for which the civil law provides a remedy in the form of damages.
  • Key terms:
    • Tort – a wrong or wrongful act or an omission, other than a crime or a breach of contract, that invades a legally protected right;
    • Indemnify – to return someone to a pre-loss condition
    • Occurrence (vs. accident) – a continuous or repeated exposure to harmful conditions; liability policies also include an accident which is a sudden, unexpected event;
    • Claims-made Form – coverage for damages that are claimed during the policy period
      • http://www.irmi.com/online/insurance-glossary/terms/c/claims-made-policy.aspx
      • Asbestos
        • http://www.asbestos.com/legislation/history.php
commercial coverage cont2
Commercial Coverage (cont.)
  • Commercial Auto – may provide liability and property coverage for business-owned vehicles
  • Workers Compensation – provides for the cost of medical care and rehabilitation for injured workers and lost wages and death benefits for dependents of persons killed in work-related accidents (III Fact Book 2013)
    • WC systems and benefits vary by state
    • History of Workers Compensation - http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1888620/
  • Employers Liability – provides coverage when employees are allowed to sue employers for a situation that is outside the scope of WC or in a dual role as employer as well as manufacturer of product that caused damage, then employee may seek damages under employers liability
  • Professional Liability or E and O – coverage for failure to perform a professional duty or to conform to appropriate standards (typically excluded under GL policies)
management liability policies
Management Liability Policies
  • Directors and Officers Liability – covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in suits against the company
    • There are numerous forms of D and O coverage (see III Fact Book, p. 185)
    • Timeline of D and O coverage - http://www.mynewmarkets.com/articles/181645/do-timeline
  • Employment Practices Liability (EPL) – losses from laws that protect employees against discrimination, sexual harassment, unfair wage practices, and other prohibited employer practices
    • May be purchased either as a stand-alone EPL policy or endorsed onto the D and O policy; (III FACT book, p. 187)
  • Fiduciary Liability - covers fiduciaries of an employee benefit plan against liability claims alleging breach of their fiduciary duties involving discretionary judgment
miscellaneous commercial coverage
Miscellaneous Commercial Coverage
  • Aircraft Insurance – specialized coverage that requires expertise to underwrite; somewhat unique in that it may be:
      • Potentially catastrophic – if high concentration of key employees in one plane or if plane crashes into highly concentrated area http://news.google.com/newspapers?nid=1842&dat=19911212&id=4U4gAAAAIBAJ&sjid=0McEAAAAIBAJ&pg=5903,1773128
      • Limited spread of risk – most companies who have Commercial Insurance do not have their own plane
  • Ocean marine – to cover the vessel, liability and cargo
  • Environmental Insurance – the need is obvious after several oil spills in recent history;
    • Was Exxon Valdez the largest?
    • http://www.mnn.com/earth-matters/wilderness-resources/stories/the-13-largest-oil-spills-in-history