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Risk Management: Homeowners Insurance. Jean Lown Erin Pratt Beth Butterworth. What is RISK?. Uncertainty of any outcome Speculative Risk (stock market) Pure Risk (driving a car, owning a home). Financial Risk. Must have a dollar amount attached to it.

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risk management homeowners insurance

Risk Management: Homeowners Insurance

Jean Lown

Erin Pratt

Beth Butterworth

what is risk
What is RISK?

Uncertainty of any outcome

Speculative Risk (stock market)

Pure Risk (driving a car, owning a home)

financial risk

Financial Risk

Must have a dollar amount attached to it


Risk Management is the process of identifying and evaluating situations involving pure risk to determine and implement the appropriate means for its management

how do you do this
How do you do this?
  • 1. Identify exposures and perils that can lead to potential financial loss.
    • Exposure: possessions and activities that can lead to loss (owning a house)
    • Peril: an actual event that causes the loss (house burns down)
2 evaluate potential losses
2. Evaluate potential losses
  • What could cause a loss?
3 choose a method of dealing with loss
3. Choose a method of dealing with loss
  • Severity and Frequency chart
  • (Garman/Forgue Personal Finance, 7th edition)
risk avoidance
Risk avoidance
  • Don’t do it or own it
risk retention
Risk retention
  • Can you retain the risk or do you need insurance?
  • Can you pay for the risk?
  • If your appliance breaks will it cause bankruptcy?
      • Refrigerator vs. house
loss reduction
Loss reduction
  • Try to prevent a loss or reduce the loss:
    • Smoke alarms
    • dead bolts
transferring risk
Transferring risk
  • You give someone else the responsibility to pay for the loss:
    • Insurance (homeowner insurance)
risk reduction
Risk Reduction
  • Cover part of the loss, transfer part of the loss:
    • Deductibles on HO & auto insurance
4 implement
4. Implement
  • Insurance is necessary-
    • high loss (could lead to bankruptcy
  • Insurance is important-
    • medium loss (would have to borrow)
  • Insurance is optional-
    • low loss (you could pay for loss)
5 evaluate and adjust
5. Evaluate and adjust
  • When would you adjust homeowner insurance?
  • Answer: home is paid off, add on, value increases
insurance q a

Insurance Q&A

What is its purpose?

Peace of mind, to protect your assets

Why are insurance companies willing to cover you?

Law of large numbers

Who can get insurance?

Insurable interest

factors affecting cost
Factors affecting cost
  • Deductible-
    • Portion of loss you pay
    • The higher the deductible, the lower the premiums
Hazard reduction:
    • take action to reduce probability of loss (ex: nonsmokers, dead bolts)

Loss reduction

    • reduces severity when there is a loss. (Ex: smoke alarms, fire extinguishers)
Coverage: how much is covered?
    • New Mercedes vs. old Ford
    • New house vs. old house
shop around
Shop around!
  • Every insurance company has different offers, so shop around, but find one that is reputable.
  • Homeowner insurance policies are standard, but premiums may vary.
  • Covers injuries or damage caused by you, a member of your family, or a pet.
    • Trampolines
    • Broken windows
    • Icy driveways during the winter
extra tips
Extra tips
  • Coverage-have enough to rebuild home, find out cost per square foot, don’t worry about land.
  • Named peril policy-covers ONLY perils named
  • All-risk-covers everything EXCEPT what is listed
are you a gambler
Are you a gambler?
  • Do you invest in risky investments?
  • Is Las Vegas your favorite vacation spot?
  • Are you a sky diver?
  • Do you have earthquake insurance on your most valuable asset?
  • Do you need flood insurance?
do you have adequate insurance
Do you have adequate insurance?
  • 3 out of 4 homes are underinsured by 35%
  • CV residents need earthquake coverage
  • Some CV homeowners need flood insurance
hurricanes tornadoes
Hurricanes & Tornadoes
  • How did Katrina affect you?
  • We are in the same insurance pool
  • Mounting insurance claims as more Americans live near coasts
  • Past decade costly to property insurers
  • HO insurance not profitable
  • Rates are going UP!
major points
Major Points
  • Understand & apply risk management principles to HO insurance
  • Evaluate & update your HO coverage
  • Document your home & possessions with a home inventory
  • Increase deductible & liability coverage
  • Purchase earthquake coverage
homeowners insurance
Homeowners Insurance
  • Liability
  • Property
    • Dwelling
    • Other structures on property
    • Personal property
    • Loss of use (additional living expenses)
buying ho insurance
Buying HO Insurance
  • How much coverage to REPLACE dwelling?
  • How much coverage on personal property?
  • How much liability coverage?
home replacement value
Home Replacement Value
  • Cost to rebuild ‘same’ home on your lot?
  • Not same as market value!
  • Get builder estimate
    • Cost may exceed new home prices due to
      • lack of economies of scale for new developments
      • Higher cost of partial rebuilding
  • Guaranteed replacement cost coverage?
  • Annual inflation adjustment?
contents coverage
Contents Coverage
  • Actual cash value
    • Yard sale/ thrift store prices
  • Contents replacement cost
    • “full” replacement value
      • Read policy limits!!
personal liability
Personal Liability
  • You could be sued
  • Even if “innocent” you need to defend against lawsuits
  • Standard coverage: Inadequate
    • $100,000 personal liability
    • $1,000 no-fault medical
    • $250 no-fault property damage
  • Higher limits are cheap
  • Cost to replace home?
  • Assess contents
  • Raise deductible
  • Raise Liability
  • Buy earthquake coverage
  • Consider flood insurance
  • DO NOT file small claims!
  • Adequate emergency fund?
ho insurance industry
HO Insurance Industry
  • Lots of losses nationwide
    • 2001 Paid out $1.16 for each premium $1
  • Premiums going up
    • 2002: 13% average hike
    • 57% in TX; FL,LA?
  • Insurers dropping customers
  • Mold losses increasing
  • Repair costs increasing
before you buy a house
Before you buy a house
  • Get CLUE report (Comprehensive Loss Underwriting Exchange)
    • Claim history on house
      • Previous claims (water damage)?
      • May affect your HO insurance cost & availability
    • Available to owner (ask seller to provide)
  • File small claims & you’ll lose insurance
    • Raise deductible
    • Cover “small” losses yourself
  • Check your credit report
    • Free reports
    • www.annualcreditreport.com
shop around38
Shop Around?
  • Compare rates & reputation!
    • Consumer Reports
    • Utah Department of Insurance
    • http://www.insurance.utah.gov/consumers.html
    • Auto & Homeowner Insurance Comparison Tables (2004)
changing insurer can backfire
Changing insurer can backfire
    • New customers
      • More likely to file claim
      • More likely to be dropped if they file a claim
  • Insurer can cancel for any reason in 1st 60 days
filing claims
Filing Claims
  • Don’t file for < $1,000
  • Raise deductible to $1,000
  • Large loss
    • Consider hiring a public adjuster
when disaster strikes

When Disaster Strikes

Do not let a crisis become a financial burden

Prepared for Financial Planning for Women by Beth Butterworth

USU Family Finance student

are you covered
Are you Covered?
  • Earthquake and Flood damage are NOT covered by standard homeowners policies
  • You must purchase separate insurance coverage for these risks
what about floods
What about Floods?
  • Recent flooding in Cache Valley
    • Nibley
    • Richmond
    • Near Blacksmith Fork River in S. Logan
  • Early-mid 1980s
    • Logan River Thrushwood-Sumac neighborhood
flood insurance
Flood Insurance
  • Floods happen in all 50 states.
  • “Everyone lives in a flood zone.” (FEMA)
  • Only one inch of water can cost over $1,000 to repair damage.
  • New land development can increase the flood risk
do you need it what areas flooded last spring
Do you need it?What areas flooded last spring?
  • Recent flooding in Cache Valley
    • Nibley
    • Richmond
    • Near Blacksmith Fork River in S. Logan
  • Early-mid 1980s
    • Logan River Thrushwood-Sumac neighborhood
what s your flood risk
What’s your flood risk?
  • http://www.floodsmart.gov/floodsmart/pages/riskassesment/findpropertyform.jsp
    • Enter your address
  • Flood Plain Maps
    • www.fema.gov/fhm.shtm $2
  • How to read a flood plain map
      • FloodSmart.gov
but i live in a low risk area
But I live in a low risk area…
  • Almost 25% of all flood insurance claims come from low risk areas
flood insurance48
Flood Insurance
  • Does your community participate?
    • www.fema.gov/fema/cxb.shtm
    • Logan, N. Logan, Richmond, Wellsville…
  • What to do to participate?
    • A letter must be sent to the local NEIP coordinator
    • www.floods.org/statepocs
special flood hazard area
Special Flood Hazard Area
  • If you live in a Special Flood Hazard Area (SFHA) or high risk area, your mortgage lender requires you to have flood insurance.
flood insurance50
Flood Insurance
  • Who offers Flood insurance?
    • Local insurance agencies
    • FEMA Federal Emergency Agency
flood insurance51
Flood Insurance
  • What will it cost to buy from a local agent?
    • Premiums are around $300-$400 a year depending risk level and value of home.
    • Estimate your premium at FloodSmart.gov
flood insurance52
Flood Insurance
  • What will it cost to buy from the government?
    • If your neighborhood participates in the NEIP National Emergency Insurance Policy and the risk is low, the cost can be as low as $137 for the entire home.
flood insurance53
Flood Insurance
  • What is covered?
    • Contents are covered only in the part of the home that is above the ground
    • For the area below ground:
      • Will not cover the contents
      • Will not cover unpainted sheetrock or stairs
flood insurance54
Flood Insurance
  • What will it cost you after the flood?
    • Usually a high deductible
      • Can be as high as $10,000
earthquake insurance
Earthquake Insurance
  • They say we’re due for a BIG ONE
  • We have had 2 major quakes in the last seventy-two years.
  • The last one was over 20 years ago.
earthquake insurance56
Earthquake Insurance
  • What is covered
    • The basic structure
    • The contents
    • And for a higher price the bricks if you live in a brick home.
earthquake insurance57
Earthquake Insurance
  • What does it cost you now?
    • An additional $1.60 per $1,000
      • Ex. $160 a year for a $100,000 home
    • An additional $7.75 per $1,000 if it is brick.
      • Ex. $775 a year for a $100,000 home
    • With a brick home they will insure it at the lower price, but when it is rebuilt they will not include the bricks.
earthquake insurance58
Earthquake Insurance
  • What will it cost you after the quake?
    • There will be a 5-10 percent deductible that you will be responsible to pay.
    • About 5% on the structure.
      • They will pay up to $100,000
    • About 10% on the contents.
      • They will pay up to $75,000
earthquake insurance59
Earthquake Insurance
  • Ask if there is anything that they do not cover or if there is anything you would need to pay extra to cover.
start the steps to preparedness
Start the Steps to Preparedness
  • Commit to 1-3 actions in coming week
  • Highest priority
  • Easiest
two mistakes of insurance
Two Mistakes of Insurance

#1 People over-insure themselves (too low a deductible) and thus spend much more on insurance than they should.

#2 People underinsure themselves and are in financial crisis after an uncontrolled event.

how to avoid these mistakes
How to Avoid these Mistakes

#1 Think ahead

  • Is the risk great enough that you need insurance?
  • If so, how much insurance do you really need?
  • Do you have the resources to cover the deductibles?

#2 Be prepared

  • Have emergency savings (3-6 months of expenses)
  • Keep a copy of your insurance policy somewhere safe (safe deposit box)
  • What is your personal finance action plan?
  • Please let us know what topics you would like FPW to cover in 2006
earthquake potential
Earthquake Potential
  • “Earthquakes have the potential to inflict a greater loss of life and property in a single event than all other hazards in Utah.”
    • Gary E. Christenson
  • See photos UGS Survey Notes Sept. 05
cache valley earthquake risk
Cache Valley Earthquake Risk
  • Overdue for a big quake
    • East Cache Fault
    • West Cache Fault
  • Areas most at risk: out in the valley
what to do in earthquake
What to do in earthquake
  • Duck under table or desk
  • Stand in doorway
  • Don’t go outside!
  • Falling debris is biggest danger
  • Bricks falling off buildings on Main St.
7 steps on the road to earthquake safety
7 Steps on the road to earthquake safety
  • Identify potential hazards & being to fix
  • Create disaster plan
  • Create disaster supply kits
  • Identify building weaknesses & begin to fix
  • Drop, cover & hold on during quake
  • Check for damage & injuries…
  • When safe, follow disaster plan
home hazards
Home Hazards
  • Kitchen cabinets- need latches
  • Secure TVs, stereos, computers- straps
  • Pottery, vases – velcro, earthquake putty
  • Use closed hooks on mirrors & pictures
  • Secure tops of top-heavy furniture
  • Secure Water heater- straps & screws
gas leaks
Gas Leaks
  • Shut off main gas valve only if you detect a leak
    • Need wrench in emergency kit
    • Only a pro can turn the gas on again
e kits for home work vehicle

First aid kit w/ gloves and handbook

Spare glasses, contacts, solution

Whistle to alert rescuers

Sturdy shoes (especially by the bed)

Phone #

Snack foods

Flashlight & batteries

Personal hygiene

Radio & batteries



E-kits for home, work & vehicle