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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