CPCU 520 Chapter Five

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CPCU 520 Chapter Five

  1. 1. CPCU 520 CHAPTER FIVE UNDERWRITING PROPERTY INSURANCE
  2. 2. UNDERWRITING FIRE INSURANCE <ul><li>EDUCATIONAL OBJECTIVE # 1: </li></ul><ul><li>Given a case, evaluate Property Loss Exposures using the “COPE” Model: </li></ul><ul><li>1) C onstruction </li></ul><ul><li>2) O ccupancy </li></ul><ul><li>3) P rotection </li></ul><ul><li>4) E xternal Loss Exposures </li></ul>
  3. 3. CONSTRUCTION ( C OPE) <ul><li>C onstruction is the Primary Consideration: </li></ul><ul><li>1) A Building’s Load-Bearing Components </li></ul><ul><li>Construction Materials’ ability to resist fire damage is classified into </li></ul><ul><li>six classes from the lowest (Class 1 – Frame) to the highest (Class 6 – </li></ul><ul><li>Fire-Resistive) </li></ul><ul><li>2) Interior Finishing Materials used on walls, floors, and ceilings </li></ul><ul><li>3) Insulation </li></ul><ul><li>4) Roofing </li></ul>
  4. 4. CONSTRUCTION <ul><li>Additional Construction Characteristics: </li></ul><ul><li>Age </li></ul><ul><li>Building Height </li></ul><ul><li>Fire Divisions – “Fire Walls” that restrict the spread of fire by serving as a </li></ul><ul><li>fire-resistive barrier </li></ul><ul><li>Building Openings – that violate the integrity of a Fire Division </li></ul><ul><li>Building Codes – Local Ordinances or State Statutes that regulate </li></ul><ul><li>construction </li></ul>
  5. 5. OCCUPANCY (C O PE) <ul><li>Occupancy affects Property Loss Frequency/Severity </li></ul><ul><li>O ccupancy Categories: </li></ul><ul><li>1) Habitational – Hotels, Apartments, etc. </li></ul><ul><li>2) Office </li></ul><ul><li>3) Institutional – Schools, Churches, Hospitals </li></ul><ul><li>4) Mercantile – Department & Specialty Stores </li></ul><ul><li>5) Service – Cleaners, Auto Service Stations </li></ul><ul><li>6) Manufacturing </li></ul>
  6. 6. OCCUPANCY <ul><li>The Loss Potential of a particular Occupancy can be evaluated by examining the contents’: </li></ul><ul><li>1) Ignition Sources </li></ul><ul><li>2) Combustibility </li></ul><ul><li>3) Damageability </li></ul>
  7. 7. OCCUPANCY <ul><li>Occupancy Hazards – Two Classes: </li></ul><ul><li>Common Hazards: </li></ul><ul><li>Housekeeping Practices </li></ul><ul><li>Heating Equipment </li></ul><ul><li>Electrical Equipment </li></ul><ul><li>Smoking </li></ul><ul><li>Special Hazards: </li></ul><ul><li>Examples: </li></ul><ul><li>Cooking in a restaurant </li></ul><ul><li>Using volatile chemicals in a manufacturing plant </li></ul>
  8. 8. PROTECTION (CO P E) <ul><li>Two Types: </li></ul><ul><li>Type 1 -- Public Protection: </li></ul><ul><li>Example ISO rates Public Protection from: </li></ul><ul><li>N.B. Class 1 – Ideal </li></ul><ul><li>to </li></ul><ul><li>N.B. Class 10 -- Unprotected </li></ul>
  9. 9. PROTECTION (CO P E) <ul><li>Type 2 – Private Protection: </li></ul><ul><li>Prevention Measures – Reduced Number of Heating Units </li></ul><ul><li>Detection Measures – Smoke and Heat Detectors, </li></ul><ul><li>Central Station Alarm System </li></ul><ul><li>Suppression Measures – </li></ul><ul><li>1) Portable Extinguishers </li></ul><ul><li>2) Standpipes and Hoses </li></ul><ul><li>3) Automatic Sprinkler System </li></ul><ul><li>4) Private Fire Brigades </li></ul>
  10. 10. EXTERNAL LOSS EXPOSURES (COP E) <ul><li>External Loss Exposures are those that are outside the area owned or controlled by the Insured: </li></ul><ul><li>Single-Occupancy Loss Exposures – these External Exposures come from adjoining properties – the construction, occupancy, etc. of adjoining structures. </li></ul><ul><li>Multiple-Occupancy Loss Exposures -- if an Insured occupies part of a building with combustible walls (no Fire-Walls) separating the Insured Property from the other properties, a Multiple-Occupancy Loss Exposure exists. </li></ul><ul><li>For example, a Shoe Store exposed by a Restaurant. </li></ul>
  11. 11. UNDERWRITING PROPERTY VALUES <ul><li>EDUCATIONAL OBJECTIVE # 2 </li></ul><ul><li>EXPLAIN HOW TO UNDERWRITE PROPERTY VALUES </li></ul><ul><li>Insurable Value – Coverage to the extent of the Insurable Interest </li></ul><ul><li>of Insured Parties </li></ul><ul><li>Property Valuation Methods: </li></ul><ul><li>Replacement Cost </li></ul><ul><li>Actual Cash Value </li></ul><ul><li>Coinsurance Clauses – are meant to encourage purchasing of Insurance to Value </li></ul><ul><li>80% 90% 100% </li></ul><ul><li>Insurable Value – differs from Market Value or Book Value in that it is based on the price the Property Covered could command in a free market </li></ul>
  12. 12. ANALYZING SPECIFIC PERIL LOSS EXPOSURES <ul><li>EDUCATIONAL OBJECTIVE # 3 -- </li></ul><ul><li>Given a Case, Analyze the Loss Exposures </li></ul><ul><li>For the Following Causes of Loss: </li></ul><ul><li>Fire </li></ul><ul><li>Lightning </li></ul><ul><li>Windstorm </li></ul><ul><li>Hail </li></ul><ul><li>Vandalism & Malicious Mischief </li></ul><ul><li>Water Damage </li></ul><ul><li>Flood </li></ul><ul><li>Earthquake </li></ul><ul><li>Collapse </li></ul>
  13. 13. FIRE <ul><li>Underwriters use the “COPE” Model </li></ul><ul><li>Measures of Loss Severity : </li></ul><ul><li>Amount Subject – Measures Loss Exposure to a single loss and varies by Cause of Loss </li></ul><ul><li>Probable Maximum Loss (PML) – measures the largest likely loss </li></ul>
  14. 14. LIGHTNING <ul><li>Loss Control: </li></ul><ul><li>Surge Protection </li></ul><ul><li>Lightning Rods </li></ul>
  15. 15. EXPLOSION <ul><li>Most Common Explosion Types: </li></ul><ul><li>Combustion Explosions – When a flammable cloud or mist encounters an ignition source </li></ul><ul><li>Pressure Explosions – When a container bursts because it cannot contain the internal pressure </li></ul>
  16. 16. WINDSTORM HAIL <ul><li>Windstorms: </li></ul><ul><li>Hurricanes </li></ul><ul><li>Tornadoes </li></ul><ul><li>Hail </li></ul>
  17. 17. VANDALISM & MALICIOUS MISCHIEF <ul><li>Mostly in Urban Areas </li></ul><ul><li>Also, Vacant Property </li></ul><ul><li>Low Severity </li></ul>
  18. 18. WATER DAMAGE <ul><li>Major Causes: </li></ul><ul><li>Poor Maintenance </li></ul><ul><li>Flat Roofs </li></ul><ul><li>Low Severity </li></ul>
  19. 19. FLOOD <ul><li>The Peril of Flood is excluded in most Commercial Property Policies but is often included in Auto Insurance and Inland Marine Insurance Policies </li></ul><ul><li>NFIA – Largest Flood Insurance Underwriter </li></ul>
  20. 20. EARTHQUAKE <ul><li>Three Major Factors in Underwriting </li></ul><ul><li>Earthquake Insurance: </li></ul><ul><li>Areas of Earthquake Activity – </li></ul><ul><li>See Exhibit 5-4 for Seismic Activity </li></ul><ul><li>Soil Conditions </li></ul><ul><li>Building Design and Construction </li></ul>
  21. 21. COLLAPSE <ul><li>Most Building Collapses occur because of: </li></ul><ul><li>Weight of Ice, Sleet, and Snow </li></ul><ul><li>Defective Design or Construction </li></ul><ul><li>Weight – of People, Personal Property, Water </li></ul><ul><li>Cumulative Effect of Vibration </li></ul>
  22. 22. OTHER CAUSES OF LOSS <ul><li>UNDERWRITING OBJECTIVE # 4: </li></ul><ul><li>Describe the Underwriting Considerations when evaluating the Loss Expectations for the following Causes of Loss: </li></ul>
  23. 23. RIOT AND CIVIL COMMOTION <ul><li>The primary Underwriting consideration for this peril is -- Locations that attract protestors with Political or Moral Agendas </li></ul>
  24. 24. SPRINKLER LEAKAGE <ul><li>The primary Underwriting Considerations for this peril are: </li></ul><ul><li>Damageability of Contents </li></ul><ul><li>Maintenance of the Sprinkler Systems </li></ul>
  25. 25. SINKHOLE COLLAPSE <ul><li>Usually associated with </li></ul><ul><li>underground water’s effect on: </li></ul><ul><li>Limestone or </li></ul><ul><li>Dolomite Bedrock </li></ul>
  26. 26. MINE SUBSIDENCE <ul><li>Rare Event – this peril is not usually evaluated </li></ul>
  27. 27. VOLCANIC ACTION <ul><li>Rare peril </li></ul><ul><li>Not usually evaluated </li></ul>
  28. 28. TERRORISM <ul><li>Exclusion available for Insurers to use if accepted by Insured </li></ul><ul><li>Only Target Locations are considered for evaluation </li></ul>
  29. 29. WEIGHT OF SNOW, SLEET, ICE <ul><li>Underwriting Consideration given mainly to colder areas, especially if flat spans of roof and/or inadequate drainage exists </li></ul>
  30. 30. THEFT <ul><li>Discussed later under Crime Coverage </li></ul>
  31. 31. EDUCATIONAL OBJECTIVE # 5 <ul><li>GIVEN A CASE, ANALYZE THE LOSS EXPOSURES FOR EACH OF THE FOLLOWING TYPES OF INSURANCE: </li></ul><ul><li>Business Income Insurance </li></ul><ul><li>Commercial Crime Insurance </li></ul><ul><li>Marine Insurance </li></ul>
  32. 32. UNDERWRITING BUSINESS INCOME AND EXTRA EXPENSE <ul><li>These losses are a consequence of the Insured’s inability to use its property following Direct Loss or Damage to the Property </li></ul><ul><li>Business Income Insurance – Pays for continuing Expenses and Loss of Profit </li></ul><ul><li>Extra Expense Insurance – Pays for any Additional Expenses to minimize the interruption of operations after a covered loss </li></ul>
  33. 33. UINDERWRITING CONSIDERATIONS <ul><li>Probable Period of Interruption – Underwriters must consider the time dimensions when Underwriting these Coverages </li></ul><ul><li>Probable Maximum Business Income Loss: </li></ul><ul><li>a) Evaluate the potential loss magnitude by projecting expected earnings for the coverage period. </li></ul><ul><li>b) Select a Coinsurance Percentage that approximates the expected interruption period </li></ul><ul><li>50% 60% 70% 80% 90% 100% 125% </li></ul>
  34. 34. UNDERWRITING CONSIDERATIONS <ul><li>Factors that lengthen the likely period of interruption increase the potential Loss Amount: </li></ul><ul><li>a) Rebuilding Time – Permit Process, Specialized </li></ul><ul><li>Structures, Severe Climactic Conditions, </li></ul><ul><li>Congested Urban Condition </li></ul><ul><li>b) Seasonality – Peak Season businesses could </li></ul><ul><li>suffer a severe loss in a short shutdown </li></ul>
  35. 35. UNDERWRITING CONSIDERATIONS <ul><li>c) Bottlenecks & Computer Nerve Centers </li></ul><ul><li>-- Flowcharts can spot Bottlenecks </li></ul><ul><li>-- Minor Damage to Computer Systems </li></ul><ul><li>can halt an entire Operation </li></ul><ul><li>d) Long Production Processes </li></ul><ul><li>-- Aged or Seasoned Products </li></ul><ul><li>e) Disaster Contingency Plans </li></ul><ul><li>-- these can reduce the Length of Interruption </li></ul>
  36. 36. UNDERWRITING CRIME INSURANCE <ul><li>Commercial Crime Losses can arise from two broad areas: </li></ul><ul><li>Crimes Committed by Employees </li></ul><ul><li>(Employee Dishonesty Coverage) </li></ul><ul><li>Crimes Committed by Others </li></ul><ul><li>(All other Crime Forms) </li></ul>
  37. 37. UNDERWRITING CRIME INSURANCE <ul><li>Underwriting Considerations for Employee Dishonesty Crime Exposures: </li></ul><ul><li>a) No moral Hazard exists </li></ul><ul><li>b) Defenses against External Crime can sometimes </li></ul><ul><li>also deter Employee Crime </li></ul><ul><li>c) Good Management Control by Insured </li></ul>
  38. 38. UNDERWRITING CRIME INSURANCE <ul><li>Underwriting Considerations for Robbery and Theft Exposures: </li></ul><ul><li>Susceptibility of being stolen and Marketability of stolen items </li></ul><ul><li>Property Location – Local crime rate </li></ul><ul><li>Occupancy – “Where the Money is” </li></ul><ul><li>Public Protection – Police response time, prosecutorial effectiveness </li></ul><ul><li>Coverage and Price Modifications – Deductibles, Protective Safeguards </li></ul>
  39. 39. UNDERWRITING OCEAN MARINE INSURANCE <ul><li>Ocean Marine Insurance </li></ul><ul><li>Underwriting Considerations: </li></ul><ul><li>Yachts – Seaworthiness, Construction, Maintenance </li></ul><ul><li>Commercial Hulls – Seaworthiness, Navigable Waters, </li></ul><ul><li>Season, Crew Experience </li></ul><ul><li>Protection & Indemnity (Liability) – Owner’s Financial Stability, </li></ul><ul><li>Master and Crew’s Experience </li></ul><ul><li>Cargo – Insured’s Business Reputation, Cargo Location on Ship </li></ul>
  40. 40. UNDERWRITING INLAND MARINE INSURANCE <ul><li>In terms of Forms and Rates, Inland Marine Insurance is divided into Two Categories: </li></ul><ul><li>Filed Classes – Inland Marine Coverages for which Advisory Organizations are required to file Loss Costs, Rules, and Forms. </li></ul><ul><li>Unfiled Classes – These Coverages are developed and Rated according to the individual Insurer’s Rules and Forms </li></ul>
  41. 41. UNDERWRITING INLAND MARINE INSURANCE <ul><li>The following are some of the Unfiled Classes that generate the largest premium volume: </li></ul><ul><li>a) Contractors’ Equipment – from hand tools to </li></ul><ul><li>Bulldozers and Cranes </li></ul><ul><li>b) Builders’ Risk – COC </li></ul><ul><li>c) Transportation -- Goods shipped by </li></ul><ul><li>Air, Rail, and Mail. Can cover the interest of </li></ul><ul><li>Shippers, Carriers and Consignees </li></ul>
  42. 42. UNDERWRITING INLAND MARINE INSURANCE <ul><li>d) Instrumentalities of </li></ul><ul><li>Transportation and Communication – </li></ul><ul><li>Bridges, Tunnels, Wharves, TV Towers, etc. </li></ul><ul><li>e) Bailee Coverages : </li></ul><ul><li>Bailee Insurance – Covers liability of </li></ul><ul><li>Bailee (Standard is Negligence) </li></ul><ul><li>Bailees’ Customers Insurance – Pays Customer </li></ul><ul><li>even if there is no Negligence on the part </li></ul><ul><li>of the Bailee. </li></ul>
  43. 43. EDUCATIONAL OBJECTIVE # 6 <ul><li>DESCRIBE THE LOSS CONTROL FUNCTION AND ITS’ GOALS: </li></ul><ul><li>The Loss Control Function supports Underwriters in determining which Loss Exposures to insure. </li></ul><ul><li>The main tool for that is Inspection Reports </li></ul>
  44. 44. GOALS OF INSURERS’ LOSS CONTROL ACTIVITIES <ul><li>To help Insurers reach Profit Goals </li></ul><ul><li>To meet Customer needs – making Accounts more attractive to Underwriters </li></ul><ul><li>To Comply with Legal Requirements – Some States require some Loss Control Service by Insurers </li></ul><ul><li>To Fulfill a Duty to Society – by attempting to prevent accidents </li></ul>
  45. 45. Poll Questions <ul><li>If we have time </li></ul>
  46. 46. EDUCATIONAL OBJECTIVE # 7 <ul><li>Explain How Loss Control Cooperates with Other Insurance Functions </li></ul>
  47. 47. LOSS CONTROL COOPERATION <ul><li>Loss Control & Underwriting – Recommendations are made for Account improvement. </li></ul><ul><li>Loss Control & Marketing – Recommendations that make an account more desirable to Underwriters aid Marketing in its goal of writing more premium and retaining customers. </li></ul>
  48. 48. LOSS CONTROL COOPERATION <ul><li>Loss Control & Premium Audit – As an example, Loss Control’s Description of operations could be a starting point for the Auditor’s Classification of Exposures </li></ul><ul><li>Loss Control & Claims – Claims information can help Loss Control concentrate on areas of concern due to previous claims </li></ul><ul><li>Loss Control & Producers – Producers and Loss Control can work together to coordinate efforts with the Insured </li></ul>
  49. 49. EDUCATIONAL OBJECTIVE # 8 <ul><li>DESCRIBE THE LOSS CONTROL SERVICES PROVIDED BY INSURERS </li></ul>
  50. 50. LOSS CONTROL SERVICES PROVIDED BY INSURERS <ul><li>Conducting Physical Surveys of Premises and Operations. </li></ul><ul><li>Performing Risk Analysis & Improvement -- make </li></ul><ul><li>and follow-up Recommendations. </li></ul><ul><li>Developing Safety Management Programs – gather information and review with Management and Monitor a complete program. </li></ul>
  51. 51. FACTORS AFFECTING LOSS CONTROL SERVICE LEVELS <ul><li>Personal Insurance – </li></ul><ul><li>Small Premiums = Modest Service: </li></ul><ul><li>Photographs </li></ul><ul><li>Publishing Educational Bulletins </li></ul><ul><li>Rate Discounts for Loss Control measures implemented </li></ul><ul><li>by the Insured </li></ul><ul><li>Commercial Insurance – </li></ul><ul><li>Dependent on Account size </li></ul><ul><li>Type of Loss Exposure Insured – </li></ul><ul><li>Large and Complex Risks require more skilled Loss Control </li></ul><ul><li>Personnel and Equipment </li></ul>

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