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Chapter 10: Risk Management and PropertyLiability Insurance


Auto Insurance Coverages. Uninsured motorist ... Auto Insurance Premium Factors. Automobile type. year, make and model. Rating territory ... – PowerPoint PPT presentation

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Title: Chapter 10: Risk Management and PropertyLiability Insurance

Chapter 10 Risk Management and
Property/Liability Insurance
  • Define risk and apply the risk-management process
    to personal financial affairs.
  • Define insurance terminology and explain the
    relationship between risk and insurance.

  • Design a homeowners insurance program to meet
    your needs and keep the cost of the plan to a
  • Design an automobile insurance program to meet
    your needs and keep the cost of the plan to a

  • Describe property and liability insurance
    policies designed to meet needs other than those
    related to housing and automobiles.
  • Outline the steps to make a claim against a
    property or liability insurance policy.

Risk Management
  • A plan to protect accumulated resources and
    assets from the possibility of financial loss.

Coverage and Type of Risk
  • Pure Risk
  • Insurable
  • Accidental, unintentional
  • Always results in a loss
  • Can be personal, property or liability risk.
  • Speculative Risk
  • Loss or gain possible
  • Uninsurable
  • Such as investing in stocks or gambling

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Risk and Risk Management
  • Gather information
  • Evaluate risk and potential losses
  • Choose mechanisms
  • Administer program
  • Evaluate and adjust

Decision Making Matrix
Risk and Risk Management
  • Risk avoidance
  • Risk retention
  • Loss control
  • Transferring risk
  • Risk reduction

What is Insurance?
Insurance is strange. It's a product that most
consumers buy, but few want to use. And many
people find insurance confusing. It's unlike any
other consumer product on the market. You can't
see it, touch it, smell it, hear it or taste it.
But without it, the world would be a much
different place. Just think about it. Would you
casually drive to the grocery store knowing that
everything you ever worked for could be at risk
if you were involved in an accident? How much
would you be willing to spend on a home without
insurance to cover it? Who would dare start a new
business without the safety net of insurance?
Insurance allows people to take risks, make
investments, protect their hard-earned assets and
provides peace of mind. Insurance and other risk
management techniques have been around in some
form for thousands of years. Insurance has its
roots in ancient China. Shipping merchants in
2500 B.C. were the first to introduce a concept
vital to the role and purpose of insurance --
spreading the risk of loss from the individual to
a group of individuals. Before sailing through
dangerous waters, merchants gathered and divided
their goods so that each boat carried some of the
contents of the others. That way no one merchant
shouldered the risk alone, protecting themselves
from a potential total loss of goods. Today's
insurance business still bases its practices on
this simple concept of spreading risk. Through a
wide array of products and services, insurance
companies provide citizens and businesses with
the economic security necessary to survive the
unpredictable and sometimes devastating events of
modern everyday life.                          
                     The Insurance Institute of
America defines insurance as three things. First,
insurance is a transfer technique whereby the
insured transfers the risk of financial loss to
another party, the insurance company or insurer.
Second, it is a contract between the policyholder
and the insurer that states what financial
consequences of loss are transferred and
expresses the insurer's promise to pay for those
consequences. Third, insurance is a business and,
as such, needs to be conducted in a way that
earns a reasonable profit for its owners. The
money a policyholder pays an insurer is small
compared to the potential for loss. If a family's
house were to burn down, they probably could not
afford to replace it without insurance. The
insurance system enables someone to transfer the
financial consequences of this loss to an
insurance company. The insurance company, in
turn, pays for covered losses and distributes the
costs among all of its policyholders. In that
way, your fellow policyholders share the cost of
your loss, as you share in theirs.
What is Insurance? (cont.)
Private companies and state and federal
governments provide insurance. There are three
major types of private property/casualty
insurers mutual, stock and reciprocal exchanges.
The primary difference among these types of
insurers is in who owns them. A stock company is
a corporation owned by individuals or
stockholders who contribute capital in the hope
of earning a profit through the sale of
insurance. The stockholders direct the company's
operations and share in any profits earned. A
mutual insurance company is a corporation owned
by its policyholders, who may receive dividends
if the firm is profitable. A reciprocal
insurance exchange is similar to a mutual company
in that the policyholders are both the insurers
and the insured. The exchange is a collection of
individuals, firms and/or corporations that
exchange insurance coverage on one another. Each
member pays for a portion of the coverage on
every other member.                            
                   One of the most critical
decisions any consumer must make when purchasing
a product or service is how they will purchase
the product. When buying insurance, consumers
have several choices. They can work with an
independent agent, an exclusive agent, an
insurance broker or deal directly with a company.
An independent insurance agent is a
self-employed businessperson who typically
represents a number of different insurance
companies through contractual relationships and
is paid on a commission basis. An exclusive
agent represents only one insurance company and
may be a salaried employee or work on a
commission basis. An insurance broker is an
intermediary between a customer and an insurance
company. A broker typically searches the market
for coverage appropriate to their clients' needs.
While purchasing insurance through an
independent or exclusive agent are the most
popular methods of buying insurance, consumers
also have the option of direct purchase. A number
of companies sell their insurance products
directly to customers through the use of a
toll-free telephone service or the Internet.
What is Insurance?
  • Physical
  • Morale
  • Moral

What is Insurance?
  • Fortuitous
  • Financial
  • Personal

What is Insurance?
  • Insurable interest
  • Principle of indemnity
  • Factors that affect cost
  • Deductibles
  • Co-insurance

Reimbursement Formula
What is Insurance?
  • Types of insurers
  • Stock
  • Mutual
  • Essence of insurance

Homeowners Insurance
  • Coverages
  • Property
  • Liability
  • Types
  • Buying

Homeowners Insurance
  • Dwelling coverage
  • Personal property coverage
  • Liability losses
  • Homeowners insurance pricing

Types of Home Insurance Policies
  • Basic form (HO-1)
  • Broad form (HO-2)
  • Special form (HO-3)
  • Tenants form (HO-4)
  • Comprehensive form HO-5)
  • Condominium form (HO-6)
  • Country home form (HO-7)
  • Modified coverage form (HO-8)

How Much Coverage Do You Need?
  • Look for a policy with full coverage rather than
    a coinsurance clause
  • What would it cost to replace your home?
  • Have sufficient liability coverage
  • Include protection for specific items such as
    collections, cameras, and jewelry
  • Determine the value of the contents of your home

Items Covered in a Renters Policy
  • Personal property
  • Personal liability
  • Additional livingexpenses

A landlords insurance usually wont cover your
personal belongings! Only 40 of renters have
renters Insurance
Replacement Cost vs.Actual Cash Value
  • Actual cash value coverage
  • Insurer will cover the cost of what the burned or
    stolen item would cost at a garage sale or if you
    sold it through a newspaper ad.
  • Replacement cost coverage
  • Insurer will cover what ever it costs you to
    replace the burned or stolen item with a new one.

Actual Cash Value Reimbursement Calculation
Value of a Home Inventory
  • Proof of belongings and their value
  • Helps you remember
  • Helps you determine needed coverage

What Affects the Cost ofHomeowners or Renters
  • Location of home or apartment
  • Type and age of the structure
  • Amount of coverage and deductibles
  • Discounts - alarm system, smoke detector
  • Varies company to company - compare
  • If you also insure your car with the same company

Automobile Insurance
  • Financial responsibility law
  • 40 states have one
  • Utah limits are 25/50/15
  • Requires you to carry certain minimum coverage if
    you damage someones person or property

Automobile Insurance
  • Liability
  • Medical
  • Uninsured/underinsured
  • Physical damage
  • Other

Auto Liability Coverage
property damage liability
bodily injury liability
Auto Insurance Coverages
  • Bodily injury coverages
  • Bodily injury liability -covers people in other
  • Medical payments -covers people in your car

Auto Insurance Coverages
  • Uninsured motorist
  • Your vehicle is hit by one of the many people who
    dont have car insurance
  • Underinsured motorist
  • Your car is hit by a person who doesnt have
    enough insurance to cover the damage they did to
    you and your car

Property Damage Liability Coverage
  • Covers damage to others persons car when you are
    at fault
  • during a snow storm you might accidentally slide
    your vehicle into a neighbors mailbox

Collision Coverage
  • When your car is in an accident, collision
    insurance pays for damage to your automobile,
    regardless of who is at fault. However, if you
    are not at fault they will try and collect from
    the other drivers property damage liability

Comprehensive Physical Damage
  • Covers damage to your car that is not caused by a
    collision, such as
  • theft
  • vandalism
  • glass breakage
  • hail, sand, or wind storm
  • your car rolls downhill into a tree

No-Fault Insurance
  • Each driver collects from their own insurance
  • medical expenses
  • lost wages
  • related injury costs
  • Intent is to reduce time and costs
  • No-fault systems vary from state to state

Auto Insurance Premium Factors
  • Automobile type
  • year, make and model
  • Rating territory
  • accident, theft, and vandalism rates
  • Driver classification
  • age, sex, marital status
  • driving record
  • Assigned risk pool

Other Property/Liability Loss Exposures
  • Floater policies
  • Antique/specialty cars
  • Professional liability
  • Comprehensive personal liability
  • Umbrella liability

To Lower Your Auto Premium
  • Find out how much it will cost to insure a car
    before you buy it
  • Compare companies
  • Have larger deductibles
  • Look for discounts
  • non-smoker
  • good driving record
  • airbags
  • car alarm or other security

Umbrella Policy
  • 1,000,000 inliability coverage
  • Covers you inyour home, car,office etc.

Collecting on Property/Liability Losses
  • Document loss
  • File claim
  • Sign release

Make Sense of anInsurance Policy
  • Perils covered
  • Property covered
  • Types of losses
  • People covered
  • Locations covered
  • Time period of coverage
  • Loss control
  • Amount of coverage

Save on Property or Liability Insurance
  • Shop around
  • Select appropriate coverages/limits
  • Assume affordable risk
  • Take advantage of discounts
  • Engage in loss control
  • Be properly classified