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