Managing Property & Liability RiskChapter 10

Personal FinanceFIN 235

LEARNING OBJECTIVESA. What is insurance?B. Why do we need insurance?C. What is the risk management process?D. How does insurance work in reducing risk?

1. Homeowners Insurance2. Renters Insurance3. Automobile Insurance

INSURANCEWhat is Insurance?

Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.

Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

Why Do We Need Insurance?It represents our primary strategy to manage or

hedge the risk of loss.

The Risk Management Process

The Five Steps:Step 1: Identify sources of riskStep 2: Estimate risk and potential lossesStep 3: Choose how to handle riskStep 4: Implement your risk management planStep 5: Evaluate and adjust your plan

Managing RiskRisk

The uncertainty of a loss that faces a person or property covered by insurance.

Peril: potential causes of risk Hurricanes and Tornadoes

Hazard: a scenario that increases the likelihood of a loss due to a peril Living near the ocean or in the Midwest.

Managing RiskRisk Management Methods

Avoidance: don’t build near the shoreReduction: wearing a seat belt.Self-Insurance: a special fund to cover losses.Risk Shifting: buy insurance

Planning the Insurance Program• Indemnity Principle limits insurance payout:

You cannot receive more [$] than the economic loss suffered

• Several factors can reduce the cost of insuranceDeductiblesCoinsuranceHazard reduction

• Insurance policies contain vital informationPerils coveredProperty coveredTypes of losses coveredTime period of coveragePolicy limits (maximum amounts)

Home & Property InsuranceHomeowner’s Insurance

Homeowner’s insurance is meant to protect against financial loss to do damage or destruction. Personal Property Living expenses if displaced Liability coverage: protection against legal actions or

claims Medical payments Personal property floater: specific items of high

value

Renter’s InsuranceMany rental agents require renter insurance

Cover damage to rental property by renterCover personal property against loss by fire,

floodLiving expenses if displaced

Home Insurance FormForm HO-D1

Section 1: Coverages and Amounts Dwelling Other Structures Personal Property Loss of Use

Section 2: Coverage and Limits of Liability Personal Liability – Each Occurrence Medical Payments to others

Deductibles

Home Insurance FormPolicy PremiumCredits and DiscountsOther Coverages and EndorsementsState Surcharges and Taxes (if applicable)Total Policy Premium

Form HO-D2Specific/Amended Declarations

Chapter Break

AUTOMOBILE INSURANCE Financial Responsibility Law

State legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accident.

Automobile Insurance CoverageBodily Injury CoverageProperty Damage Coverage

AUTOMOBILE INSURANCE Motor Vehicle Bodily Injury Coverage (1)

Bodily Injury Liability is for the risk of financial loss due to legal expenses, medical expenses, lost wages, and other expenses associated with injuries caused by an automobile accident for which you were responsible

Medical Payments cover the costs of health care for people who were injured in your automobile, including yourself.

Uninsured Motorists Protection covers the cost of injuries to you and your family but, in most states, not property damage

AUTOMOBILE INSURANCEMotor Vehicle Bodily Injury Coverage (2)

No-fault Insurance System provides for drivers in an accident to collect medical expenses, lost wages, and related injury costs from their own insurance company.

AUTOMOBILE INSURANCEMotor Vehicle Property Damage Coverage (1)

Property Damage Liability protects you against financial loss including vehicles, street signs, lampposts, and buildings.

Collision insurance pays for the damage to the automobile regardless of who is at fault. But if another driver caused the accident, your insurance company will try to recover the repair costs for your vehicle from the other driver’s property damage liability coverage.

AUTOMOBILE INSURANCEMotor Vehicle Property Damage Coverage (2)

Comprehensive Physical Damage covers you for such risks as fire, theft, glass breakage, falling objects, vandalism, wind, hail, or damage caused by hitting an animal.

No-Fault Insurance Under the no-fault system, drivers who are involved in accidents collect money from their own insurance companies

AUTOMOBILE INSURANCEOther Automobile Insurance Coverage

Wage loss insurance will reimburse you for any salary or income lost due to injury in an automobile accident.

Towing and emergency road service pays for the cost of breakdowns and mechanical assistance.

AUTO INSURANCE COSTSDeterminants of Cost

Amount of Coverage Every state has laws that require or encourage

automobile liability insurance coverage. Medical expenses and legal settlements have increased,

so too the cost of automobiles, making higher amounts of property damage coverage necessary

Insurance Premium Factors Year, Make, and Model of your automobile Driver classification is a category based on the

driver’s age, sex, marital status, driving record, and driving habits.

Risk Pool assignment

AUTO INSURANCE COSTSReducing Vehicle Insurance Premiums

Establish and maintain a safe driving recordDrivers under 25 can qualify for reduced rates

by completing a driver training program and maintaining good grades in school

Installing anti-theft devicesIncreasing the amount of the deductible

Homework AssignmentQuestion #1 (Applies to those who currently rent)

Does your landlord require renters liability insurance?If so, what are the Coverages? Deductibles?

Question #2If you own a car, examine your policy and determine

your coverage in terms of;Bodily injury Medical paymentsUninsured motorists Property damageCollision Comprehensive

Be Your Own Personal Financial Planner1 – Property Loss Exposures (w/s 43)5 – Shop for Automobile Insurance (w/s 45)