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