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FIL350 - Chapter 1

Introduction and overview of Commercial Property Risk Mgmt

QuestionAnswer
Risk control (defined) Any method that attempts to reduce the frequency and/or severity of losses to a business, individual, or organization.
List risk control techniques Avoidance, loss prevention, loss reduction, separation, duplication, and diversification
Avoidance A risk management technique whereby risk of loss is prevented in its entirety by not engaging or abandoning the activities which present the risk
Loss prevention A risk management technique that seeks to reduce the frequency of losses. A safety program is an example.
Loss reduction A risk control activity focusing on reducing the severity of losses. A sprinkler system is the classic example.
Separation A risk control techniques that involves spreading out the activity or asset over several locations to reduce severity of losses.
Duplication A technique that relies on backups or copies to be used if the original asset or activity suffers a loss.
Retention A risk financing technique where the entity simply pays losses out of internal funds as they occur.
Commercial Package Policy (CPP) Aimed at mid- to large-sized businesses, a CPP can be customized and covers two or more lines of insurance. Two lines almost always included are property coverage (BPP) and general liability (CGL). Others are chosen based on the needs of the business.
Businessowners policy (BOP) A package policy that combines most of the property and liability coverages needed by smaller businesses that often do not have dedicated risk management staff.
Output Policy A policy that combines, in one form (instead of multiple forms), all or most of the commercial property coverages that the insured organization needs.
Commercial Property Conditions It contains conditions applicable to all property coverage forms if a CPP contains property insurance. This is in addition to the property declarations, coverage form, and other forms depending on the specific line of business.
Policy Condition Any provision that qualifies an otherwise enforceable promise made in the policy. Insurance companies are only required to make loss payments if a policyholder has met all stated conditions.
Actual Cash Value (ACV) The most common valuation basis in property insurance. It is equal to the cost to replace property with a new property of like kind and quality less depreciation
Replacement cost Often used as the basis for real property (such as buildings). It is the cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation
What are four types of loss exposures faced by businesses? property, liability, personnel/personal, net inocme
What are the six steps in the risk management process? 1. identification of loss exposures, 2. measurement of loss exposures, 3. examine risk management alternatives, 4. select optimal technique, 5. implement the selected technique, 6. monitor outcomes and revise
monoline policy an insurance policy that provides coverage for only one type of loss
multiline policy a package policy providing coverage for several types of loss
What are the sections of an insurance policy indicated in the acronym "DICE"? Declarations, insuring agreement (called a coverage form in commercial insurance), Conditions, and exclusions.
What are the six conditions in the common policy conditions form? cancellation, changes to policy, examination of books and records, insurer right to inspect premises, premiums, transfer of rights (assignment)
What are the nine conditions in the commercial property conditions form? fraud/misrepresentation, control over property, insurance under two or more coverages, legal action against us, liberization, no benefit to bailee, other insurance, policy period/coverage territory
Coinsurance Requires a minimum insurance-to-value requirement that if not met, will result in the insured sharing in the loss.
Describe the three most common forms of theft. 1. Burglary: forced entry. 2. Robbery: Use of threat or force against a person. 3. Employee Theft/Embezzlement: theft by an employee against employer.
Insurance Services Office (ISO) The organization that standardizes insurance contract language.
What are the three elements to completely define a loss exposure? 1. The asset subject to loss 2. The specific peril that can cause loss, including the hazards that can increase the chance of loss 3. the potential financial consequences
What are the two major categories of risk management techniques? risk control and risk financing
What are the two extremes for risk financing? retention - where the company pays its losses directly and risk transfer (such as insurance)
What two approaches are used when developing risk management techniques that are geared toward a specific peril or hazard? Technology (the engineering approach) and human behavior
What are the three elements that are required in order for a fire to occur? some source of heat, oxygen, and fuel
What coinsurance percentage corresponds with "standard" insurance rates? What discounts apply for other coinsurance choices? 80% is standard. If the policyholder chooses 90% coinsurance, they get a 5% discount. If they use 100% coinsurance, they get a 10% discount off of standard rates.
Pro rata liability Often used in standard policies, it determines how much an insurer pays when multiple policies cover the same loss. The amount paid is based on the amount of insurance provided by each insurer relative to the total insurance on the property.
Straight deductible Also called a "per occurrence" deductible, it is the most common deductible in property insurance, it is a deductible that must be paid each and every time a policyholder has a loss.
Aggregate deductible Often used in health insurance, the deductible is paid once per policy period. Once total losses exceed the deductible in the period, insurance benefits kick in.
Elimination period used in disability insurance and in business income insurance, it is the first few days of losses that are retained by the policyholder. It is a deductible stated in terms of days instead of dollars.
Standard definition of vacancy in insurance contracts Building is vacant if at least 70% is not rented or used for 60 days. (Less than 30% is occupied). If vacant, loss payments are reduced.
Created by: FIL350