RMIN 5950 Final
What is the minimum limit of E & O coverage an agent or broker should provide evidence of when you select them?
$1 million
Incident rate =
(Claim frequency) / (# of exposures)
Total losses =
(Claim frequency) X (Average severity)
Average severity =
(Total losses) / (Claim frequency)
Cost of Motor Vehicle Crashes in US (2013)
- 32,719 fatalities (3.1% decrease) - 2.31 million individuals injured - Economic cost of motor vehicle crashes, $277 billion - 5.615 million crashes - Insured liability costs of $79 billion - Insured property damage costs of $45 billion - 31% of fatalities involved alcohol
Other States Insurance
- 3A states with know operations (existing operations) - 3C states where operations could arise (list where could potentially go (no premium)) - Monopolistic States cannot be listed (cannot list Ohio) monopolistic states only sell WC, not EL
Valuation
- Actual cash value - RC - depreciation - Replacement Cost - Agreed Value - Functional Valuation
Civil Justice Reform Proposals:
- Attorney Fees - Frivolous suits (loser pays) - Limits on Expert Testimony - Limiting Punitive Damages - Caps on noneconomic damages - Collateral Source Rule - Joint and Several Liability - Alternative Dispute Resolution (ADR) - Limits on Class Action Lawsuits
Exposures to Loss (D&O Legal Liability)
- Basic Functional Duties - Fiduciary Duties - Types of Suits
Causes of Loss Form
- Basic: 11 named perils - Broad: basic +4 and collapse - Special: all risk with exceptions - Earthquake: % deductible
Covered Property
- Buildings (scheduled or blanket) - Business Personal Property (leased property considered owned) - Property of others
Business Continuation Plans
- Business Form - Buy-Sell Agreements - Funding Approaches
Mobile Equipment
- CGL - Inland Marine (equipment floaters)
Policy Conditions
- Cancellation - Transfer of rights (subrogation)
Most commonly considered civil justice reform proposals
- Caps on noneconomic damages - Collateral Source Rule - Joint and Several Liability - Alternative Dispute Resolution (ADR)
D&O Insurance (Common Policy Features)
- Claims-Made Basis - Exclusions: 1) Dishonest acts 2) Bodily injury of any person 3) Pollution 4) Defamation -Discovery Clause: 12 month tail
Auto Physical Damage Insurance
- Collision - Comprehensive (OTC= Other Than Collision)-written on an "open perils" basis - Exclusions: 1) Wear and tear 2) Sound reproducing/recording equipment 3) Radar detectors
Fundamental Guidelines
- Consider financial ability of transferee (solvency issues) - Require certificates of insurance to prove existence - Be named as an additional insured - Waiver of subrogation - Avoid being ambiguous or too severe
Function of DIC Insurance
- Converts named perils or all-risks policy to even broader all-risks policy - Not intended to be "excess" insurance (DIL) - Manuscripted coverage
Insurance Problems
- Cost: insurance may be available, but it comes with a very high cost - Availability: it may not be available
Advantage of DIC Insurance
- Covers identified and unidentified perils - Less costly than separate insurance - No coinsurance - Fewer policies: existing policy can be "filled in"
High Cost of U.S. System
- Currently, the system is extremely inefficient, and sometimes it is uncertain who actually benefits from the litigation process. + 22% of the tort dollar goes to compensate victims for economic losses + 54% of the tort dollar never reaches the victim - Increases uncertainty associated with the legal system leads to more risk, which leads to higher costs
OSHA Penalties
- De minimus - Serious - Recordkeeping and Compliance
Key Persons Exposures
- Death - Disability - Insurance: company buys insurance on key person to protect against loss - COLI: Cost of Living Index
Additional Coverages (BPP)
- Debris removal - Preservation of Property - Fire dept service charge - Pollutant clean-up and removal
Ratings (Controlling Costs)
- Deductibles - Coinsurance - Reporting Forms (for fluctuating values) - Duplicate Records (credits provided if maintain backups)
Types of Benefits (Workers Compensation)
- Disability (indemnity) *partial v. total *temporary v. permanent * benefit levels - Compensation for death - Medical benefits - Rehabilitation - Second Injury Funds
Describe the pay back method of evaluating a loss control program
- Does not consider TVM - It's not good enough
Describe the IRR method of evaluating a loss control program
- Don't need to know cost of capital - IRR based on hurdle rate
Retention
- Draws on funds origination within the firm or its economic activity - Two types: ---> Active (planned) ---> Passive (unplanned)
Post-Accident Control
- EMT and rehab
Emerging Liability Issues:
- EPL - D&O/Corporate Governance - Obesity - Pollution - Terrorism - E-Risks/info privacy - Asbestos - Others
Auto Liability Exposures (Liability for others vicarious)
- Employer/Employee: if employee advancing interest of employer, employer will be liable - Business name on vehicle: adds number in fleet, even though vehicle not insured - Negligent Entrustment: allowing a poor driver to drive an insured vehicle
Factors Affecting Use
- Enforceability:insurance policies are Contracts of adhesion, which means any ambiguity is construed against the writer of the contract - Ability to manage risk - Price/Consideration paid
Funding Approaches
- Entity Plan - Cross Purchase Plan
What factors determine the impact of deductibles?
- Flat - Split - Time - Percentage - Disappearing (sliding) - Franchise - Aggregate
Types of Risk Control Transfers:
- Incorporation - Leasing - Subcontracting - Waivers
OSHA Standards
- Industrial hygiene - Machine operations - Material handling - Medical facilities - Personal protection - Plant design and maintenance
Declarations
- Insurable interest - Coinsurance - Causes of loss form - Valuation
Types of Risk Financing Transfers:
- Insurance (primary method) - Hold-Harmless Agreements - Indemnity Agreements
Garage Coverage Forms
- Liability Coverage (general liability & auto liability) - Garagekeepers Coverage (property in care, custody and control) - Physical Damage Protection (collision & comprehensive coverage)
Auto Liability Exposures (Factors affecting auto exposures)
- Location/territory (garaging) - Vehicle size and type - Mileage - Characteristics of Operator - Claims record - Credit-based insurance scores - Driving record
Engineering Controls
- Machine guards - Health hazards
Prospective Insurance Rating Plans (Guaranteed Cost)
- Manual Rate - Experience Modification
Disadvantages of DIC Insurance
- Market is more volatile: may not always be available - Policy interpretation can be difficult
What factors determining financial conditions are important to consider in retention?
- Net worth - Cash flows - Available credit - Earnings - Investment expertise - Asset liquidity
Coverage Extensions (BPP)
- Newly acquired and constructed - Personal effects and property of others - Valuable papers and records - Property off-premises - Outdoor property (signs and landscaping)
Worker's Compensation Coverage (Coverage A or Part 1)
- No policy limits: must conform with state's statutes or laws - Pays a stated benefit and pre-defined costs - Subrogation: employers can recover from wrongdoers or other insurance if possible (huge benefit)
Perils Covered under DIC Insurance
- Often adds flood and earthquake, and may cover indirect losses or loss in transit
Auto Liability Exposures (Activity that leads to liability)
- Ownership - Operation: most common - Maintenance
Abnormal Reserves
- Paid losses by injury - Five years of data - Compute mean and standard deviation - Mean +(3 x Std. Deviation)= Norm
What is included in the "general information" part of an insurance program?
- Proposal requirements - Timetables - Organization's history - Type of operations - Organizational structure - Info about organization
Extent of Responsibility Transferred
- Restating law (limited): Clarifying contract terms - Shifting responsibility for joint fault (moderate): both parties responsible, but only one pays - Shifting all responsibility (broad): No responsibility for one party, but still pay
Job-Safety Analysis
- Selection of critical list - Materials handling and storage - Repetitive motion injuries
D&O Who Sues:
- Shareholders - Employees - Customers/Clients
What is included in the "coverage terms and conditions" part of an insurance program?
- Specific lines - Endorsements - Exclusions - Payroll for workers' compensation - Fleet size (auto) - Loss history (five years) - Discussion of unusual or large losses
D&O Insurance (Coverages)
- To individual Directors or Officers - Entity Coverage - Prior Acts Coverage
Why is it important for a company to be transparent and truthful when mentioning unusual or large losses?
- To show what they have LEARNED from it - It is an opportunity to show IMPROVEMENT
Employer's Liability Coverage (Coverage B or Part 2)
- Tort suits by employees and families: "Dual Capacity Doctrine" - Exclusions: retaliation/discharge: coverage is excluded if employer responsible for this behavior - Limits of Liability: can be limited based on bodily injury per accident per year (per accident, per employee, and aggregate limits can apply)
WC/EL Insurance (Other Coverages)
- Voluntary compensation endorsement - Stopgap cover - Endorsements for federal acts - Foreign voluntary compensation coverage
Common Exclusions under Umbrella Liability Policy:
- WC - Aircraft/Watercraft - Pollution - Product recall - Care, Custody, and Control - Insured's Product or Work
D&O Issues:
- Wrongful termination - Inadequate/Inaccurate disclosures - Merger/Acquisition activities
Business Auto Coverage (BAC) Liability Coverage (Other Coverages)
-Medical Payments to injured persons insured - Uninsured/Underinsured motorist coverage - Personal Injury Protection (PIP)
Liability Exposures (Auto Exposures)
1) Activity that leads to liability 2) Liability for others (Vicarious): Respondeat Superious
Controlling WC Costs
1) Analyzing loss records 2) Job Safety 3) Assessing reserving practices
Covered Autos: categories 3-7 exist so org. can target only the coverage that the state may mandate
1) Any Auto that is licensed for public roads 2) Owned Autos only 3) Owned private passenger vehicles only 4) Owned autos other than private passenger autos 5) Owned autos subject to no-fault laws 6) Owned autos subject to compulsive under/uninsured motorist law 7) Specifically described autos 8) Hired autos only 9) Non-owned autos only
What are the 5 feasibility conditions in retention?
1) Attitude of management 2) Financial conditions 3) Ability to administer the program 4) Ability to return to insurance 5) Ability to adapt to change
Name 3 types of costs that require loss control measures
1) Capital expenditures and depreciation 2) Expenses for safety personnel 3) Program expenses
Analyzing Loss Records:
1) Clerical errors 2) Subrogation 3) Non-compensable claims 4) Fraudulent Claims 5) Repeat Claimants 6) Analyze by location 7) Analyze by cause, injury type and body part
Common Primary Policies under Umbrella:
1) Commercial General Liability 2) Business Auto Coverage 3) Employer's Liability 4) Liquor Liability
Defenses to Negligence Include the Following:
1) Contributory Negligence 2) Comparative Negligence 3) Assumption of the Risk
According to Haddon's energy release approach to loss control, accidents can be viewed in light of the following 2 steps:
1) Control energy buildup 2) Separate released energy from persons or objects
Automobile Exposures
1) Costs of these exposures 2) Liability Exposures 3) Factors Affecting Auto Exposures
Coverage Forms (BPP)
1) Covered Property 2) Property not covered 3) Additional Coverages 4) Coverage Extensions
Policy Organization
1) Declarations 2) Policy Conditions 3) Coverage Forms (BPP)
What are 6 specific techniques of retention?
1) Deductibles 2) Current spending of losses 3) Unfunded reserve 4) Funded reserve 5) Borrowing 6) Captive
What are the 4 valid reasons for marketing your insurance program?
1) Dissatisfied with current service 2) Lower price (price may signal quality) 3) Consider the market cycle 4) Don't bid to often
Negligence has Four Key Elements:
1) Existence of a legal duty of care 2) Breach of the legal duty 3) The breach being the proximate cause of an injury 4) Actual injury or loss sustained
What are considerations to keep in mind when retaining?
1) Expense 2) Expected losses and risk 3) Opportunity costs 4) Quality of services 5) Tax considerations 6) Market considerations
Directors and Officers Legal Liability
1) Exposures to loss 2) D&O Insurance
Management of Contractual Transfers
1) Factors Affecting Use 2) Fundamental Guidelines
What are the 3 main RM/probability distributions?
1) Frequency 2) Severity 3) Total Losses
DIC Insurance
1) Function 2) Perils Covered 3) Advantages and disadvantages of DIC
Workers' Compensation Loss Financing
1) General Financing Issues 2) Prospective Insurance Rating Plans 3) Retrospective Plans 4) Employee Leasing
What are 2 types of analyses in systems safety?
1) Hazard mode and effect analysis 2) Fault-free analysis
Assessing Reserving Practices
1) Inactivity 2) Abnormal Reserves 3) Reserving Accuracy (open v. closed)
Types of Tort Liability's:
1) Intentional Torts 2) Negligence 3) Strict Liability 4) Vicarious Liability 5) Assumption by Contract 6) Statutory Liability
Job Safety
1) Job-safety analysis 2) Engineering controls 3) Personal Protective Equipment 4) Post-accident control
Business Continuity
1) Key Person Exposures 2) Business Continuation Plans
Business Auto Coverage (BAC)
1) Liability Coverage 2) Other Coverages 3) Auto PD Insurance 4) Covered Autos 5) Car Rental Issues
Other Compensation Laws
1) Longshore and Harbor Workers Act 2) Federal Employers Liability Act 3) Jones Act (Maritime Employment)
Losses Covered under Umbrella Liability Policy:
1) Losses that are above the single (occurrence) or aggregate limits in primary policy - Loss is covered but the limit is exhausted 2) Losses outside of the primary policy, in which case umbrella pays after retention (Self-Insured Retention/SIR) - There is no gap between primary policies and umbrella policies. Once primary limit is penetrated, umbrella policy is triggered.
Funding of Obligation (WC)
1) Monopolistic State Fund 2) Competitive State Fund 3) Private Insurance 4) Retention (Qualified Self Insurance) 5) Assigned Risk Plans
What are the 3 probability rules?
1) Mutually Exclusive 2) Independence 3) Conditional probability
Modeling procedure (steps)
1) PLOT each proposed predictor against the dependent variable. 2) Draw the PICTURE. 3) Look for PATTERNS of relationship. 4) Analyze the correlation matrix.
Types of Dividend Plans:
1) Participating 2) Sliding Scale
Important Concepts in Liability Insurance:
1) Policy Trigger - Accident - Occurrence - Claims-Made 2) Policy Limits 3) Defense Costs
Specific Liability Exposures:
1) Premises and Operations 2) Products or Services 3) Bailee Liability 4) Fiduciary Liability 5) Professional Liability 6) Employment Practices Liability
What 2 types of allocation exist in profit centers?
1) Premium allocation 2) Cost allocation
Types of Contractual Liability Transfers:
1) Risk Control Transfers - Incorporation - Leasing - Subcontracting - Waivers 2) Risk Financing Transfers - Insurance - Hold-Harmless Agreements - Indemnity Agreements
What are the 4 key mechanisms of the Alternative Risk Transfer (ART) Market?
1) Self insurance 2) Captives 3) Risk retention groups 4) Capital market securitizations
Classifications
1) Service 2) Retail 3) Commercial 4) Mobile Equipment
Types of Deductible Plans:
1) Small 2) Large
OSHA
1) Standards 2) Penalties
Employers' Liability Exposures
1) Suits by employees 2) Suits by third parties
General Financing Issues (WC Loss Financing)
1) Timing and Amounts - Lag - Predictability 2) IRR (discount rate) 3) Taxes (for premiums) and RML (residual market loads) - Firms want to decrease friction costs
Contractual Liability Transfers:
1) Types of Contractual Liability Transfers 2) Extent of Responsibility Transferred 3) Management of Contractual Transfers 4) Contractual Transfers in Case
Controlling Costs
1) Valuation 2) Rating
WC/EL Insurance
1) Workers Compensation Coverage (Coverage A Part 1) 2) Employers Liability Coverage (Coverage B Part 2) 3) Other States Insurance 4) Other Coverages
Probability
1) proportion of losses among a large number of exposures; 2) proportion of losses over a long period 0-1 probabilities
True
22% of the tort dollar goes to compensate victims for economic losses.
About what percentage of the total commercial risk market is ART?
30%
Foreign Voluntary Compensation Coverage
30+ day overseas employees not covered under standard policy, but can use this endorsement to provide coverage - Normally must also meet local requirements
How much more do indirect costs compare to direct costs?
4 to 8 times as much
True
54% of the tort dollar never reaches the victim.
How long do underwriters typically need to review a policy?
90 days
What is the formula for the coefficient of variation?
= (standard deviation) / (mean)
Confidence bonds based on Normal distribution assumption
=1-NORMDIST(900,460,309.84,TRUE) P( X>900 ) = .078
Liability Exposure
A condition that presents the possibility of a legal claim or lawsuit being made against an organization
What 3 RM insurance specifications in the marketing of an insurance program?
A) Introduction B) General Information C) Coverage terms and conditions
AEL:
Actual Excess Loss (>$10,000)
APL:
Actual Primary Loss (<=$10,000)
Special Damages
Actual monetary losses sustained, has a $ amount.
What suspends coinsurance?
Agreed Value
Transfer of Rights of Recovery
Also called subrogation
Manual Rate
Applies only to current policy year
Longshore and Harbor Workers Act
Applies to longshoremen, harbor workers, and other maritime workers who are injured during course of employment, or suffer diseases caused/worsened by conditions of employment - Provides medical benefits, comp for lost wages, and rehab services - Has been extended by Defense Base Act, Other Continental Shelf Lands Act, and Nonappropriated Fund Act
Products or Services
Arise out of injuries/damage that results from a defective product or faulty workmanship.
Professional Liability
Arises out of the practice of a profession, which has traditionally been associated with medicine, law, education, and clergy.
Types of Suits
Ask question of "on whose behalf is plaintiff seeking damages?" - Derivative Suits - Non-derivative Suits
What are 3 other names for the mean?
Averaged, weighted average, and expected value
Bailee Liability
Bailee only becomes liable to bailor when the bailee is negligent, and what constitutes negligence depends on the circumstances of the bailment
B:
Ballast
Reserves
Based on incurred, we expect to have to pay reserves
Derivative Suits
Brought by shareholders on behalf of the company for harm to the company
Non-Derivative Suits
Can come from a multitude of different parties (class-actions common form)
Cancellation
Can sometimes extend cancellation period
Voluntary Compensation Endorsement
Cannot force employee to collect, but takes place of WC in states without statute - Employees can still sue if they choose to. Often builds goodwill for employer
Experience Modification
Carries on with employer (avg= 1; higher numbers are bad) =(Actual/Expected) - Frequency is more within control of employer, sometimes losses get out of control
Disability (WC)
Cash payments to injured workers to replace income lost because of worker's inability to return to work or inability to return to the position he/she had before injury - Basically, they are indemnity payments - Benefits not payable immediately after injury, must wait a specified number of days
Reserving Accuracy (open v. closed)
Compare accuracy of reserves while claims are still open
What are the two types of direct costs?
Compensation and medicals
Damages under Negligence Include the Following:
Compensatory - Special - General Punitive
What is simulation?
Computer is simulating drawing outcomes from distributions.
Entity Plan
Controlled through the business, better when firm has many owners - Org. purchases life insurance on each key person
Prospective Insurance Rating Plans
Cost this year is what insurer believes to expected cost of losses based on prior experience, normally an average of past 3 years. 1) Guaranteed Cost 2) Dividend Plans 3) Deductible Plan
How are intentional torts usually insured?
Coverage B in CGL
Excess Liability
Coverage on top of a single, specific underlying coverage
Umbrella Liability
Coverage on top of multiple underlying categories of coverage
Types of Benefits (Medical Benefits)
Covered by almost all states - Scope of covered medical care is broad, and coverage begins immediately after injury
Ordinance or Law Coverage (ICC) Coverage B
Covers cost to demolish undamaged portion of structure and remove debris
Ordinance or Law Coverage (ICC) Coverage C
Covers increased cost to repair/replace in accordance with codes
Ordinance or Law Coverage (Increased Cost of Construction) Coverage A
Covers reduction in value of undamaged portion that must be demolished
W:
Credibility factor (0<=W<=1)
Business Continuity
Crucial for closely held businesses - Ideal solution for most businesses is to make prior arrangements for the sale of an individual's interest prior to the death/disability through a buy and sell agreement.
What is included in the "introduction" part of an insurance program?
Description about the company and organization
What are the two costs involved in accidents?
Direct and indirect costs
What is strongly influenced recently by Sarbannes-Oxley: builds more oversight into corporate governance? - No fiscal limit on liability - Must convince regulators of a backup plan
Directors & Officers Legal Liability
Fiduciary Duties
Disclosure, pension management, etc. Must act in best interest of others
Unfunded reserve
Do NOT match assets to reserves
Stopgap Coverage
EL exposure still exists in monopolistic states, so stopgap covers EL exposures in those states
Experience Modification Formula
EM= [APL + B + B(AEL) + (1-W)(EEL)] / (TEL + B)
Suits by Employees
Employees can sue the employer based on the Dual Capacity Doctrine, which asserts employer is serving a capacity other than a employer when the injury occurs
Excluded Employees/Employers (WC)
Employers with less than three employees are not required to purchase WC insurance - Counting Rules
Federal Employers Liability Act (Interstate Railroad Workers)
Enables injured railroad employees to sue employer for occupational injuries resulting from negligence, and prevents employer from asserting common-law defenses - Tort based Act, involves comparative negligence on part of employer
Policy Trigger
Event/activity that activates coverage for a particular policy.
Why is EXPECTED LOSSES AND RISK an important retention consideration?
Every insurance company will state that they are "better than the average" in terms of premium.
Business Auto Coverage (BAC) Liability Coverage (Exclusions and Limits)
Exclusions: - Pollution - Mobile Equipment: inland marine used to cover property damage, CGL for liability (premises/operations) Limits: - DOT requirements: may stipulate limits - State laws - Requirements for umbrella
Fiduciary Liability
Exists when a director/officer fails to act in the best interest of the shareholders.
EEL:
Expected Excess Losses
Negligence
Failure to exercise degree of care a reasonably prudent person would've exercised under similar circumstances.
Non-compensable claims are those that are consistent with workplace activities.
False
Professional Liability tend to have more "short-tailed" claims than most other liability exposures.
False
Which type of Specific Liability Exposure is frequently involved with D&O claims, and employee benefit claims?
Fiduciary Liability
Serious
Firm has immediate threats to health - Fines: financial - Prison is possible
Truckers Coverage Form
For insureds in the business of transporting property of others
Jones Act (Maritime Employment)
For sailors on US vessels, allows negligence suits against the employer
Property Not Covered
Generally anything underground
Employment Practices Liability
Generally involves discrimination in hiring/firing practices, sexual harassment, and wrongful termination claims.
Policy Limits
Generally separated by occurrence limits, and annual aggregate limits
Basic Functional Duties
Hiring, appointing, managing firm, etc.
Inactivity
If claim open for certain period of time, can probably be closed
Contributory Negligence
If plaintiff 1% at fault, recovery is completely barred
Why is QUALITY OF SERVICES an important retention consideration?
If we transfer, a third party (claims department) would become involved in rating the quality of a claim. We want to avoid this.
Elective (WC)
In Texas and NJ, WC must be elected by the employer
Compulsory (WC)
In most states, any employer with over 3 employees must purchase WC insurance
Valuation (Controlling Costs)
Include only values of insured property - Excluded Property should not be included - Correct Valuations: keep up to date
As we (increase/decrease) the number of probabilities in simulation, we get closer to actual "tabulated distribution."
Increase
Recent Developments
Increased likelihood for tort reform
Partial Disability
Injured worker can work in some capacity despite injury
What is the normal distribution assumption?
It assumes that distribution is normal.
Additional Factor of Negligence
Joint and Several Liability
Employee Leasing
Leasing firms responsible for HR and WC of leased employees
Is an unfunded reserve an asset or a liability for a company?
Liability
Joint and Several Liability
Liability of multiple defendants collectively or individually for entire amount of damages
Assumption by Contract
Liability that arises bc of an enforceable agreement between two or more parties that creates an obligation to do, or not to do, something.
Strict Liability
Liability that is not based on negligence or the intent to cause harm. - Can be imposed by tort law, or by statutes - Tort Law applies to: 1) Abnormally dangerous activities 2) Sale of dangerously defective products
How can we control loss frequency?
Loss prevention
How can loss severity?
Loss reduction
A low coefficient of variation corresponds with a (high/low) level of risk/variation.
Low
Retention (Qualified Self-Insurance)
Lowest cost option
Funded reserve
MATCH assets to reserves
3 examples of measures of location
Mean, median, mode
Types of Benefits (Rehabilitation)
Means to reduce seriousness, and cost of disabling injuries - Provide vocational/physical assistance to injured workers - Often reduce ultimate losses; available even if state does not include specific provision for them
Deductible Plan
More retention is built into the program
Business Form
Most appropriate plan depends on the business form
Job Safety
Most recommendations for workplace injuries involve changes to work style (back most common body part at UGA)
Risk Control Transfers
Moving activity around
Insurable Interest
Must exist at time of loss
Monopolistic State Fund (WC)
Must purchase WC insurance from a state-approved fund
Fleet Safety Program:
Needs to be broad, many claims/losses stem from improper loading 1) Driver selection 2) Driver training 3) Driver control 4) Vehicle maintenance and design 5) Breakdown and accident response 6) Drug and alcohol testing
Do companies typically buy pure insurance or purely retain?
Neither! They usually do some combination of both.
Is a RManager necessary for a successful RM program?
No
General Damages
No dollar amount, injuries are presumed to follow from the type of wrong.
De Minimus
No immediate threat, but acts as a warning
Mutually exclusive
No probability that A and B will occur together. P(A n B) = 0
Can the direction of the relationship between the x and y variables be established statistically?
No, it must be established analytically.
Defense Costs
Normally responsibility of insurer, who has a comparative advantage - Can be in addition to the limit, or included in the limit
Why is OPPORTUNITY COSTS an important retention consideration?
OC has to do with TVM. Insurers want premiums upfront but companies want to pay it later.
Cross Purchase Plan
One owner must purchase life insurance for each of partners, other than himself - Becomes complicated as number of owners increase
RML (residual market loads)
Option for orgs. that cannot obtain coverage through voluntary market - Charge on voluntary premiums to subsidize residuals
Buy-Sell Agreements
Other owners can purchase interests of deceased partner at time of death
Commercial (Vehicles)
Other than service or retail
Long-Term Leases
Over 1 year at inception date, treated as owned auto for insurance purposes
Participating (Dividend Plans)
Overall experience of insured
Is TVM in determining loss control expenses measured in future value or present value?
PV
Compensatory Damages
Payment for actual losses sustained and there are two types (Special and General)
Car Rental Issues:
Personal (Hertz): waiver of collision rights common if auto policy covers rented autos - Short-Term Leases - Long-Term Leases
Retail (Vehicles)
Pick-up property from, or deliver to, individual households
Assumption of the Risk
Plaintiff knowingly/voluntarily accepted the possibility of harm
Comparative Negligence
Plaintiff's recovery reduced by extent to which at fault
Policy Trigger (Accident)
Policy activated when accident occurs; common for auto
Claims-Made Basis
Policy in force when claim is made, regardless of when act committed, is the policy that will pay for losses
Policy Trigger (Claims-Made)
Policy in force when claim was made is the one that pays; very common for long-tailed claim line of business
Policy Trigger (Occurrence)
Policy in force when wrongdoing occurred is activated; no limits on length of time
The other theoretical probability distributions (lognormal, pareto, gamma) are ______ skewed.
Positively
Premises and Operations:
Possibility that an organization will be held liable because of bodily injury/property damage caused by either: 1) An accident occurring on premises owned/rented by the org., or 2) An accident occurring away from such premises, but only if it arises out of the org. ongoing operations
Borrowing
Pre-commitment with lines of credit, etc.
Independence
Probability that A and B will occur together. P(A n B) = P(A) X P(B)
What is often referred to as malpractice or E&O?
Professional Liability
Dividend Plans
Provide a refund of premiums for good (low) loss experience
Accidents Covered (WC)
Provides benefits only for occupational injuries- those that arise from worker's employment. - Accident= undersigned, sudden, and unexpected event. - Must arise out of and in the course of employment - Injuries that occur while commuting to and from work not covered, but delivery injuries are covered - Pre-existing condition diseases often challenged
Endorsements for Federal Acts
Provides coverage for other, additional employees
Punitive Damages
Punishment for especially wrongful act, or deterrent for future purposes - Both frequency and severity of punitive damages have been increasing in recent years
Private Insurance (WC)
Purchase insurance from private insurers
Classifications
Range from least expensive (service) to most expensive (mobile equip.)
Retrospective Rating Plans
Rates based on actual losses in current year, which impact current premiums
What is most attractive bc of tax laws?
Replacement Cost
Assigned Risk (WC)
Residual markets
Statutory Liability
Responsibilities are prescribed by statutes and regulations (law) rather than by tort law principles, and a breach need not be intentional.
When financial condition factors are HIGH, should you retain or not?
Retain.
Contractual Transfers In Case
Review leases carefully - Assumption of liability - Insurance obligations - Other duties Consider other agreements where transfers could be used or may be present
Who most commonly files D&O suits?
Shareholders; may file on behalf of themselves as individuals or on behalf of the corporation (Derivative and non derivative)
Sliding Scale (Dividend Plans)
Somewhat loss-sensitive
Competitive State Fund (WC)
State fund competes with private insurers
Which tort is prevalent with WC, pollution, and auto in some states?
Statutory Liability
What is very common with products liability and WC?
Strict Liability
Suits by Third Parties
Suits can be brought by any of the following against an employer: - Spouses - Consequential Injuries (mother pregnant w/ child) - Third-Party-Over Injuries (employee sues employer and manufacturer, manufacturer then files EL suit on employer to recover damages)
Is a normal distribution symmetrical or asymmetrical?
Symmetrical
Why is EXPENSE an important retention consideration?
The most costly part of RM transfer is underwriting.
Why is MARKET CONSIDERATIONS an important retention consideration?
There is pressure (at least now) to buy insurance when the market is in a SOFT state.
Short-Term Leases
Those that are less than 1 year at inception date, treated as hired autos
Types of Benefits (Compensation for Death)
To surviving spouses and dependents; also vary by state - Normally limited in time, and some states provide burial allowance
Global Competitiveness
Tort costs represent 1.82% of U.S. GDP, which puts the U.S. at a significant disadvantage when compared to other countries - Emerging markets have very low litigation costs
Intentional Tort
Torts committed with general/specific intent to commit the tortuous act. - Can be against a person, or can involve property or business - Includes assault & battery, malicious prosecution, defamation (libel & slander), and others - The intent to cause harm is not necessary
TEL:
Total Expected Losses
Service (Vehicles)
Transporting the insured's personnel, tools, equipment, and individual supplies to or from a job location
70% of fraudulent claims are from providers, not employees.
True
94% of the US M&A deals in 2013 over $100 million were challenged in shareholder lawsuits
True
Both Umbrella and Excess Liability policies exist to provide coverage on top of primary coverage.
True
Insurers may have incentive to overstate reserves.
True
It is the insurer's responsibility to assess reserve practices.
True
Mobile equipment is usually covered under the CGL for liability. However, if an insured is transporting an item of mobile equipment on a trailer connected to one of its motor vehicles, liability arising from that transport is covered by the auto policy
True
Monday and Friday are most common days for WC claims.
True
Professional Liability tend to have more "long-tailed" claims than most other liability exposures.
True
Record keeping and compliance is the most significant part of Penalties section under OSHA.
True
Subrogation can help losses, and see if third party is responsible.
True
Vicarious liability is included in negligence
True
Workers Compensation laws are generally left to the states.
True
board members of smaller, closely - held companies and of non-profit organizations also face the risk of D&O suits
True
What are 2 characteristics underwriters appreciate about the information we compile and sent to them?
Truthful and organized
Coinsurance %
Underinsurance penalty, encourages insurance to value
Total Disability
Until recovery (if possible) injured worker is not able to work
What should a company remember to identify when presenting general information to the underwriter?
Unusual risks
Benefit Levels (WC)
Usually expressed as % of pre-injury wages, normally 2/3; but mandated by states
What applies to acts of employees, or joint tortfeasors, and depends on the laws in the state?
Vicarious Liability
What began with the concept of Respondeat Superious?
Vicarious Liability
Why is TAX CONSIDERATIONS an important retention consideration?
We can deduct taxes with transfer. If we pay for workers' compensation, those claims are tax deductible.
Functional Valuation
When MV exceeds RC, good for old buildings, replaces with functional equivalent
Vicarious Liability
When one party is held responsible for action of a subordinate/associate bc of the relationship between the two parties
When is it desirable to use the Poisson distribution?
When there are > 50 exposure units and the chance of loss < 0.1.
Risk Financing Transfers
Without the presence of all three, any risk financing measures are doomed. Insurance provides financial assets in the event of losses, but insured's cannot control 3rd party's exposures
Risk retention groups
Work like captives but are regulated by the government more
Temporary Disability
Worker is expected to recover
Permanent Disability
Worker will never be the same as before the injury occurred
Which line of insurance makes up the largest sections of the Alternative Risk Transfer Marker
Workers' compensation
When deductibles in the overall market are higher, should a company retain or not?
Yes, they should retain.
Is borrowing common with lots of retention within a company?
Yes.
Frivolous suits (loser pays)
another reform that has been advanced and is place in the British Legal System
PIP
is personal injury protection and is usually required in states that have a no-fault statute (Georgia is NOT a no-fault state, but Florida and Michigan are a few notable ones that are)
Where is D&O exposure the greatest?
large, publicly held corporations
What is the MOST effective reforms at reducing insurance costs?
limits or caps on noneconomic damages
Who are non derivative suits brought by?
stakeholders other than shareholders OR by shareholders individually
A good strategy is to purchase adequate limits on the auto policy so that the umbrella policy van be used to increase the overall liability coverage for the firm
true
Negligence is a common basis for liability for companies
true
The fact that workers' compensation benefits may be available for auto-related injuries of employees may cause firms to limit their purchase of medical payments (a no-fault coverage) or uninsured motorist coverage
true
Transporting pollutants is not covered in the base policy, but as an exception to the pollution exclusion, the liability arising from the reals of fuels or fluids that operate the vehicle are covered
true
With regard to property coverages, it should be noted that wear and tear is not covered (that is a maintenance issue) and electronic equipment that is not permanently installed in a location intended for it is also excluded. Radar detectors are usually explicitly excluded (primary use is not one that insurers favor).
true
directors and officers can be held personally liable and without limit to any investment in the company. Therefore, they expect the company to purchase D&O coverage to protect them personally
true
the term auto is broadly defined in the commercial auto policy to include all vehicles that are licensed for use on public roads. As a result, even a large tractor-trailer truck can be covered under the business auto coverage form (BAC), unless it is generally used for transporting property of others.
true
What percentage of accidents are a result of unsafe acts?
88%
What is an example of a natural hedge?
Busch Gardens mitigates the risk of inclement weather by opening a ski resort in the Northwest.
AKA Human approach to loss control
Heinrich's domino theory
Predictor
Independent variable
What is binomial distribution?
Indicates the probability of r events in n possible times
Regression analysis
An attempt to measure the degree of relationship between two or more variables and a variable of interest
Law of Large Numbers
As we INCREASE the number of exposure units, actual results will approach the expected results; As 'n' increases, relative risk decreases n=1, E( losses ) = µ, Var( losses ) = σ2 , CV = σ/µ
Why is it unwise to market your program more often than once every 5 years?
Carriers assume a lack of consistency and commitment
Probability of 0
Certain NOT to occur
Probability of 1
Certain TO occur
What is R^2 and what is the best R^2 you can get?
Coefficient of determination; 1 (=100%)
What does the correlation of risks (AKA the portfolio effect) imply?
Diversifying DECREASES the correlation of risks.
What is fault-free analysis?
Drawing tree that reveals the process of how safety is implemented
Of what should agents and brokers provide evidence when you select them?
E & O coverage
What is the difference between empirical distribution and theoretical distribution?
Empirical is based on events that have actually occurred while theoretical is based on a mathematical formula.
What is E & O coverage?
Errors and Omissions coverage
What are 3 parts to developing a RM program
1) RM policy statement 2) Safety program 3) Institute a coordinated effort
What are 2 examples of the reward-penalty system in a loss control program?
1) Salary evaluation 2) Profit centers
What are 5 examples of loss control techniques?
1) Separation of assets 2) Salvage 3) Rehabilitation 4) Redundancy 5) Noninsurance transfers
According to Heinrich's domino theory, employee accidents can be viewed in light of the following 5 steps:
1) Social environment 2) Fault of the person 3) Unsafe act 4) Accident 5) Injury
What are 6 examples of indirect costs?
1) Time lost by injured employees 2) Time lost by other employees 3) Time lost to prepare accident reports & do retraining 4) Cost due to damage to machinery, tools, cleanup, etc. 5) Reduced productivity of injured worker upon return 6) Reduced morale
What are 3 general considerations in evaluating loss control projects?
1) Timing 2) Opportunity cost of capital (discount rate) 3) Cash flows v. accounting values
What is the value of a predictor in a multiple regression?
> 1
Describe the NPV method of evaluating a loss control program
- Considers the size of project - Need to select discount rate - Discount all flows back to current value - If there is a positive NPV, it is a VALUABLE investment - This is the PREFERRED method of evaluating a loss control program
What are some examples of mechanical loss control?
- Machine guards - Good lighting - Cleanliness - Lock out switches - Workplace design (ergonomics)
What are some examples of the implementation of loss control programs?
- Policy - Manual - Hiring - Training - Promotion of program - Reports - Committees (executive/safety)
What are some examples of human loss control?
- Safety rule enforcement - Training for safety - Careful hiring practices - Education
What happens in the review part of the approval part of underwriting an insurance program?
- Select participants - Collect prioritized lists of markets - Allocate markets - Allow time for questions after specifications have been sent out - Set a firm deadline for written proposals - Select winning proposal - Implementation (2 weeks minimum)
What characteristics should you consider is selecting qualified agents/brokers?
- Services - Experience (with similar businesses) - Account team - Personalities - Abilities - Professionalism (ethics)
What are some examples of crisis management?
- Three Mile Island ---> Nuclear activity in the 70s - Tylenol ---> Tampering with poison in packaging ---> Did a great job recovering and actually INCREASED sales - Exxon Valdez ---> Drunk capitan driving - Katrina / Rita / Ike - Target ---> Data breach ---> By not admitting the possible scope of the problem, the CEO lost his job - VW ---> Another example of a CEO losing his job
What are 3 methods of evaluating loss control projects?
1) Pay back method 2) NPV method 3) IRR method
Regression modeling (steps)
1) Plot the data ---> Are they linear? If not, transform by taking the natural log 2) Fit a regression line. 3) Test the fit, R^2, and p-values 4) Plug into the right-hand side to obtain forecast 5) Note variation. Remember that forecast is just a point estimate.
What are the 3 most common theoretical distributions used in RM? (Measure Frequency)
1) Poisson 2) Binomial 3) Negative Binomial
Name 3 factors in comparing costs and benefits
1) Probability 2) TVM 3) PV of expected costs with PV of expected benefits
What does the variation/standard deviation tell?
Absolute variation/rise
Who will assist us in managing and marketing the insurance program?
Agent or broker
AKA Physical engineering approach to loss control
Haddon's energy release approach
If the market is currently in a (soft / hard) cycle, you should not market your program.
Hard
Correlation
It is a statistical relationship (-1, +1)
Is it correct to assume normal distribution in RM?
No. In RM, distribution is usually positively skewed.
What are the theoretical distributions that are associated with severity?
Normal Lognormal Gamma Pareto
Frequency Distribution Relates to what
Number of occurrences
How often should you market your program?
Once every five years
Confidence bonds based on empirical distribution
P( X>900 ) = .1
Example of Conditional Probability: P(E) = .01, P(F) = .10, P(E F) = .009 .... P(F|E) = ?
P(F|E) = P(E F)/ P(E) = .009/ .01 = .90
Variable of interest
Predicted of dependent variable
Probability Dist must equal what? And can contain what?
Probability Distribution must equal 1 and contain mutually exclusive & collectively exclusive
Conditional probability
Probability of an event ( A ), given that another ( B ) has already occurred.
In regards to losses and retention, what probability does the total claims distribution (Convolution) assume?
Probability that Losses < retention, probability of ruin, maximum probable yearly loss, Value at Risk (VaR)
What is the key part of implementation in loss control programs?
Provide incentive
What are 2 ways to measure the explanatory power of a model?
R^2 and p-values
3 examples of dispersion
Range, variance/standard deviation, coefficient of variation
How do we forecast frequency and severity?
Regression modeling
What does the coefficient of variation tell?
Relative variation/relative risk
Mean will be to the _____ side of the median in a positively skewed set of data
Right
Is a smaller or larger p-value better to determine if an individual variable is more important?
Smaller!
What are zero-beta assets and what is an example?
They are not correlated to market risk; CAT bonds
total claims distribution relates to
Total $ losses in a given period
What is VaR?
Value at Risk; it is another distribution that is more financial based
Standard deviation
Variation from what is expected
Since distribution is usually positively skewed in RM, does that mean that probability is overestimated or underestimated when we assume it is normally distributed?
We UNDERESTIMATE the probability when we assume normal distribution.
Conditional and Severity Distribution relates to what
severity of losses
