C-70 STUDY GUIDE

Hann, Megan
TD INSURANCE

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 Table of Contents
Chapter 1- The Commercial Insurance Context........................................................................................... 3
Objective 1- Evolution Of Business .......................................................................................................... 3
Objective 2- Key Players In Canadian Commercial Insurance................................................................. 4
Objective 3- Marketing Dynamics............................................................................................................ 6
Objective 4- Regulation And Compliance ................................................................................................ 7
Objective 5 Emerging themes in commercial insurance ....................................................................... 10
Chapter 2- Commercial Insurance Stakeholders ....................................................................................... 12
Objective 1- Roles of Commercial Insurance Professionals .................................................................. 12
Objective 2- Commercial Industries....................................................................................................... 14
Objective 3- Business Characteristics that affect commercial insurance ............................................. 15
Objective 4- Essential Workplace Skills ................................................................................................. 17
Chapter 3- Risk Management and commercial insurance ........................................................................ 19
Objective 1- An Introduction To Risk Management Why Use Risk Management ............................... 19
Objective 2- The Risk Management Process ......................................................................................... 20
Objective 3- Loss exposures ................................................................................................................... 21
Chapter 4- Identifying Exposures ............................................................................................................... 25
Objective 1- Stakeholder Priorities: Identifying Exposures .................................................................. 25
Objective 2- Tools For Identifying Loss Exposures ................................................................................ 27
Objective 3- Case Study: Identifying Exposures .................................................................................... 31
Chapter 5- Applying For Coverage ............................................................................................................. 33
Objective 1- Applying For Coverage: Stakeholder Priorities................................................................. 33
Objective 2- Considering Coverage Solutions ....................................................................................... 34
Objective 3- The application .................................................................................................................. 41
Objective 4- Case Study: Facilitating The Application Process ............................................................. 45
Chapter 6- Analyzing Risk........................................................................................................................... 47
Objective 1 Analyzing Risk: Stakeholder Priorities ............................................................................... 47
Objective 2- Pricing Risk ......................................................................................................................... 48
Objective 3- Ratemaking Applied .......................................................................................................... 51
Objective 4- The Quote .......................................................................................................................... 53
Objective 4- Case Study: Analyzing risk ................................................................................................. 54
Chapter 7 Implementing The Policy........................................................................................................... 56
Objective 1: Implementing The Policy: Stakeholder Priorities ............................................................. 56

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 Objective 2: The Policy ........................................................................................................................... 58
Objective 3: Assigning, Terminating, Or Renewing Commercial Insurance ......................................... 61
Objective 4- Case Study: Explaining The Contract ................................................................................ 63
Chapter 8- Commercial Claims ................................................................................................................... 65
Objective 1: Processing Claims: Stakeholder Priorities......................................................................... 65
Objective 2- Critical Components: Understanding a claim ................................................................... 66
Objective 3: Critical Components: Investigating And Resolving Claims ............................................... 69
Objective 4- Cross Border Claims ........................................................................................................... 72
Objective 5- Case Study: Frictionless Claims ......................................................................................... 73
Chapter 9- Commercial Property Exposures ............................................................................................. 76
Objective 1- Common Property Exposures ........................................................................................... 76
Objective 2- Common property perils ................................................................................................... 86
Objective 3- Commercial Property Hazards .......................................................................................... 87
Chapter 10- Commercial Property Solutions ............................................................................................. 89
Objective 1- Commercial Property Risk Controls .................................................................................. 89
Objective 2- Commercial Property Coverage Solutions ........................................................................ 90
Objective 3- Case Study: Determining Commercial Property Coverage............................................... 93

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 Chapter 1- The Commercial Insurance Context

Objective 1- Evolution Of Business

- Businesses need to evolve and adapt to the environment and culture around them to succeed
- A business needs to stay relevant in its market to be successful and meet their customers' needs
and expectations
- Changes In market demand can impact how the business operates, what products they offer,
and how those products are marketed
- Timing is also a major factor in business operations
- Blockbuster is a great example of this. Once a movie rental hub for customers, replaced by
digital streaming services like Netflix.

- 3 categories play a major role in business evolution:

1. Technological developments
2. Climate risk
3. Globalization

Technological Development

- Technological evolution improves business processes, productivity, efficiencies and our personal
lives
- There have been a few technological revolutions that have shaped the way that businesses
operate by introducing new tools and strategies
1. The Industrial revolution (1760-1840)- technological innovations improved
manufacturing processes
2. Technical Revolution (1870-1920)- Improved means of communication increased how
quickly scientific theories were introduced- needs were now being met faster
3. Scientific/technical revolution (1940-1970)- The modern era of computers triggers the
need for technological solutions
4. Information and telecommunication revolution (1975-Present)- Fine-tuning technology
to make it faster, more efficient, more portable allowing us to communicate with
anyone, anywhere at anytime

- The spinning Jenny (1974) is one of the first known examples of an invention that was based on
research to create a better product. It increased productivity of thread for weaving during a
time where the demand for cloth was more than the manufactures were able to produce

Technological Development And Insurable Losses

- Technology is a major contributor in the kinds of coverages that are available, changes in
technology create new exposures
- In insurance, business concerns include:

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 1. Goods traveling long distances- risk of damage from vehicle upset
2. Production line equipment breaking down (repair costs/loss of contracts)
3. Scooters being used for delivery services being considered motorized vehicles and
needing insurance
4. Personal/sensitive info prone to data theft or network systems prone to cyber attacks

Technological Developments And The Digitalization Of Services

- Technology development has eased many insurance processes including:

1. Delivering policies- once handwritten now are e docs/electronic format
2. Policy management and claims handling systems have been developed to reducing
handling times
3. Drones used during claims processes to estimate property damages
4. vehicle damage estimates can be done using pictures taken by smartphones and then
sent digitally to be analyzed

Climate Risk

- Climate risk impacts nearly all businesses- factors that should be considered include:
1. Physical location and ability to withstand environmental conditions
2. Business activities and employees
3. Length, location, and diversity of the supply chain
4. Customer base

Globalization

- Is the process where businesses develop international influence or start operating on an

international scale
- Global integration of economies via trade and investments has evolved to where supply chains
include products/services from all over the world
- Honda Civic 4D is an example of this- 60% of its parts are from US/CAN, transmission is from
India, 20% remaining parts are from Japan

Objective 2- Key Players In Canadian Commercial Insurance

- Understanding how Canadian commercial insurance operates means understanding who is
involved in making it work.

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 Consumer

Direct Writer
Broker

Regulatory Bodies

Insurance Company

Reinsurance Supporting
Companies Players

Commercial Insurance Consumers

- Insurance facilitates economic growth through the security provided by insurance coverages
provided to businesses- companies protected by insurance can partake in greater risks
- Ex: manufacturing automobiles -without insurance the risk of liability (car crashes/malfunctions
etc.) would be too high and it would outweigh any profit

Insurance Companies

- Most general insurers in Canada are foreign owned (American or British parent organizations)
- Loss Ratio- ratio of total losses paid out in claims + adjustment expenses /divided by the total
earned premium
- Loss ratios determine the financial strength of the insurance company

Reinsurance Companies

- Reinsurance is insurance for insurance companies that provides protection against large losses
that they wouldn’t be able to absorb.

Regulatory Bodies

- The federal government is responsible for monitoring the solvency of federally incorporated
insurers.
- Each federally incorporated insurer must be licensed to operate in each province/territory
where it writes business
- The impact of regulations can be felt in all areas of the company- not complying with regulations
can lead to large fines
- Regulations can impact which risks underwriters are able to accept

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 Supporting Players

- The most common supporting players are:

1. Independent adjusters
2. Inspection companies/independent inspectors
3. Preferred contractors/restoration companies
4. Preferred repair garages
5. Education and data-collection companies (Insurance bureau of Canada, Insurance
Institute of Canada, Fire Underwriters Survey, etc.)

Objective 3- Marketing Dynamics

Market Cycles

- The insurance market fluctuates between hard and soft market cycles
- The property and casualty marketplace operates in a free-market system shifting between hard
and soft markets that are determined by capacity (the largest amount of risk that can be
accepted, or the max volume of business the company is prepared to accept)

Soft Market Conditions

- Come about when there is excess financial capacity in the marketplace, which creates a highly
competitive environment where underwriters typically:
1. Lower premiums/deductibles
2. Relax Policy terms and conditions
3. Relax Loss prevention and control measures
4. Write classes of business that they normally wouldn’t
- After a few years in a soft market of large volumes of business being written for a low premium,
losses and expenses will exceed the premium brought in, eventually creating hard market
conditions

Hard Market Conditions

- When a company's return rate on equity drops extensively, shareholders will demand corrective
measures,
- Hard markets drive underwriters to:
1. Approach risk with caution
2. Set higher underwriting standards
3. Give loss control and loss prevention measures more consideration
4. Tighten policy terms to limit exposures
5. Make rate increases
6. Terminate relationships with brokers that aren’t profitable or only yield small amounts
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 7. Withdraw from a jurisdiction, class of business, or individual risk when sufficient market
share has not been gained or a certain risk is not profitable
8. Withdraw from the market all together by selling the policy to another insurer or placing
it into what is called a run-off

Factors That Affect Market Cycles

- To help anticipate risks, the World Economic Forum puts together a Global Risk Report each
year that outlines risks that threaten corporations all over the world (ex: water shortages,
climate risk etc.)

Factors that affect market cycles:

- Economic conditions
- Legal climate
- Catastrophes

Economic Conditions

- Hard markets are triggered by reduced profitability. Possible causes of reduced profitability
include:
1. The underperformance of Insurance companies' investment portfolios
2. Failing interest rates
3. Government regulation

Legal Climate

- Class action lawsuits, punitive damages awards, and other areas of litigation affect profitability
of insurers
- The government can also have effect on policies through their regulations
- Insurers must consider product liability. Underwriters are cautious when considering product
liability coverages
- With property damage, the property can be replaced, injury claims can be unpredictable and
court decisions can vary

Catastrophe

- Catastrophic events can erode the insurance industries capacity

- Insurance claims catastrophes can be natural or human-caused
- Large losses, or large series of losses can take billions from the market
- Insurance companies may pull back or completely stop writing certain lines of business in
certain geographic areas that are at risk

Objective 4- Regulation And Compliance

Insurance Regulators

Insurance regulators include:

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 - OFSI (Office of the Superintendent of Financial Institutions)-Primary regulator protecting the
interest of depositors, policy holders, pension plan members, and creditors from loss.
- FCAC (Financial Consumer Agency of Canada)- oversees consumer issues expand consumer
education in the financial sector
- CCIR (Canadian Council of Insurance Regulators)- Improving the efficiency and effectiveness of
the Canadian regulatory framework
- IBAC (Insurance Brokers Association of Canada)- safeguards the interest of independent
brokers
- IBC (Insurance Bureau of Canada)- Identify regulatory issues, secure legislative efficiency,
promote self-regulation in the insurance industry
- IAIS (International Association of Insurance Supervisors- focused on finding common structure
and common standards for all insurance providers
- Provincial/Territorial regulatory boards and organizations

OFSI (Office Of The Superintendent Of Financial Institutions)

- The primary regulator of federally chartered Canadian and foreign property and casualty
insurance companies
- Protects depositors, policy holders, pension plan members, and creditors of financial institution
form loss
- They assess the safety and soundness of the institution in question
- OFSI conducts on site reviews to measure the insurers risk that include:
1. Insurance risk
2. How risks are underwritten
3. Legal and regulatory compliance
4. Dishonesty or error detection
5. Disaster recovery plans

Provincial And Territorial Regulators

- Responsibilities of provincial and territorial insurance regulators include:

1. Approving classes of business
2. Approving policy forms
3. Controlling an insurers advertising
4. Enforcing underwriting eligibility criteria
5. Licensing and supervising adjusters, brokers, and agents
6. Licensing insurers to operate in its jurisdiction
7. Monitoring each insurers compliance with provincial and territorial insurance legislation
8. Monitoring insurer solvency or provincially and territorially incorporated insurers
9. Overseeing claims settlement practices
10. Overseeing electronic marketing of insurance
11. Overseeing ethical, operational, and trade practices of insurers
12. Reviewing insurance contract wordings

Regulatory Considerations

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 - Regulators take several factors into consideration when making laws, rules, and guidelines for
the insurance industry

Solvency

- Financial institutions have an obligation to provide financial security to their consumers

- Because of this, regulators pay very close attention to insurer solvency
- A company is considered solvent when they can pay all their debts even if they were shut down
- This is achieved by having more assets than liabilities

Assets include:

- Investments
- Premiums received
- Deferred acquisition costs
- Prepaid reinsurance premiums

Liabilities include:
- Unearned premiums
- Loss and loss adjustment expenses
- Shareholders' equity
- Debt

- The federal government is responsible for regulating solvency for federally chartered insurers
- Provincial and territorial governments share the responsibility for insurers in their jurisdiction

Financial Regulatory Tests

- OFSI uses the Minimum Capital Test (MCT) to measure solvency

- MCT requires the insurers assets must exceed its liability by a specific ratio which can be higher
or lower depending on the insurer
- Federally rated property and casualty insurers must maintain MCT of 100%

Market Considerations

- Insurance companies are always looking to grow, a way to achieve this is by introducing new
products
- If an insurer wants to offer insurance on a product that doesn’t fit under any existing class of
insurance, it must seek regulatory approval
- CCIR is an association composed of regulators, insurers most conform with CCIR guidelines when
applying for new products or classes of insurance
- An insurance company must do the following when seeking approval for a new product or class
of insurance:
1. Complete an analysis of their underwriting expertise, claims handling abilities, and other
important areas to show the new product/class of insurance will be supported

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 2. Establish controls and reporting to monitor performance of the new class/product of
insurance
3. Prepare financial forecasts to show viability of the new product/class of insurance
4. Develop and exit strategy to minimize market dislocation effects

Privacy Regulation

- Businesses must comply with PIPEDA

- Consumers have privacy complaints against insurers, brokers, and other industry players on the
following:
1. Requests to access personal info
2. Use and disclosure of personal info
3. Collection of personal info without consent (including credit checks
4. Wording used on insurer consent forms
5. Discrimination claims

Objective 5 Emerging themes in commercial insurance

Important factors involved in the evolution of commercial insurance:

1. Building strong relationships

2. The use of risk management
3. Understanding exposures

1. Building strong relationships

- Two relationships within the commercial community are:
1. The broker-Client relationship
2. The broker-underwriter relationship

The broker-client relationship

- By building a relationship with clients, visiting operations, and understanding the business, the
broker is able to figure out the best coverage for the client.

The broker-underwriter relationship

- Business requirements vary from business to business, so it is not easy and sometimes not
possible to automate
- The relationship between brokers and underwriters is necessary to secure the best coverage for
the best price
- Brokers and underwriters can work together to give the client great service which can look like:
1. Timely responses
2. Accurate and comprehensive info
3. Complete submissions
4. Flexibility

2. The rise of risk management

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 - Risk management is a way to mitigate losses and reduce premiums
- Risk management includes identifying, assessing, and controlling risks that could cause loss to an
organization

3. Understanding exposures
- Before assessing or reviewing the available coverages, exposures that the business could face
should be identified
- A product centered sales approach is not the best approach, a client centered approach is
- This starts by learning about the clients business an understanding their exposures, followed by
the best coverage

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 Chapter 2- Commercial Insurance Stakeholders

Objective 1- Roles of Commercial Insurance Professionals

- The following roles will be covered in this section
1. Brokers/agents
2. Underwriters
3. Commercial claims professionals
4. Risk analysts
5. Managing general agents (MGA)

Brokers/Agents

- Insurance intermediaries facilitate the placement of insurance, and are categorized as brokers
or agents
- The roles of brokers and agents are:
1. Brokers are independent intermediaries who have agreements with any number of
insurers
2. Agents usually represent one insurer and operate according to their agreement with the
insurer. Agents can be:
▪ Independent agents- Can place their business with multiple insurers
▪ Exclusive agents (AKA Captive agents)- Place all of their business with one
insurer

Commercial Licensing Requirements

- Broker licensing is part of federal/provincial regulation

- A licensing exam must be completed to become a broker
- These licenses allow the broker to sell all lines of insurance except life
- To advance through each license level, the necessary courses must be completed
1. Level 1 General License- broker can handle sales of home, auto, and travel, and some
commercial lines under supervision of a level 2/3
2. Level 2 General License- broker can handle personal insurance as well a farm and
commercial insurance transactions, but cannot manage an agency
3. Level 3 General license- broker can manage an agency and sell all personal/commercial
lines

Unique Characteristics Of Commercial Brokers

- Commercial insurance has more varied, complex risks, often with higher values
- Commercial brokers must be proficient in:
1. Communication
▪ Ask the right questions, effectively gather information
▪ Ability to help clients understand coverages/restrictions and excluded coverages
2. Research
▪ Ability to find the best coverage for the client's needs and budget

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 ▪ Ability to provide innovative and cost-effective solutions for clients
3. Negotiation
▪ Ability to create a mutually beneficial agreement for the insurer and the insured
4. Time Management
▪ Ability to be organized, on task. And maintain proper documentation
▪ Ability to be reliable and on time

Underwriters

- Accept or reject risks on behalf of the insurer

- Must ensure the premium is fair to the risk
- Some insurers have rate manuals that fix rates for certain classes of business and don’t give
underwriters much freedom to deviate from that
- Others have recommended rates and give underwriters more freedom
- Underwriters will reject risk based on 1 or more of the following 3:
1. The line guide does not allow the Class of risk, or doesn’t meet minimum requirements
set out in the line guide
2. Market conditions could make the risk unacceptable
3. The risk is too flawed to be acceptable
- Line guide- A listing of the maximum amounts of exposure an insurance company will accept for
a certain class of risk

Unique Characteristics Of Commercial Underwriters

- Commercial underwriters must be proficient in the following:

1. Analytical and critical thinking
▪ Ability to work though info provided and organize further details
▪ Ability to compare the risk to the guidelines and determine if it can be
accepted/rejected
2. Math and statistics
▪ Ability to apply actuarial rates
3. Communication
▪ Ability to communicate with the broker and others about the account
▪ Ability to decline a risk and advise of rate
increases/restrictions/exclusions/conditions effectively
4. Attention to detail
▪ Ability to keep notes and keep files organized and up to date

Commercial Claims Professionals

- Claims professionals go by a variety of names including:

1. Adjusters
2. Claims examiner
3. Claims representative
- They investigate insurance claims, make recommendations regarding benefit payments, and
negotiate payments/settlements
- Claims professionals can be:

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 1. Salaried employees
2. Independent adjusters
3. Public adjusters

Claim Professional Responsibilities

- Confirming their authority regarding the handling of the claim

- Checking policy coverages
- Supplying the insurer with documentation (ex: Notice of loss)
- Investigating the claims
- Keeping the insurer/insured informed
- Making decisions about payments, negotiating claims settlements
- High quality customer service

Risk Analysts

- Large corporations usually have risk analysts on staff. In smaller organizations there is usually an
employee who performs some of the functions that a risk analyst would
- Duties include:
1. Identifying loss exposures
2. Preventing loss
3. Reducing loss
4. Loss financing
5. Educating other corporate managers
6. Acting as a resource to other managers (like a broker would for a small business client)

Managing General Agents

- Are brokers who work the wholesale market (aka- the brokers broker)
- They operate like entrepreneurs and have authority from the insurer to manage all of the
insurer's business as outlined in the contract between the insurer and the MGA
- MGA's have authority to:
1. Appoint agents on behalf of the insurer
2. Handle policy administration
3. Provide accounting services
4. Handle claims (if they have their own claim department/3rdparty claims administrators
- Brokers may use MGAs to place specialty risks

Objective 2- Commercial Industries

Classification systems
- The two most common classification systems used in insurance are:
1. Standard Industrial Classification (SIC)
2. North American Industry Classification System (NAICS)

NAICS Canada

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 - Is a business classification system development by statistical agencies of Canada, USA, and
Mexico.
- Developed after NAFTA to make an easy way to compare industries and collect data from all 3
countries
- NAICS using a 6-digit coding system
- The first two digits of the NAICS code indicates the company's largest business sector
(determined by largest share of revenue)
- The third digit is the company's sub-sector
- Fourth digit is the industry group that the company belongs to
- Firth digit is the company's industry of operation
- Sixth digit identifies national industries

SIC Codes

- Is an older classification system that is still in use

- They are 4-digit codes the categorize companies by the type of business activities they are
engaged in
- These codes were created by the US government in 1937 to monitor economic activity across
industries
- SIC and NAICS codes can be used at the same time
- SIC codes are used mostly for older industries like manufacturing and agriculture
- NAICS codes are used for newer industries, like tech
- Canadian insurers use a mix of NAICS and SIC codes

Industries

- Businesses have their own characteristics, processes, and activities that give them different risk
exposures
- Businesses are grouped together into different industries based on their operations
- Each industry has specific considerations regarding insurance
- Ex: Finance and Insurance Industry has:
1. Online exposures
2. Cyber/Hacking exposures
3. Geographic exposures (many insurance companies operate in multiple countries)

Objective 3- Business Characteristics that affect commercial insurance

- The most common business characteristics that affect he placement of commercial insurance
are:
1. Size
2. Location
3. Expertise
4. Claims History
5. Regulatory requirements

Size

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 - Size of the business affects the premium and the insurers decision to accept it
- The following factors affect an insurers assessment of a commercial risk's size:
1. Annual revenue- higher revenue= more clients/opportunities
2. Number of employees- # of employees impacts liability exposure
3. Place of business- Home office, strip mall location, commercial building all
different exposures
4. Equipment- Tools vary from hand tools to manufacturing equipment
Location

- Factors about location that a company will review

1. Geographic location- proximity to the fire department/police effect property exposures
2. Urban vs. Rural location- Urban properties present different risk than rural
3. Environmental factors- companies in areas prone to flood, earthquake, fires etc. have
increased risk of loss

Expertise

- Factors that indicate how stable and credible the business is includes:
1. Business owners training and history-extensive training in their field increases likeliness
of profitability
2. Time in business- A more experienced business owner could have fewer claims
3. Stability- Businesses that have been profitable for longer have a better chance of
survival
4. Credibility- businesses that have been around a long time, have repeat customers, and
referrals are running the business well and likely will have fewer claims

Claims History

- Insurers will review:

1. Patterns- Frequent claims can indicate carelessness, property in disrepair, poor
storage/security, or financial hardship
2. Loss frequency- how often are claims occurring? Are they similar losses? Are loss
prevention measures in place for similar losses?
3. Potential for future losses- Claim frequency of similar business can be reviewed to
assess likeliness of future loses

Regulatory Requirements

- Examples of industries and areas that are regulated include:

1. Eating establishments- food hygiene, avoiding slip-and-fall injuries
2. Childcare/Education- employee background checks, protection of children
3. Financial services- privacy regulations, secure sensitive info, avoid cyber attacks
4. Agricultural products- safe working conditions, storage protocols
5. Drugs and cosmetics- product testing

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 Objective 4- Essential Workplace Skills
- The following are essential workplace skills
1. Collaboration
2. Active listening
3. Asking effective questions
4. Delivering difficult messages

Collaboration

- Working together is an important part of achieving objectives

- Collaboration can lighten the workload for individuals, but also leave room for potential
misunderstandings and confusion
- Communication is key

Teamwork and online workplace collaboration

- Advances in technology mean online communication is more prevalent
- Collaboration via Microsoft teams and skype allow info to be shared via instant messaging
- Video conferencing is another means to communicate online

Active Listening

- To work effectively with others, you must understand and balance different perspectives
- Active listening is a way to see things from another perspective
- Active listening requires the ability to put aside your own thoughts and perspectives and focus
entirely on another person
- Active listening is also about identify unspoken messages as well by observing tone, body
language, and word choice
- The first step is understanding the person perspective

Asking Effective questions

- Asking good questions, clarifying assumptions, and balancing other perspectives are imperative
to effective communication
- Asking open ended questions, active listening, asking follow-up questions, asking probing
questions and being tone conscious are all important
- Helpful strategies include:
1. Avoid questions that focus on why someone didn’t succeed
2. Avoid leading questions
3. Think about how assumptions may be embedded within a question

Delivering difficult messages

- Reasons for needing to convey a difficult message include:

1. An unanticipated development
2. Failure to achieve a task
3. A change in strategy
4. An unexpected result

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 5. A surprising disclosure

- When delivering difficult messages, it is important to be:

1. Timely
2. Specific
3. Honest
4. Focused on the facts
5. Positive
6. Informative
7. Informing them of what happens next

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 Chapter 3- Risk Management and commercial insurance

Objective 1- An Introduction To Risk Management Why Use Risk Management

- Risk management is a process that involved identifying, assessing, and controlling risks that
could cause loss to an organization
- Brokers/underwriters make recommendations to reduce/eliminate loss exposures
- Clients may need help to identify their insurable risks and coverage needed, this is an
opportunity to work with the client instead of selling to them
- The objectives of risk management are:
1. Determine key loss exposures
2. Provide a plan of action to manage those risks
3. Recommend insurance coverage for those risks

Risk Management Provides Added Value

- The ways a broker can add value through risk management are:
1. Risk identification and assessment
2. Risk control
3. Risk monitoring
4. Risk financing

1.Risk identification and assessment

- Is used to guide existing risk control/risk financing programs or t develop new ones
- Also used to reduce possibility of missing/overlooking significant risks/exposures that could lead
to loss

2.Risk Control
- Is about preventing loss from happening
- Broker can assist by providing loss prevention and loss reduction tools/services to identify and
manage risks

3.Risk financing
- Involves negotiating he broadest possible insurance coverage for the best possible price

4.Risk Monitoring
- Involves engaging with the client throughout the year/policy period to monitor the risks and
coverage placed
- Revisions may be needed if:
1. New loss exposures arise
2. Existing controls are ineffective
3. Clients start using new techniques/tools in their operations
4. Insurance marketplace changes occur regarding coverage availability/affordability

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 Objective 2- The Risk Management Process

Enterprise Risk Management

- An approach to managing all of an organizations key business risks and opportunities in order
to maximize shareholder value
- The steps in the risk management process are:
1. Identify loss exposures
2. Analyze loss exposures
3. Formulate the best technique/Examine feasibility of risk management techniques
4. Select the best techniques
5. Implement the risk management techniques
6. Monitor the results

Identify Loss Exposures

- The following methods are used to identify loss exposures:

1. Risk registers and assessment questionnaires- risk registers are a list of internal and
external risks that confront a business. Questionnaires determine key
hazards/vulnerabilities within the organization
2. Financial statements and other documents- documents provide info about current
financial and operational status and any planned changes
3. Loss history- provide a summary of past losses
4. On-site inspections by loss control engineer or subject matter expert- large
organization may have its own inspectors, engineers etc. Smaller or less complex clients
usually rely on their insurance broker

Analyze Loss Exposures

- The impact of a loss includes its frequency and resulting severity

- To determine the impact of a loss, qualitative and quantitative analysis can be used:
1. Qualitative analysis- assess non-numerical data like observations
2. Quantitative analysis- reviews numerical data/figures like cost, finances, or population
3. A combo of both techniques may be used
- Other techniques for assessing loss include:
1. Root cause analysis- Determining the root cause of an incident
2. Fault modes and effect analysis- Analyzing the outcome when a new risk factor is
introduced
3. Gap analysis- Determining whether business requirements/objectives are being met,
and if they aren’t, what steps should be taken to meet them

Examine The Feasibility Of Risk Management Techniques

- The following techniques are used to formulate ethe best technique

1. Risk control-Techniques to prevent/reduce the severity of losses (avoidance, loss
prevention, loss reduction. Separation, diversification, non-insurance risk transfer)

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 2. Risk financing- Involves techniques to pay for losses that fall into two categories:
▪ Retention- paying for the loss from one's own resources, best for highly
predictable, low severity losses. These can be paid for by current expenses,
unfunded reserves, funded reserves, borrowing, captive insurance company (pg.
3-12 advantages and disadvantages)
▪ Transfer- Two transfer methods are via contract and through insurance
• Non-insurance risk transfer (aka contractual risk transfer) can be done
through a hold-harmless agreement, construction agreement, contract
of sale/suppl, or purchase order agreement (Pg 3-13 advantages and
disadvantages)

Select The Best Risk Management Technique

- To select the best technique or combo of loss control and loss transfer techniques the
organization must determine evaluation criteria. (Financial considerations)
- The total cost of each risk must be measured including loss control and transfer costs
- Non-financial considerations like the organizations goals and objectives may need to be
considered as well

Implement The Risk Management Plan

- Requires a technical decision as to what should be done and a managerial decision as to who
should be responsible for accomplishing each part of the risk management program
- Risk management program must include:
1. A plan for implementing the risk control program- outside experts may need to be
utilized, budgets can be a factor- low-cost changes can be implemented immediately,
those requiring larger capital may have to wait until the next budget review
2. A communication plan- any risk management plan requires an extensive external and
internal communication plan
3. A method to allocate costs- the cost of risk is composed of the cost of loss control,
insurance premiums, retained losses, and even the overhead of the risk management
department

Monitor The Results

- The risk management plan requires regular evaluation and updating as exposures
change/develop.
- A good way to measure performance is through benchmarks

Objective 3- Loss exposures

Four categories of risk

1. Hazard
2. Financial
3. Operational
4. Strategic

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 1. Hazard
- Pure risk covered by insurance including:
• Property
• Liability
• People
• Net Income

2. Financial
- Risk created by fluctuations of the financial market; it includes:
• Market risk
• Credit risk
• Liquidity risk
• Currency risk

3. Operational
- The risk of loss from inadequate or failed internal processes, people, and systems, or from
external events which include:
• Personal mistakes
• Internal and external fraud
• Computer failures
• Damage to physical assets

4. Strategic
- Risks that affect or are created by an organizations business strategy and strategic objectives
(speculative risk) and includes
• Moving into new markets
• Reputational risks
• Turnover in leadership

Loss Exposures

- A loss exposure has 3 elements:

1. Assets exposed to loss
2. Cause of loss (perils)
3. Financial consequences of the loss

Assets exposed to loss

1. Property- includes physical assets/resources owned by the insured (building, stock, equipment
etc.)

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 2. Liability- Legal liabilities arise from situations where the insured will be held legally liable for a
negative event (ex: negligence)
3. People- Expenses incurred to people through disability, death, medical costs, or loss of key staff
members
4. Net Income- Indirect loss of income or extra expense related to business operations

Types of property

Personal property

1. Intended for permanent placement- counters, furniture, fixtures, large display cases, heating
equipment
2. Subject to movement- Desktop computers, photocopies, cash registers
3. Intended for movement- laptop computers, inventory, automobiles, contractors' equipment

- The follow types of property are not obvious sources of loss exposure
1. Property that is owned, leased, borrowed, or held for others-
2. Offsite property like inventory or equipment- property stored at other locations is also
subject to loss
3. Property under construction- not always covered by contractors
4. Intangible property- ex: a secret formula is solen or exposed through social media

Liability loss exposures

- Is the possibility that an individual or firm will be held legally responsible for damages suffered
by another party
- The costs associated with liability are mostly compensatory payments for damages and or
injuries
- The 3 main areas of liability are:
1. Negligence- Failure to use the degree of care a reasonable person in the same situation
would use to avoid injury to others (negligence and accidental negligence)
2. Vicarious Liability- A situation where one party is responsible for the actions or
omission of another party (ex: employer employee, parent child)
3. Absolute liability- A modification of negligent liability- activities that are inherently
dangerous create liability if a third party is injured (ex: use of explosives)

People loss exposures

- The risk management role regarding people loss has two aspects:
1. Advise the client on dealing with the loss of a key person(s)
2. Advise the client on employee benefits needed to maintain a stable workforce

Net income loss exposures

- There are 3 types of income loss exposures (aka earnings loss exposures)

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 1. Business interruption- Concerns loss of profits and he expenses that continue when
business is interrupted due to direct damage to the insured's property
2. Extra expense exposures- some businesses must continue to run regardless of business
interruption, incurring expenses over their normal operating costs
3. Supply Chain risk- financial consequences due to a key customer or supplying
experiencing an interruption in operations

Cause Of Loss (Perils)

- Perils can be grouped by origin into 3 categories:

1. Human perils- caused by human behavior
2. Natural perils- caused by natural forces
3. Economic peril- Includes changes in consumer taste, currency fluctuations.
Depreciation, stock market declines, technological advances- all of which can cause
economic loss
- Perils are influenced by potential hazards, or conditions that increase the likelihood and severity
of a loss

Financial Consequence Of The Loss

- When an item is damaged, an organization will be affected by:

1. The reduced value of the asset
2. The decreased volume derived from the asset
3. The increased expenses to keep the asset operating

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 Chapter 4- Identifying Exposures

Objective 1- Stakeholder Priorities: Identifying Exposures

Stakeholder Priorities

Client priorities

- The client is the person who best understands the risks that their business faces
- To identify exposures effectively, the clients' priorities are:
1. To help determine which parts of their business are most susceptible to loss
2. To prioritize the most valuable aspects of their business operations
3. To consider threats that could damage the business
4. To communicate proactively with the broker about risks and challenges the business
faces
- It is in the client's best interest to identify loss exposures in a timely manner, and in a way that
avoids disrupting regular business activities

Broker priorities
- When identifying exposures, the brokers priorities are:
1. Build a trusting relationship with the client by investing time into understanding their
business objectives
2. Use their knowledge of the tools available to identify the possible losses that the client's
business may face
3. Stay updated on typical and emerging risks as well as the best methods to identify these
exposures though communication with colleagues and industry research
4. Match the client's potential exposures with the best possible insurance products
5. Reach out to an UW to find out what info is important when considering loss exposures
- The broker should never assume that the client is able to recognize all the exposures their
business faces, they are not insurance professionals
- Failure to identify key assets that have value for the business can lead to major financial loss

Underwriter Priorities
- UW's are not typically involved with the original identification of the clients exposures
- UW's depend on the client and broker to provide the info needed to properly assess the risk
- During this stage the UW's priorities are to:
1. Communicate any insuring requirements so the broker can consider them during the
initial identification
2. Be attentive to any questions the broker may ask regarding auto insurance needs

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 Priorities By Exposure Area

Property loss exposures

- Clients can usually identify their major exposures

- Insurance professionals help by recognizing other exposures that may have been overlooked but
could cause major financial consequences if a loss occurs
- Examples include:
1. Property of others held in the client's location
2. Client property stored off site
- The financial consequence of a loss from these exposures can affect the commercial client and
other internal/external stakeholders within the companies supply chain
- Another challenge for commercial clients in manufacturing, research and development, and
information management is insuring intangible assets
- Intangible assets aren’t physical in form but are very valuable to the company (ex: trademarks,
copywrite, goodwill)

Liability loss exposures

- Liability insurance is important for all commercial enterprises
- Businesses have a duty of care to protect the public from bodily injury or damage to property
- Brokers can assist clients in understanding the importance of liability by making them aware of
their duties and identifying risk management solutions to help prevent/reduce liability loss
exposures
- Developing/implementing waivers of liability or legal contracts and transferring liability to other
parties are examples of effective risk management that can limit the client's responsibility to
some loss exposures
- Brokers can give advice to commercial clients to protect their customers and themselves ex:
maintaining good housekeeping, keeping workplace free from debris

People loss exposures

- Understanding employee contributions and organizations contractual obligations is important
- Breaching any existing terms and conditions could cause serious financial consequences for the
employer
- Some provinces may provide workers comp plans for injured employees, but not all commercial
clients will have access to those plans

Net income loss exposures

- Net income exposures (earnings loss exposures) arise from a direct loss to an organization's
assets or from business risks
- Ex: a manufacturer suffers a production machine breakdown and cannot manufacture products,
resulting in loss of sales
- Most businesses engage in business continuity exercises to help prepare for events that could
interrupt operation. This process helps them identify:
1. The types of exposures that could lead to a net income loss
2. The degree to which such a loss would affect operations (ex: total or partial shutdown)

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 3. The time needed to get back to work

Objective 2- Tools For Identifying Loss Exposures

Business Tools For Identifying Risk

- The following is a list of question to help start the risk identification process
1. What risks can occur?
2. What aspects of the business can they affect?
3. How rare are the risks?
4. How reliable are our risk controls?
5. What level of loss is likely for each risk?
6. What is the worst-case scenario for each risk?
7. What risks can we improve?
8. How can we improve those risks?

The Prouty Approach To Risk Management

- The Prouty approach is a popular approach to evaluating risks that was developed by Richard
Prouty
- It allows projections to be developed and loss exposures to be prioritized so that resources can
be allocated effectively to ensure risks can be managed through either retention, transfer, or
avoidance
- The argument Prouty made was that where the probability (frequency) and impact (severity)
can be estimated accurately, prudent risk managers will target those exposures in the middle of
the matrix (page 4-8 chart shows these in yellow) for risk transfer via insurance
- Those risks on the low end of the risk spectrum (page 4-8 chart shows these in green) are best
retained
- Those risk on the high end of the risk spectrum (page 4-8 shoes these in red) are best avoided
entirely

Risk Assessment Surveys And Risk Maps

- Risks can also be analyzed using a risk assessment survey and a risk map (aka risk matrix)
- These are tools used to identify, evaluate, and prioritize risks that could majorly impact a
company's ability to accomplish its business strategies
- The risk assessment survey is used to rate the significance and likelihood of a business risk that
occurs.
- On the Risk Assessment survey, the risk is assessed by multiplying the likelihood by the impact
- Once business risks are assessed, a risk map is used to plot the likeliness and severity of the risks
occurring (page 4-9 shows a great example of a risk assessment survey)
- Usually, multiple risks are assessed on the risk map to give the business owner visual
representation of their potential impact (page 4-10 shows a great example of a risk map)

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 Root Cause Analysis

- Identifying and addressing the root cause of a risk is essential to ensuring that the response to
that risk is complete and effective
- Root cause analysis is especially important when the organization is dependent on other
processes or divisions within the organization and other stakeholders are involved

SWOT (strength, weakness, opportunity, threat) analysis

- Used to determine viability of business strategies (ex: deciding to introduce a new product line
or not)
- Page 4-11 shows are great example of a SWOT analysis

A holistic View
- All types of organizations take a holistic approach to managing risks and identifying exposures
by viewing their business in its entirety and considering that both internal and external risk are
connected
- Insurance professionals who take a holistic approach provide effective and comprehensive risk
mitigation and insurance transfer solutions

Tools For Identifying Loss Exposures

- The tools insurance professionals use to understand business risks and develop insurance terms
are:
1. Surveys, risk analysis questionnaires, and checklists
2. Flow charts
3. Financial statements
4. Contracts and other records
5. Loss histories
6. Inspections

1.Surveys, questionnaires, and checklists

- Are the most common tools used by insurance professionals to identify loss exposures for
commercial clients
- They provide a standardized approach to gathering information about commercial operations
- If an exposure survey is used to identify exposures, it is important to be aware of:
1. The survey is not an application for insurance, but it can resemble one
2. The survey should be appropriate for the type of organization being assessed
3. The survey should be modified to make sure the information collected is relevant –
supplementary forms for specific industries may need to be completed
4. Completing the survey does not guarantee the insurance coverage is available
5. The survey may not provide all of the facts about the client's operations

Risk analysis questionnaires

- Are commonly used identification tools that are convenient, and readily available

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 - There are some disadvantages to consider including:
1. May not be specific, missing key loss exposures
2. Questionnaires are usually developed by UW's and usually focus on insurable loss
exposures only (not all loss exposures are insurable, but they still need to be addressed)
3. If a client has multiple locations/divisions, separate questionnaires may be required
4. Insurers have their own questionnaires that need to be completed, so if a broker is
marketing to multiple UW's, filling out so many questionaries can be time consuming
5. Questionnaires don't tell the whole story and can fail to reveal key loss exposures- they
should be joined with other documents and inspections

Checklists
- Do the following:
1. Describes subjects of insurance
2. Highlight the perils the exposures are subject to
3. Lists types of insurance policies for the exposures
- Also used to sell insurance and gather basic underwriting information

2.Flow Charts

- Is a graphic representation that outlines a workflow or process

- It shows a step-by-step approach to solving a task
- Especially helpful for manufacturing clients
- Useful for showing interdependencies of each step of the manufacturing
process/interdependencies with external stakeholders (Pg 4-11 has a great flow chart example)
- Flow charts reveal any bottle necks in production
- Flow charts may be too simplistic

3.Financial statements
- Such as:
1. Balance sheets
2. Income statements
3. Other accounting documents
- All assist in identifying the assets, liabilities, and operating results of a business
- A balance sheet identifies the major categories of assets such as:
1. Buildings
2. Stock
3. Organization's liabilities
4. Organizations net worth
5. Accounting valuations of the assets
6. Financial obligations such as loans
- This information allows insurance professionals to identify continuing obligations that the client
could face in the event of a shutdown of operation due to a loss

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 - A typical challenge for brokers is trying to figure out an appropriate amount of insurance value
compared with the balance sheet value of an asset
- In insurance most assets are valued based on replacement value whereas accounting figures on
the balance sheet are usually depreciated values
- An income statement (profit and loss statement) summarizes revenues and expenses for a
specific period of time
- If revenues exceed expenses, profit is made- vice versa, profit is lost
- Income statements give info that allow insurance professionals to determine the impact of a net
income loss exposure if a business interruption occurs (net income Is the difference between
revenues and expenses)
- Statement of cashflows is a financial statement that shows how changes in the balance sheet
and income affect cash and cash equivalents entering and leaving a company
- During a loss, and organization would rely on its cash to keep it running short term

4.Contracts and other records

- Include purchase agreements which identify the type and value of an asset as well as the
financial interest in the asset
- Contracts with major vendors/contractors are important as they provide info on the scope of
work or description of the assets involved

5.Loss Histories

- Provide a summary of past losses arising from exposures that could be repeated in the future
- Identify past loss exposures and can be used to predict future losses
- Main disadvantage is the data may not be:
1. Relevant
2. Complete
3. Organized
4. Consistent
- Does not provide the "total picture"

6.Inspections
- Cannot be substituted with charts, financial statements, surveys etc.
- Firsthand impressions are more useful than second or third hand info
- Loss control inspections can be conducted by the broker or loss control engineers or other
experts
- The underwriter usually orders loss control inspection to provide a summary of hazards and
includes:
Info on the overall condition of the premises and operations regarding:
▪ Age and housekeeping
▪ Physical description of buildings and equipment (type, make, model)
▪ External risks by type including:
• The occupancy of neighboring premises

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 • The types of protection systems (fire, burglary, Etc.)
- All of this info is compiled into an inspection report that the underwriter uses to determine
insurability
- Disadvantage of site inspections is they can be very expensive

Objective 3- Case Study: Identifying Exposures

Overview

- This case study reviews how a broker can use flow charts, financial statements, and other
documents to identify key net income loss exposures and put together a risk management plan
for a custom furniture building company

Situation

- New Hamburg Custom furniture manufactures high-end tables and chairs for residential
kitchen's and dining rooms
- Recent risk control insurance inspection identified areas of improvement

Using The Flow Chart To Identify Exposures

- Some of the issues identified include:

1. Supplier of raw material- (single or multiple supplier(s)? are raw materials readily
available or is storage of surplus material needed?
2. Breakdown of CNC cutting machine- machine is integral to entire production process. If
it breaks down, business interruption will occur
3. Staff training for different machines- employees need to be cross trained on multiple
machines to prevent interruption of machine operator becoming ill, dies etc.
4. Drying room- limited space in the drying room during peak season causes disruptions to
the manufacturing process- look into alternate facilities

Fixing Bottlenecks

- Main bottleneck is the drying room having limited space, which is being worked on

Contingency Plan For Machinery Breakdown

- There is a need for a contingency plan in the event of machine breakdown, which is one of the
main causes of net income losses
- Some questions highlighted in the inspection were:
1. Are replacement parts quickly available?
2. Who will repair the machines?
3. Are their back-up machines available?

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 Using Financial Statements

- One of the key exposures identified is the business interruption risk that would happen if the
CNC cutting machine were to break down
- The broker will use New Hamburg's financial statements to figure out how to cover the risk
- Questions to be answered:
1. How long would the interruption last?
2. What is the worst-case scenario?
3. Would it be a total or partial interruption?

Reviewing Contracts And Other Documents

- The broker should also ask to review any contracts New Hamburg has in place with suppliers,
customers, employees, banks, etc.
- These documents provide insight on financial exposures
- All of the contracts and documents will help the broker put together a risk management plan for
New Hamburg

Outcome

- By reviewing the flow chart, financial statements, contracts, and other records, the broker is
able to identify New Hamburg's net income loss exposures
- This helps the broker to put together an application for business interruption insurance

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 Chapter 5- Applying For Coverage

Objective 1- Applying For Coverage: Stakeholder Priorities

Understanding Stakeholders

- The following questions can be useful in understanding a stakeholder's objectives

1. How would the stakeholder describe themselves?
2. What makes the stakeholder unique?
3. What are the stakeholder's larger business objectives?
4. What does the stakeholder expect from the insurance relationship?
5. How much risk is the stakeholder willing to take on?
- It is also important to recognize challenges the stakeholder could face like:
1. What could prevent them from meeting their business objective?
2. What relevant information could the stakeholder be withholding, and their motivation
for doing so?
3. What could happen to existing circumstances that would impact them?

Client Priorities

- After their exposures are identified, clients may not know about all of the different insurance
coverages available
- It’s unlikely they will take insurance to cover all possible threats
- When deciding what insurance coverages to apply for, clients must:
1. Clarify their organizations objectives to prioritize their exposures
2. Decide whether to avoid, reduce, or transfer their risks
3. Tell their broker what their requirements are so the broker can negotiate the best
results

Broker Priorities

- During the application phase the broker must make sure the client ends up with the best policy
for their needs, from the best possible insurer. To do this, the broker must:
1. Understand the clients and the underwriters' priorities that they work for
2. Be knowledgeable about the available markets and products insurers offer
3. Stay up to date on insurers' coverage options. Lots of insurers provide a wide variety of
coverages, but some risks are hard to find coverage for.
4. Make sure the application is completed properly, and submitted

Underwriter Priorities

- In this stage it’s the underwriters role to decide to accept or reject the application for insurance
- To do so the underwriter must
1. Make sure accurate and relevant info is on the application including:
▪ Applicant details

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 ▪ Loss history
▪ Insurance requirements
2. Work efficiently to review the application quickly
3. Communicate with the broker to clear up any uncertainty, building a relationship with
the broker makes delivering bad news easier

Stakeholder Priorities During The Application Process: An Example

- Two contractors show stakeholders priorities during the application process. Both contractors
deal in renovations, but their overall objectives are different, meaning insurance needs are also
vastly different, even though both are contractors
- Contractor A- retired, works part time to stay busy. Does residential renos, gets word of mouth
referrals, looking for protection against accidental damage to his clients property
- Contractor B has a young family, does retail renos, advertises to get new jobs, works for large
realty companies, looking for protection for:
1. His employees
2. Expensive tools
3. Contractual obligations to building owner

Objective 2- Considering Coverage Solutions

- When placing coverage, the following areas need to be negotiated and reviewed:
1. Policy types
2. Insurance markets
3. Alternative insurance solutions

Policy Types

- Policy types include:

1. Monoline policies
2. Package polcies
3. Personalized packages

Monoline Packages

- Serves 2 purposes
1. To provide the client with the simplest coverage needed to maintain business
operations
2. To cover exposures that cannot be covered under a package policy

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 Insurance For A Law Firm Example

Insurer A package policy Insurer B Monoline Policy

• Property • Errors and
• Liability Omissions
• Business Interruption

Advantages Of Monoline Policies

- They allow insurers to accept risks limiting their exposure while still maintaining profitability.
The exposures that are not covered under a package policy can be underwritten in a specialty
market where the pricing is more refined and specific to the higher risk
- They allow clients to cover only what they want/need covered

Disadvantages Of Monoline Policies

- Can be more expensive to separate coverages or lines into multiple monoline policies with
different insurers
- They expose clients to potential gaps in coverage
- The claims may be more complex if multiple monoline policies are in force and may require
specialized claims experts

Package Policies

- Package policy is a general term, many common polcies are packages that cover multiple lines of
insurance within one policy ex: multiline policy could include:
1. Property coverages
2. Crime coverages
3. Liability coverages
- And A multi-peril policy could cover
• Fire
• Theft
• Vandalism
- Most business package polcies are applicable to the following risk types:
1. Small to medium size businesses
2. Contractors
3. Motels and hotels
4. Offices
5. Apartments
6. Condominiums
7. Wholesalers
- The following risk are generally too diverse to incorporate into package policy
1. Manufacturers

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 2. Large risks
3. Unusual exposures or operations

Advantages Of Package Policies

- Brokers can be given binding authority for package policies, improving the amount of time it
takes to get a policy in place
- Package polices allow for standardization of coverages for similar risk
- UW and claims training is easier with package policies
- Renewals can be automated with no underwriter intervention due to the standardization of
wordings, coverages, and pricing (automatic renewal can be programmed based on certain
criteria)

Disadvantages Of Package Polices

- They restrict UW's ability to deviate from a standard rate or provide concessions
- The automation of renewals can mean some policies are not reviewed at all or not often enough
- Making changes to the package, rates, or wordings is labor intensive and will affect a large
volume of the book of business

Personalized Packages

- Aka build up, custom, or a la carte package is used for risks that do not qualify for a package
policy but are still acceptable within UW guidelines
- This could be a good fit for businesses that only need coverage for a few exposures

Advantages Of Personalized Packages

- They give UW's greater freedom to tailor a policy to a business's needs

- They allow for more flexibility in pricing
- They give UW's the ability to exclude exposures that should be either placed in specialty markets
or are not insurable

Disadvantages Of Personalized Packages

- Include labor intensive application process that’s difficult to automate

- Can be more expensive than package polices, making them harder to sell
- Cannot be delivered via a broker's binding authority, more UW time and staff needed to service
these policies

Insurance Markets

- Some of the main players in the insurance market are

1. Insurers
2. Wholesalers
3. MGA's
4. Lloyds
5. Captives
6. Reciprocal Insurance exchanges

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 1.Insurers

- Provides insurance solutions for individuals and companies. Offers coverage/ compensation for
loss, damage or injury in exchange for a premium set by an underwriter

Advantages
- When brokers build relationships with companies to place large volumes with specific insurers,
the broker becomes an expert in 1 or 2 insurers products
- Large insurers can provide brokers with a lot of solutions for their clients

Disadvantages

- Smaller insurers may not be able to offer specialized coverage for high-risk exposures, there
experience could be with certain market segments, or they may not have capacity to write large
books of business
- Large insurers have strict underwriting guidelines limiting the types of risks the can accept

2.Wholesalers
- Used when a broker has trouble arranging insurance for a client- for hard-to-place risks, they
provide access to a greater number and wider range of insurers

Advantages
- Brokers who require capacity above their present standards markets may use wholesale brokers
to provide the capacity
- Brokers may work with wholesale brokers to protect normal markets and profit-sharing
arrangements by using them to place risks with higher loss frequencies

Disadvantages
- Wholesale brokers don’t have binding authority from the insurer, which can interfere with
securing coverage
- Cost of policies will increase and reduce the commission for brokers

3.MGA's
- Are a type of wholesale broker that works on the insurers behalf while also working with the
original broker and client. All MGAs are wholesale brokers, but not all wholesale brokers are
MGA's. MGAs usually have some authority to underwrite, bind, and settle claims, on behalf of
the companies they represent, wholesalers don’t

Advantages
- MGA's allow brokers to write accounts with potential higher risk without affecting their loss
ratios
- MGA's allow brokers to insure accounts that otherwise may not have a competitive market that
is willing to underwrite that type of risk
- MGA'S have binding authority from insurers (other wholesale brokers do not)

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 Disadvantages
- MGAs don’t deal with clients directly, they only deal with brokers
- MGAs are not regulated the same way insurers are, this can create challenges with the many
high-risk products they insure

4.Lloyds
- Is an association of independent UW's operating out of England. It isn’t an insurance company; it
is a marketplace for large/unusual insurance exposures. Brokers seeking this type of coverage
can connect with those offering it. Specialty classes of business they insure include:
1. Kidnap and ransom
2. Fine art
3. Aviation war
4. Bloodstock (racehorse insurance)

Advantages
- Lloyds has a unique business model that allows them to increase they types of risks they can UW
- Lloyds contract UW facilities give brokers a better sense of control over their business
- Lloyds pays higher commissions to brokers

Disadvantages
- Only Lloyds brokers can place risks in the Lloyds market
- Lloyds operates in place of the insurer, so brokers need people to:
1. Process the applications
2. UW and place risks
3. Issue policies
4. Maintain the statistical data insurers transmit to the IBC (Lloyds brokers do this, not
Lloyds itself)

5.Captives

- A captive insurance company is an insurance company owned by one or more entities known as
parents whose purpose is to insure all or some of the risks of its owners or affiliated
organizations
- Pure captives have one owner and insure only the risks of the owner or affiliated firms
- Captives are often set up because due to unavailability or high cost of traditional insurance
products
- Group captives have multiple owners and insureds (ex: hospitals)

Advantages
- Allows the owners better control of insurance costs
- Allow for tax benefits, including deductions for the parent company on premiums paid to the
captive, as well as gift and estate savings

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 - Access to lower cost insurers

Disadvantages
- Captives will not benefit from the spread of risk as much as standard markets do

6.Reciprocal exchanges
- Are a means of insurance where subscribers exchange insurance policies and pay premiums
through an attorney-in-fact to pool and spread risk
- They are pools where a number of businesses or non-profits:
1. combine their insurance risks and premiums
2. recruit new subscribers
3. UW business
4. Receive premiums, and
5. arrange contracts of reinsurance
- Reciprocals are licensed by provincial regulators and operate like an insurance company with
some exceptions:
1. They aren’t incorporated
2. They operate through a principal attorney
3. They nominate an advisory board to oversee membership and fees

Advantages
- Can be used to maintain coverage for difficult/traditionally uninsurable risks
- Can return money to subscribers if payments exceed required payouts

Disadvantages
- They may only cover apportion of a client's insurance requirements. A brokerage can assist
clients in meeting their ither insurance needs through traditional markets

Alternative Insurance Solutions

- Sometimes alternative and specialty insurance companies are not able to provide a solution for
a business or risk
- The following are alterative insurance solutions
1. Retrospective Insurance
2. Self-Insurance
3. Layered programs
4. Subscription policies

1.Retrospective Insurance
- A retrospective rating is a rating procedure that determines the final rate at the policy
expirations when the claims experience is known
- The premium is adjusted as the loss experience of the business develops over time
- Companies tend to by retrospective-rated policies to try a cover risks including:
1. Workers' comp
2. Property, and

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 3. Crime coverages
- This rating is used for risks that won't develop into catastrophic losses, but may occur regular

Advantages
- Premium reductions are immediate based on the current loss position
- Businesses with good loss experience and predictable claims will have low premiums
- Businesses with a large catastrophic loss in their history could find the plan beneficial if the
current situation is minimal or low risk

Disadvantages
- If claims take a downward turn, premiums are higher
- Deductibles can be large

2.Self-Insurance
- Is a risk management technique used by companies to mitigate their own losses
- Companies carry the risk themselves
- They set aside a pool of money in the event of an unexpected loss
- This can be more economical than traditional insurance

Advantages
- Improves a company's operating profits by reducing premium cost
- There is no need to have profit margins and no cost of doing business with a broker/insurer

Disadvantages
- Chance of loss still exists and failure to maintain the right amount of funds could cause major
issues in the event of loss
- There won't be the same resources available as an insured business in the event of a loss

3.Layered programs
- Allows an insurer to limit its exposure but still provide insurance solutions but still provide
insurance solutions to potential clients
- Businesses can purchase additional limits over what the primary insurer provides (aka a top up )
- Excess insurance can fill gaps (excess insurance does not kick in until all other similar insurance
on the same subject is exhausted)

Advantages
- Increased limits may be available for smaller premiums than under a primary policy
- Excess/layered programs offer insulation against rising litigation costs and jury awards

Disadvantages
- There is still a possibility for insufficient coverage if limits and liabilities are not assessed or
reviewed regularly
- More parties are involved in a claim, excess insurers will need to be included where their polcies
respond

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 4.Subscription Policies
- Is a policy where two or more insurers take on a share of the policy.
- The "lead" company is responsible for the review, acceptance, and UW of the risk
- The lead company provides declarations and wordings
- These policies are most common for large commercial building risks, to cover:
1. Building replacement costs
2. contents, and
3. rental income

Advantages

- Multiple insurers share the risk and gain premium volume without having to assume the entire
risk

Disadvantages

- The lead company controls:

1. The rate
2. Policy declarations
3. Policy wordings
- Other companies must accept the terms
- The only negotiable term is their percentage of the risk they will accept

Objective 3- The application

The Application

- Is a request for insurance that introduces the applicant to the insurance company
- It also identifies the broker of record (broker who is currently receiving commission to handle a
policy), and which insurer the coverage is being directed to
- The application includes:
1. Applicant information
2. Limits and deductibles
3. Effective and expiry dates
4. Loss history
5. Previous insurer information
6. Description of exposures
7. Broker information

1.Applicant information

- Is the data sections that includes:

1. Facts that describe the applicant
2. Business location

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 3. Business operations

Applicant's name
- If multiple parties are named on the app on a commercial policy, the first party will be held
responsible for the premium payment
- If the policy is written in the name of a corporation, it is worthwhile for UW to investigate the
people in charge- some questions the UW may consider are:
1. Are those running the organization experienced in the industry?
2. If the applicant is a numbered company/ company name shown with a person name, the
UW should watch for moral hazard.
▪ What is the company, and who is involved?
▪ What does it do?
▪ Why show both a company and a personal name?
3. Do those running the organization have criminal records?
4. Is the organization licensed to operate in other jurisdictions?
5. Does the organization hold the required tickets/licenses for the industry they operate in?
6. If there's multiple parties, is there a separation of ownership?
- It is important to inquire if any other parties are to be listed as additional named insured,
addition insureds, or unnamed insureds
- The additional insured will benefit from the coverage under the policy, the additional named
insured can add/remove coverage, make changes, or cancel the policy

Legal Entity
- The entity named as the insured is required to be a legal entity since insurance policies are legal
contracts
- A legal entity is someone or something considered to be a person under the law
- A legal entity includes
1. An individual
2. A group of individuals
3. An incorporated business
- It is crucial to identify a legal entity because this entity becomes the subject of the insurance
policy

Business operations
- When UW this part pf the application, it’s important to understand business operations and
degree of exposure. Some of that info includes:
1. Where are revenues derived? (US, CAN, Other)
2. Is anything imported from US/Other?
3. How much work is subcontracted?
4. How many employees?
5. Length of time in business
6. Company experience in the trade?
7. What are the physical attributes of the risk location? (Location rented or owned?)

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 2.Limits and deductibles

- For the UW to assess the application and determined required coverages, the applicant needs to
say what needs to be covered and the limits of coverage
- Deductibles are a method of self-insurance- the amount of money absorbed by the insured if a
claim should occur
- A deductible can also be used as a loss control function by the UW if the applicant has a high
frequency of small claims

3.Effective date and expiry

- Declare the time periods the client is seeking coverage for
- The period of time could vary from 1 month to 1 year, and over 1 year including 18, 24m etc.
- Unlike personal line policies, commercial policies can follow a variety of policy periods
- Normally the effective date Is in the future, in rare cases there may be a request for back dated
coverage, which should be very carefully reviewed

4.Loss history
- Is a critical tool for assessing the exposure to future loss
- Provides the UW with insight into business operations
- Is the applicant learning from claims?
- An ideal loss history includes:
1. DOL
2. When the loss was reported
3. Details of the loss
4. Circumstance of the loss
5. Whether the claim is closed or still open
6. Payout date
- In Canada loss history databases are maintained by the IBC who grants access for a fee
Challenges with loss history
- Losses are different from claims. A loss is still a loss regardless of if a claim is made
- UW's need to be aware of locations that are removed from the insurance policy, but still owned-
they could have experienced loss in the past
- The presence or absence of insurance does not excuse an applicant from disclosing all losses
- All losses should be reported on the application

5.Previous insurer information

- UW's will want to know about previous coverage including any cancellations.
- Cancellations can occur for many reasons including:
1. Insurer no longer wished to write their business
2. Applicant jumped carriers to improve their coverage
3. Applicant represents a moral hazard
4. Applicant operations have changed/evolved
5. Applicant only maintained insurance when required by contract

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 - The applicants record with previous insurers is very useful information, like a record of
employment for a job applicant
- A good UW will be aware of market conditions and be sensitive to the coverage and terms that
competing insurers offer

6.Description of exposures
- This section of the application is the first indicator to the UW of how much time the review will
take
- When reviewing the application, the UW will want to know the characteristics of the risk itself
(ex: for property, building, its size, number of openings)

7.Broker information
- Some points the UW may consider are:
1. The source of business and proximity of the broker and the risk or client
▪ How did the broker make contact with this client?
▪ What is the brokers relationship with the client?
▪ Does the brokers relationship to the client or risk create conflict of interest?
2. The number of brokers who have handled the client's business before the current app
3. The extend of the applications
▪ Is the broker submitting the entire risk for the UW, or just the difficult to insure
aspects of the risk?

The Application Submission

- When a risk is submitted for quotation, the objective is for the broker to attract the UW to
quote on the business
- Brokers try to establish credibility so that UW's will trust them for future dealings

Multiple Submissions

- Who a risk is submitted to depends on the circumstances

- If a broker only represents one insurer, this isn’t a question- and though that is preferable it isn’t
always possible
- An insurer who specializes in one area, may not specialize in another
- A risk could also be so large or complex that one insurer cannot write it solely

US Exposures

- Not all insurers are licensed to write in CA and USA

- A broker may need assistance of a local partner to handle risks with US exposures
- If a CA insurer is able to insure in the USA, they may still need to be handled by an insurer or
broker licensed in the USA for example:
1. Some states require a state-admitted insurer for mandatory insurance, but not for
optional coverages
2. A state that requires a policy to be countersigned by an agent may require that coverage
be placed through an agent/broker licensed in the USA

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 - If the client operates their business in the USA the broker will have to investigate the laws in the
jurisdiction

Objective 4- Case Study: Facilitating The Application Process

Overview

- Client approaches broker for insurance that needs to be set up quickly

Situation

- Roy Hughes recently reopened his business with his partner Amanda as the manager
- Business named Sticks N Rocks, registered under Roy's name
- Amanda contacted Simon and ABC insurance for a quote, when asked if she had prior
commercial insurance she said no
- New business project was starting immediately and machinery worth $150,000 needed
coverage
- Simon called an UW at XYZ insurance to set up the policy quickly, policy was issued, declarations
were sent to the insured
- First payment defaulted, no one could get ahold of Amanda, policy was cancelled
- Amanda had left Roy and the business, leaving Roy with no insurance
- Policy is rewritten in Roy's name
- Sometime later a claim come through for stolen machinery
- The team discovers Roy has two past theft claims
- Because these claims were not mentioned on the app the policy was cancelled for
misrepresentation and claim was denied

Verifying The Client

- Verifying ownership is a vital step- If it isn’t payment can be delivered to the wrong party,
coverage can be denied
- If business license would have been requested, it would have been noticed that Amanda has no
legal right to set up the policy

Damaged Relationship Between Underwriter And Broker

- Simon built a strong relationship with the UW and knew he could rely on her for a quick quote
- The UW had good dealings with Simon in the past and though she could trust him

Misrepresentation Of Loss History Leads To Loss Of Coverage

- Amanda told the truth about her loss history, but was not well informed enough to speak about
Roy's

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 - When Amanda disappeared and the policy was re-written, Roy's information should have been
carefully reviewed
- Both the UW and the Broker could face punishment for their roles in this

Competing Priorities

- Time is one of the biggest complications, clients often want coverage now
- Brokers don’t like to spend a lot of time on small (less profitable) accounts
- For proper protection to be secured, the UW needs time to properly review a submission
- Roy and Amanda's account was small, to more time the broker spent on it the less commission
he would get
- However, the UW needed time to review the client's loss history
- One of the UW's duties was to maintain a profitable book of business, this situation caused a
large hit to her loss ratio, she also had to follow her company's UW guidelines, and failed to do
so
- Simon, the broker has damaged his reputation by failing to accurately collet info from the client

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 Chapter 6- Analyzing Risk

Objective 1 Analyzing Risk: Stakeholder Priorities

- Class rating is a rating approach that uses rates that reflect the average probability of loss for
businesses within large groups of similar risks

Client Priorities

- Risk exists in a broader class system used by UW's to determine how it will be rated
- If a client has an exposure with a higher risk factor, the premium to cover that risk will also be
higher
- Clients don’t play a part in analyzing the risk, but they still have to:
1. Implement loss control measures to get a potential discount
▪ Doing this shows a good attitude towards risk control
▪ UW's will inquire about what steps the client takes to reduce loss
▪ Brokers must explain why a discount on premium is or is not possible
2. Continue to gather and share any information requested by the UW and/or broker in a
timely fashion

Broker Priorities

- Part of analyzing the risk for brokers is determining if the client is a good fit for them or not
- To determine the best fit with clients the principals of a brokerage must:
1. Make marketing plans that target specific groups: these market segments can be based
on location, industry, or other distinguishing features
2. Determine what type of clients they will target based on brokerage staffs expertise
3. Consider the criteria for clientele that’s used by the insurer(s) they represent, which can
affect what segment the broker targets
- When analyzing prospective clients, the individual broker must:
1. Be transparent in their communication with the client and the insurer throughout the
process: if a broker misrepresents a risk to an insurer, they will damage the relationship
2. Consider the clients habits and attitudes towards the risk and insurance. Some questions
to reflect on are:
▪ What are the clients values and business objectives?
▪ Does the client tolerate dangerous workplace conditions and practices?
▪ Does the client think of insurance as a safety net that eliminates the need to
take necessary precautions?

Underwriter Priorities

- When analyzing risk, UW's must:

1. Be attentive to the underlying priorities of the insurance company they work for/support
▪ If the insurer is in a growth period, the UW will want to accept and write as
many new policies as possible at a reasonable/reduced premium

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 ▪ If the insurer is experiencing high loss ratios, the UW's priority may focus on loss
control and stricter UW models
2. Adhere to the manuals, processes, and procedures created by their company
3. Ask lots of questions to the client, this is the only way to really understand the exposure
4. Review company guidelines or other industry resources (A.M Best guides for example) to
understand the relevance of the questions they are asking
5. Take the brokers needs into consideration. Failure to provide coverage could jeopardize
the brokers reputation with the client, and therefore the brokers relationship with UW

Objective 2- Pricing Risk

Ratemaking

- Is the process of compiling and analyzing data to establish rates that accurately reflect the level
of risk.
- Ratemaking is usually performed by actuaries, rating is done by UW's
- An actuary is a professional who specializes in the mathematics of insurance, mortality rates,
etc.
- A rate is the price for a unit of insurance, usually for one year- (ex: the rate for fire insurance on
a building for any given risk may be $0.50 per $100 of insurance)
- A premium is the total cost of insurance
- The premium Is derived by multiplying the rate of insurance by the amount of insurance (rate of
insurance X Amount of insurance = premium)
- In the above example if the rate was insured against fire for $100,000 the fire insurance
premium would be: ($0.50 / $100 of insurance) X ($100,000 of insurance) = $500
- The major components of any rate are:
1. Anticipated cost of settling claims (loss ratio)
2. Acquisition costs of the business (sales expenses), like commissions
3. Cost of administering the process, including taxes on the premiums
- The cost of settling claims (the loss ratio) varies amongst different insurance types and different
locations
- Acquisition costs (sales expenses) vary according to the distribution method

Conditions For Rate Accuracy

- A rate will be adequate (aka sufficient) to cover the anticipated losses and expenses associated
with that risk when two conditions occur
1. The actuarial forecast of future losses based on past losses is accurate
2. The sample represented by the book of business written by a particular UW or insurer is
representative of the population

Establishing Rate Adequacy

1. Classify the risk

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 2. Determine the rating classes
3. Select the proper measure of exposure
4. Gather loss statistics
5. Predict future losses based on past losses
6. Calculate pure premium from the predicted losses
7. Calculate the premium rate or unit cost
8. Calculate the final premium rate

1. Classify the risk

- The insurers first step is to decide what objects of insurance it wants to cover (ex: auto,
property, marine, liability, aviation, etc.)
- Next the insurer must decide how to subdivide each of the classes of insurance they choose (ex:
property can be broken down into residential risks, commercial risks, special risks, and public
facilities)
- After the insurer establishes the class of insurance it wants to insure, they determine the
exposures to loss each class represents
2. Determine the rating classes
- Determining the rating class of an exposure is about putting the risk into a more focused
category
- Categorizing a risk in a more specific manner is determining its rating class
- Rating class should reflect the probable frequency and severity of loss that will be experienced
by insureds in that class
3. Select the proper measure of exposure
- Exposure base is the unit of measurement of exposure for a class of risks
- The exposure base is the denomination that the unit of exposure is expressed as
- Example of exposure base is gross sales
- The exposure unit is a unit of measurement used in insurance pricing. It is expressed as a
specified amount of the exposure base
- Ex: gross sales are often expressed in units of $1000, so that the rating for the liability exposure
of a certain risk could be expressed as so much per $1000 gross sales
- Ideally the exposure base will reflect the frequency and severity of loss that the risk experiences
- Ex: there are several possible exposure bases for a movie theatre such as
1. Size of the theatre
2. Number of seats
3. Number of films shown

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 4.Gather loss statistics

- Once rating classes have been identified and exposure bases and units are determined, the
insurer must gather statistics about loss experience for insureds
- If the insurer is large enough, these statistics may be drawn from their own portfolio
- Insurers tend to write certain types of business, and that selectivity means that there is more
loss data available which means more reliable data to base their rating decisions from
- Auto insurers are obligated by regulators to submit their loss statistics to be pooled by an agent
appointed to act on behalf of insurance regulators
- GISA- General insurance statistical agency is an independent non-profit agency that is appointed
to act as a statistical agent for 9 participating insurance regulatory authorities across Canada
including:
1. Nova Scotia
2. New Brunswick
3. PEI
4. Newfoundland
5. Alberta
6. Ontario
7. Yukon
8. Northwest Territories
9. Nunavut
- The IBC collects info from insurers, does quality assurance, and compiles exhibits, for the two
mandatory plans administered by the GISA
1. The automobile statistical plan (ASP) aka the Green Book which applies for all nine of the
previous mentioned jurisdictions where GISA is a statistical agent
2. The Ontario Commercial Liability Statistical Plan (OCLSP)

5. Predict future losses

- Predicting future losses is an application of the law of large numbers (aka law of averages) and
the theory of probability
- The law or large numbers is the principal that probability becomes more reliable when there's a
larger sample size
- How useful statistics will be in future loss experience depends on:
1. How much loss info is collected (the size of the sample)
2. When it is collected (the time period the sample was taken)
3. The conditions it is collected under (past and future conditions)

6. Calculate the pure premium from the predicted losses

- The insurer needs to determine how much money would be needed to pay for those losses
- This is decided by calculating the pure premium

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 - Pure premium is the portion of the total premium that is needed to pay expected losses (it does not
take money needed for company expense into consideration)

If an insurers book of business = 100,000 office buildings

Office building value= $1,200,000 each
The buildings in the book tend to suffer 8000 fires per year
Each fire results in an average of $15,000
The pure premium would be:

Total premium required= 8,000 fires X $15,000 damage = $120,000,000

Pure premium per office= $120,000,000 / 100,000 offices= $1200 per office

# of fires (or relevant peril) X Damages = Total premium required

Total premium required / number of buildings (or other relevant risk insured) = pure premium per
office

7. Calculate the premium rate of unit cost

- After determining the pure premium, the insurer can calculate the premium rate
- The premium rate is the price per unit of insurance
- Pure premium / exposure unit = Premium rate (premium/$ of property=premium
rate)
- Exposure units allow insurers to talk about a "unit" of exposure when setting rates
- Ex: An Exposure unit for car insurance may be 100$ worth of the value of the vehicle

8. Calculate the final premium rate

- After determining an adequate rate, a final premium rate must be determined

- The final premium rate takes various expenses into consideration such as:
1. Admin costs
2. Brokers' commissions
3. Profit
- Base rate + commission + admin costs + profit = Final premium rate

Objective 3- Ratemaking Applied

Class Rating
- Is used for common risks that are charged a standard rate
- These risks tend to have similar characteristics and risks qualities to other similar
risks
- Rates developed by the class rating method are applicable to broad groups of risks
that share common characteristics

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 - By submitting certain pieces of key info into an algorithm, the rate is automatically
determined for the UW

Schedule Rating

- Some classes of business are individually rated because they are complex and need
underwriting review
- This approached may be characterized as schedule rating
- In schedule rating, rates are based on a schedule, or manual that lists a bunch of
characteristics that have been identified by UW's over time (many decades)
- The process of schedule rating involved establishing a base or key rate
- The base rate is used as the initial charge to apply to the community where the risk
is located, it also takes degree of fire protection into consideration
- For property insurance COPE factors are included in ratemaking and underwriting
the Exposure
1. Construction- materials used to construct the building
2. Occupancy- the buildings purpose
3. Protection- measures used to secure the building
4. Exposure- Nearby buildings or hazards that could cause damage
- Rates for schedule-rated risks are modified periodically based on statistics that
contain cells broad enough in scope that they can indicate future claims costs

Role Of The Uw In Ratemaking

- The flexibility available to the uw in rating a risk varies by type of insurance and size
of risk
- In some types of insurance, the UW may have more discretion about whether and
how much to deviate from the rate manuals for risks within a class, than others

Competitive Considerations

- After classifying a risk, reviewing COPE details, and securing a rate that the UW
believes matches the risk, the next thing to consider is the market rate
- The market rate is the rate/price that the market will bear for the risk
- There will likely be competition quoting on the same risk, so the UW's must select
competitive pricing too

Impact Of Big Data

- Big data plays into pricing sophistication in many ways

- There's more access to more detailed data and more advanced analytics
technologies which hallows for opportunities including:
1. Actuarial teams make more detailed/individualized pricing for insurance
consumers
2. Insurers can offer coverage in areas there were previous uninsurable
because of better modeling capabilities (ex: flood location models have
improved so insurers can provide coverage on a house-by-house basis

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 3. Carriers can collect detailed data regarding claims file reserves and loss
activity
4. Improved reserving quality can allow for more timely recognition of loss
trends and improve profitability measures

Usage Based Insurance (UBI)

- Tracks milage and driving habits via a smartphone app or telematics device
- This data a combination of other rating factors is used to calculate the premium-
favorable use of UBI can lower the premium for the client
- Two options have emerged in UBI hardware
1. Insurers use telematics dongle that plugs into cars diagnostics port to collect
info directly from the vehicle and send it to servers
2. Most smartphones can assess speed, acceleration, deceleration and also
have GPS so they can be used on their own to calculate the driver score- this
is less expensive than a plug-in device
- UBI programs are expensive to set up, as well as expensive to store the data it
collects
- Some UBI/telematics devices raise privacy concerns, but they have to follow PIPEDA
- The goal of UBI is to change driving habits lower car emissions, and result in fewer
casualties

Objective 4- The Quote

- An insurers response to a brokers request for quotation could be:

• Request for more info
• Refusal to cover the risk
• The quotation of terms

Request For More Information

- The uw should have questions ready

- The Uw should ask all questions at once
- The broker can help expedite this process by collecting all the answers at once, and
making one call to the UW to respond to all the questions

Refusal To Cover The Risk

- If an UW declines the risk or is undecided the broker can accept the decision or
follow up with the UW to clarify
- The broker may be able to reverse the UW's decision by clarifying issues of concern

Quotation Of Terms

- The brokers desired outcome is to get a quotation for the entire account from one
market
- When the broker receives a quote, he or she should take these actions:

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 1. Review the quote against the submission paying attention to:
▪ Limits of insurance
▪ Coverage and rating
▪ Proposed wording
▪ Factors affecting binding coverage
2. Note any differences of special conditions imposed by the UW
3. Compare the quotes from multiple insurers If applicable
4. Assess the terms of each quote to understand how the terms will affect the
client
5. Consider if the terms will be acceptable to the client
6. Contact the UW to talk about any amendments if necessary

Reviewing The Quote

- The uw needs to review the submission before sending the quote to the broker, to
make sure all the coverage issue that the broker requested have been addressed
- This helps avoid any confusion between the coverages requested, and the coverages
that are being provided
- This is a chance for the uw to offer coverages that the broker hadn’t requested or
considered

Objective 4- Case Study: Analyzing risk

Situation

- Jets brewery (JB) is a fully licensed microbrewery in business for 3 years

- They sell craft beer and run a retail store
- JB is open 7 days a week from 12pm-12am, with live entertainment on weekends
- JB has capacity for 100 patrons
- JB has had a lot of growth since opening, 5 mill in sales last year, owner (Dustin)
wants to see 10 mill in the next 3 years
- Dustin bought to original policy from a direct writer, and he thinks the business has
outgrown it because more business+ potential for increased liability issues (current
limit 2 mill for premises liability) and he's scared not all of his business risks are
covered

Underwriters' Concerns (Pg 6-22 Example)

- This Exposure can be assessed many ways including assessing:

1. Previous claims
2. Hours of operations
3. Employee training and education
4. Volume vs sales
5. Policies and procedures
6. Monitoring patrons

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 7. Experienced Management

Assessing Jb's Risks

- The questions in the examples act as a preliminary guide for how an UW could begin
to assess JB's host liability risk
- Further questions may be required
- The next step is to use the answers to the questions to analyze the risk
- Some insurers could consider JBs a bar, others could consider it a licensed
restaurant
- Some insurers will have higher risk appetite for this type of risk
- Many insurers back away from this type of risk because the claims can be severe
- Several markets will avoid this Exposure, often a specialty market will provide this
coverage
- The price could be high because the UW is worried about severity of claims, not
frequency

6-24 exam breakdown

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 Chapter 7 Implementing The Policy

- All insurance policies have common elements:

1. Declaration's page
2. Insuring agreements
3. Exclusions
4. Conditions
5. Warranties
6. Limits and deductibles
7. Endorsements
8. Signature Clause

Objective 1: Implementing The Policy: Stakeholder Priorities

Understanding A Contract

- A policy is a legally binding contract

- A contract Is a legally enforceable agreement or promise between two or more
competent parties
- In a contract two or more parties make promises to provide benefits to one another
by doing or abstaining from doing something

Elements Of A Contract

- A standard contract has 5 elements (ACCGL- A Cool Cat Gets Lucky)

1. Agreement- offer and acceptance
▪ Offer must be definite and be communicated
▪ Acceptance must be definite and be communicated
2. Consideration
▪ There must be a benefit for the parties who enter a contract
3. Capacity to contract
▪ The parties must be legal age, sound mind, and able to enter a
contract as permitted by law
4. Genuine Intention-
▪ The intention of the parties must be to enter an agreement with
each other (there must be a meeting of the minds)
5. Legality of object
▪ The duties to be carried out in the contract must be of a legal
nature. Any contract that deals with an illegal object is void

Insurance Policy Principals

- An insurance policy includes the 3 following principals (IIC- In its Underwear):

1. Insurable interest

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 ▪ The insured must have a direct monetary interest in the asset that’s
being insured
▪ The inured must have a legal relationship to the object of insurance.
For example, they are financially prejudiced by the assets
loss/damage and financially benefited by its existence
2. Indemnity
▪ The insurer must reimburse the insured for the loss suffered and
put them back in the same financial position they were in right
before the loss happened
▪ The insured cant make profit from the loss
3. Utmost good faith (uberrimae fidei)
▪ The insurer and insured must act according to the highest standard
of honesty

- Each stakeholder has different priorities.

Client Priorities

- When a client receives a policy they are responsible for:

1. Ensure the implications of the policy are understood
2. Get clarification on any parts that are unclear
3. Make sure the policy serves its intended purpose- if the policy offers no
value to the client, they likely reject it
4. Report any changes that would affect the provisions of the policy to the
broker or insurer

Broker Priorities

- When a broker receives an insurance policy they must

1. Read through it carefully
2. Examine the terms of the policy and wording details:
▪ Is the coverage outlined in the policy the same as the coverage
requested?
▪ Was the insurer unable to provide certain coverages?
▪ If the coverage doesn’t match the request, why as the change
required?
▪ What implications will the change have for the client?
▪ What other solutions can the broker offer the client to counter the
effects of the change?
3. Be prepared to [resent and explain the policy to the client and answer any
questions they have
4. Communicate with the insurer to get more info on the coverage, or research
alterative coverage

Underwriter Priorities

- After a policy is written, the underwriter's priorities are:

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 1. To take direction from the broker to ensure any additions required are
insurable under and existing policy. Addition could include:
▪ New equipment
▪ A new location
▪ A new contact to perform new services the company didn’t offer
before
2. To offer valid insight about coverage. Underwriters don’t want to indicate
coverage where there isn't any

Objective 2: The Policy

Binding Authority

- Binding authority is the capacity to confirm to those who have submitted insurance
applications that they have insurance coverage
- A broker is given binding authority based on an agreement that is negotiated the
insurer and the principals of the brokerage that the broker works for
- This agreement gives the brokerage a specified amount of authority in which they
can bind insurance
- Not all brokers are granted the same authority or same degree of binding authority

Binding Terms

- The terms of binding authority include the following

1. The class of risk and limits of insurance the brokerage is permitted to bind
2. The risks that the brokerage cannot bind
3. The reporting requirements, including the time frame that the insurer
expects the broker to forward notice of binding in (the broker has a certain
number of days after binding insurance to submit the binder to the insurer
- Brokers and agents must stay withing the bounds of their agreement with the
insurer

Elements Of A Policy

- Declaration's page
- Insuring agreements
- Exclusions
- Conditions
- Warranties
- Limits and deductibles
- Endorsements
- Signature clause

Declaration's Page

- Declarations are usually on their own page and include:

1. The parties to the contract (insurer and insured)

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 2. Effective and expiry dates
3. Amount of the premium
4. The amount insured
5. Other interested parties (ex: mortgagee)

Potential Issues

- Incorrect spelling of the name(s) or addresses of the insured

- Incorrect spelling of the name or address of loss payee
- Incorrect total premium based on when the quote was created vs. when the policy
was issued

Insuring Agreements

- This section explains the applicable coverages, what is and isn’t covered by the
policy, the causes of loss that are covered (perils), exceptions to the losses covered
(exclusions), and how the insured
- Wording varies depending on what type of coverage is bought

Potential Issues

- Are wording different than the ones presented in the quote?

- Has all the property been included in the quote?

Exclusions

- Are risks, perils, or properties in the policy that are not covered
- The insurer would not provide coverage for any losses that are excluded

Conditions

- Provisions that state the rights and duties of the insured or insurer
- Policy conditions affect the actions of the insured/insurer under the policy under
certain circumstances
- If a condition is breached, it could lead to a void policy or a voidable contract, or
claim denial
- Void policy is a policy that is treated as if it never existed

Valuation

- The valuation clause is a clause which the insurer and insured agree on the value of
a covered property
- This is the amount the insured will receive in the event a covered loss occurs
- There are typically 3 types of valuations in an insurance policy
1. Actual cash value
2. Replacement value
3. Agreed or appraised amount
1.ACV or actual cash value is the cost of a new item minus depreciation

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 2.Replacement Value is the cost to replace the item lost or destroyed with no
reduction for depreciation considered
3.The agreed/appraised amount is the amount determined by an appraisal of an
item. These items usually include
1. Fine art
2. Jewelry
3. Antiques, etc.

Coinsurance

- Coinsurance clause requires the insured to maintain insurance on their insured

property. The insurance needs to be a specified percentage of the properties value
- Coinsurance clause requires the insured carry separate insurance for a specified
amount in order to be eligible for full coverage
- If the insured fails to comply with the coinsurance clause requirements, they may
not be paid the entire coverage amount shown on the declarations page
- Coinsurance percentages are usually 80/90/100 %

Warranties

- Are promises the insured makes as part of the contract of insurance

- Breaching of this promise can null the insurance contract, meaning the insurer may
not pay the claim
- Warranties are obligations that the insured must fulfill to keep the policy in force
- Ex: a jewelry store has a warranty stating they must have an alarm system in
working order, for burglary losses to be covered
- The difference between a warranty and a condition? Warranty is a promise made by
the insured to do/maintain something, a condition states if the insured does or
doesn’t do something the policy could be void and claim could be denied

Potential Issues

- Do the coinsurance clauses correspond to the amounts of insurance required to

avoid being underinsured?
- What conditions or warranties require action or duties by the insured to maintain
coverage?

Limits And Deductibles

- The limit of liability on the declarations page is the maximum amount that the
insurance company will pay for a covered loss
- Deductibles are the amount the insured is responsible for paying before the rest of a
loss is covered, or the amount the final determined value will be reduced by

Potential Issues

- Are limits of coverage different than what was requested?

- Are deductibles at a reasonable level based on the values of the items insured?

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 - Is the insurer able to write the entire line? If the insurer can't write 100% of the risk
they can:
1. Approach other insurers to participate in the risk, initiating a subscription
policy
2. Contact reinsurance companies to secure additional capacity
3. Arrange excess insurance over the primary insurance quoted

Endorsements

- Are additional wordings attached to the policy to amend the coverages provided by
the main terms and conditions of the policy
- Ex: a policy could have an exclusion for overland flooding, but an endorsement
could be added to the policy to cover it

Signature Clause

- The policy is signed by the insurance company only

- The insureds signature is not required
- Policy usually has a pre-printed signature of the insurance companies CEO and is
countersigned by an agent or employee

Objective 3: Assigning, Terminating, Or Renewing Commercial Insurance

- Insurance policies deal with change in the following ways

1. Assignment of insurance policies
2. Termination of insurance policies
3. Renewal of Insurance policies

1.Assignment of Insurance policies

- an insurance policy cannot be assigned by an insured to another individual
- and insurance contract is a personal contract that Is between the insurer and the
insured and the insured cannot substitute another person as the insured with out the
insurers consent
- There are some situations where and insurance policy can be assigned

Effect of insurance being a personal contract

- A fire policy does not run with the land when real property is sold. Selling property
does not = transfer of insurance
- This point also applied to policies covering chattel property
- Chattel is tangible personal property that is movable between locations

Situations where assignment is allowed

1. An authorized assignment under the Bankruptcy Act
2. A change of title by:
• Succession

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 • The operation of law
• The death of a named insured

Assignment of proceeds may occur without consent

- Insureds can assign the proceeds of policies without consent of their insurers
- Meaning any claim payment money can be signed over to another party without the
insurers permission
- Signing over the right to receive return premiums if the policy is cancelled is another
example of assignment of proceeds

2.Termination of Insurance Polices

- Statutory conditions (in QC- General Conditions) set out provisions that apply to
every policy subject to these conditions
- Fire and casualty insurance policies generally contain a cancellation clause that
outlines the conditions under which the policy can be cancelled by the insurer or the
insured
- Termination conditions state the insurer can cancel the policy by giving a set
number of days' notice in writing by registered or hand delivered mail- and
returning the pro rate premium
- The insured can cancel the policy at any time, but the insurer will retain the
premium calculated on a short rate basis

Voided Polcies
- If the insurer discovers that a policy has been issued after misrepresentation or non-
disclosure by the insured, they can send out a letter for pro rate cancellation
- By doing this, the insurer is using termination conditions of the policy, treating the
policy as valid and in existence
- The insurer could have declared its position that misrepresentation or non-
disclosure made the policy void from the beginning
- In that case the insurer would return the entire premium

3.Renewal if Insurance policies

- Policies may be renewed in 2 ways:
1. Specific instructions to the insurer from the insured or agent or broker
2. Automatic renewal
- Insurers may send agents a renewal list that identifies policies expiring in a given
month. They await renewal instructions from the insured, and if none are received
the policies are allowed to lapse
- In other cases, a renewal list is accompanied by new policies renewing the
insurance or by renewal receipts of certificates that give essential details of the
insurance and provides that the original policy stays in force for another term
- Renewal receipt is a certificate that attests that an insurance policy has been
extended for another term

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 - Renewal certificate is a short form certificate issued at renewal that refers to the
expiring policy and states that its provisions, clauses and exceptions continue for
another term

Objective 4- Case Study: Explaining The Contract

Overview

- The case study will cover:

1. The purchase of the property
2. Initial coverage for the property
3. Options for the final policy

Situation

- Donald invests in real estate buying and selling properties to increase ethe size of
his portfolio of buildings
- Donald decides to buy a vacant, old frame building originally used as an ammunition
manufacturing facility
- Building listed at $12,000,000, Donald offers $10,000,000, George- the vendor
accepts the offer
- Donald contacts his broker Stanley to advise of his purchase
- Stanley is recently licensed and had a binding authority agreement with Acme
Insurance. He hasn’t reviewed the terms of his binding agreement with Acme yet
- Because of his inexperience, Stanley congratulates Donald and tell shim he is
covered
- Donald is entitled to some immediate coverage, but there are limitations:
1. Type of building- Donald's existing policy doesn’t give automatic coverage
for vacant buildings
2. Estimated replacement value: with replacement value at an estimated
$7,500, 000 Donald will require approval from the insurer before coverage
is guaranteed
- Christina, an UW from Acme gets the request to add the new building. She does not
want to expose Acme to the full replacement value of the building because its old

Review The Purchase Of The Property

- In the sale and purchase of the new building the main elements of a standard
contract have been met
- Donald and George have a legal capacity to make an informed decision on the sale
and purchase of the building.
- They both agree to the sale, there is genuine intent on both parties to proceed with
the sale
- It would have been best for Donald to consult with his broker before purchasing the
building

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 Reviewing The Initial Coverage

- Stanley advised Donald that he had coverage, but Stanley didn’t have authority
under his contract with Acme insurance to bind coverage for the building
- This could lead way for a potential errors and omissions lawsuit
- Brokers need to understand their binding authority agreements with insurers
- If Stanley would have reviewed his contract with Acme he would have known that
the building wouldn’t have been covered

Reviewing Options For The Final Policy

- When Christina (the UW) looks at the details of the building and Acme's insurance
tables she has a few options
1. She can tell Stanley the amount of insurance she will offer to cover the
building and tell him to approach other insurance companies that Stanley's
office represents to set up a potential subscription policy (subscription
policy)
2. She can contact reinsurance companies that Acme does business with to see
if any of them would provide Acme with the extra capacity needed to insure
the building (reinsurance)
3. She can ask Stanley to see any of the other insurance companies his office
represents are interested in providing insurance above the amount that
Christina and Acme are prepared to accept (excess)
- Since Donald is a long-time client, Acme wants to try and keep his business, but an
UW also can't accept unreasonable risks

Outcome

- Stanley learned an important lesson and was able to get other insurance companies
to participate in a subscription policy
- Donald's investment remains secure
- Stanleys relationship with Christina the UW will remain profitable and trustworthy,
and Christina can be confident that she obtained the extra insurance Acme needs
for the building

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 Chapter 8- Commercial Claims
Typical steps in the claim process include:

1. The client reports the loss to the broker

2. The broker reports the loss to the insurer
3. The claim goes through an intake process where the claims professional is
assigned
4. The first issue to be determined is coverage. No coverage =no claim
5. Reserves are set after conformation of coverage. Reserves are updated
thought the process
6. Claims investigation begins. Documents are reviewed (contracts, waivers,
etc.) witnesses are interviewed etc.
7. Resolution should be able to be reached- which typically is a payout to the
parties involved
8. Once a resolution is reached either via litigation or negotiation,
stakeholders must be notified

Objective 1: Processing Claims: Stakeholder Priorities

Client Priorities

Some of the common priorities when a commercial claim is presented include:

1. Receiving confirmation of coverage for the claim

2. Timely communication throughout the process
3. Being aware of the cost of the claim (future premiums and deductibles or
SIR's)
4. Resolution of the claim (amount and timing)

Claims Professional Priorities

The role of a claim's professional is the following

1. Verify coverage based on the loss details

2. Clarify the claims process and maintain the client-insurer relationship
3. Communicate with the client and broker about how coverage applies to
the specific loss
4. Notify underwriting of possible issues with the policy or new risks
5. Verify loss details and explain the claims process to the client
6. Evaluate the claim by setting appropriate reserves
7. Pay amounts owed under the policy as defined
8. Communicate any developments throughout the life of the claim with
other stakeholders
• The claim professional wants to resolve the claim as quickly as possible

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 • Claims professionals are usually employees, but sometimes insurers hire TPA's (third party
administrators) to process the claims

Broker Priorities

• The role of the broker is regard to claims is NOT to confirm coverage, but to
1. Assist the client in reporting their loss to the insurer by taking their
FNOL form and transmitting it to the insurer
2. Explain the claims process- reduce anxiety, set clear expectations
3. Monitor the progress of the claim
4. Advocate on the insureds behalf when they have concerns

Underwriter Priorities

• Claims come from risks that Underwriters have accepted as part of the policy in
exchange for premium paid
• An insurer could be exposed to a large claim if the UW makes a mistake in
accepting a risk they don’t fully understand
• It is important for stakeholders t provide UW's with the info needed to assess
the risk
• The role of the UW's in relation to claims is:
1. To verify that the policy is intended to respond to the risk when
questions arise
2. To assess policy renewals based on claims history
3. To confirm whether there are policy issues with a claim
4. To have copies of endorsements and business descriptions, as well as
other policy documents needed to confirm coverage
• UW's decide if a material fact has been misrepresented or not disclosed
• The result of this could be ab into cancellation (policy considered cancelled from
its inception date- like there never was a policy)
• A material fact is a fact that would affect a contract of insurance enough to
influence the insurers decision on accepting or rejecting the risk

Objective 2- Critical Components: Understanding a claim

• Claims are an opportunity to demonstrate the value of insurance and the
service provided
• A more holistic understanding of insurance makes better insurance
professionals who are better able to service insurance clients and understand
their coverage needs
• The basics of the claims process are:
1. Reporting a loss
2. Confirming coverage
3. Effective communication

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 1.Reporting a loss
• When a known loss occurs, the onus is on the client to report the incident
promptly and preserve the material needed to present the claim
• It is important to capture as much of the basic info as possible at the beginning
of the claim, as it can assist in answering questions that help the progression of
the claim
• Important info to gather when recording a loss includes:
1. Loss details
2. Date of loss
3. Jurisdiction
4. Contracts (do any exist with that could alter obligations under the
policy?)
5. Contact info
6. Reporting of the loss
• If the client hasn’t recorded much info, most of the FNOL info will be captured
by the broker
• The first report from the broker to the insurer is very important, the more loss
info captured, the better

Failing to Report a loss

• There are some instances where a loss isn’t reported, or is not reported right
away to the insurer
• This could happen because the insured thinks they can cover the claim out of
pocket at first
• It could also happen if the broker tries to help the insured settle a claim without
involving the insurer (bad idea)
• When a loss isn’t reported to the insurer, several preventable issues can happen
including:
1. Claims professional loses the opportunity to verify info about coverage
or injuries, interview witnesses, or preserve evidence
2. The chance of litigation against the insured increases
3. Underwriters may not have the opportunity to consider the risk impact
on the renewal
4. Late reporting to the insurer could mean late reporting to other parties
like the reinsurer
5. Reputation of the insurance professional involved, and their companies
are at stake

2.Confirming Coverage
• After a loss is record and a claim opened by the insurer, claims professionals will
review details, and try to fill in gaps
• Before anything can proceed with a claim, coverage needs to be investigated
and confirmed

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 • Confirming coverage starts out very basic: ensuring the claim is reported to the
right insurer, under the right policy, for the correct policy period
• The claims professional will review the policy definitions, exclusions, and
endorsements that may apply
• They will also need to confirm the limits on the policy and any deductibles, SIR's,
and claims-handling agreements
• Confirming coverage should be quick and straightforward
• Where coverage is unclear, it should be communicated to the client right away
and any issues explained, and recommendations given
• Significant coverage clarification concerns (like material misrepresentation)
could take weeks or months to sort out

When coverage is in question

• Coverage for claims can be problematic when losses happen for unknown risks,
or risks fall outside of the policy scope
• If a coverage issue is identified, claims professionals will notify the UW
department and will send the insured and broker notification of the possible
coverage in one of two ways
1. Reservation of rights letter- informs the client that an investigation into
claims coverage is ongoing but not confirmed. The insurer is reserving
rights to later deny coverage based on the results of the investigation
2. Non-Waiver agreement- is a document advising the insured of the same
information contained in the reservation of rights letter. It states the
insurer is investigating coverage, not waiving its right to later deny
coverage. The main difference is a non-waiver is signed by a
policyholder/representative to acknowledge the agreement
• When coverage comes into question the insurer will often hire counsel to
review the obligations set out in the policy against info available from the claim
• If the recommendation is that coverage should not apply. It will be reviewed by
the insurers management tea to weigh out the risks of denying coverage

3.Effective Communication
• The goal is for any insurance professional to provide the best outcome form the
client
• There may be claims-handling agreements within the policy that define the
communication expectations on claim updates
• For claims examiners being timely and having accurate communication is vital
• Many actions, or lack thereof, can increase feelings of uncertainty including
failure to:
1. Provide regular updates
2. Respond to emails
3. Return calls
4. Deliver on promises

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 Broker communication
• The broker is the person who has direct contact with the premium paying client
• It’s often up to the broker to communicate concerns to the insurer about:
1. Reserves
2. Claims handling decisions
3. Delays
4. Settlements
• The broker may also have to relay technical or complex claims developments to
the client

Underwriter Communication
• Underwriters need to do their part by clarifying questions they have about any
risks they're concerned about
• If a claim arises where its unclear if the policy responds, the UW may have to
figure out the insurers position
• As soon as issues with coverage are identified by the broker or claims
professional, the UW needs to be notified

Objective 3: Critical Components: Investigating And Resolving Claims

• This section reviews the following parts of the claim process:
1. How it is investigated
2. How reserves are set
3. What paths claim resolution may take (including litigation)
4. How a claim is resolved

Investigating A Claim

• Generally, a claim investigation will include the following:

1. Review all information
2. Speaking to the parties involved
3. Verifying facts
4. Ensuring reserve adequacy (updating reserves as more info is available)
5. Complying with any claims-handling agreements
6. Keeping brokers, clients, and underwriters updated and informed on
developments
• Some important aspects of the claim investigation include:
1. Statement and internal documents- statements could come from over
the phone, in person signed statement, or a statutory declaration
2. Site inspection
3. Photos and videos
4. Contracts and lease agreements- are there any hold-harmless
agreements, exclusions, or indemnity clauses that make someone else
liable for payment?

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 5. Appraisals, estimates, subrogation, and productions- these are the
basis of most claims and form the evidence for the loss
• Statutory declaration is a declaration made under statutory authority asserting
knowledge of an event, circumstance, or fact
• Subrogation is the legal process where after a payment of a loss, and insurance
company is assigned the right of to recover the amount of the loss from those
legally responsible
• Reserves are funds set aside by an insurance company to meet obligations as
they come up such as liabilities for unearned premiums, estimated costs of
unpaid claims

Setting Reserves

• All of the investigation elements help assess the claim and are used to update
case reserves
• Insurers use reserves to track their claims liabilities, making reserves very
important
• It is important that claims professionals set appropriate reserves based on the
risk of the claim as more info on the claim is received
• Resolving the claim in a timely manner is one way to reduce costs
• Smaller commercial clients that don't have as much experience loss experience
with an insurer may need help understanding the implication of reserve changes
on the way their business is assessed
• Reserves also have impact on a clients cost to resolve the claim
• Reserves can have a significant impact on the clients cost to resolve a claim if
the client had deductibles or SIR's (self-insured retention)
• SIR is a dollar amount specified in a policy (usually liability policy) that must be
paid by the insured before the policy will respond to the loss
• The reserve Is an assessment of the risk and amount to be paid for a claim, so
the reserve is a signal to a client that has an SIR or A deductible, of the amount
they will likely have to pay under these agreements
• Sometimes the initial claims report makes the loss seem small or
uncomplicated, but as more info about the claim is received, reserves may
increase significantly
• Every risk is different, and facts need to be evaluated as they become available

Path to claims resolution

• There are three primary ways that a claim can be resolved:
1. Direct resolution
2. Notice of representation
3. Litigation
• Direct resolution: the party looking to recover the loss is working directly with
the insurer to resolve the claim. There are limitations on how long a claimant
has resolved the matter directly. If a resolution cannot be made within

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 the limitation period a statement of claim will need to be filed and start the
litigation process.
• Notice of representation: the claimant has retained counsel for representation,
but the claim is not yet being litigated. The claims professional will work with
the counsel retained by the claimant and try to resolve the claim before the
limitation period.. Any issues that arise with the claim will have to be addressed
with counsel after they are retained.
• Litigation: A claim has been filed in the court, at any point within the limitation
period. The claim will name the plaintiff who is seeking relief for damages as
result of a loss caused by the defendant. The document that is filed and served
is called a statement of claim. This document sets out the compensation being
sought, the allegations behind the claim, and the damages incurred.

Litigation And The Statement Of Claim

- A statement of claim is issued when a person or company is being sued. A statement of

claim could be filed by a plaintiff for a number of reasons:
• The end of the limitation period is approaching, so a statement of claim is filed
to preserve the right of the plaintiff to recover beyond the defined deadline.
• The claim is very complicated, with multiple parties involved.
• Details about the claim are quarrelsome (in terms of liability, extent of
damages), and litigation is the only practical way to proceed

Pleadings

- An important part of a statement of claim is its pleadings

- The pleadings determine which policy should respond and how coverage should be applied.
- The pleadings may change the nature of coverage. Originally, a claim may be reported, and the
initial investigation may not. However, New information could be included in the pleadings that
could lead to denial of all or part of the coverage.
- The way the statement of claim is drafted directs how coverage under the policy applies in
litigation.
- A statement of claim may include allegations of intentional or criminal acts, or it may seek
punitive and exemplary damages.
- The relief sought in the statement of claim may exceed the limits of coverage under the primary
policy

Serving A Statement Of Claim

- A statement of claim is served to the named defendants.

- There are different rules in each jurisdiction, but usually a claim is considered served when a
process server serves the documents in person to the defendant or an adult at the address
of the defendant.
- Once service is completed, the statement of claim must be forwarded to the
insurer immediately.

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 - There are time frames to respond once a statement of claim is served; if no response is
received, the plaintiff could file a motion with the court for a default judgment and be
awarded the damages they seek in the claim.

Responding To A Statement Of Claim

- Once the insurer receives the statement of claim, the insurer can respond in two ways:
1. Waiver of defense: Through this waiver, the plaintiff’s counsel agrees not to proceed with any
motion for default judgment against the defendant. The waiver can be time limited for a set
period, or it can be indefinite. The benefit in working under a waiver is that the costs associated
with defending a claim in litigation can be reduced
2. Statement of defense: When a statement of claim is served, defense counsel may be assigned,
and a statement of defense filed in court and served to plaintiff(s) and other defendant(s) This is
a response to the allegations in the statement of claim. At this point, the matter proceeds
through litigation

Resolving A Claim

- The goal of all stakeholders in the claims process is coming to a settlement

- a claim settlement can be negotiated, and a release be signed between the parties resolving the
matter.
- Alternatively, a claim is abandoned, and a release may or may not be signed
- A settlement can take several forms:
• Replacement cost or actual cash value for damaged property
• Agreements for treatment and pecuniary and non-pecuniary damages for casualty
incidents

Resolving Claims In Litigation

- Claims in litigation can be resolved in several ways.

• The claim can be discontinued by the plaintiff against any defendant,
• dismissed,
• or go to trial and be settled in court.
- A discontinuance is filed with the court, where there will be confirmation that the claim will not
continue against any of the defendants
- A dismissal is an order from the court, heard by a judge or justice, dismissing the action against
the defendant(s).
- A discontinuance and dismissal order have the same effect- they both end litigation against the
defendant.

Objective 4- Cross Border Claims

How is the claims process affected by cross-border losses?

- When a loss occurs in another jurisdiction, factors that affect the claims process include the
following:

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 • Limitation period and claims reporting: The limitation period and claims reporting
requirements for a claim can be different in different jurisdictions.
• The beginning of the litigation process: In Canada, a statement of claim is filed and served to
start the litigation process. In the United States, a summons and complaint are filed to begin
a lawsuit.
• Service of a litigated claim: How service of a litigated claim is completed is also different in
the United States.
• Minimum levels of insurance: Many states have significantly lower minimum levels of
liability insurance on auto policies, This can increase the risk of underinsured motorist
claims.
• The right to subrogation: US insurers often have the right to subrogate both property and
casualty claims against a liable party.
• Medical liens and obligations to cover losses: Different medical liens and obligations to cover
losses on a policy exist in different jurisdictions.

Objective 5- Case Study: Frictionless Claims

» This case study reviews the process of a claim, which will typically go through the following
actions:
• Confirming coverage
• Investigating the claim
• Working toward a resolution
• Establishing regular communication

Situation

- Client owns Fair Links Golf Club, they host corporate and private events. The course
arranges and manages events, companies can also rent out the space and organize the
events.
- The golf course hosted an event organized by another company, General Parts. a General
Parts employee was hurt.
- in the parking lot of the golf course two participants started driving golf carts into each
other.
- One participant attempted to jump onto another cart, and his foot got caught. The injury did
not sound serious, an ambulance was called to attend the scene.
- The incident was witnessed by an employee of Fair Links Golf Club, who recorded the event
details

Situation

- After the incident, Fair Links got a letter from a personal injury law firm. It advised that its
client was injured and pursuing a claim against the golf course. The letter included photos,
which showed deep laceration wounds.
- the letter was forwarded to Fair Links' broker, so that she would pass it along to the insurer.
- Fair Links had hosted the event, but it had been organized by General Parts.
- An employee witness saw the plaintiff consuming alcohol at the event.

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 - Because of that, the manager didn’t feel he had to file a report; he thought the injured party
would have reported the incident to his insurance company.
- Eight months after receiving the first letter, the Fair Links got another letter from the
claimant’s law firm. This one advised that it hadn’t received a response to the initial notice
letter sent by counsel.
- As a result, counsel advised that it was filing a claim against the insured. The next day, a
claim was served at the golf course.

Confirming Coverage

- The first step taken by the claims professional was to confirm coverage. The golf course’s policy
indicated the following:
• The policy has a $2,000,000 liability limit.
• No specific exclusions apply.
• There are no deductibles or self-insured retentions.
• No claims-handling agreement is included.
- According to their policy, Fair Links is required to report a loss and provide any related
documents received.
- The golf course manager did take the correct action: he notified the broker. The broker chose
not to forward the notice letter because she felt that there was no liability on the golf course,
given the loss details
- In this case, the client won't be penalized for the breakdown in communication
- The statement of claim was seeking more than the available limits on the policy. $2,000,000 plus
interest and costs.
- The total claim value would therefore be over the policy limit of $2,000,000.
- If the full award were to be given, and the golf course was found to be the sole liable party, they
would have to pay any amount over $2,000,000
- An excess letter was mailed to both the insured client and the broker to advise of this.

Reviewing the Loss Details

- To review the loss details, the claims professional needed to secure all of the available
information including:

• Statements: Statements were gathered from the golf course manager, the employee
witness, and other witnesses

• Witness credibility: Defense counsel also spoke to the people specifically named on the
claim as defendants who are covered by the policy. This helped assess how
people could present if the matter were to continue to a trial in the future

• Investigating the scene: The claims professional assigned an independent adjuster to review
the scene.

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 • Productions: The plaintiff’s counsel secured records to support its client’s claim. Plaintiff’s
counsel would “produce” documents for review by defense counsel and the claims
professional so that the damages can be assessed, and the case reserves set.

Identifying Third Parties

- The claims professional was able to identify the parties that may be liable and/or negligent. The
list included the following:

• The insured: As the named defendant, the golf course would have some exposure. The event
was held at its venue, meaning that this loss falls under its occupier’s liability policy. In
addition, the golf course’s employees were serving alcohol to participants and provided
carts without requiring waivers to be signed.

• General Parts (plaintiff’s employer): General Parts organized the event, and its own staff
assisted the golf course’s staff.

• Plaintiff: The plaintiff contributed to the incident that led to his injuries, so he was negligent
in his actions. There should be a reduction in the claim as a result.

• Cart driver (John/Jane Doe): The driver of the cart that hit the plaintiff and caused the
damage was also named. He was a club member

Working Toward a Resolution

» It is rare for all parties to agree on how responsibility should be split in a claim.

Mediation

» Mediation was scheduled for all parties to try and resolve the claim

» The plaintiff did not want to accept any shared responsibility for the incident.

Final Outcome

» The claim was resolved at pre-trial. The judge was able to convey that the plaintiff had a
significant risk of losing if the claim were to proceed to trial.

» The judge recommended the following split of liability:

• Fair Links Golf Club: 15 percent

• General Parts: 15 percent

• Cart driver: 30 percent (personal home policy)

• Plaintiff: 40 percent (reduction on claim)

» All parties agreed.

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 Chapter 9- Commercial Property Exposures

Objective 1- Common Property Exposures

- COPE is a term used to explain the factors of a building that determine commercial property
insurance rates
- C- construction
- O- occupancy
- P- protection
- E- exposure

Construction

- Is one of the key attributes of commercial property that insurers and UW's consider
- It usually includes a description of the type of material used in the walls and roof of the building

Construction Considerations

- Building age
- Building size
- Material quality and workmanship
» Fire barriers
- Interior finish and insulation
- Concealed spaces

Construction Material Types

- Fire resistive
- Non-combustible masonry
- Masonry construction
- Brick veneer construction

Fire Resistive

- buildings have walls, floors, and roofs constructed of masonry or steel beam material (ex:
hospitals, Malls)

Non-Combustible Masonry

- buildings have floors and roof assemblies constructed of masonry, steel beams, or other fire-
resistive materials (ex: a strip malls, manufacturing buildings)

Masonry Construction

- walls are made of masonry (such as brick, stone, concrete, hollow concrete block, or hollow
tiles) or other fire-resistive materials (ex: commercial buildings found in downtown areas)

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 Brick Veneer Construction

- walls, floors, and roofs are made of combustible materials or are veneered on the outside. (ex:
law/accounting offices, residential homes)

Building Age

- A building’s age and its overall condition (wiring, plumbing, heating, roofing) are directly related
to potential loss
- Buildings up to 15 years old are usually in very good condition
- Buildings between 16-40 years of age are typically in acceptable condition
- Buildings over 40 years of age are a risk for deterioration, which can result in:
• Cracked wiring,
• Plumbing deficiencies
• Settling of the foundation
• Roof leaks.

Building Size

- High-rise buildings have a potential for fire and life safety risks
- A high-rise building is any building taller than the town or city’s ground-based firefighting
equipment can handle (usually any building greater than 6 stories)

Material And Quality Workmanship

- This refers to the characteristics of a building

- Key concerns include:
• Fire resistance
• Suitability for occupancy
- Thing that impact the quality of a finished structure include:
• The contractor’s experience and reputation,
• The insured’s financial and personal commitment to the project
• Building codes (which change over time, causing areas of concern)
- An example of an item defined by building codes is fire barriers

Fire Barriers

- Fire barriers are used to stop fire from spreading. They include the elements that follow:

• Fire division: The separation of two buildings by two independent walls is a fire division.

• Fire Walls: These walls have a minimum fire-resistive rating of three to four hours, with
great internal strength that allows them to remain standing during a fire.

• Fire cut-offs: Walls with lower fire-resistive ratings that act to slow down the spread of
fire.

• Fire stops: Elements used to delay the spread of fire in concealed spaces, such as
internal walls extending through attic areas, above a suspended ceiling, or around
electrical conduits.

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 • Fire dampers: Movable metal plates in a duct or flue(aka a duct/pipe/chimney opening)
arranged to automatically interrupt air flow and restrict the passage of heat and smoke

Interior Finish And Insulation

- Combustible materials used to decorate pr protective coverings on walls, floor, and ceilings can
increase the spread of fire

Concealed Spaces

- Often created unintentionally through renovations

- Usually found above dropped ceilings, or void areas of the structure
- May contain combustible materials such as insulation, debris, store displays
- Fires in these may be undetectable for some time, causing increased risk

COPE: Occupancy

Occupancy covers:

- Activities and operations

- Contents
• Non-combustibles
• Limited combustibility
• Combustible
• Free burning
• Rapid or flash burning
- Housekeeping and maintenance

- Occupancy is the use of the property by its occupants including

• The number of occupants

• If there is more than one

• A description of the operations of each

• The space each occupies

• The hazards associated with each occupancy

• Measures taken to reduce those hazards

- Occupancy information is useful for the following reasons:

• It helps identify hazards and the presence of controls.

• It assists in risk selection.

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 • It helps identify the correct occupancy line.

• It assists in risk pricing.

• It is a key factor in estimating contents susceptible to loss.

Activities and Operations

- Understanding the type of occupants and their relation to the property is crucial: What is the
building being used for, and what activities are taking place inside?

- Different types of occupants will have different uses for a building.

- For example, manufacturing companies generally have larger buildings that contain the
machinery used to produce goods. Retail operations manage the space available to
accommodate the flow of customer traffic.

- The activity within the property changes the types of risks that come with it

- The occupant’s business hours also impact the risk to the insurance company.

- vacant buildings and unoccupied buildings are a higher risk for vandalism, theft, and fire losses.

Contents

- Insurers use a Class Hazard Guide to rank the combustibility. There are five classes ranked

1. Non-combustible

• refers to merchandise or materials that don't actively fuel the spread of fire. Ex: clay and
glass products)

2. Limited Combustibility

• merchandise or materials of low combustibility and limited concentration of

combustible materials. (ex: offices, banks)

3. Combustible

• merchandise or materials of moderate combustibility. Ex: food, hardware, and home

appliance stores.

4. Free Burning

• refers to merchandise or materials that burn freely and constitute an active fuel. Ex:
businesses that work with baled cotton, furniture, and wood products.

5. Rapid or Flash Burning

• refers to merchandise or materials that represent an extreme fire hazard to the

structure (most extreme, or worst of all)

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 Rapid or Flash burning

- characteristics include
• Burn with great intensity
• Spontaneous ignition and are difficult to extinguish
• Give off flammable or explosive vapors at ordinary temps
• Produce large amounts of dust or debris subject to flash fire or explosion
- Business in this class include ammunition manufactures, mattress manufacturers etc.

COPE: Protection

- When assessing the security of a risk, both fire protection and theft protection are considered.

- Within each of these categories, protection can be thought of in two ways:

1. public protection and

2. private protection

- Public protection is provided by municipalities to protect citizens and their property. Ex: fire
departments and police services.

- Private protection refers to the ways a company can reduce its own risk. Ex: fire extinguishers,
sprinkler systems, installing an alarm.

Fire Protection

Public protection includes

- Water supply
- Fire department
- Fire safety control
- Fire services communications

Private protection (detection) includes

- Automatic fire alarm systems

- Security guard services

Private protection (extinguishment) includes:

- Fire extinguishers
- Sprinkler systems

Theft protection

Public protection

Private protection

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 - Building construction
- Lighting
- Locks
- Doors
- Windows
- Fencing
- Burglar alarms
- Security guards

Fire Protection: Public Protection

- Insurance companies use the proximity of public services such as fire departments and fire
hydrants to classify fire protection of a risk.

- The Fire Underwriters Survey (FUS) provides data on public fire protection for fire insurance
statistical work and underwriting purposes for insurance companies.

- Their grading system is known as the Public Fire Protection Classification (PFPC). It is expressed
on a 1 to 10 scale commonly known as “town grades.”

- The major grading features that make up the PFPC are as follows:

• Water supply

• Fire department

• Fire safety control

• Fire service communications

Water Supply

- A reliable and adequate water supply is important. Factors that increase reliability include the
following:

• No shortages during periods of peak demand (that is, if several fire hydrants are
operating simultaneously during a fire)

• Type of water source (reservoirs, elevated water tanks, rivers)

• The adequacy of pumps

• The age and size of piping

• The types of water lines

• The number, location, and condition of fire hydrants

Water Supply

- A water supply risk can be considered protected, semi-protected, and unprotected:

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 • Protected
: A fully operational fire hydrant with adequate water pressure is located within 300 m
of the risk. Also, the risk is serviced by a full-time fire department that is adequately
staffed and located within 5 km.

• Semi-protected: Although a fire hydrant is not located within 300 m of the risk, a full-
time fire department is located within 5 km.

• Unprotected
: The risk is located outside of the distances of both a fire hydrant and fire department.

Fire Department

- The FUS analysis of the fire department’s firefighting capacity includes an examination of the
administration, fire apparatus and equipment, fire station numbers and locations, response
times, number of firefighters and whether they are career or volunteer, training programs, and
records.

Fire Safety Control

- The FUS reviews the various fire safety programs, the number of staff committed to this
important function, and the adequacy of records.

Fire Service Communications

- Fire service communications includes the communications center, telephone system, telephone
lines, dispatching system, radio communications, and staffing.

Private Protections: Detection

- Security Guard Services— qualified persons patrol the premises, often during inoperative
periods. Security guards can detect fire, burglary, or vandalism.

- Controls are necessary to ensure their effectiveness, including:

• Guard rounds should commence immediately after business hours to help identify
potential fire situations, such as lit cigarettes, open flames, or heat-producing devices
that have not been shut off.

• Rounds should be made periodically hourly at night and bi-hourly during the day at off
periods.

• Check stations (the guard uses a key at the station to punch the clock he/she carries)
should be employed, ensuring a regular route.

Alarm Systems

Types of alarm systems include:

- Local Alarm -rings only at the premises to notify the occupants

- Auxiliary Alarm- connected to municipal alarm system using the same circuits that carry signals
from street fire alarm boxes

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 - Remote alarm- transmitted over phone lines to fire or police department
- Proprietary alarm- rings to alert occupants on protected property or rings at another facility of
the same organization
- Central station alarm- rings at the premises of a company that handles alarms

Private Protection: Extinguishment

- Fire extinguishment is another important factor to help mitigate loss. Two main systems are:
Fire Extinguishers and Sprinkler systems.

- Types of extinguishers include the following:

1. Standpipe and hose system: elements of both automatic sprinkler systems and portable
fire extinguishers are combined. The system consists of a series of pipes turning
throughout a building that supply water to attached fire hoses.

2. Portable fire extinguishers: designed to extinguish or control incipient fires before the
fire department arrives. They are labelled according to the class of fire on which they
may be used

Classes of fires and extinguishing agents

- A- anything that leaves ash

- B- anything in a barrel like gas or oil
- C- for current (electrical current)
- D- for "ding" things (sound metal makes when it hits something)
- K- for kitchen

Sprinkler Systems

▪ Automatic sprinklers
are one of the most effective for overall fire and life safety protection. Sprinklers are most
effective in controlling a fire before it has a chance to grow. Types of sprinkler systems include
the following:

• Wet pipe system: piping is constantly filled with water, immediately discharging the
water when the sprinkler head opens from fire heat melting the sprinkler head fuse

• Dry pipe system: piping is initially filled with pressurized compressed air, but when a
sprinkler head is opened, a valve also opens to fill the system with water and is then
discharged through the open sprinkler head

• Pre-action system: the sprinkler heads are normally closed so that both the sprinkler
heads and the detection component of a pre-action system must operate before any
water is released

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 • Deluge sprinkler system: sprinklers are open at all times; they are connected to a dry
pipe that is connected to a main water supply

• Antifreeze loop system protects areas in a building that are prone to freezing; a check
valve isolates the antifreeze loop from the rest of the sprinkler system

• Foam-water sprinkler system: system is pipe-connected to a source of foam

concentrate and to a water supply

Theft Protection

- Public protection

» is provided by municipal police services. They respond to break and enters and also
investigate crimes and lay charges.

» Many insurance companies hire former police officers to combat fraud in claims
investigations. They often work on a team known as the special investigations unit (SIU)

Theft Protection- Private Protection

- Physical protection includes the following factors.

• Building Construction- The stronger a building’s construction, the greater the protection
afforded.

• Lighting- good exterior lighting after dark is a major deterrent against burglary.

• Locks- Lock types include the following:

• Spring latch: very poor protection and can be opened with a credit card.

• Dead latch: When the door is closed, the latch is “dead” with a pin. It offers minimal
protection as the pin must be correctly aligned and the latch can be forced.

• Dead bolt: It needs a key to lock and unlock (it may use a thumb turn on the inside).
It provides the best protection, since there is no spring action, and it cannot be
forced.

• Doors- Construction material makes a difference: the better the panel construction material
used, generally the better the protection.

• Windows— If a window can be accessed with some ease, the window is vulnerable.
Windows can be protected by metal bars, screens, and grilles.

• Fencing—High metal fencing surrounding the premises’ perimeter can provide good
physical protection..

• Burglar Alarm Systems—There are three major types of burglar alarm systems:

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 1. Local: The sensors of this system are connected to a tamper-protected loud-
sounding gong or siren attached to the outside of the building

2. Monitoring station: The electrical protection circuits and devices or intrusion

sensors of this system trigger the alarm signal. The signal is sent automatically to a
monitoring station.

3. Central station: This system is similar to a monitoring station, but guards are
dispatched to immediately investigate any unauthorized entry.

Exposure

- Involves assess the possibility of exposure to loss from nearby hazards

- There are two types of exposures reviewed in this section
1. Fire
2. burglary

Fire Exposures

- Adequate separation distance

- Openings in the exposing building
- Height of the exposing building
- Private protection of exposing building
- Private protection of the risk
- Explosion possibilities
- Wind conditions
- Grass and vegetation

Burglary Exposure

- Location
- Type of merchandise

Fire Exposures

- factors to be considered when assessing a property’s fire exposure.

- Adequate Separation Distance- If the risk is separated from fire exposure, the possibility of
flame or heat is unlikely.

- Openings in the Exposing Building- Limited openings help contain flames within the interior of
the exposed structure.

- Height of the Exposing Building- Buildings that are lower in height than the risk will have flames
and radiant heat that cause more damage. Buildings that are higher than the risk threaten the
risk’s roof and walls

- Private Protection of the Exposing Building- automatic sprinkler systems will help to control the
fire and eliminate the radiant heat exposure.

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 - Private Protection of the Risk- Automatic outside water curtains on walls, deluged sprinklers
over openings, and automatic fire doors in openings protect the risk structure from the exposing
to fire.

- Explosion Possibilities- Flammable liquid or gas storage facilities or other explosion possibilities
require greater distance separation.

- Wind Conditions- Increased winds allow fire to spread more rapidly and over greater distances.

- Grass and Vegetation- Overgrown, dry grass as well as trees surrounding the risk must be
considered an exposure creating a possible fire bridge allowing a fire to spread

Objective 2- Common property perils

- With the invention of sprinkler systems came another major cause of loss: leakage from fire-
protective equipment.
- This led the insurance industry to recognize additional perils, which can be expressed by the
acronym SWILER:
• Smoke
• Windstorm/hail
• Impact by aircraft, spacecraft, or land vehicle
• Leakage from fire-protective equipment
• Explosion
• Riot
-

Smoke

- refers to smoke caused by a sudden, unusual, and faulty operation of any heating or cooking
unit in or on the premises but not smoke from fireplaces.

- In IBC's all-risks forms, smoke is covered, except for smoke from agricultural smudging and
industrial operations.

Windstorm/Hail

- Damage from windstorms includes tornadoes and hurricanes but not loss or damage caused by
waves, floods, or the weight, pressure, or melting of ice or snow.

- For interior damage to be covered, the wind or hail must cause damage to the outside of the
insured premise- leaving a window open is not covered

Impact by Aircraft, Spacecraft, or Land Vehicle

- loss of or damage to insured property caused by being struck by an aircraft or a land vehicle

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 - loss caused by any vehicle owned or operated by the insured or any of the insured’s employees
is excluded. Wear and tear damage is not covered

Leakage from Fire-Protective Equipment

- refers to loss of or damage to insured property caused by the escape of water from fire-
suppression systems such as sprinkler systems.

Explosion

- This peril goes beyond explosions due to natural, coal, and manufactured gas. Examples of other
types of explosions included are mechanical explosions, chemical explosions, and electrical
explosions.

Riot

- is an act or threat of violence by one or more persons who are part of an assembly of three or
more persons that might give rise to damage to property or injury to persons.

Objective 3- Commercial Property Hazards

What is A Hazard?

» Hazards are the conditions that cause or increase the likelihood of a loss.

» Hazards are broken down into:

1. Physical Hazards- hazards created from the physical characteristics of the property
being insured

2. Moral Hazards- hazards originating from the traits of a person

Physical Hazards

- There are two types of physical hazards:

1. Physical Hazards Resulting from Natural Events

2. Physical Hazards with Human Influence

Physical Hazards With Human Influence

- Examples are:

• Some municipalities are known to have an inferior or outdated infrastructure;

properties could be prone to sewer backup

• Premises that are near roads, airports, and railways have an increased likelihood of
impact by land vehicle or aircraft.

• Renovations to buildings can often create concealed spaces. These areas can cause a fire
to go unnoticed for a longer period of time

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 • Businesses often move property away from their premises to go to industry functions.
These items become exposed to other perils, such as theft or vandalism.

• If hazardous materials (cleaning supplies, paints, solvents, oils, and fuel) are stored close
to heat they can catch fire or fuel the fire.

Moral Hazards

- Examples include:

• Careless smoking causes fires. Cigarettes that are improperly discarded can ignite garbage
bins, surrounding dry grass, or other areas.

• When people fail to maintain their property, there is more clutter and dirt that could cause
a loss.

• An insured with a poor attitude toward loss prevention is also a moral hazard. Some people
won't try to reduce losses because they believe that’s what insurance is for.

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 Chapter 10- Commercial Property Solutions
Objective 1- Commercial Property Risk Controls

Risk Control Strategies

- Risk control includes:

1. Loss Control- controlling the exposure to prevent losses or to reduce the severity of a
loss

2. Loss financing- techniques to pay for losses that do occur.

Loss Control

- techniques include the following:

• Avoidance: avoiding a loss completely. By eliminating an exposure or by not assuming a new

exposure, a business can avoid the risks associated with it.

• Loss prevention: aims to reduce preventable losses through anticipatory safety measures.

• Loss reduction: is used to lessen the severity of those losses that do occur.

• Separation or diversification focuses on spreading assets to minimize risk. Assets subject to loss
can be moved to separate locations to reduce the concentration of value should a loss occur at
one location.

• Non-insurance risk transfer involves transferring risk from one business to another (which could
be a supplier or customer) via contractual agreement.

Loss Financing

- Two methods are used to finance losses: retention and transfer.

Retention

• Aka self-insurance, a business absorbs all or part of a loss. Retention is sometimes the only risk
management technique available to a business for a particular loss

• A plan to retain losses should be for those low in severity and high in frequency. . Exposures that
are retained because they were never identified is known as passive retention.

Transfer

- Two approaches are.

1. transfer loss to other entities by a business contract.

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 2. transfer loss to an insurer through an insurance policy.

Objective 2- Commercial Property Coverage Solutions

Named-Perils Policies

- provides coverage against direct physical loss or damage caused by only the listed perils. The
property must be directly damaged by a peril that is explicitly named in the policy to be covered.
The loss must be considered fortuitous or an accident.
- Named perils include the following:
• Fire or lightning
• Explosion (beyond what is contemplated under the explosion peril of the basic fire
policy)
• Impact by aircraft, spacecraft, or land vehicle
• Riot, vandalism, or malicious acts
• Smoke
• Leakage from fire-protective equipment
• Windstorm or hail
- Basic fire policy perils + additional perils (SWILER) = Named perils

All-Risks Policies

- Cover against direct physical loss or damage caused by any peril, provided that the peril is not
excluded. The event must be fortuitous and occur within the policy period).
- Since all-risks forms limit coverage by exclusions, they insure against more perils than named-
perils forms. All-risks coverage is therefore broader.
- Coverage afforded by all-risks forms is established by the exclusions contained in the wording.
The two categories of exclusions are property and specific perils. The onus is on the insurer to
prove that the exclusion applies.

What is Covered

- Building- refers to fixed structures that pertain to the building and are located on the premises.
It also includes signs, plants, trees, and shrubs. Many insurers also consider equipment used for
maintenance and normal repairs as part of the building.
- Stock- is merchandise usual to the insureds business, and it includes packaging, wrapping, and
advertising materials. Many insurance companies also consider similar property belonging to
others
- Equipment- Insurance companies generally consider equipment to be all contents usual to the
business, including furniture, furnishings, fittings, fixtures, machinery, tools, utensils, and
appliances other than building or stock.

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 - Floaters- The main purpose of a floater is to cover property that is moved off the premises.
Coverage “floats” over this property wherever it is moved, subject to territory restrictions set
out by each insurance company.
- Floaters also enhance insurance limits and extend coverage to perils not contemplated under a
blanket stock or equipment limit on a policy.

Endorsements

- An endorsement is an amendment or change to an existing wording. It alters the provisions of

the main wording to add or remove coverage. It may also be used to grant the business
permission for certain activities
- There are two main types of endorsements:
1. Standardized: It is written to apply to any policy it is attached to. For example: flood,
earthquake, and sewer backup.
2. Manuscript wording
or free form: It does not conform to a standard wording and is uniquely written for a
particular risk. Often, insureds will have a say in what goes into the manuscript. This
type of endorsement is used for large commercial accounts where the premium is large
enough to offset the additional cost of generating the manuscript.

Important Features of Commercial Property Forms

- When selecting the amount of insurance for property coverage, the following elements should
be considered:
• The valuation basis (typically, replacement cost or actual cash value) on which claims
will be settled under the policy
• The policy’s coinsurance clause
• The choice between blanket and separate limits
• Whether values at risk fluctuate over the course of the year

Valuation

- Commercial property forms allow the insured to choose between insuring property for actual
cash value or at replacement cost.
- Actual cash value (ACV) is the cost (at the time of loss) of replacing the property, minus any
depreciation to it
- replacement value is the amount it would cost to repair or replace insured property with new
property of like kind and quality and no allowance for depreciation.
- Receiving new property after an insured loss comes at a cost. The amount of insurance will be
higher on a policy that settles claims at replacement cost than on a policy that settles at actual
cash value.
- The premium for a policy that settles claims at replacement cost will be higher than for a policy
on the same property that settles claims at actual cash value.

Coinsurance clause

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 - encourage insureds to insure their property to value. This clause requires an insured to carry a
minimum amount of insurance (a % of the property value) Meaning, an insured that is
underinsured would have to bear part of the loss along with the insurer.
- The insured’s share of the loss is based on the amount of insurance required by the coinsurance
clause.

Stated Amount Coinsurance

- Stated amount coinsurance clause is the alternative to the standard coinsurance clause
- It encourages insureds to maintain a minimum amount of insurance just like the coinsurance
clause
- It is specified in dollars, not percentage of the actual cash value of the property insured
- The insurer establishes the minimum amount, usually 100% but sometimes 90% of stated values

Blanket Policies

- May be preferred by the insured instead of specifying individual limits for each type of property
- Blanket policies can be:
• combining coverage at a single location
• Combining coverage at multiple locations
• A single limit for property of every description (POED)- covers building and contents
under a single limit (applies to all locations)
• Contents of every description (COED)

Fluctuating Values

- When there are wide swings in values over the course of the year, the insured needs insurance
to cover these fluctuations.
- Two ways to solve this are
1. Stock reporting endorsement
2. Peak Season Endorsement

Stock reporting basis

- the policy limit should reflect the highest value of the stock on hand
- Policy should include a reporting clause to adjust the premium, so that the premium accurately
reflects the values at risk
- Insured can report stock values monthly, quarterly, or annually and premium is adjusted at year
end

Peak Season Endorsement

- Increases the limit of insurance at a specified period or unspecified locations for a specific
period of time (ex: during a busy season when more stock is on hand)
- The amount of insurance on the policy reflects the normal value for stock on hand

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 - Peak season endorsement increases the amount at a specified time of year, which allows the
insured to temporarily increase policy limits and add locations without a permanent increase in
premium

Objective 3- Case Study: Determining Commercial Property Coverage

Overview

- This case study walks through the following points in determining the best property coverage
for a client:
• The initial meeting, where the COPE framework is used to identify exposures
• Following up with the client to confirm concerns and go over insurance solutions
• Negotiating coverage
• Compromising to reach the best insurance solution for all parties involved

The Business

- Gray’s Variety is a small chain of convenience stores owned by Mr. Gray. first location opened
10 years ago.
- He is currently in the final stages of opening his fourth store. He also has a small storage facility
where he keeps extra stock and maintenance equipment.
- Mr. Gray needs insurance coverage for his new store. the new store is in a suburban, residential
neighborhood. It is near a small popular lake
- The new store, Like the other locations, will sell lots of items: grocery products (both perishable
and non-perishable), toiletries, stationery products, lottery tickets, cigarettes, and other
household items. Unlike the other locations, the new store will sell products for fishing during
the season. Off-season, these products will be kept in the storage facility.
- All the stores are open from 6 a.m. to midnight and are staffed by one to two employees,
depending on the time of day.

The Location

- Factors that impact Gray’s Variety include the city, the neighborhood, the strip plaza, and the
building itself.
- The City- usually has sunny weather, even in the winter. It is not a tornado- or earthquake-prone
area. There is little rain. But, in the past five years there has been some heavy rainfall, and a
catastrophic event where rivers overflowed and caused major flooding. The city is also quite
windy

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 - The Neighborhood- Is near the lake, which adds the business opportunity to sell fishing
products. It is also a suburban, residential area, and Mr. Gray hopes that this area will have less
crime. Petty theft is typical in his downtown locations.
- The Strip Plaza- Gray’s new store Is one of five commercial condo units in a strip plaza. The
other units are a family restaurant, a dental office, a dry cleaner, and a travel agency. Gray’s
operates out of the smallest unit (800 sq. ft.). The largest, a 2,000 sq. ft. restaurant, is
immediately next to Gray’s. The unit on the other side is occupied by a dry-cleaning operation

The Stakeholders

- Client Perspective- Mr. Gray invested heavily in security systems and other theft deterrents due
to past break-ins at his other stores. He thinks the new location should have lower premiums
because it’s in safer area. He’s hoping that he might be eligible for some kind of discount,
considering that this is the fourth store he is insuring.
- Mr. Gray ultimately wants to pay a low premium, but will listen to well-justified advice.

- Broker Perspective- The broker, Ms. Mila, works with several clients who are small businesses.
She has seen a rise in water damage claims. Many of her clients weren't prepared for the
unexpected weather events. As a result, they were not eligible for coverage. This has had a
negative effect on Ms. Mila’s reputation as a broker and her relationship with her clients. She
has decided that she will emphasize the importance of proper coverage for potential damage
from flooding.

- Underwriter Perspective- Gray’s Variety is currently insured by a well-established commercial

insurer that has provided the business with insurance coverage for the last five years. The
insurer is happy to take on the coverage of a new store, and is familiar with the loss history of
the other stores related to theft. The insurer is likely to assume that the new store will have the
same level of theft and related claims as the other stores.

Initial Analysis

Construction
- Mr. installed new wiring himself. He is not a licensed electrician.
- The inside ceiling tiles show signs of water damage. The building owner resurfaced the roof 15
years ago.

Occupancy
- Cleaning supplies are left scattered around the furnace room.
- The lottery ticket display is missing a shield, leaving the tickets susceptible to theft.
- There is more cash in the safe and on-premises compared with other variety stores.
- Mr. Gray makes a trip to the bank every Friday evening to deposit cash. Many businesses make a
point of doing this at the end of each business day.

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 Occupancy
- Large quantities of overstocked cigarettes are kept in the back room but are in plain sight of the
store’s customers.
- ,Mr. Gray hires high school students. He can pay them minimum wage and does not have to pay
benefits since it is only part-time work.
- The store aisles are cluttered.
- Freezers and coolers, which store perishable items, are older with no service agreement in
place.

Protection
- Mr. Gray does not keep a fire extinguisher on-site.
- Ms. Mila knows Mr. Gray is looking into installing a sprinkler system. She also knows that this
can take a long time
- Mr. Gray has installed bars on windows, video surveillance, a centrally monitored alarm system,
and deadbolt locks on the doors.

Exposures
- The dry cleaner located next to Gray’s Variety uses a variety of chemicals for cleaning, which are
kept on-site.
- The restaurant in the strip plaza has multiple business-grade ovens and deep fat fryers.
- Overnight, all of the strip plaza operations closed down. There is substantially little customer
traffic at this time.
- The strip plaza has a large parking lot with high vehicle traffic during the day. There are no
barriers between Gray’s Variety and the parking lot.
- Ms. Mila notices a “For Sale” sign in the window of the Luxury Travel office
- Based on a preliminary review, Ms. Mila suggests an all-risks commercial property insurance
policy.
- My Gray didn't ask questions about the coverage, instead he focused on if he would get any
additional discounts
- Ms. Mila is concerned about potential floods, because of the incidents that happened in the past
in this area
- Ms. Mila calls Mr. Gray to review her proposal and talk a bit more in detail about the flood
exposure
- Mr. Gray raises his concerns about the investment he made in preventing theft at his store, Ms.
Mila confirms the insurer will take that into consideration
- Ms. Mila calls several insurance companies to see if Mr. Grays store will be eligible for flood
coverage, and reviews his existing policies to compare coverage

Negotiating Coverage
- Ms. Mila understands Mr. Gray’s objectives and is prepared to follow up with the insurer to see
what it is able to offer. The underwriter states that Mr. Gray could be eligible for premium
discounts. However, the underwriter has other concerns that need to be

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 - The risk of a grease fire from the neighboring restaurant: Does the building have a parapet or
concrete fire-resistive wall between units?
- The risk of an impact to the store by a vehicle: Will Mr. Gray be installing a concrete barrier or
posts in front of the store?
- If Mr. Gray is able to prove both of these things, the underwriter is willing to provide coverage,
including a discount on the premium for the theft coverage.

Compromise
- Ms. Mila returns with the insurer’s risk control recommendations.
- In addition to the all-risks commercial property policy, she suggests adding a floater to protect
items kept in the storage facility and a peak season endorsement for the busy summer months.
- Mr. Gray agrees to the insurance plan Ms. Mila discusses the possibility of increasing his
property deductible from $1,000 to $5,000 to save $300 a year in premium. Mr. Gray accepts.

Outcome
- Mr. Gray now has a plan that works for his business.
- Ms. Mila identified the key risks that Gray’s Variety was exposed to and provided solutions to
manage them.
- A comprehensive insurance plan was established, and loss prevention and controls were
implemented. Mr. Gray agreed to
• install a concrete barrier in front of the entrance.
• install a cover for lottery tickets.
• make nightly cash deposits.
• eliminate clutter.
• establish a purchase agreement based on past sales data for ordering stock of cigarettes
to prevent overstock; and
• purchase a fire-resistive cabinet for storage of cleaning supplies.

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