Risk Management: Homeowners Insurance

1. Risk Management: Homeowners Insurance Jean Lown Erin Pratt Beth Butterworth

2. What is RISK? Uncertainty of any outcome Speculative Risk (stock market) Pure Risk (driving a car, owning a home)

3. Financial Risk Must have a dollar amount attached to it

4. What type of risk will insurance cover? Answer: Pure Risk

5. Risk Management is the process of identifying and evaluating situations involving pure risk to determine and implement the appropriate means for its management

6. How do you do this? • 1. Identify exposures and perils that can lead to potential financial loss. • Exposure: possessions and activities that can lead to loss (owning a house) • Peril: an actual event that causes the loss (house burns down)

7. 2. Evaluate potential losses • What could cause a loss?

8. 3. Choose a method of dealing with loss • Severity and Frequency chart • (Garman/Forgue Personal Finance, 7th edition)

9. Risk avoidance • Don’t do it or own it

10. Risk retention • Can you retain the risk or do you need insurance? • Can you pay for the risk? • If your appliance breaks will it cause bankruptcy? • Refrigerator vs. house

11. Loss reduction • Try to prevent a loss or reduce the loss: • Smoke alarms • dead bolts

12. Transferring risk • You give someone else the responsibility to pay for the loss: • Insurance (homeowner insurance)

13. Risk Reduction • Cover part of the loss, transfer part of the loss: • Deductibles on HO & auto insurance

14. 4. Implement • Insurance is necessary- • high loss (could lead to bankruptcy • Insurance is important- • medium loss (would have to borrow) • Insurance is optional- • low loss (you could pay for loss)

15. 5. Evaluate and adjust • When would you adjust homeowner insurance? • Answer: home is paid off, add on, value increases

16. Insurance Q&A What is its purpose? Peace of mind, to protect your assets Why are insurance companies willing to cover you? Law of large numbers Who can get insurance? Insurable interest

17. Factors affecting cost • Deductible- • Portion of loss you pay • The higher the deductible, the lower the premiums

18. Hazard reduction: • take action to reduce probability of loss (ex: nonsmokers, dead bolts) Loss reduction • reduces severity when there is a loss. (Ex: smoke alarms, fire extinguishers)

19. Coverage: how much is covered? • New Mercedes vs. old Ford • New house vs. old house

20. Shop around! • Every insurance company has different offers, so shop around, but find one that is reputable. • Homeowner insurance policies are standard, but premiums may vary.

21. Liability • Covers injuries or damage caused by you, a member of your family, or a pet. • Trampolines • Broken windows • Icy driveways during the winter

22. Extra tips • Coverage-have enough to rebuild home, find out cost per square foot, don’t worry about land. • Named peril policy-covers ONLY perils named • All-risk-covers everything EXCEPT what is listed

23. Questions?

24. Are you a gambler? • Do you invest in risky investments? • Is Las Vegas your favorite vacation spot? • Are you a sky diver? • Do you have earthquake insurance on your most valuable asset? • Do you need flood insurance?

25. Do you have adequate insurance? • 3 out of 4 homes are underinsured by 35% • CV residents need earthquake coverage • Some CV homeowners need flood insurance

26. Hurricanes & Tornadoes • How did Katrina affect you? • We are in the same insurance pool • Mounting insurance claims as more Americans live near coasts • Past decade costly to property insurers • HO insurance not profitable • Rates are going UP!

27. Major Points • Understand & apply risk management principles to HO insurance • Evaluate & update your HO coverage • Document your home & possessions with a home inventory • Increase deductible & liability coverage • Purchase earthquake coverage

28. Homeowners Insurance • Liability • Property • Dwelling • Other structures on property • Personal property • Loss of use (additional living expenses)

29. Buying HO Insurance • How much coverage to REPLACE dwelling? • How much coverage on personal property? • How much liability coverage?

30. Home Replacement Value • Cost to rebuild ‘same’ home on your lot? • Not same as market value! • Get builder estimate • Cost may exceed new home prices due to • lack of economies of scale for new developments • Higher cost of partial rebuilding • Guaranteed replacement cost coverage? • Annual inflation adjustment?

31. Contents Coverage • Actual cash value • Yard sale/ thrift store prices • Contents replacement cost • “full” replacement value • Read policy limits!!

32. Personal Liability • You could be sued • Even if “innocent” you need to defend against lawsuits • Standard coverage: Inadequate • $100,000 personal liability • $1,000 no-fault medical • $250 no-fault property damage • Higher limits are cheap

33. Actions • Cost to replace home? • Assess contents • Raise deductible • Raise Liability • Buy earthquake coverage • Consider flood insurance • DO NOT file small claims! • Adequate emergency fund?

34. Questions on Basics?

35. HO Insurance Industry • Lots of losses nationwide • 2001 Paid out $1.16 for each premium $1 • Premiums going up • 2002: 13% average hike • 57% in TX; FL,LA? • Insurers dropping customers • Mold losses increasing • Repair costs increasing

36. Before you buy a house • Get CLUE report (Comprehensive Loss Underwriting Exchange) • Claim history on house • Previous claims (water damage)? • May affect your HO insurance cost & availability • Available to owner (ask seller to provide)

37. Actions • File small claims & you’ll lose insurance • Raise deductible • Cover “small” losses yourself • Check your credit report • Free reports • www.annualcreditreport.com

38. Shop Around? • Compare rates & reputation! • Consumer Reports • Utah Department of Insurance • http://www.insurance.utah.gov/consumers.html • Auto & Homeowner Insurance Comparison Tables (2004)

39. Changing insurer can backfire • New customers • More likely to file claim • More likely to be dropped if they file a claim • Insurer can cancel for any reason in 1st 60 days

40. Filing Claims • Don’t file for < $1,000 • Raise deductible to $1,000 • Large loss • Consider hiring a public adjuster

41. When Disaster Strikes Do not let a crisis become a financial burden Prepared for Financial Planning for Women by Beth Butterworth USU Family Finance student

42. Are you Covered? • Earthquake and Flood damage are NOT covered by standard homeowners policies • You must purchase separate insurance coverage for these risks

43. What about Floods? • Recent flooding in Cache Valley • Nibley • Richmond • Near Blacksmith Fork River in S. Logan • Early-mid 1980s • Logan River Thrushwood-Sumac neighborhood

44. Flood Insurance • Floods happen in all 50 states. • “Everyone lives in a flood zone.” (FEMA) • Only one inch of water can cost over $1,000 to repair damage. • New land development can increase the flood risk

45. Do you need it?What areas flooded last spring? • Recent flooding in Cache Valley • Nibley • Richmond • Near Blacksmith Fork River in S. Logan • Early-mid 1980s • Logan River Thrushwood-Sumac neighborhood

46. What’s your flood risk? • http://www.floodsmart.gov/floodsmart/pages/riskassesment/findpropertyform.jsp • Enter your address • Flood Plain Maps • www.fema.gov/fhm.shtm $2 • How to read a flood plain map • FloodSmart.gov

47. But I live in a low risk area… • Almost 25% of all flood insurance claims come from low risk areas

48. Flood Insurance • Does your community participate? • www.fema.gov/fema/cxb.shtm • Logan, N. Logan, Richmond, Wellsville… • What to do to participate? • A letter must be sent to the local NEIP coordinator • www.floods.org/statepocs

49. Special Flood Hazard Area • If you live in a Special Flood Hazard Area (SFHA) or high risk area, your mortgage lender requires you to have flood insurance.

50. Flood Insurance • Who offers Flood insurance? • Local insurance agencies • FEMA Federal Emergency Agency