1. Managing Property & Liability RiskChapter 10 Personal Finance FIN 235

2. Learning objectives • What is insurance? • Why do we need insurance? • What is the risk management process? • How does insurance work in reducing risk? • Homeowners Insurance • Renters Insurance • Automobile Insurance

3. INSURANCE • What is Insurance? • Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. • Insurance is a form of risk managementprimarily used to hedge against the risk of a contingent, uncertain loss. • Why Do We Need Insurance? • It represents our primary strategy to manage or hedge the risk of loss.

4. The Risk Management Process The Five Steps: Step 1: Identify sources of risk Step 2: Estimate risk and potential losses Step 3: Choose how to handle risk Step 4: Implement your risk management plan Step 5: Evaluate and adjust your plan

5. Managing Risk • Risk • The uncertainty of a loss that faces a person or property covered by insurance. • Peril: potential causes of risk • Hurricanes and Tornadoes • Hazard: a scenario that increases the likelihood of a loss due to a peril • Living near the ocean or in the Midwest.

6. Managing Risk • Risk Management Methods • Avoidance: don’t build near the shore • Reduction: wearing a seat belt. • Self-Insurance: a special fund to cover losses. • Risk Shifting: buy insurance

7. Planning the Insurance Program • Indemnity Principle limits insurance payout: You cannot receive more [$] than the economic loss suffered • Several factors can reduce the cost of insurance • Deductibles • Coinsurance • Hazard reduction • Insurance policies contain vital information • Perils covered • Property covered • Types of losses covered • Time period of coverage • Policy limits (maximum amounts)

8. Home & Property Insurance • Homeowner’s Insurance • Homeowner’s insurance is meant to protect against financial loss to do damage or destruction. • Personal Property • Living expenses if displaced • Liability coverage: protection against legal actions or claims • Medical payments • Personal property floater: specific items of high value

9. Renter’s Insurance • Many rental agents require renter insurance • Cover damage to rental property by renter • Cover personal property against loss by fire, flood • Living expenses if displaced

10. Home Insurance Form • Form HO-D1 • Section 1: Coverages and Amounts • Dwelling • Other Structures • Personal Property • Loss of Use • Section 2: Coverage and Limits of Liability • Personal Liability – Each Occurrence • Medical Payments to others • Deductibles

11. Home Insurance Form • Policy Premium • Credits and Discounts • Other Coverages and Endorsements • State Surcharges and Taxes (if applicable) • Total Policy Premium • Form HO-D2 • Specific/Amended Declarations

12. Chapter Break

13. AUTOMOBILE INSURANCE • Financial Responsibility Law • State legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accident. • Automobile Insurance Coverage • Bodily Injury Coverage • Property Damage Coverage

14. AUTOMOBILE INSURANCE • Motor Vehicle Bodily Injury Coverage (1) • Bodily Injury Liability is for the risk of financial loss due to legal expenses, medical expenses, lost wages, and other expenses associated with injuries caused by an automobile accident for which you were responsible • Medical Payments cover the costs of health care for people who were injured in your automobile, including yourself. • Uninsured Motorists Protection covers the cost of injuries to you and your family but, in most states, not property damage

15. AUTOMOBILE INSURANCE • Motor Vehicle Bodily Injury Coverage (2) • No-fault Insurance System provides for drivers in an accident to collect medical expenses, lost wages, and related injury costs from their own insurance company.

16. AUTOMOBILE INSURANCE • Motor Vehicle Property Damage Coverage (1) • Property Damage Liability protects you against financial loss including vehicles, street signs, lampposts, and buildings. • Collision insurance pays for the damage to the automobile regardless of who is at fault. But if another driver caused the accident, your insurance company will try to recover the repair costs for your vehicle from the other driver’s property damage liability coverage.

17. AUTOMOBILE INSURANCE • Motor Vehicle Property Damage Coverage (2) • Comprehensive Physical Damage covers you for such risks as fire, theft, glass breakage, falling objects, vandalism, wind, hail, or damage caused by hitting an animal. • No-Fault Insurance Under the no-fault system, drivers who are involved in accidents collect money from their own insurance companies

18. AUTOMOBILE INSURANCE • Other Automobile Insurance Coverage • Wage loss insurance will reimburse you for any salary or income lost due to injury in an automobile accident. • Towing and emergency road service pays for the cost of breakdowns and mechanical assistance.

19. AUTO INSURANCE COSTS • Determinants of Cost • Amount of Coverage • Every state has laws that require or encourage automobile liability insurance coverage. • Medical expenses and legal settlements have increased, so too the cost of automobiles, making higher amounts of property damage coverage necessary • Insurance Premium Factors • Year, Make, and Model of your automobile • Driver classification is a category based on the driver’s age, sex, marital status, driving record, and driving habits. • Risk Pool assignment

20. AUTO INSURANCE COSTS • Reducing Vehicle Insurance Premiums • Establish and maintain a safe driving record • Drivers under 25 can qualify for reduced rates by completing a driver training program and maintaining good grades in school • Installing anti-theft devices • Increasing the amount of the deductible

21. Homework Assignment • Question #1 (Applies to those who currently rent) • Does your landlord require renters liability insurance? • If so, what are the Coverages? Deductibles? • Question #2 • If you own a car, examine your policy and determine your coverage in terms of; Bodily injury Medical payments Uninsured motorists Property damage Collision Comprehensive • Be Your Own Personal Financial Planner • 1 – Property Loss Exposures (w/s 43) • 5 – Shop for Automobile Insurance (w/s 45)