Risk Management: Homeowners Insurance Jean Lown Erin Pratt

Risk Management:
Homeowners Insurance
Jean Lown
Erin Pratt
Beth Butterworth
What is RISK?
Uncertainty of any outcome
Speculative Risk (stock market)
Pure Risk (driving a car, owning a home)
Financial Risk
Must have a dollar amount
attached to it
What type of risk will
insurance cover?
Answer: Pure Risk
Risk Management is the process
of identifying and evaluating
situations involving pure risk to
determine and implement the
appropriate means for its
management
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)
2. Evaluate potential losses
• What could cause a loss?
3. Choose a method of dealing
with loss
• Severity and Frequency chart
•
(Garman/Forgue Personal Finance, 7th edition)
Risk avoidance
• Don’t do it or own it
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
Loss reduction
• Try to prevent a loss or reduce the loss:
– Smoke alarms
– dead bolts
Transferring risk
• You give someone else the responsibility
to pay for the loss:
– Insurance (homeowner insurance)
Risk Reduction
• Cover part of the loss, transfer part of the
loss:
– Deductibles on HO & auto insurance
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)
5. Evaluate and adjust
• When would you adjust homeowner insurance?
• Answer: home is paid off, add on, value
increases
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
Factors affecting cost
• Deductible– Portion of loss you pay
– The higher the deductible, the lower the
premiums
• 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)
• Coverage: how much is covered?
–New Mercedes vs. old Ford
–New house vs. old house
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.
Liability
• Covers injuries or damage caused by you,
a member of your family, or a pet.
– Trampolines
– Broken windows
– Icy driveways during the winter
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
Questions?
Are you a gambler?
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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?
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
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!
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
Homeowners Insurance
• Liability
• Property
– Dwelling
– Other structures on property
– Personal property
– Loss of use (additional living expenses)
Buying HO Insurance
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How much coverage to REPLACE
dwelling?
How much coverage on personal
property?
How much liability coverage?
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?
Contents Coverage
• Actual cash value
– Yard sale/ thrift store prices
• Contents replacement cost
– “full” replacement value
• Read policy limits!!
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
Actions
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Cost to replace home?
Assess contents
Raise deductible
Raise Liability
Buy earthquake coverage
Consider flood insurance
DO NOT file small claims!
Adequate emergency fund?
Questions on Basics?
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
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)
Actions
• File small claims & you’ll lose insurance
– Raise deductible
– Cover “small” losses yourself
• Check your credit report
– Free reports
– www.annualcreditreport.com
Shop Around?
• Compare rates & reputation!
– Consumer Reports
– Utah Department of Insurance
– http://www.insurance.utah.gov/consumers.html
– Auto & Homeowner Insurance Comparison
Tables (2004)
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
Filing Claims
• Don’t file for < $1,000
• Raise deductible to $1,000
• Large loss
– Consider hiring a public adjuster
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
Are you Covered?
• Earthquake and Flood damage are NOT
covered by standard homeowners policies
• You must purchase separate insurance
coverage for these risks
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
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
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
What’s your flood risk?
• http://www.floodsmart.gov/floodsmart/page
s/riskassesment/findpropertyform.jsp
– Enter your address
• Flood Plain Maps
–www.fema.gov/fhm.shtm $2
• How to read a flood plain map
• FloodSmart.gov
But I live in a low risk area…
• Almost 25% of all flood insurance claims
come from low risk areas
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
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.
Flood Insurance
• Who offers Flood insurance?
– Local insurance agencies
– FEMA Federal Emergency Agency
Flood Insurance
• What will it cost to buy from a local agent?
– Premiums are around $300-$400 a year
depending risk level and value of home.
– Estimate your premium at FloodSmart.gov
Flood Insurance
• What will it cost to buy from the
government?
– If your neighborhood participates in the NEIP
National Emergency Insurance Policy and the
risk is low, the cost can be as low as $137 for
the entire home.
Flood Insurance
• What is covered?
– Contents are covered only in the part of the
home that is above the ground
– For the area below ground:
• Will not cover the contents
• Will not cover unpainted sheetrock or stairs
Flood Insurance
• What will it cost you after the flood?
– Usually a high deductible
• Can be as high as $10,000
Earthquake Insurance
• They say we’re due for a BIG ONE
• We have had 2 major quakes in the last
seventy-two years.
• The last one was over 20 years ago.
Earthquake Insurance
• What is covered
– The basic structure
– The contents
– And for a higher price the bricks if you live in a
brick home.
Earthquake Insurance
• What does it cost you now?
– An additional $1.60 per $1,000
• Ex. $160 a year for a $100,000 home
– An additional $7.75 per $1,000 if it is brick.
• Ex. $775 a year for a $100,000 home
– With a brick home they will insure it at the
lower price, but when it is rebuilt they will not
include the bricks.
Earthquake Insurance
• What will it cost you after the quake?
– There will be a 5-10 percent deductible that
you will be responsible to pay.
– About 5% on the structure.
• They will pay up to $100,000
– About 10% on the contents.
• They will pay up to $75,000
Earthquake Insurance
• Ask if there is anything that they do not
cover or if there is anything you would
need to pay extra to cover.
Start the Steps to Preparedness
• Commit to 1-3 actions in coming week
• Highest priority
• Easiest
Two Mistakes of Insurance
#1 People over-insure themselves (too low a
deductible) and thus spend much more on
insurance than they should.
#2 People underinsure themselves and are
in financial crisis after an uncontrolled
event.
How to Avoid these Mistakes
#1 Think ahead
– Is the risk great enough that you need insurance?
– If so, how much insurance do you really need?
– Do you have the resources to cover the deductibles?
#2 Be prepared
– Have emergency savings (3-6 months of expenses)
– Keep a copy of your insurance policy somewhere
safe (safe deposit box)
Questions?
• What is your personal finance action plan?
• Please let us know what topics you would
like FPW to cover in 2006
Earthquake Potential
• “Earthquakes have the potential to inflict a
greater loss of life and property in a single
event than all other hazards in Utah.”
– Gary E. Christenson
• See photos UGS Survey Notes Sept. 05
Cache Valley Earthquake Risk
• Overdue for a big quake
– East Cache Fault
– West Cache Fault
• Areas most at risk: out in the valley
What to do in earthquake
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Duck under table or desk
Stand in doorway
Don’t go outside!
Falling debris is biggest danger
Bricks falling off buildings on Main St.
7 Steps on the road to earthquake
safety
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3.
4.
5.
6.
7.
Identify potential hazards & being to fix
Create disaster plan
Create disaster supply kits
Identify building weaknesses & begin to fix
Drop, cover & hold on during quake
Check for damage & injuries…
When safe, follow disaster plan
Home Hazards
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Kitchen cabinets- need latches
Secure TVs, stereos, computers- straps
Pottery, vases – velcro, earthquake putty
Use closed hooks on mirrors & pictures
Secure tops of top-heavy furniture
Secure Water heater- straps & screws
Gas Leaks
• Shut off main gas valve only if you detect
a leak
– Need wrench in emergency kit
– Only a pro can turn the gas on again
E-kits for home, work & vehicle
– Medications
– First aid kit w/ gloves
and handbook
– Spare glasses,
contacts, solution
– Whistle to alert
rescuers
– Sturdy shoes
(especially by the bed)
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Phone #
Snack foods
Flashlight & batteries
Personal hygiene
Radio & batteries
Cash
Water