DEVELOPING A

PLAN OF PROTECTION

Risk Exposure Assessment

Reducing, Abandoning and Absorbing Risk

Understanding the Basics of Transferring Risk

Obtaining Insurance Quotations

PREPARED BY:

GIL SAUNDERS

AFN INSURANCE BROKERS INC.

Table of Content

Table of Content......

DOCUMENT Introduction......

Section 1 - RISK EXPOSURE ASSESSMENT......

Introduction......

1. Types of Potential Losses......

2. How To Measure Potential Loss Exposure......

1 - Direct Losses to Property......

Preparing a List......

Determining Value......

For Capital Properties......

For Contents......

For Persons......

2 - Indirect Losses......

3 - Third Party Losses......

4 - Contingent Loss Exposure......

3. Protecting Yourself from Potential Losses......

4. Deciding Who Should Complete the Assessment......

In House......

Advantages:......

Disadvantages:......

Contracting Out......

Advantages:......

Disadvantages:......

Conclusions......

SECTION 2 – REDUCING, ABANDONING & ABSORBING rISK......

Introduction......

Reducing Risk......

Abandon......

Absorb......

part 3 - Understanding the Basics of Transferring Risk......

Introduction......

Transferring Risk......

Insurance Concepts......

Advantages Of Insurance......

Types Of Insurance Coverage......

Property:......

LIABILITY......

Conclusions......

section 4 – TRANSFERRING RISK......

Introduction......

Informal Insurance Quotations......

Formal Insurance Quotations Or Tenders......

What Should A Formal “Request For Proposal” Contain......

Introduction......

Schedule Of Coverage......

What Documentation Should An R.F.P. Contain......

Who Should Be Invited To Tender......

Analysing The Proposals......

Conclusions......

document conclussion......

DOCUMENT Introduction

The purpose of this document is to explain the complexities of preparing a “Plan of Protection” for any community, business or organization. The processes and principals described could even be used for personal assessment. Preparing a Plan of Protection involves four major steps including:

  1. Risk Exposure Assessment
  2. Reducing, Abandoning and Absorbing Risk
  3. Understanding the Basics of Transferring Risk
  4. Obtaining Insurance Quotations

Accordingly, the document is divided into four appropriate sections.

If the guidelines described are followed the organization should be comfortable that they have

  • an accurate assessment of their exposure to loss
  • made reasonable decisions on what they can do to protect their assets from loss or exposure
  • made informed decisions on what exposures they should abandon, absorb or ignore
  • a reasonable understanding of what insurance is able to do for them
  • obtained a good package of insurance that provides the protection that they want
  • obtained the best pricing available for that coverage from a source they can trust
  • a positive relationship with their broker and insurers

Section 1 - RISK EXPOSURE ASSESSMENT

Introduction

In order for any individual, business, organization, or community to decide on a reasonable “Plan of Protection” it is necessary to first assess exactly what needs to be protected.

Everyone has many areas of potential loss and each one needs to be addressed, separately and in conjunction with related exposures.

Four items are covered in this section:

  1. Types of potential losses.
  2. Measuring potential loss exposure
  3. Protecting yourself from potential losses
  4. Deciding who should complete the assessment

1. Types of Potential Losses

There are four broad areas of potential losses:

  • Direct Loss or Damage
  • Indirect Loss or Damage
  • Third Party Losses
  • Contingent Losses
Direct Loss or Damage

Direct loss or damage can occur to property and people.

Direct Loss of Property may be caused by

  • Normal Perils - fire, lightning, etc.
  • Special Perils – flood, earthquake, etc.
  • Crime - employee theft, fraud, burglary, etc.
  • Aging - deterioration, obsolescence, etc.

Direct Loss to Persons may be caused by

  • Disease,
  • Accident
  • Age
Indirect Loss

Indirect loss includes increased operations cost and/or loss of potential revenue incurred by a direct loss.

Indirect Loss to Property includes

  • Increased cost of continued operation such as renting temporary quarters
  • Setting up a temporary infrastructure
  • Missed opportunities such as failure to hold an event, etc.
  • Lost revenue such as rents from a tenant or loss of sales.

Indirect Loss to a person caused by injury or death includes

  • Loss of earnings to the individual or family
  • Medical expense;
  • Temporary salaries
  • Retraining expense
  • Potential errors
  • Missed opportunity
Third Party Losses

Third Party Losses are generally referred to as Liability Losses. They can result from

  • Injury or death to someone else
  • Damage caused to property of others
  • Lost opportunities caused by either
  • Personal injury, ie libel or slander
  • Professional malfeasance, ie bad counseling
  • Poor treatment
  • Wrong decision
  • Wrongful dismissal a/o hiring

Indirect Third Party Losses can result from high legal expenses and lost time.

Third party losses are legal liability for damage to property of others, injury or death of other people, or perceived loss of financial advantage by another party.

Contingent Losses
  • are defined as the loss of you ability to operate normally due to the loss of a service or of supplies usually obtained from a particular outside source.
  • can occur when a supplier of service or supplies is unable to provide you with those things necessary for your continued operation such as gas; electricity; parts; labor; transportation. This can be caused by a direct loss to the supplier or by the supplier simply going out of business.

2. How To Measure Potential Loss Exposure

1 - Direct Losses to Property

Direct losses are at the same time the simplest and the most difficult to measure.

  • Simplest because you have an actual object or person to assess
  • Most difficult because it takes considerable effort depending on the nature of the operation to do a good job.

There are several steps to assess potential direct loss.

Preparing a List

  • Draw up a complete list of all buildings, contents, supplies, stock, capital property and people. The list must be complete.
  • Do not omit small items that individually are unimportant but collectively can exceed the cost of a valuable piece of equipment.
  • This inventory should be revised with all major acquisitions on an ongoing basis and redone annually.

Determining Value

  • Determine the appropriate value of the item for an inventory.
  • Determine what your cost will be to replace or rebuild the object at the time the loss occurs. Your strategy is to make the assessment valid for a one year period and allow for adjustments caused by acquisitions and inflation.
  • Do not use the normal values of accounting (book or depreciated) value or real estate value or net worth on sale or your original cost of purchase. These values are all meaningful in their own context but are not suitable for this purpose.
For Real Property

For Real Property, (buildings), there are four methods of assessing value that may be appropriate depending on the type of building you are assessing:

Original Cost Method
  • The original cost of construction may be used for relatively new buildings up to four or five years old. Apply the appropriate inflation factors from StatsCan for the geographic area and the type of structure you are assessing.
  • The advantage of this method is low cost and simplicity.
  • The disadvantage is that any changes to the structure from the time of original construction might get missed.
Costemator Assessment
  • For relatively standard/simple structures such as office buildings, schools, warehouses, strip malls etc. there are “costemator” software or manual systems that will provide a reasonably accurate assessment of current value.
  • The advantage of this method is that it is fairly easy and inexpensive to use.
  • The disadvantage of this method that they do not allow for all extras that might be in a structure and the value determined could be in error to a small percentage. Depending on who completes “costemator”, insurers may or may not recognize the assessment.
General Contractor Estimate
  • For larger or more complicated structures, a recognized general contractor with experience in building that type of structure may be used to provide a detailed evaluation of the building.
  • Using this method, the contractor should not use a simplistic X dollars per square foot but provide an estimate such as would be used if he were attempting to obtain a new contract.
  • He should also assume that the existing building has been removed completely and he is starting from scratch.
  • The advantage of this method is that it is slightly less costly than a professional appraisal firm and is more accurate than either of the previous approaches
  • The disadvantage is that it is more expensive than either of the previous approaches and recognition will be dependant on the reputation of the contractor
Using a professional appraisal firm
  • The most accurate and accepted method of building appraisal is to use a professional appraisal firm. The firm should have expertise in reconstruction appraisals and not just market value appraisals.
  • Such a firm will do a physical examination of the property, draw up a detailed component list and price out the various aspects of construction.
  • They will assess not only the reconstruction cost but will evaluate the present condition of the property including any deficiencies.
  • They will allow for any changes in the legal requirements in construction and prepare a full report.
  • The advantage of this method is that this appraisal is recognized by any insurer
  • The disadvantage of such an evaluation of property is cost.
Deciding On Which Method To Use

A large organization may elect to use all of the methods listed above where appropriate to evaluate real property. Obviously, one would not want to use a professional appraiser to evaluate an 80 square foot storage shed nor would one want to rely on a “guesstimate” on a hospital with an approximate value in the millions.

Updating Values

After the building values have been determined, annual up dates are handled by making adjustments for any changes during the course of the year and applying the appropriate StatsCan inflation factors. Such updating will generally be acceptable for at least a four-year period.

For Capital Properties

For Capital Properties such as sewers, water systems etc will usually require evaluation using 1, 3 or 4 depending on the actual risk. Generally speaking the “Costemator” approach will be inappropriate.

For Contents

For Contents and Moveable Property it is simply a matter of taking the property list and determining from available suppliers the appropriate cost to purchase new.

  • For the purposes of risk assessment, it is not appropriate to allow for sale pricing, as the sale may not be in place when the loss occurs.
  • If a major supplier traditionally allows volume/loyalty discounts these may be factored into the replacement value of the moveable property.
  • Do not anticipate special deals because of the disaster nor anticipate special purchase arrangements on the part of insurers. It has been my experience that special deals are not readily available to someone suffering a loss and insurers traditionally pay premium pricing to replace lost property.

For Persons

For Persons, the organization must realistically assess that person’s worth to the organization.

  • Can they be replaced?
  • What is the cost of hiring someone capable of the job, not their salary but the cost of the hiring process?
  • Will you have to pay more than the current salary?
  • Will there be a training cost?
  • What is the potential for lost revenue etc.?
  • If it is a temporary loss of service, can you do without them?
  • Is it possible to hire someone on a temporary basis to replace the person?

By answering these questions in a realistic and unemotional way, an accurate real dollar assessment can be made of the potential loss. In addition, the organization will want to consider their “moral” position with respect to the personal loss of the employee.

  • What does an employer do if an employee dies?
  • Pay for the funeral
  • Send flowers
  • Help the family regroup without a main income earner
  • What does an employer do if an employee becomes disabled
  • Keep the employee on your payroll – if so, How long can you afford to keep paying an individual no longer contributing to the operations of the organization
  • What does an employer do if an employee or one of his dependants develops a serious illness
  • Can the employer assist with major medical expenses

2 - Indirect Losses

Assess the following

  • Cost to provide temporary accommodation. Initially and for an extended period of time?
  • Length of time you can expect to be in temporary accommodation in a worst case situation?
  • Costs of setting up a temporary infrastructure. Telephones, etc.?
  • Cost of temporary equipment?
  • Potential lost opportunity. Events, rents, sales, etc.?

3 - Third Party Losses

  • It is impossible to predetermine how much a court might award if a person is held responsible for injury or loss to a third party.
  • The difference in settlement is not determined by the nature of the operations but by the nature and extent of the damages to the injured party.
  • A broken leg for an office worker might be settled for a small sum while the same injury to a professional athlete might result in a major settlement.
  • A permanent long-term disability could result in a settlement of millions where a death might result in a settlement for substantially less.
Assessing Exposure
  • Underwriters of Liability Insurance do not consider the amount of insurance purchased as the major factor in setting premium levels.
  • They first assess the nature of the operation for the likelihood of a loss occurring and for the likely seriousness of the injury or damage that may be caused. For example,
  • A manufacturer of office desks is not likely to have suits brought against them for life threatening injuries or to have frequent suits
  • A manufacturer of playground equipment could expect to have more frequent suits and of a more serious nature.

Assessment of the seriousness of an organization’s exposure to suit is best left to the statistical experts. For the experts to do a good job, they will need an accurate description of all of your activities and operations. However, any organization should review the nature of their operations to see if they can do anything to reduce the potential for the frequency or the value of such losses.

4 - Contingent Loss Exposure

Lists all supplies and services that are purchased from outside the organization, and assess what would happen if particular suppliers were no longer available for the short or long term.

  • Is there an immediately available alternative?
  • Is there any major increase in costs?
  • Is there a conversion cost?
  • Can you offset the interruption with temporary measures? What would those costs be?
  • In the worst case is there any lost major activity and or revenue?

3. Protecting Yourself from Potential Losses

After assessing your potential loss exposure, you have a good idea of your overall exposures. You can now decide how to protect yourself from potential losses. Base your decisions on the following:

  • Steps you can take to reduce our exposure – Procedures? Physical Protection?
  • Assets you can do without if they were destroyed? I.e. – Abandoned or deteriorated buildings.
  • Amount of risk you can reasonably absorb?
  • Risk you should transfer to others, (insurance)?

4. Deciding Who Should Complete the Assessment

There are two methods of preparing the assessment:

  • In House
  • Contracting Out

In House

You may train or employ personnel with the necessary skills to complete the assessment process. The skills are not complex and could be taught in a two or three day seminar. There are both advantages and disadvantages to involving your own staff.

Advantages:

  • You may already have personnel on staff that have some expertise to provide unbiased information
  • It is usually less costly to work in house.
  • You have better control of the timing of the evaluation process – once established, the process can be ongoing
  • By completing the process in house, you develop a better awareness of all the assets of your operation

Disadvantages:

  • Additional work load for staff
  • Special skills & training will be required
  • Potential for poor results if staff not properly motivated
  • Potential for management interference if supervisors not aware of importance of accuracy

Contracting Out

You may contract with a Risk Management Firm to complete the process for you. There are many Risk Management companies of various sizes and competency. Again, there are advantages and disadvantages to contracting out.

Advantages:

  • You may choose your firm carefully for a totally independent & unbiased results
  • You will be able to obtain documentation concerning training and demonstrated results
  • You will be able to budget for expense as a good firm will give you a reasonably accurate estimate of cost

Disadvantages:

  • The Risk Management Firm will not have direct knowledge of your operations and will rely on interviewing you staff which can involve an extensive amount of your own staff’s time
  • Because your staff are indirectly involved, it is easy for some items to be missed or forgotten
  • You lose control - the Risk Managers will work in a concentrated period of time which may be inconvenient for specific departments or personnel
  • Cost – Risk Managers will generally work on a fixed hourly rate plus expenses – including travel and accommodation

The decision to contract out or work in house should be an informed decision.

  • Obtain some estimates of “total” cost to contract out.
  • Survey our present staff for available expertise and interest.
  • Look into the cost of training your own staff via a Risk Managers Course or Special Seminars

You may decide to contract out to complete the process for the first time while preparing your staff for future evaluations, using the original report as a template. If you choose this method, the Risk Managers may be willing to provide some training with their evaluation.

Conclusions

The process of Risk Exposure Assessment is a time consuming occupation, particularly the first time through. You should be aware that whatever method you choose, if the process is to be completed properly, there will be a substantial cost involved.

  • You must prepare schedules of your exposures, property, people and potential liabilities.
  • You must then evaluate those exposures
  • You must decide what can be done to reduce, abandon, absorb and transfer
  • You must decide who should complete the process

After completing the evaluation process, you will be in a position to complete a realistic Plan of Protection. The next steps will be to formulate plans to: