risk management: homeowners insurance jean lown erin pratt beth butterworth

Risk Management: Risk Management: Homeowners InsuranceHomeowners Insurance

Jean LownJean Lown

Erin PrattErin Pratt

Beth ButterworthBeth Butterworth

What is RISK?What is RISK?

Uncertainty of any outcome

Speculative Risk (stock market)

Pure Risk (driving a car, owning a home)

Financial RiskFinancial Risk

Must have a dollar amount Must have a dollar amount attached to itattached to it

What type of risk will What type of risk will insurance cover?insurance cover?

Answer: Pure RiskAnswer: Pure Risk

Risk Management is the process Risk Management is the process of identifying and evaluating of identifying and evaluating

situations involving pure risk to situations involving pure risk to determine and implement the determine and implement the

appropriate means for its appropriate means for its managementmanagement

How do you do this?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 losses2. Evaluate potential losses

• What could cause a loss?

3. Choose a method of dealing 3. Choose a method of dealing with losswith loss

• Severity and Frequency chart • (Garman/Forgue Personal Finance, 7th edition)

Risk avoidanceRisk avoidance

• Don’t do it or own it

Risk retentionRisk 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 reductionLoss reduction

• Try to prevent a loss or reduce the loss:– Smoke alarms– dead bolts

Transferring riskTransferring risk

• You give someone else the responsibility to pay for the loss:– Insurance (homeowner insurance)

Risk ReductionRisk Reduction

• Cover part of the loss, transfer part of the loss:– Deductibles on HO & auto insurance

4. Implement4. 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 adjust5. Evaluate and adjust

• When would you adjust homeowner insurance?

• Answer: home is paid off, add on, value increases

Insurance Q&AInsurance Q&A

What is its purpose?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 costFactors 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!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.

LiabilityLiability

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

Extra tipsExtra 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? Questions?

Are you a gambler? 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?

Do you have adequate 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 & TornadoesHurricanes & 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 PointsMajor 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 InsuranceHomeowners Insurance

• Liability

• Property– Dwelling– Other structures on property– Personal property – Loss of use (additional living expenses)

Buying HO InsuranceBuying HO Insurance

• How much coverage to REPLACE dwelling?

• How much coverage on personal property?

• How much liability coverage?

Home Replacement ValueHome 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 CoverageContents Coverage

• Actual cash value – Yard sale/ thrift store prices

• Contents replacement cost – “full” replacement value

• Read policy limits!!

Personal LiabilityPersonal 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

ActionsActions

• 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?Questions on Basics?

HO Insurance IndustryHO 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 houseBefore 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)

ActionsActions

• File small claims & you’ll lose insurance– Raise deductible – Cover “small” losses yourself

• Check your credit report– Free reports– www.annualcreditreport.com

Shop Around? 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 backfireChanging 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 ClaimsFiling Claims

• Don’t file for < $1,000

• Raise deductible to $1,000

• Large loss– Consider hiring a public adjuster

When Disaster StrikesWhen Disaster Strikes

Do not let a crisis become a Do not let a crisis become a financial burdenfinancial burden

Prepared for Financial Planning for Women by Beth ButterworthUSU Family Finance student

Are you Covered? 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?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 InsuranceFlood 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?Do you need it?What areas flooded last spring?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?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

But I live in a low risk area…But I live in a low risk area…

• Almost 25% of all flood insurance claims come from low risk areas

Flood InsuranceFlood 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 AreaSpecial 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 InsuranceFlood Insurance

• Who offers Flood insurance?– Local insurance agencies– FEMA Federal Emergency Agency

Flood InsuranceFlood 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 InsuranceFlood 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 InsuranceFlood 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 InsuranceFlood Insurance

• What will it cost you after the flood?– Usually a high deductible

• Can be as high as $10,000

Earthquake InsuranceEarthquake 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 InsuranceEarthquake Insurance

• What is covered– The basic structure– The contents– And for a higher price the bricks if you live in a

brick home.

Earthquake InsuranceEarthquake 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 InsuranceEarthquake 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 InsuranceEarthquake 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 PreparednessStart the Steps to Preparedness

• Commit to 1-3 actions in coming week

• Highest priority

• Easiest

Two Mistakes of InsuranceTwo 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 MistakesHow 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? Questions?

• What is your personal finance action plan?

• Please let us know what topics you would like FPW to cover in 2006

Earthquake PotentialEarthquake 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 RiskCache 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 earthquakeWhat to do in earthquake

• 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 7 Steps on the road to earthquake safetysafety

1. Identify potential hazards & being to fix

2. Create disaster plan

3. Create disaster supply kits

4. Identify building weaknesses & begin to fix

5. Drop, cover & hold on during quake

6. Check for damage & injuries…

7. When safe, follow disaster plan

Home HazardsHome Hazards

• 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 LeaksGas 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 & vehicleE-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)

• Phone #• Snack foods• Flashlight & batteries• Personal hygiene• Radio & batteries• Cash• Water