Assigning Risk in Various Regions

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R IS K M A N A G E M E N T F O R E N T E R P R IS E S A N D I N D I V I D U A L S

C hapte r 11 P rope r ty R isk M anagement

Learning Objectives

In this chapter, we elaborate on the following: How insurable property is classified. The ways in which valuation, deductibles, and coinsurance clauses influence property coverage and premiums. The increased frequency and severity of e-commerce property risks. Five major categories of e-commerce property risks.

Learning Objectives

In this chapter, we elaborate on the following: Loss-control steps that can reduce e-commerce property risks. Availability of insurance as a means of transferring e- commerce property risks. Global risk exposures in the international competitive landscape. Risk control measures for reducing common global risks. Insurance options for global risk exposures.

Property Risks

Property can be classified in a number of ways, including its mobility, use value, and ownership.

Physical p rope r ty: Consists of real or personal property. R eal p rope r ty: Permanent structures (realty) that if removed would alter the functioning of the property. Pe rsonal p rope r ty: Physical property that is mobile (not permanently attached to something else).

Property Risks

General Property Coverage The first standa r d fi r e policy (S F P) came into effect during the late 1800s and came to be described as the generally accepted manner of underwriting for property loss due to fire. Most recently, the SFP has been replaced by homeowners policies for residential property owners, and the commercial package policy (CPP).

Property Risks

Types of Property Coverage and Determination of Payments

Valuation Clause Property insurers often offer coverage on a replacement cost new (RCN) basis. R eplacement cost new is the value of the lost or destroyed property if it were bought new or rebuilt on the day of the loss.

Property Risks

Deductibles Purpose is to reduce costs for the insurer, thus making lower premiums possible. The most common forms being:

St r aight deductible: Requires payment for all losses less than a specified dollar amount. F r anchise deductible: Pays the entire amount in full once the amount of loss equals the deductible. D isappea r ing deductible: One whose amount decreases as the amount of the loss increases.

Help maintain reasonable premiums because they eliminate administrative expenses of the low-value, common losses.

Property Risks

Coinsurance Clause Has two main provisions:

Requires one to carry an amount of insurance equal to a specified percentage of the value of property in order to be paid the full amount of loss incurred Stipulates a proportional payment of loss for failure to carry sufficient insurance.

The coinsurance limit is calculated as follows:

E-Commerce Property Risks

Business risk exposures due to the use of computers, the Internet, and the Web. Are grouped into five broad categories:

Hardware and software thefts (information asset losses and corruption due to hackers, vandalism, and viruses) Technological changes Regulatory and legal changes Internet-based telephony crimes

E-Commerce Property Risks

Trademark Infringements occurs when an individual or a

business reserves a domain name that uses the trademark of a competitor. Seeking compensation for the use of a registered domain name from the rightful trademark holder is known as cybe rsquatting.

occurs when a Web site operator knowingly deceives the user by redirecting the user to a site the user did not intend to view.

E-Commerce Property Risks

Businesses can take loss-control steps to reduce the e-commerce property and business interruption risks by using the following:

Security products and processes; System audits Antivirus protection Backup systems and redundancies Data protection and security Passwords Digital signatures and Encryption Firewalls and Virtual private network (VPN)

E-Commerce Property Risks

E-Commerce Property Insurance Some insurers now offer customized e-commerce insurance policies that expand the areas of coverage available for e-commerce property risk. ISO has an e-commerce endorsement that modifies insurance provided under commercial property coverage.

Global Property Exposures

G lobal r isk: The unique problems that arise when companies cross national borders. The main categories of global risk exposure are:

Destabilized international political environment Heightened terrorism risk; Legal risk due to changes in local laws Lack-of-data risk; Currency inconvertibility risk; Cultural barriers risks

Political r isk: Unanticipated political events that disrupt the earning or profit-making ability of an enterprise.

Table 11.2 - Ten Ways to Tune up Management of Political Risks

Legal Risk Nonadmitted cove r age: Contracts issued by a company not authorized to write insurance in the country where a risk exposure is located. A dmitted insu r ance: Contracts written by companies authorized to write insurance in the country where a risk exposure is located. Coverage is also affected by the codification of the legal system in the other countries.

Global Property Exposures

Summary

Insurable property is classified as real or personal,

for valuation. E-commerce property risks are categorized into hardware and software thefts, technological, regulatory and legal changes, trademark infringements, and Internet-based telephony crimes. The steps in global risk management include processes to reduce risk and develop loss-control policies, along with obtaining the appropriate insurance.