Ch14--In301 Types of Policies Multiple-line 1st party property 3rd party liability 3rd party medical expense Multiple-peril Fire, windstorms, theft, etc. Named peril versus open peril policies Standard policy forms (HO3 form most common)

Ch14--In301 Major Coverages Type of CoverageAmount of Coverage in HO3 Policy A.Dwelling Chosen by policyholder B.Other Structures 10 percent of dwelling coverage C.Unscheduled Personal Property 50 percent of dwelling coverage D.Loss of Use (e.g., additional living expenses if dwelling cannot be occupied) 20 percent of dwelling coverage E.Personal liability $100,000 (can be increased) F.Medical payments to others $1,000 per person *(can be increased) $25,000 aggregate limit (can be increased)

Ch14--In301 Excluded Perils Intentional acts Normal wear and tear Changes in laws Earthquakes Floods Nuclear accidents War

Ch14--In301 Property Loss Settlement Per occurrence deductible Methods of valuing property Like-kind replacement cost Actual cash value replacement cost - depreciation Guaranteed replacement cost Functional replacement cost

Ch14--In301 Pricing Premium = (insured value) x rate Estimation of insured value square footage dwelling type construction grade construction material location Factors affecting the rate location construction materials

Ch14--In301 Personal Umbrella Policies Excess liability coverage Limits > $1 million Applies once losses exceed limits on other policies auto liability homeowners

Ch14--In301 Coverage of Catastrophic Perils Earthquake Offered by most homeowners’ insurers required in CA Deductible = % of home value Flood (NFIP) Purchased through private insurers Risk borne by federal government (taxpayers) Some policies are subsidized Moral hazard Many exposed homeowners go w/o coverage

Ch14--In301 Residual Market Plans Fair Plans Created following urban riots in Subsidized coverage for urban property CA expanded scope between states have plans Beach and Windstorm Plans Subsidized coverage for coastal property 7 states have plans

Ch14--In301 Policies in Beach and Windstorm Plans

Ch14--In301 Hurricane Andrew $16 billion in insured losses Insurers attempted to (1) reduce exposure and (2) increase price FL restricted both activities Still many homeowners could not find coverage Beach & windstorm plan exposure increased FL created new residual market plan in 1993 (JUA) Merged beach & windstorm plan with JUA in 2002 Created Hurricane Catastrophe Fund in 1993 Investment earnings not taxed

Ch14--In301 Northridge Earthquake $12.5 billion in insured losses Insurers attempted to (1) reduce exposure to earthquakes and (2) stop selling homeowners’ coverage CA restricted ability to cancel or fail to renew coverage Created CA Earthquake Authority (CEA) Insurers could satisfy its requirement to sell earthquake coverage by offering a CEA policy

Ch14--In301 Government Reinsurance Arrangements FL, CA, and HA have reinsurance plans Proposals have been introduced for federal plan Advantages Preferential tax treatment of investment earnings on capital set aside to fund future losses Governments can facilitate risk pooling over time Potential disadvantages Inadequate pricing Raid funds for other purposes

Ch14--In301 New Capital Market Instruments Examples Catastrophe bonds Insurer issues bonds If cat occurs, insurer does not have to repay interest and/or principal Contingent equity Insurer has option to issue new stock at pre-arranged price if a catastrophe occurs Potential advantages: Insurer can hold less equity capital Lower tax and agency costs