For your insurance client, managing risk typically includes:
- Avoiding potentially harmful activities and/or conditions
- Transferring the risk to another party, as in taking out an insurance policy with a company willing to share the risk he or she faces
The transfer of risk, or risk sharing, makes sense to the insured because protection against a large financial loss can be obtained in exchange for a relatively modest amount of premium payment.
For the insurer, the risk being assumed is that claims paid out will be greater than premium dollars received. To this end, it makes sense for the insurer to:
- Only insure properties whose risk profiles fall within acceptable limits
- Properly calculate premium amounts charged for each policy written, commensurate with the amount of perceived risk being underwritten
- Ensure that any claims made against a policy conform to the contractural conditions of the policy
- Recommend the practice of proactive loss prevention and reduction activities to ensure clients maintain safe conditions regarding their properties
- Perform an in-depth inspection of a property as part of the underwriting process in order to obtain a reliable picture of the existing insurance risk situation
- Require corrective actions on the part of the property owner in order to mitigate unacceptable existing insurance risk exposure
- Conduct periodic property inspections to ensure maintenance of a safe property environment, especially important when a policy comes up for renewal
Loss Prevention and Reduction Activities
Risk is an ongoing factor in just about everything we do, and insurance risk represents the potential that financial loss could occur unexpectedly at any time. A driver who’s also a heavy drinker represents significant risk to his vehicle insurer. A smoker represents risk to his health insurer and someone who regularly engages in dangerous activities such as motorcycle racing or mountain climbing will be looked at as a high insurance risk to the company considering writing him or her a life insurance policy.
If you’re a property owner looking to insure your property, the condition of that property, its current use and your and its past claims history will all play a role in determining whether or not insurance coverage will be offered and, if so, how much that coverage will cost. A history involving one or more claims, especially high-dollar claims, will move you and/or your property into a higher insurance risk category. This can make obtaining adequate insurance more difficult and, if a policy is granted, it will likely mean higher premiums.
Prudent risk management involves risk control by way of risk avoidance and/or risk control. If, for example, past claims have been made on a property’s policy for damage done by chimney fires, discontinuing use of fireplaces or wood stoves would avoid future problems of this nature. Adding monitored smoke detectors and installing fire sprinklers and fire extinguishers are methods of risk control aimed at mitigating the risk by lowering both the probability and extent of serious losses.
Whether by risk avoidance or risk control, steps can be taken to lower some future potential losses in any property. A thorough property inspection like those offered by Insurance Risk Services can help identify where risk avoidance or control are best applied. Contact IRS for more information.