Insurance Risk Mitigation: Case Study
Insurance Risk Mitigation: Case Study
People face different kinds of risks in their personal lives and in the communities where they live. Being aware of one’s level of risk exposure and taking concrete steps to mitigate the risks and associated liabilities can help people protect their lives and properties. Most risks are manageable and the resulting losses avoidable if the right measures are taken. From the case study, it is clear that Mr. Arkanfarkar and his family are exposed to several types of personal and commercial risks. This report presents a strategy for managing the personal exposures of Arkanfarkar’s family. The objectives of this risk management process are:
i. To protect Arkanfarkar’s family, guests and other people who suffer as a result of harm originating from Arkanfarkar’s home.
ii. To safeguard Arkanfarkar’s home, attached structures and their contents
iii. To mitigate exposure to environmental liabilities arising from the use of Arkanfarkar’s property.
iv. To assists in defining Arkanfarkar’s insurance needs.
Identification and Evaluation of Risks
Just like any other family that owns a residential property, the Arkanfarkars face different types of risk exposures. For a dwelling property, the most pressing risk is the threat of fire. According to a study by (Grossi & Howard, 2005), the possibility of a house fire is one of the most common risks that every homeowner or occupant must take into consideration. Each year, thousands of homes are destroyed in preventable fires. Another risk facing Arkanfarkar’s family is the possibility of destruction due to natural forces such as hailstorms, earthquakes, wind, lighting, and floods. Destruction of these forces is hard to prevent, but their impact can be mitigated by taking appropriate insurance covers (Runyan, Bangdiwala, Linzer, Sacks & Butts, 1992). The third risk is a loss of household items and destruction of the house due to theft, burglary and vandalism. Another important risk facing the Arkanfarkars is the possibility of personal liability. Personal liability can arise from bodily harm or property damage sustained by other people for which Arkanfarkars are liable (Kunreuther & Erwann, 2009).
Arkanfarkar’s house, which is valued at $ 650000, is the largest investment and greatest asset in his family portfolio. As such, the house is the subject of the family’s risk management efforts. In the event of a fire, his family will suffer massive financial losses, which may take a long time to recover. Indeed, fire is the most important risk facing the Arkanfarkars. Statistics indicate that across the world, several houses are consumed in accidental fires year (Dorfman, 2007). As the houses are burnt, people die, some are injured, and properties worthy billions f dollars are destroyed. In residential houses such as Arkanfarkar’s, cooking is the leading cause of accidental fires. Other leading causes are electrical malfunctioning, heating, careless conduct and open flame (Goss & David, 2010). Any of the categories of seemingly trivial events can cause a fire that can bring down a building. Although not mentioned in the case study, it is obvious that there are plenty of household objects and activities taking place in Arkanfarkar’s home that can cause a fire. These include electrical appliances, candles, and cookers. Fire can also be caused by acts of arson or spread from nearby buildings (Grossi & Howard, 2005).
The risk of liability is related to acts of negligence that may cause injuries to other people or damage to their properties. The risk of personal liability can also extend to legal costs for damages caused by Arkanfarkar’s family. Similarly, medical bills for people injured in Arkanfarkar’s property are a source of personal liability risk. The risks of theft and vandalism are a major threat to many residential home dwellers. In the US, this risk is ranked highly, and presents the most difficult and complicated insurance claim, some of which take too long to settle (Gregory, 2003).
Selection of Risk Management Devices and Implementation of the decision
Homeowner insurance can provide the best protection against the personal exposures of the Arkanfarkars. Homeowner policies provide protection in the event that a home or its contents are damaged. This type of insurance cover can also provide protection in case the homeowner or family member are held liable for third party injuries or damage to other people’s property (Goss & David, 2010). Most homeowner insurance policies cover risks caused by such perils as fire, hailstorms, wind, theft, lighting, falling objects, and vandalism. Typically, earthquakes and floods are excluded from homeowner insurance policies although the two can be covered under other types of insurance policies. In the US, homeowner insurance is required by mortgage providers. Purchasing a homeowner insurance cover will provide the following benefits to Mr. Arkanfarkar and his family:
i. Coverage for the dwelling house: under a homeowner insurance policy, Arkanfarkar’s residential house (which is valued at $650,000) will be covered. The cover excludes the value of the land on which the house is situated, but will include the cost of repairing or renovating the house, including plumbing, electrical wiring, heating and air conditioning systems (Runyan, Bangdiwala, Linzer, Sacks & Butts, 1992).
ii. Other structures: taking a homeowner insurance cover will enable Arkanfarkar to obtain coverage for damages to attached structures like the garage, doghouse, swimming pool and trampoline (Goss & David, 2010).
iii. Personal property coverage: anything of value in Arkanfarkar’s home is considered his personal property. It includes clothing, furniture, appliances and sports equipment. Not all items that fall under personal property are covered by homeowner insurance. Certain items such as jewelry, firearms and money may have limited or no coverage at all.
iv. Loss of use coverage: homeowner insurance will pay for Arkanfarkar’s alternative if he or his family will have to move out of his dwelling house as a result of damage and while it is being restored (Kunreuther & Erwann, 2009).
v. Liability coverage: the policy will help Arkanfarkar protect his family’s assets and cover defense costs in the event that members of his family are responsible for causing injuries or damage to other people’s property (Runyan, Bangdiwala, Linzer, Sacks & Butts, 1992).
vi. Additional home coverage: there are numerous additional home coverages which Arkanfarkar can add to his homeowner's policy to help meet more insurance needs. These include a special content cover, which provides extra protection for valuable possessions such as jewelry (Goss & David, 2010).
If the Arkanfarkars purchase a homeowner insurance policy, they must take effective protective measures to reduce their insurance premiums and make the insurance a good investment. These measures include:
i. Installing smoke detectors at strategic points within their home and outside. These detectors should be tested regularly to ascertain their usefulness.
ii. Placing properly maintained portable fire extinguishers within the home and making sure that occupants know when and how to use them (Grossi & Howard, 2005).
iii. Inspecting and maintaining electrical systems such as wirings and outlets.
iv. Using the right equipment for cooking and ensuring that the right procedures are followed when cooking (Gregory, 2003).
v. Storing and using flammable materials (such as paraffin and petrol oil) properly.
vi. Making the home difficulty to break in by locking all outside doors and leaving lights on. It is advisable to install deadlock bolts on outside doors instead of pushbutton locks which are easy to open (Kunreuther & Erwann, 2009).
vii. To reduce risks of personal liability claims, the house should be kept well maintained and all safety features reviewed regularly. Dangerous objects such as broken bottles and cur metals should be kept away.
Evaluation and Review
Arkanfarkars’ case illustrates typical challenges faced by the majority of residential homeowners. Indeed, there are several categories of risks for homeowners. To reduce the potential costs of these risks, it is necessary to take insurance cover for the homes. While there are different types of covers available in the market, homeowner insurance is the most suitable for the Arkanfarkars. This comprehensive cover offers maximum protection against different kinds of risks such as fires, theft, and personal liability. For the Arkanfarkars, taking an insurance cover is not the only thing that the family can do to manage its risks. The cost of homeowners insurance goes up each year, which in turn pushes insurance premiums up. To reduce the cost of insurance premiums, the Arkanfarkars should reduce the vulnerability of their home by reinforcing the necessary security features such as installing fire extinguishers in the house.
References
Dorfman, M. S. (2007). Introduction to Risk Management and Insurance. Englewood Cliffs, N.J: Prentice Hall
Goss, R. & David, O. (2010). Long-Term Retail General Insurance. ABI Research Paper No. 21, London, U.K.: Association of British Insurers.
Gregory, D. S. (2003). Racial Profiling, Insurance Style: Insurance Redlining and the Uneven Development of Metropolitan Areas. Journal of Urban Affairs, 25(4), 391–410.
Grossi, P. & Howard, K. (2005). Catastrophe modeling: A new approach to managing risk. New York: Springer.
Kunreuther, H. & Erwann, M. (2009). At War with the Weather. Cambridge, MA: MIT Press.
Runyan, C., Bangdiwala, S., Linzer, M., Sacks, J. & Butts, J. (1992). Risk factors for fatal residential fires. N. Engl. J. Med, 327 (12): 859–63.
