CHAPTER 6:ANALYSING

PROPERTY LOSS EXPOSURES

ELYAELYANA BT SHAFEENURUL ZETA BT ABU SAMAH

NURZATI ALYANI BT MOHD ASHARIRAJA KHAIRUN NURFARHANNA BT RAJA HAMZAH

IDENTIFYING AND ANALYSING LOSS EXPOSURES

A loss exposures is a set of circumstances that presents a possibility of loss, whether or not it actually takes place.

Element of property loss exposures:- the value exposed to loss- the peril causing the loss- the potential financial impact of the

loss

TYPES OF PROPERTY AND VALUES EXPOSED TO LOSS

i. Real propertyii. Personal property

- tangible property- intangible property

iii. Non-owned property

i. Real Property

Structures that intended to be permanently attached to the land.

a) Unimproved land Real estate excluding all permanent

property improvements. Classified separately because values are

tough to determine and perils that can cause damage are distinctive or unusual.

Not covered by insurance.

b) Buildings and other structures Loss exposure depends on the type of

construction, occupancy and location of property.

Potential loss exposures includes:i. values of building and structures

directly exposed to loss.ii. Income lost until damaged property

is repaired or replaced. These exposures are almost always

insurable.

ii. Personal Property Includes all property other than real property.

Categorized as tangible or intangible.

a) Tangible propertyProperty that has physical form. Money and securities;• All types of monetary asset. (e.g: cash,

securities and notes)• Loss exposure varies between size of

business.• Biggest lost exposure is theft.

Accounts receivable;• Paper or other means on which account

receivable are recorded is subject to physical damage, destruction or removal of possession.• Loss potential can be reduced by

implementing loss control methods. Inventory;• Defined as raw material, good in progress

and finished goods.• Loss exposures include perils of

transportation, fluctuation of values and when the time supplier suffer loss and unable to deliver.

Furniture, equipment and supplies;• It consists of many separate pieces and

relatively low value and frequently shift from one location to another.• Thus it is impractical to focus on one

item for precise valuation and it is difficult to keep and accurate inventory.• May then lead to risk management

problem.

Machinery;• It subject to depreciation and

obsolescence and can be very costly to reproduce.• Loss exposures usually caused by

breakdown of machinery which will resulted in additional loss consequences.• Example is damage to power, heating,

cooling and lighting system.• It also subject to unique perils such as

technological advances.• It is usually uninsurable.

Computer equipment;• It includes software, hardware, data in

the system and discs, cards or tapes on which it is recorded.• It requires special environmental

control system such as separate temperature and humidity control. (e.g: magnetic tape)• Other loss potential is from computer

fraud and obsolescence.

Valuable papers, books and documents;• It includes maps, books, drawings and

other documents.• It creates special loss exposure because

they are small, light and easily destroyed or lost.• It also can be difficult to value and

reproducing it is time consuming and may lose income or incur additional expense.

Mobile property;• It consists of cars, aircraft, boats and

other mobile machinery.• Exposed to special hazards arise from

transportation.• Collision is a major cause of loss.• Mobile property is usually insurable.

ii. b) Intangible property

It includes goodwill, copyrights, patent, trademark, trade names, leases and leasehold interest, licenses and trade secrets.

They are difficult to recognize and value.

Some intangible asset exposures are insurable and some are not.

iii. Non-owned Property:

Have less obvious of losses than losses by damage to owned property. Non-owned property include: Bailed property:

Dry cleaner or laundry and warehouse operators have on their premises property of customers which they are not legally responsible.

Leased property: The terms of the lease agreement usually

determine who is responsible for losses. But some leases require tenants to pay for repairs towards damage on premises.

Property on consignment: Between distributors and retailers should be

spelled out in a contract of the responsibility for losses.

PERILS CAUSING PROPERTY LOSSES

There are an infinite number of perils that can destroy or damage property.

Many perils for which insurance is readily available but many causes of loss that are excluded from insurance coverage such as explosion as a human peril.

A peril covered by insurance policy is defined in the policy to include only what the insurer intends to cover.

Being familiar with the insurance definitions of particular perils may be useful in the risk management process.

Examples of natural and peril events:Natural perils – Acts of nature

Human perils –Acts of individual or

small group of individual

Economic perils – Acts of large group of

people who act independently responding to

particular conditions

• Collapse• Earthquake• Fire of natural

origin• Flood• Landslide/mudslide• Meteor shower• Tidal waves• Volcanic eruption• Wind (tornado,

hurricane)

• Chemical leakage• Discrimination• Embezzlement• Human error• Pollution (smoke,

fog, water, noise)• Sabotage• Terrorism• Theft, forgery,

fraud• Vandalism

• Changes in consumer tastes

• Currency fluctuations

• Depression (recession)

• Inflation• Obsolescence• Stock market

declines• Consequence of

strikes• Technological

advances• War

FINANCIAL CONSEQUENCES OF A PROPERTY LOSS

There are many type of valuation methods associated with property, such as:i. Historical costii. Tax-appraised valueiii. Accounting (book) valueiv. Replacement costv. Reproduction costvi. Functional replacement costvii. Market valueviii.Actual cash value (depreciated replacement

cost)ix. Economic or use value

i. Historical cost;

This represent the price paid to acquire the asset.

HC is a useful indicator to assess property losses for assets that are kept for a relatively short period of time such as inventory.

The longer the assets remain with the firm, the less useful is HC since it will be soon be outdated because of inflation, changes in technology and other factors.

ii. Tax-appraised value;

Tax appraised value is usually determined by the local authority (government) and is of little use to other parties.

This valuation is only useful for the purpose of determining local council rates of taxes that are payable by property owners to the local authority based on property values.

iii. Accounting (book) value;

Book value is HC less the accumulated depreciation.

Accumulated depreciation is an estimation of the decline in the value of the asset over its useful life, and is determined using accounting assumptions.

However, book value will not represent the current value of the asset and may sometimes be revised.

iv. Replacement cost;

RC is one of the most useful measures of assessing the property loss exposure.

RC is the amount required to replace a lost, damaged or destroyed asset

For buildings, the replacement cost may be determined by: Quotations or bids by contractors or

valuers Using construction price index Using square foot construction cost

and then extrapolating in for the entire building

For personal property, the replacement cost may be determined by: Begins with an inventory that owns or

uses at each of its facilities Once developed, personal property

falls into number of broad classifications

Method of establishing the RC of items in each broad category

Normally the process performed on computers which can be easily brought up to date with current prices as needed

v. Reproduction cost;

Some assets cannot be replaced with assets that readily available in the market. Instead they have to be replicated or reproduced.

For example documents, maps, paintings

Reproduction cost represents the cost of reproducing the assets using the same material, artistry and other expertise comparable to that used in the original

vi. Functional Replacement Cost;

For certain specific assets, RC may not be suitable simply because the asset to be replaced is no longer available.

Example mobile phones FRC is an assessment based on the RC

of a different model of asset but which is capable of performing the same function as the old one.

vii. Market value;

The market price represents the price to be paid between a willing seller and a willing buyer in an arm’s length transaction.

However, in certain cases, market value may be difficult to assess in the absence of a secondary market for such assets.

viii. Actual Cash Value (Depreciated Replacement Cost);

The actual cash value is replacement cost less its depreciation. • The depreciation may be calculated on

a different basis than that used for accounting purposes.• Can be applied to real or personal

property.

ix. Economic or Use Value

For valuing items of property based on the value of the future income stream attributable to that item of property.

Not affected by cost of an item or expenses that will incurred.

TECHNIQUES TO IDENTIFY PROPERTY LOSS EXPOSURES

i. Standardized questionnaire; Thorough survey/questionnaire to identify

items of tangible property whether real or personal.

Provide indications of intangible property

ii. Loss Histories; Know the amounts, causes of losses. Helpful in analysing loss exposures as a

basis for forecasting the frequency and effective control of an organisation’s future actual loss.

Good predictor for future losses.

iii. Financial statements and underlying records;

Identify loss by referring organization’s income statement.

Focus on revenue section iv. Other records and documents; Minutes of board meeting can reveal plan to

acquire or dispose. Records, memorandum or correspondence

may reveal property exposures for example from purchasing and maintenance department.

v. Flowcharts; Extend beyond an organization,

encompassing suppliers and customers and the routes to them.

Suggest the importance:i. Suppliers’ and customers’ propertiesii. Transportation bottlenecksiii. Key role of an organization’s vehicles

vi. Personal Inspections; May discover assets that are not identified

on any balance sheet or flowchart or find any reported assets no longer exist but yet to be removed from records.

vii. Consultation with experts within and outside the organization;

Discussion with front line Supervisors and middle managers may

have alternative assets give better serve. Experts outside can determine the

replacements cost of assets.

THE END