LECTURE 2

ASSESSING AND MANAGING A LIABILITY RISK

INTRODUCTION
In this session, we are dealing with:
oRisk perception
oEvaluation
oManagement
Risk is a hazard, danger, chance of loss or injury; the
degree of the probability of loss; a person, thing or
factor likely to cause loss or danger (Chambers
Dictionary)
INTRODUCTION cont..

From the definition we have four vital elements

relevant to the insured and the underwriter
o Hazard;
o Chance of loss or injury;
o Degree of probability; and
o A person, thing or factor likely to cause loss or damage.
RISK ASSESSMENT

The insured and the underwriter are interested in all

these elements
The insured may hire a manager and safety and risk
control specialists who considers these elements on
their behalf
The underwriter together with the loss control surveyor
will study them on behalf of the insurer
Both the insurer and the insured have a shared interest
in reducing the likelihood of risk
RISK ASSESSMENT cont..

INTERESTS OF DIFFERENT PARTIES IN THE RISK

Interest of the insured/risk manager
Responsible for assessing which risks threaten the future viability
of their enterprise
Including for instance, a consideration of which situations require:
o Immediate action soon because the situation threatens the enterprise
–’red light’ situations;
o Action soon because, while the enterprise is not threatened, its ability to
achieve its goals is threatened – ‘amber light’ situations; and
o No action and can be ‘lived with’ – situations can be improved, but are
low on the priority list – ‘green light’ situations
RISK ASSESSMENT cont..

How to deal with them?

Four possibilities:
o Avoid the risk;
o Reduce the risk;
o Transfer the risk to someone else; and
o Manage the risks retained within the company.
RISK ASSESSMENT cont..

Interest of the underwriter:

The underwriter considers the risk from the insurer’s
point of view
Weighing up the amount of risk that is transferred to
the insurer by the proposal
RISK ASSESSMENT cont..

The underwriter decides whether to accept the

proposal and, if so:
oAt what premium;
oOn what wording;
oFor what limit of indemnity; and
oWith what excess, co-insurance or other restrictions
RISK ASSESSMENT cont..

Interest of the loss control surveyor:

May be employed by the insurer, the insured’s broker or
by the insured itself
Concerned with what measures can be taken to improve
the risk:
o With no changes to working practices or the physical nature of
the proposal;
o With minor changes to improve work practices; or
o With major changes involving a long-term commitment by the
insured to risk improvement.
RISK ASSESSMENT cont..

Elements of Hazard:
When the underwriter is determining the acceptability
and terms for a proposal, they consider two main
elements of hazard:
o The physical hazard;
- Physical aspects of risk need to be clearly known before
deciding upon the correct premium
- For smaller risks a written proposal form is used
- For large or more complex risks the insured or the intermediary
supply the necessary information by means of presentation
RISK ASSESSMENT cont..

For a few classes of liability business – Directors’ and

Officers’ liability, professional indemnity, a proposal form and
declaration are always required, regardless of the size of risk.
For certain risks there could be:
o A frequency hazard (lots of small claims, as shown by the loss
experience);
o A particular loss exposure (noise, asbestos, invasive medical
products); or
o A severity hazard (the possibility of a major loss such as a train
crash
RISK ASSESSMENT cont..

Underwriters may seek additional information by

means of a loss control audit by the insurer or outside
experts.
o The moral hazard.
In commercial liability insurance – relates to the
character or culture of the insured’s management.
Reflection is on character of the insured’s employees
and the manner in which they work
RISK ASSESSMENT cont..

IDENTIFYING AND PERCEIVING RISK:

Starting point:
-For the insured/risk manager: it is ‘How can the assets or
earning capacity of the enterprise be threatened?’;
-For the liability underwriter it is ‘What is the possibility of an
insured event happening?
The ‘insured event’ – the event covered by the operative
clause of the policy, which could give rise to a legal liability
Examples of such events and the liability policy referred are
shown in the following table:
RISK ASSESSMENT cont..
Bodily injury • Injury, including disease, Employers’ liability
caused to employees
• Injury to persons other than Public liability
employees, happening either
at the insured’s premises or
in the course of work at third
party premises

• Injury caused to any person Product liability

through the use or mis-use
of the product
Property damage • Fire, water, or waste Public liability
escaping from the insured’s
premises, damage happening
in the course of work away
from the insured’s premises,
damage to property
entrusted to the insured’s
care
RISK ASSESSMENT cont..
Property damage • Damage caused by the Product liability
hazardous properties of the
product, damage to any
assembly or mixture of which
the product was a component
or ingredient

Costs to the business/reputational • Hazard that bodily injury or Product recall (first part).
damage property damage might occur Product guarantee.
because products are faulty or Malicious tamper insurance
below specification

Economic or Financial loss • The possibility that a third party e.g. a financial loss extension to the
may have a claim where there is public liability and/or products
no bodily injury or property liability
damage, for example, third part
recall costs, defective products
delaying production, denial of
access for third parties to their
premises

• Wrongful acts, faulty or Professional indemnity.

inadequate advice or design, Directors’ and Officers’ liability
breach of professional duty,
breach of trust
RISK ASSESSMENT cont..
Legal defence costs • For many insureds this All forms of liability
is a very important cover.
element of cover.
• The cost of defending
themselves can
potentially be just as
significant as any
damages that result
from an unsuccessful
defence.
• Underwriters must
realize this and
underwrite this
exposure
RISK ASSESSMENT cont..

EVALUATION:
Once identified, all these risks must be analysed and
evaluated
This is a quantitative process and a subjective
judgement
Concerned with measuring the impact that risk would
have if it actually happened.
The following concept can be used:
RISK ASSESSMENT cont..

Likeliho
od

History Severity
Evaluatin
g the
impact
of risk

Freque
Latency
ncy
UNDERWRITER’S RISK EVALUATION

The following figure provides a summary of the

evaluation process undertaken by the underwriter when
a risk is proposed for insurance.
UNDERWRITER’S RISK EVALUATION cont..
1.Consider the key
exposures and activities
undertaken by the insured

2.What is the probability of

the activities of the insured
causing an insured event-
injury or damage?

3. Ifsuch a thing happens,

could the insured be liable
in law to a third party –
taking account of where
the insured is operating?

4. If so, is the remedy

damages?
UNDERWRITER’S RISK EVALUATION cont..

5. If the insured could be liable

in damages, who could sue?

6. What is the likelihood of them

suing?

7. What are the likely costs of

defending such an action or
actions?

8. What level of damages could

be awarded?
COMMON UNDERWRITING INFORMATION FOR
LIABILITY RISKS

Details of who is seeking insurance;

Business of the proposer for which insurance is
required;
Cover, limits and deductibles required;
Previous loss history;
Previous insurance history;
Details of any prosecutions relating to the risk
proposed; and
COMMON UNDERWRITING INFORMATION FOR
LIABILITY RISKS cont..

Material facts.