The Devil You Know…
A brief look at risk surveying…
Hugh Khull, Risk Survey Manager, Cerno
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The Devil You Know…
The devil you know is better than the one you don’t.
Old idiom
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A changing industry…
…for the times they are a-changing….
Bob Dylan 1964
• The Insurance Industry has undergone deep
structural change over the past 50 years and is now
vastly different
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Tariff – whats that…?
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Legislative Changes…
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Insurance Act 1973
Trade Practices Act 1974
Insurance Contracts Act 1984, &
Insurance (Agents & brokers) Act 1984
Financial Services Reform (FSR)
It is now a highly regulated industry…
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Other changes…
Competition
Computerisation
Centralisation, decentralisation
Mergers and acquisitions
Insurance by telephone – Call Centres &
dominance of direct insurers in domestic insurance
• Internet & Comparison sites, &
• More recently, supermarkets …
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Other Changes (cont)…
• The emergence of Brokers
• Changes in Claims handling
• Changes in Loss adjusting …
– Reduction in fees creating time pressures to assess
claims properly.
– In house assessing & builder’s panels
• Change is continuing, all of which brings us to….
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Current Changes …
• The way in which insurance is transacted –
electronically, sometimes remotely, and at speed
• DIY insurance – foregoing the use of a broker
• Electronic Underwriting Platforms – subtly shifting
onus of underwriting to the broker
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Question…
Is the underwriting information provided by the insured
complete, correct, clear and unambiguous or has it
become unintentionally distorted, either through
misunderstanding of the question by the insured, or of
the Insured’s answers by the broker and insurer or by
misinterpretation of the facts or by non-disclosure –
intentional or unintentional?
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Case 1:
EPS Building
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EPS building
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Case 2:
Jumping Pillow Spinal Injury
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Warning Signs …
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Case 3:
Undisclosed occupant …
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But …
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Underwriting
• Defined – Art, Science or Skill of risk selection?
• Underwriting – Per Risk & Portfolio
• How can we be sure a risk fits the Portfolio profile?
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By a Risk Survey …
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Risks …
• Physical Risks
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Construction
Occupation
Exposures,
Fire protection
Electrical systems
Security
Liability hazards
– Warehousing & storage
– Cooking
– Dangerous goods (incl
flammable liquids)
– Safety procedures
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Moral Risks …
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Insured
Approach to business
Type of business
Housekeeping
Indifference to Safety & Security
Indifference Fire Risk and Prevention equipment
Poor maintenance & presentation of the work place
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Underinsurance…
• Underinsurance is a major issue in Australia…
• Reasons for underinsurance are many and varied,
• And they are complex…
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Reasons for underinsurance…
• Lack of understanding of the actual replacement
cost
• Confusion between market value and replacement
cost
• Building too large or unsuitable for current
operations
• Increased cost of reinstatement not understood
• Not reviewed for years – believed to be adequate
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Surveying …
A Risk Survey can assist by…
• Collecting and reporting accurate underwriting
information
• Confirming information provided
• Identifying risk exposures and making
recommendations
• Identifying the risk of underinsurance
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Benefits of surveying…
Insureds
• The Company is aware of what it is insuring
• Identifies exposures and assists in the Risk
Management process
• Can identify possible underinsurance and assist in
arriving at adequate sums insured
• Addition value adding service for them
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Benefits (continued)
Underwriters
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Ensures accurate underwriting information
Identifies risk improvements
Assists in risk management decisions
Assists in addressing underinsurance
Provides an additional value adding service to
brokers & insureds
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Benefits (continued)...
Brokers
• Confirms the underwriter has an accurate
description of the risk
• Assists in identifying underinsurance
• Provides an additional value adding service
• Protects professional indemnity exposure
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Types of surveys
• Risk survey
• Recovery (Underinsurance) survey
• Composite – Risk & underinsurance
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Survey content…
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Construction
Occupation
Housekeeping
Exposures
Fire control systems
Electrical systems
Management controls – moral risks
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Massive building …
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Fire Resisting Construction
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Inferior …
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Glass curtain buildings...
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Tilt up concrete
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EPS...
• Expanded Polystyrene Foam Sandwich panel
(EPS)
• A sandwich of a central core of expanded
polystyrene foam between steel sheets.
• Used in freezers cool rooms and similar buildings
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EPS (Expanded Polystyrene Foam
Sandwich Panel)
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EPS building
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EPS building
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Cool rooms …
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EPS Management system…
Regular inspection of panels to ensure no damage
Immediate repair of any damaged panels
Preventative measures - impact
Removal or isolation of heat/ignition sources –
including switchboards
• Minimise and protect penetrations
• No attachment of items to panels – switchboards
• Hot Works Permit System
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Impact prevention – EPS
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Unprotected openings…
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Occupation…
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Single or multiple occupancies
A description of the business activities & processes
Housekeeping
Storage & warehousing
Dangerous goods
Cooking
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Dangerous goods…
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Gas Storage …
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Gas Bottles …
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Exposures…
• Internal - other tenants
• External – occupancy, proximity, construction of
neighbouring businesses
• Separation – distance or physical barriers
• Environmental - land
• Type of area
• Exposures to extraneous hazards
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Exposures…
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Types & uses of extinguishers…
Type
Colour code
Class of fire
Water
Red
A
Foam
Red with blue band
A&B
Dry Chemical
Red with white band
A,B,C & E
CO2
Red with black band
E
Vaporising
Red with yellow band
A&E
Wet Chemical
Red with oatmeal band
A&F
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Typical extinguishers…
Dry Chemical & CO2
Hose reel & Dry Chemical
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More extinguishers…
Dry Chemical & Wet Chemical
Dry Chemical & Wet Chemical
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Water on burning oil…
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Sprinkler systems…
• The most effective way of controlling fires
• First sprinkler system (manually operated) – 1812
• First automatic system – 1874
• Grinnell system - 1881 (improvement on 1874
system)
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Sprinklers…
Sprinkler heads – (Red – 68 C)
Blue (141 C) over deep fry
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Sprinklers…
Stop valves
External window (Green 93 C)
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Electrical systems…
Switch boards & wiring checked to ensure:
• Switchboard – type & positioning
• Apparent age & condition
• Wiring
• Temporary wiring
• Thermographic scan
• Test & tag system
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Electrical…
Overloaded?
In a joinery…
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Electrical…
Hot spot
Wiring in old conduits
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Electrical…
Switchboard in pub
Conduits from that switchboard
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Electrical…
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Management controls …
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Attitude
Layout
House keeping
Cleaning & waste disposal
Fire load
Fire equipment
Evacuation plan
Maintenance – building & equipment
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Underinsurance
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Calculating replacement cost
• Estimated Replacement Cost - not a valuation
• To identify the risk of underinsurance…
• The only accurate cost is when there is a full set of
plans, drawings, specifications, engineering
requirements and a contractor has costed it to do
the job.
• Even the contractor adds a contingency margin, &
• There are usually variations during the build.
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What is in an ERC…
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Cost of the building
Car park, driveways, fences, gates etc
Cost of demolition and removal of debris
Professional fees
Builders mark-up
Location allowance
Escalation allowance
GST
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Example 1…
Warehouses, offices, display rooms and motor
wreckers:
• building was owner designed, engineered & built
• input from family & associates
• Drastically underinsured at $3.150 million
• ERC - $5.9 Million
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Example 2…
Retail shop…
• Massive construction
• Previously occupied as an office
• Purchased for $1.5 million
• Insured for $1.5 million
• ERC - $4.4 million (average); $5.0 million (quality)
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Example 3 …
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Large farm shed
Approx. 1,500 square metres
Steel frame, steel clad, concrete floor
Insured for $300,000
Estimated replacement cost - $1,700,000
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Typical risks surveyed…
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Mushroom growers
Flower growers
Plastic extrusion factories
Hotels & restaurants
Take away food outlets
Go Kart Club circuit
Electronic component
Nursing homes
Cinemas & theatres
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Abrasive blasting works
Timber mills
Hardware & timber outlets
Joinery factories
Strata title residential
Surf club
Furniture carriers/stores
Retail
Seafood factories (EPS)
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Case study – Cinema complex...
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Cinema
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Cinema
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New steel & glass extension
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Cinema – steel & glass extension
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Cinema complex floor plan
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Behaviour of steel in a fire...
Steel loses its strength in a fire. At:...
• 300 degrees C it starts to lose strength
• 550 degrees C it has lost 60% strength
• 800 degrees C it has lost 90% of its strength
• Continues to lose strength at an increasingly slower
rate until around 1,500 degrees C when it fails
completely.
• Typical fire: 1,200 degrees C
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Fire fighting equipment
Classes of Fires
• ‘A’ – combustible materials (wood, paper, textiles,
plastic, etc)
• ‘B’ – Flammable liquids
• ‘C’ – Combustible gases
• ‘D’ – Metals (magnesium etc)
• ‘E’ – Electrical
• ‘F’ – Cooking oils
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Calculating Replacement Cost...
Steps in the calculation process...
• Class of construction
• Class of Building
• Area of building
• Other inclusions in the estimated replacement cost
• Construction cost rates
• The calculaton
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