1. CHAPTER 6:
ANALYSING PROPERTY
LOSS EXPOSURES

2. ELYAELYANA BT SHAFEE
NURUL ZETA BT ABU SAMAH
NURZATI ALYANI BT MOHD ASHARI
RAJA KHAIRUN NURFARHANNA BT RAJA HAMZAH

3. 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


4. TYPES OF PROPERTY AND VALUES
EXPOSED TO LOSS
i. Real property
ii. Personal property
- tangible property
- intangible property
iii. Non-owned property

5. 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.


6. 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.

7. ii. Personal Property

Includes all property other than real property.
Categorized as tangible or intangible.
Tangible property
 Property 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.
a)

8. 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.


9. 
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.

10. 
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.

11. 
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.

12. 
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.

13. 
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.

14. 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.

15. 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.

16. 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.


17. 

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
•
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•
•
•
•
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Collapse
Earthquake
Fire of natural origin
Flood
Landslide/mudslide
Meteor shower
Tidal waves
Volcanic eruption
Wind (tornado,
hurricane)
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
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
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18. FINANCIAL CONSEQUENCES OF
A PROPERTY LOSS

There are many type of valuation
associated with property, such as:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
methods
Historical cost
Tax-appraised value
Accounting (book) value
Replacement cost
Reproduction cost
Functional replacement cost
Market value
Actual cash value (depreciated replacement cost)
Economic or use value

19. 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.

20. 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.

21. 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.

22. 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

23.  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

24. 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

25. 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.

26. 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.

27. 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.

28. 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.


29. TECHNIQUES TO IDENTIFY
PROPERTY LOSS EXPOSURES

30. Standardized questionnaire;
 Thorough survey/questionnaire to identify items of
tangible property whether real or personal.
 Provide indications of intangible property
i.
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.
ii.

31. Financial statements and underlying records;
 Identify loss by referring organization’s income
statement.
 Focus on revenue section
iii.
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.
iv.

32. Flowcharts;
 Extend beyond an organization, encompassing
suppliers and customers and the routes to them.
 Suggest the importance:
i. Suppliers’ and customers’ properties
ii. Transportation bottlenecks
iii. Key role of an organization’s vehicles
v.

33. 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.
vi.
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.
vii.

34. THE END