Losses Due to Hail, Vandalism, Earthquakes, Water, and Other Perils: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters. 2004. Chapter 5, pp. 5.30-5.37.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-57-1. Which of the following statements about hail damage are true? More than one answer may be correct.

(a) Virtually all destructive hail falls during violent thunderstorms.
(b) Damage to personal residences constitutes almost 80 percent of all hail losses.
(c) Wooden frame structures within a building are particularly susceptible to hail damage.
(d) Roofing materials are particularly susceptible to hail damage.
(e) Aluminum siding is particularly susceptible to hail damage.
(f) Hail damage can be easily prevented by purchasing special protective coverings over buildings and crops.
(g) It is possible to develop an underwriting strategy that minimizes the insurer's hail-related losses by restricting the writing of business in areas that have been historically susceptible to hailstorms.

Solution S5-57-1. This question is based on the discussion in Myhr and Markham, p. 5.30. The following answers are correct:
(a) Virtually all destructive hail falls during violent thunderstorms.
(d) Roofing materials are particularly susceptible to hail damage.
(e) Aluminum siding is particularly susceptible to hail damage.
(g) It is possible to develop an underwriting strategy that minimizes the insurer's hail-related losses by restricting the writing of business in areas that have been historically susceptible to hailstorms.

Choice (b) is not correct; nearly 80 percent of all hail losses are damage to crops.

Choice (c) is not correct; the internal structure of a building is less vulnerable to hail than external elements like roofs and siding.

Choice (f) is not correct; with present technology, there are few viable measures that can prevent hail damage.

Problem S5-57-2. Which of the following statements about damage due to vandalism and malicious mischief are true? More than one answer may be correct.

(a) Vandalism is more common in rural areas than in urban areas.
(b) Vandalism is more likely to be committed by individuals between the ages of 25 and 40 than by members of any other age group.
(c) Schools can be particular targets for vandalism.
(d) Nursing homes can be particular targets for vandalism.
(e) Vacant property tends to attract vandals.
(f) Vandalism tends to produce losses that are relatively infrequent, but quite severe when they occur.
(g) Vandalism tends to produce losses that are quite frequent, but typically not severe when they occur.
(h) Vandalism losses are typically neither frequent nor severe.
(i) Of the two underwriting concerns for vandalism, frequency is a greater concern than severity.
(j) Of the two underwriting concerns for vandalism, severity is a greater concern than frequency.

Solution S5-57-2. This question is based on the discussion in Myhr and Markham, p. 5.31. The following answers are correct:

(c) Schools can be particular targets for vandalism.
(e) Vacant property tends to attract vandals.
(h) Vandalism losses are typically neither frequent nor severe.
(i) Of the two underwriting concerns for vandalism, frequency is a greater concern than severity.

Choice (a) is not correct; vandalism is more common in urban areas than in rural areas.

Choice (b) is not correct; vandalism is more likely to be committed by children and young adults than by members of any other age group.

Choice (d) is not correct; vandals generally do not target institutions that primarily cater to the elderly; they tend to target institutions where there is a high concentration of young people.

Choices (f) and (g) cannot be correct if choice (h) is correct. Likewise, choice (j) cannot be correct if choice (i) is correct.

Problem S5-57-3. The following questions pertain to water damage.

(a) Name two types of water damage against which many homeowners' insurance policies provide coverage.
(b) What typically causes the types of water damage in part (a)? Name two possible sources.
(c) Name one type of water damage against which most homeowners' insurance policies do not provide coverage. Briefly, what is the rationale for excluding it?
(d) In the United States, what entity does often provide coverage for the type of water damage in part (c)?
(e) What are six kinds of the type of water damage in part (c), as discussed by Myhr and Markham, p. 5.33?

Solution S5-57-3.

(a) Two types of water damage against which many homeowners' insurance policies provide coverage are as follows, according to Myhr and Markham, p. 5.32:

1. Accidental discharge, overflow, or leakage of water;
2. Steam from plumbing, heating, and cooling systems.

(b) The two possible sources of the water damage types in part (a) are as follows, according to Myhr and Markham, p. 5.32:

1. Poor maintenance;
2. Flat roofs, where water can soak through the roof covering.

(c) Flood is a type of water damage against which most homeowners' insurance policies do not provide coverage. This is because flood losses tend to be catastrophic.

(d) In the United States, the National Flood Insurance Program (NFIP), a part of the Federal Emergency Management Administration (FEMA), is the largest underwriter of flood insurance.

(e) The six types of floods, as discussed by Myhr and Markham, p. 5.33, are as follows:

1. Riverine floods that "occur when rivers, streams, and other watercourses rise and overflow their banks";

2. Tidal floods that "arise from high tides, frequently driven by high winds offshore, and from tropical storms making landfall or passing closely offshore";

3. Wind floods that "occur whenever a strong wind holds back a large body of water from its normal drainage course and raises the water level";

4. Backwater floods that are caused by "rising water levels downstream" that "prevent drainage upstream";

5. Floods due to ice jams that are caused when an ice jam blocks the flow of water and then breaks suddenly and causes flooding downstream;

6. Accidental floods that "are caused by the failure of flood control systems," such as dam breakage or blocked floodgates.

Problem S5-57-4. The following questions pertain to earthquake damage.

(a) What are the three major earthquake underwriting considerations, discussed by Myhr and Markham, p. 5.34?
(b) What is the most seismically active area in the United States?
(c) Name one category of soil upon which buildings are superior at withstanding earthquake damage.
(d) Name one category of soil upon which buildings do not withstand earthquake damage well.
(e) What kind of stresses do earthquakes cause - horizontal stresses or vertical stresses? What kinds of stresses are most buildings designed to bear?
(f) Classify the following kinds of construction into types that typically withstand earthquake damage well and types that typically do not earthquake damage well:

(i) Joisted masonry construction;
(ii) Frame construction;
(iii) Brick facing;
(iv) Stone veneer;
(v) Tile roofs;
(vi) Tilt slab construction;
(vii) Fire-resistive construction.

Solution S5-57-4.

(a) The three major earthquake underwriting considerations, discussed by Myhr and Markham, p. 5.34, are as follows:
"1. Areas of earthquake activity;
"2. Soil conditions;
"3. Building design and construction."

(b) "The Pacific Coast from Alaska to California is the most seismically active area in the United States" (Myhr and Markham, p. 5.34). 90 percent of U. S. earthquakes occur in California and western Nevada.

(c) Buildings on consolidated soil, such as limestone and certain kinds of clay, are superior at withstanding earthquake damage (Myhr and Markham, p. 5.34).

(d) Buildings on unconsolidated soil, such as sand, gravel, silt, and certain other kinds of clay, are inferior at withstanding earthquake damage. Also, buildings on filled land, particularly unconsolidated filled land, are particularly vulnerable during an earthquake (Myhr and Markham, p. 5.34).

(e) Earthquakes cause horizontal stresses, whereas most buildings are designed to bear vertical stresses (Myhr and Markham, p. 5.34).

(f) This question is based on the discussion in Myhr and Markham, pp. 5.34-5.36.

The following types of construction typically withstand earthquake damage well:

(ii) Frame construction;
(vii) Fire-resistive construction.

The following types of construction typically do not withstand earthquake damage well:

(i) Joisted masonry construction;
(iii) Brick facing;
(iv) Stone veneer;
(v) Tile roofs;
(vi) Tilt slab construction;

Problem S5-57-5.

(a) List three common causes of building collapse.

(b) Name five other causes of loss, against which property insurance often exists, that have not been discussed in this section or in Sections 53-57 of this study guide.

Solution S5-57-5.

(a) According to Myhr and Markham, p. 5.36, the following are common causes of building collapse:
1. Weight of ice, snow, or sleet;
2. Defective design or construction;
3. Deterioration;
4. Weight of people, personal property, or water;
5. Rain water accumulating on flat roofs when drains are blocked;
6. The cumulative effect of vibration.

Any three of the above answers would suffice. Other valid answers may be possible.

(b) According to Myhr and Markham, p. 5.37, the following are additional causes of loss against which property insurance sometimes protects:
1. Riot and civil commotion;
2. Sprinkler leakage;
3. Sinkhole collapse;
4. Mine subsidence;
5. Volcanic action;
6. Terrorism;
7. Theft.

Any five of the above answers would suffice. Other valid answers may be possible.

See other sections of The Actuary's Free Study Guide for Exam 5.