Answer

Exposure Due Diligence

In insurance, exposure due diligence helps in evaluation and assessment of the true value of mergers and accusations (Reibstein, Petkun & Rudolph, 2013). To realize this objective exposure due diligence involves a detailed of insurance, workers compensation and overall risk management practice. All these help in identifying problem areas that could have an impact on the performance of the company (Andrew & White, 2017; Klein, 2016). These problem areas includes: uninsured and unfunded exposures, advance claims trends, bad debt management and environmental risks. Environmental risks results into losses that potentially and adversely affect the company. As a result an environmental insurance policy is used to fill the insurance coverage gaps created by these risks. Due to the great variation of environmental risks, environmental insurance policies also vary greatly (Klein, 2016). Among key environmental risks are “acts of God”. An “act of God” refers to any natural disaster that cannot be foreseen or prevented in any way by human beings and it causes damage. Acts of God include naturally occurring catastrophes such as hail, lightning, windstorm, earthquakes, erupting volcanos, tornados and hurricanes. Therefore the work of estimating the chances of a single “Act of God” occurring in the cause of upcoming year as well as the chances of more than one “Act of God” materializing in the cause of next year due diligence is important (Andrew & White, 2017; Reibstein, Petkun & Rudolph, 2013).

Conditional Probability and Insurance

In risk assessment model, data in use is conditional in nature. Trustworthy and valid data can easily be obtained from meteorological department and other departments that monitor the occurrence of natural catastrophes (Bayraktar, Promislow & Young, 2015). This data may not in the form required for analysis and as such it is prudent to classify or segregate data into appropriate risk classification such as high likelihood of occurrence and low likelihood of occurrence. In addition it is important to observe the trend of the catastrophes happening and know whether there are certain catastphes that predisposes others from occurring. All this information will help in developing a sound and strong insurance cover for either a single or multiple related and unrelated occurrences. Using conditional probability method which postulates that the likelihood of an event occurring is conditional to the occurrence of prior event occurring it is possible to estimate the likelihood of an event occurring and thus acquire a comprehensive cover that is cost effective (Aro, Djehiche & Löfdahl, 2015). In instances where the second event is dependent on the first event both events are utilized in the assessment of the risk and premium. Conditional probability is critical in exposure of due diligence efforts because an occurrence of one event may not necessarily result into an economic loss such as flood that does not carry away an insured car but only destroys uninsured fence (Bayraktar, Promislow & Young, 2015; Leguizamon, & Hammond, 2015).

To conclude, we can say that, risk is inevitable and some acts such as “Acts of God” cannot be prevented. In such a scenario, insurance coverage providing protection against damage caused by act of God require consideration of the dependency and independency of occurrence of “acts of God” in any given year when either one or more than one “acts of God” can materialize. Occurrence of an event may result into economic losses. If jointly occurring it may be impossible to appropriately apportion the losses to the specific “act of God” therefore it is important to secure any property against damage caused by an independent “act of God” or a combination of “Acts of God”.