The savvy thing to do on property insurance

Insurance Helpline,With Cedric Stephens

Question: I moved into a 3,000 square feet, two-storey house located in Manchester with members of my family recently. It has all of the modern features. The walls were built with reinforced concrete blocks while the roof is covered with aluminium-steel tiles. Ceramic and porcelain tiles overlay the floors. The replacement value is estimated at J$40 million. My wife and I cannot agree whether we should insure the house. What are your views?

- P.M. W, Mandeville PO, Manchester.

HELPLINE: Many thanks for posing a most interesting question. It is especially topical at this time, the beginning of the 2011 Atlantic hurricane season.

When one considers the number of the catastrophic events that have occurred between 2010 and this year, your question takes on even more significance. Some of the more notable events include major earthquakes in Haiti, Chile and New Zealand last year. Massive floods in China, Pakistan, Australia, Brazil and in the United States, a series of earthquakes and a huge tsunami in Japan, wildfires and tornadoes in the US, plus another large earthquake in New Zealand.

Some 42 million persons were displaced from their homes last year - that figure is double the number in 2009 and 14 times the entire Jamaican population.

With the exception of wildfires and tornadoes, Jamaica is exposed more than moderately to losses arising from all of the other catastrophes. Given the poor state of our economy over the past several decades, our government cannot be relied upon to provide significant levels of disaster relief.

Even if such relief were to be made available, it would be directed more towards those at the lower end of the economic ladder and be tainted by politics.

unpredictable

Expectations of donations from friendly countries in times of need are, at best, unpredictable especially when their economies are stagnant and the lives of thousands of their own citizens are disrupted by catastrophic events.

The private insurance market, in my opinion, offers the best guarantee of protection in the event of disasters which result in injuries or death in the case of persons or loss or damage in the case of property. The benefits of insurance should be examined in this broad context.

Buying house insurance is one thing that savvy persons do preserve their wealth since one's house is often one's biggest investment.

One of the many lessons that are being learned from the Japanese earthquake/tsunami and other disasters is the tendency to ignore what Nassim Nicholas Taleb describes in his book as 'Black Swans'. Those types of events, he says, "lie outside of the realm of regular expectations É carry extreme impact É make us concoct explanations for their occurrence after the fact".

The impact of highly improbable events is often overlooked when risks are being assessed even by experts. Here are 10 things that you and your wife should bear in mind about house insurance and insurers:

1. Insurance companies are, like the banks, regulated by an agency of the government. The regulator, The Financial Services Commission is responsible by law to ensure that these entities operate within the provisions of the Insurance Act, 2001 and the rules and regulations that are enacted under that Act. One of the principal duties of the FSC is to ensure that insurers have the financial resources to meet their obligations in the event of disasters.

2. Insurance coverage against hurricane damage is not obtainable when a tropical storm or hurricane is approaching the island.

3. All insurance contracts usually provide protection against loss or damage caused by hurricanes, earthquakes and flood as well as other perils. Typically, losses arising from these natural catastrophes are subject to deductibles (or excesses) which represent two per cent of the insured value. In other words, protection is cent of the insured value by insurers while the insured is expected to bear the remaining two per cent.

4. Many of the disputes that arise between policyholders and insurers take place at the time of loss. Some of these disputes can be avoided if consumers take greater care in ensuring the accuracy of the information that they provide to insurers at the start of the contract and obtain professional estimates of the value of their houses.

5. Steps should be taken to ensure that the sum insured on your house should always represent 100 per cent of what it costs to rebuild the house and/or replace the contents.

6. You can save money on your house insurance by insuring it with the same company that insures your car and by choosing a higher deductible for earthquake, hurricane and flood than the normal two per cent.

7. Many buyers refuse to read and understand their insurance contracts even though it is intended to protect their most valuable asset. Some companies offer contracts that are written in plain English. Get a specimen copy of the contract and read it before signing on the dotted lines. Almost all of the insurers that operate locally have websites. Visit them to get information.

8. Consider hiring a broker to help you to shop for the best deal.

9. Always ask for discounts for things like smoke detectors, fire alarm systems and other devices that help to minimise the risks.

10. Always keep your policy up to date.

I hope that these comments will help you and your wife make a decision.

Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. Send email to aegis@cwjamaica.com SMS/text message to 812-7233