Question: Last year my insurers increased the rates for fire insurance. The same thing happened in 2003. The main reason for this was hurricanes. Reinsurers were said to take this into account when calculating their rates. The amount charged in one year is based on the experience in the previous year. Most of our buildings have reinforced concrete walls and concrete slab roofs. Because of this I decided not to buy hurricane insurance. To my great surprise the company said they would not delete the hurricane risk. Insurance would only be offered against fire OR fire and ALL allied risks. Is this a con? If their main concern was really hurricanes, shouldn't the insurers be happy to relieve themselves of that risk? - P.A., Kingston 5.
Answer: Your question is very important. It provides strong evidence that local insurers need to "get their act" together. They dissed a commercial buyer like your company. How will the so-called 'little man' from Westmoreland - who owns a deportee - be treated? The question is also timely. Insurance consumers will face another round of price increases early next year. As a result, they have to find ways to reduce the impact. Risk transfer (or insurance) despite its many faults is, increasingly, seen as a better solution than no insurance at all. The recent signing of a grant agreement between the Finance Minister and the Japanese confirms this.
Insurance company managers are driven by only one thing. In spite of the hype - their only concern is the six letter word:
p-r-o-f-i-t. Everything they do is linked directly to that. This includes how they sell insurance against fire, earthquake and hurricane. When I posed your question to the chairman of the lobby group, Jamaica Association of General Insurance Companies (JAGIC), Andrew Levy, this is what he had to say: "The root of this problem is probably the reinsurance protection that insurance companies buy to protect themselves against the costs of a catastrophe (either hurricane or earthquake). The reality of the reinsurance pricing is that the catastrophe perils are purchased together and there is no reduction in cost to the insurer for selling a policy excluding hurricane. However, there are companies that will offer to sell Fire & Hurricane cover OR Fire & Earthquake cover. One has to ask around or use a competent broker as an advisor."
CLEAR PREMISES
Three things are clear from Mr. Levy's statement:
1. Reinsurance is probably (note, he did not say categorically) at the root of the problem that you experienced.
2. Companies other than the one with whom your company is insured have reinsurance arrangements that allow them to unbundle hurricane from the other perils in exchange for a discount off the rate. In other words, it is very possible to buy buildings and contents insurance without hurricane coverage.
3. Factors other than reinsurance, e.g. marrying (to use the idiom of our urban and rural produce markets) the perils, can explain why insurers refused your company's request to exclude hurricane for two years in a row.
MANY LESSONS TO BE LEARNED
There are many lessons to be learned from your experience. They include:
(a) trust your instincts to guide you. Never accept the word of one insurer as gospel;
(b) always shop around to find solutions to problems since there are 11 companies that insure property;
(c) explore the overseas option. Foreign insurers are sometimes more flexible than the local ones;
(d) insurance-buying in today's management jargon is a non-core activity. Consider out-sourcing that function. The market is far more complex now than it was in previous years.
Finally, be very careful about not buying hurricane coverage. Many persons tend to think only about wind damage associated with storms. Flood damage caused by the overflowing of gullies, rivers and storm surge is often ignored. Losses of this type are, in Jamaica, considered to be part of hurricane damage - unlike what happens in the U.S.A. So, unless you have done an assessment and determined that the hurricane flood risk is minimal, it would be unwise not to buy hurricane.
If this does not help, I will make myself available for a private consultation!
Cedric E. Stephens provides independent information and advice about the management of risks and insurance. If you need free information or counsel to help you solve a problem write to The Financial Editor or contact Mr. Stephens directly at aegis@cwjamaica.com
