QUESTION: I own a three-bedroom house in St. James. It was recently valued at $8.5 million. What would it cost to insure it? Last year some persons told me that insurance prices would increase by at least 25 per cent this year. This was due to the many hurricanes. Is that figure realistic? Also, what can a 'small person' like me do to save money?
- P.D., Montego Bay, St. James.
Answer: The country's largest public sector insurer- the Government of Jamaica (GoJ) - is struggling to pay for Hurricane Ivan damage. Only 40 per cent or 289 of the 742 schools that suffered damaged nearly two years ago " ... will be repaired in phase 1," says a ministry official, according to a report in this newspaper.
When work will begin or what will happen to the other 60 per cent was left unsaid. Your plan to buy coverage for some of the risks of house ownership is a wise move. Self-insurance is a no-no. If GoJ, with its many experts and billions of dollars, finds it so tough to fix the schools, don't mention the roads, can you take on that burden?
A leading reinsurer (it provides 'backative' to private insurers) says that the "elevated frequency of intense storms in 2004 and 2005 ... hints at a systematic change in the hazard situation." This means that stronger events have occurred more often in the last two years than before.
This view is shared by many insurers in the Caribbean, Central America and in the U.S. Experts estimate that claim payments for those years will exceed US$100 billion. Insurance is a global business. What happens elsewhere will affect us here - sooner or later. This explains the context in which insurers here operate.
Local prices for property insurance are expected to rise on average by 10 to 17.5 per cent this year. The information is based on the results of a survey I conducted. The reinsurance market was unexpectedly more 'flexible' than many thought. Price hikes turned out to be less than first estimated. There were reports, too, that some reinsurers have stopped writing coverage for the region, and that prices for coastal properties are under pressure.
Supply shortfalls cause prices to rise higher. Since our losses were a small fraction of those in the U.S. we have, for now, escaped the increases which have occurred in Florida and the Gulf States.
INSURING YOUR HOUSE
To insure your house this year will cost between a low of $85,000 and a high of $102,000. Those amounts, which exclude GCT, are based on a sum insured of $8.5 million. They also assume that the house is not within 500 metres of the coastline. About 40 per cent of the premium will be for hurricane insurance. Sources tell me that though local prices look high they are lower those in Puerto Rico and the Cayman Islands - two of our nearest neighbours. Trinidad prices are, however, lower than those in Jamaica. This due to what some say is reduced threat from tropical storms.
COST SAVINGS
Your third question is easier to answer than the second. Since hurricane represents the largest chunk of the premium, you should look for cost savings there. House policies protect only 98 per cent of hurricane losses. The remaining 2 per cent (called an excess or deductible) is borne by the policyholder when a loss occurs. This amounts to $170,000. It means that you will assume all hurricane losses up to that sum. Insurers pay claims over the 2 per cent.
RISK ALLOCATION
Depending on your attitude towards risk, the location of the house, its history of losses, the type and quality of its construction and the size of your bank account, you could elect to assume a larger share of the hurricane risk - for example, 5 per cent (or $425,000) in exchange for a discount off the premium. The savings would add over years. Another way to save money is to shop around. A saving of $17,000 in one year should not be sneezed at.
Recheck the valuation. Was it done to find out the market price of the premises if it were to be offered for sale? Or, was it prepared to determine the rebuilding costs of the house? If the former, the $8.5 million would normally include the cost of the land, which should be excluded for the purposes of insurance.
Valuations done to estimate market value are often of no use to insure property.
Finally, if you feel uncomfortable doing this by yourself, speak with an insurance broker.
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.
