Cedric Stephens, Contributor

Question: I paid off the mortgage on my house five years ago. Since then, it has not been insured. This is due largely to my experience with the averageclause during Hurricane Ivan. I am rethinking that decision. We are now in a hurricane season which forecasters say will be very active. What advice do you have to offer? The replacement value of the house is estimated at $17.5 million.

- B.R., Kingston 6.

Answer: A gentleman, whose name I omitted to obtain, advised me two weeks ago to ask the editor to reprint some of my earlier articles. Some of the things I wrote about, he believed, needed to be re-printed. His reaction took me by surprise. Your question gives me another opportunity to tell him thanks. It also allows me to test the premise of his argument. Was the advice I gave nearly 12 months ago about what some call "self-insurance" relevant to the question you posed?

Re-examine your decision

It is right to re-examine your decision to not buy insurance. Many persons confuse non-insurance with self-insurance. Insurance is an organised way of handling certain kinds of risks. Those risks are transferred to insurers in exchange for a premium.

Self-insurance means that retained risks and the money saved by not paying premiums to insurers are managed in clever ways. Often, this does not happen. I call the practice non-insurance or a gamble that the unpleasant event will not occur.

Managing risks is a complex, full-time business. Michael Lee Chin, Gordon 'Butch' Stewart, Douglas Orane, or even Dr. Omar Davies, I am sure, will agree that handling risks properly is not easy.

Know your cost/price

Insurance buyers in Jamaica give the average clause a bad name. They say it is unfair. This argument is often not based on fact. Many home owners do not have a clue what it would cost to rebuild their homes. As a result, they end up buying too little insurance.

In the United States, for example, more than 50 per cent of the houses that were insured between 2000 and 2006 were under insured. This is according to research published by experts on building costs (http://www.iii.org/media/facts/statsbyissue/homeowners/).

Home owners here are no different from their U.S. counterparts. Because of this, the average clause is a standard feature of most household policies. The problem is, in my opinion, what to do to reduce the impact of the average clause.

The good news, however, is that there are solutions. One company that specialises in valuing houses here has begun offering a special deal to home owners. They claim it will nullify the effect of the average clause. I recommend that you contact them or some other reputable firm to get an estimate of the replacement value of your house.

Consumers can also protect themselves by asking for the special condition of average instead of the average clause.

Under the former, the average condition will not be applied in cases where the sum insured represents say 80 per cent of the replacement value. In the latter case, deductions are made from the claim whenever the sum insured is less than 100 per cent of the replacement value. The third method is to buy a policy without the average clause.

Seek the help of a broker. There are 12 insurers that provide coverage for houses. This means that you have choices. Make sure that you ask the broker to tell you how to save money.

If you are comfortable with bearing some risks, as you have done over the last few years, there is no reason why you should transfer all of your risks to insurers. If it makes financial sense, carry some for your own account.

In spite of all the bad press about the average clause, consumers in Jamaica are still fortunate. They can still buy coverage to protect home investment, unlike many persons in several parts of the U.S.

Cedric E. Stephens is an insurance consultant. He provides free, independent information and advice to consumers who need help to solve their problems. Email: aegis@cwjamaica.com.