Insurance Helpline with Cedric Stephens

Question: The cost of perils insurance on my house has been increased. Last year I paid nearly $1,200 per month. This year, the price is $1,700 per month. What is the reason for this dramatic increase? I am now thinking about cancelling the coverage. What am I getting from paying all of this money to the insurance company?

E.S., Spanish Town, St. Catherine

Answer: Insurance companies in Jamaica are their own worst enemies. They are losing the battle for the hearts and minds of the average house owner. Why? Only one out of every three houses is insured, say industry experts. Given our location and long history with fires, floods, storms and earthquakes, that figure should be higher. Insurers are doing something wrong. Are they, like corrupt and self-serving politicians - or the police - not trusted? Unti forms of handling risks - and better systems of government - are invented, it is unwise in my opinion, to avoid insurers - or, to opt out of the political system.

Cancellation of your insurance is, probably, not an option. This assumes that your house has a mortgage. Lenders require insurance and say so in their mortgage agreements. Insurance minimises the lender's risks if the building suffers damage. You, on the other hand, can decide how to handle these risks when you repay the loan.

If you have done so, ask yourself a few questions before making a decision to cancel. What is the total value of your financial resources? How do they compare with those of the mortgage company? Is the value of the house likely to appreciate or depreciate over time? Why is it that in some rich countries e.g., Switzerland, perils insurance is compulsory? Does it make sense for you to retain the same risks that the lender transferred to insurers?

I can only guess at the reasons for the increase in your premium. Ask your mortgage lender or insurer to explain why. In the meantime, I will try to give you some general information about the market for house insurance.

Insurers are in business to make money. Each dollar of premiums includes an element to pay claims, overheads and make a contribution to profit. Local consumers paid an average of nearly $1 billion per annum for house insurance over the last three years.

Guesses about the Increase

Last year, only five of the 11 insurers made an underwriting profit. This means that most of them made losses after paying claims and overheads. Note that this was during a period when there were no major hurricanes or earthquakes. In 2005, the results were not much better. In 2004, the year of hurricanes Ivan, Dennis and Emily, insurers drowned in red ink. Interest and other income offset the (underwriting) losses that the companies reported. It seems that there are problems with the pricing of coverage.

Are increases in premium justified? Increases are probably justified, based on many things such as what is happening in the global insurance industry in Florida, along the United States eastern seaboard, other parts of the U.S. and in the Caribbean.

A similar thing is taking place in oil markets. Prices are rising, especially in high-risk places.

Some local properties in coastal areas are finding it very hard to get coverage, as this newspaper reported. The situation is so bad in parts of the U.S. that state governments have had to step in. Locally, the situation is more difficult because for some reason, insurers are hugging up the information.

Consumers borrowed $1.5 billion to buy vehicles during the first four months of 2007. If the trend continues, $4.5 billion will be on loan by the end of this year - plus interest. These moneys will be used to buy assets that will fall in value.

Banks and other firms that lend money convince consumers to go into debt to buy assets that decline in value. Should not insurers, who protect assets that appreciate in value, be able to get consumers to spend more than $1 billion per annum to insure them?

Call me risk-averse, biased or, whatever. I would prefer to spend my money to insure my house rather than driving around town in a shiny, new SUV.

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