Insurance Talk – Joseph Holness
There is a tendency to discount present dangers to which we have grown accustomed, and overreact to new and unfamiliar threats, says Joseph Holness Assistant General Manager for Reinsurance and Underwriting at NEM Insurance. In the following interview Mr. Holness assesses the issues that need to be faced in considering your approach to property insurance.
Q. Given Jamaica’s environmental profile, what should I insure against?
The University of the West Indies Earthquake Unit reports that the island is affected by about 200 normally minor earthquakes each year and each generation can expect to experience at last one devastating Hurricane. We therefore recommend that insurance is maintained accordingly. In addition, we suggest that building policies include cover for fire, flood and other perils which may occur independently of catastrophic events.
Q. What is the Average Clause?
Average is the equation that is applied to the adjusted loss on an under-insured risk in order to determine the proportion of the loss the insurer, and the insured, must bear.
The above is perhaps best simplified by an example :
• Actual Replacement value of the insured building – $ 10,000,000
• Amount for which the building was insured - $ 5,000,000
• Agreed loss due to fire damage - $ 800,000
Application of the average clause principle would be as follows :
$5,000,000 ( Sum insured) x $800,000 ( Loss ) = $400,000
Amount to be paid by insurer after the application of the average clause.
$10,000,000 (Actual value at risk)
Q. Why should you insure for the correct value of your property?
The first reason would be to ensure that in the event of a loss there is adequate compensation to indemnify you for the damage to or total loss of the property. Then there is the application of the average clause as outlined, which demonstrates that under-insurance will result in a proportionate reduction of the claim settlement.
Q. Isn’t insuring for the full value sometimes difficult?
The Jamaican economy tends to be prone to inflation. For 2008 into early 2009 there was significant devaluation of the Jamaican dollar against its US counterpart. This has impacted the replacement cost of buildings, due to the cost associated with raw materials and labour. A building appropriately insured for the correct replacement value on day one, could thus be under-insured after, say six months, due to inflation. NEM has an Agreed Value Policy which substantially eliminates the under-insurance exposure due to inflation.
Q. Tell me about the Agreed Value Policy?
The Agreed Value Homeowners policy gives the insured an opportunity to mitigate against the effects of the average clause. Essentially, at inception and renewal of the policy, the replacement value of the building is determined and agreed to by NEM and the insured. Provided the building is insured at this pre-determined value, average will not apply during the policy period, if the replacement value increases due to inflation.
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