House owners insurance amid COVID-19 pandemic

TODAY, we revisit an article published on May 12, 2020, which focused on the effects of the coronavirus pandemic.
The subject is compounded by the onset of the rainy season which brings along summer-related risks such as storm, flood, and wind damage, among others.
Cognisant of the severe economic woes of the COVID-19 pandemic that has ravaged the world, insurance remains a serious option within the risk management framework to property owners in responding to the continued need of protecting their prized assets.
Sometimes it is tempting to suspend or postpone insurance by the perceived remoteness of the risk of fire, characteristic of low frequency yet high severity.
Well, in addressing this conundrum, which on the one hand there is an economic strain yet on the other, the fire risk is neither eliminated nor reduced; there is need to do a cost-benefit analysis.
It is where rationality and objective should, hopefully, prevail. In other words, what are the benefits of not insuring the house, can one absorb the financial losses if the house was gutted?
In this discussion, I will belabour to shed some light on key factors necessary in the process of insuring a house.
Within the insurance terminology, a house is defined as a private dwelling residence including outdoor buildings, landlord’s permanent fixtures and fittings (those a tenant will not carry along when moving out of the house), wall fences, swimming pools, boreholes and water pumps, water tanks etc.
All these parts within the definition should be financially ascertained to arrive at the right sum insured.
I must emphasise that the best way to arrive at the sum insured is to understand the basis of cover.
Unlike pure indemnity policies which cover an asset and at the time of loss considers the age including wear and tear, reinstatement is best and usually used in house owners insurance.
Reinstatement is defined as the cost of demolishing and clearing away the existing structure and rebuilding it to the existing design with modern materials, using modern techniques, to a standard equal to the existing property and following current local and national laws.
This definition does not mean constructing a better structure.
In arriving at the reinstatement value, one needs to factor in the rebuilding costs, i.e. building from scratch until the house is complete.
It can be achieved by keeping a record of all expenses incurred during the construction period plus the cost of demolishing and clearing if there is a loss. From experience, this is less pragmatic.
A better alternative is to seek services of a professional valuating firm to carry out a professional assessment of the property.
Such an undertaking has a twofold benefit, the owner can ascertain the correct value of the property, to verify net worth, and at the same time get the right amount for insurance purposes so that they pay appropriate premiums.
However, up to a certain sum insured, insurers will not insist on a professional valuation report, in which case they will rely on the value declared by the owner although they may still subject the premises to inspection before accepting the risk. However, if someone is getting a loan from the bank and using their house as collateral, a valuation report is mandatory.
It is important to note that a building should not be insured on market value because this value fluctuates depending on market forces.
Also important to note is that the value of the structure tends to go up because rebuilding costs usually go up, resulting from economic factors such as inflation.
Another critical factor to consider in house owners insurance is the location of the house.
A house located in a township without proper roads, for example, poses a higher risk than one in an area with better roads.
In the event of a fire incidence, it is easier to access the house by the fire brigade. In places where there are no fire brigade services, the risk is even higher.
The other key factor is the construction materials used, and this is usually captured when evaluating the house.
Generically speaking a house with thatched roof has a higher risk than one with corrugated roofing sheets.
Similarly, a home with substandard construction materials attracts a higher rating or insurers may refuse to cover it.
Once the sum insured and all other essential factors have been ascertained, the next step in the process is for the insurer to compute the premium and decide which terms to apply.
A rate per mille is used on the sum insured. As a general guide, the minimum rate on a standard risk approved by the regulator is 0.125 percent of the sum insured. However, there is a minimum premium which is currently at around K250.
It means that for all houses which are K200, 000 or below, the annual premium will be as low as K250.
Therefore, keeping houses insured is not an option; it is the only viable option, notwithstanding the present economic challenges.
Customers may consider negotiating flexible payment options with insurers than not insuring their prized assets.
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