There are few options available to insurers other than using claims averaging on underinsured properties.
However, raising deductibles or taking a peril insurance that does not include hurricane damage could give homeowners more affordable insurance options.
In a speech to members of the Cayman Islands Insurance Association last week, Cayman Islands Monetary Authority Chairman Tim Ridley noted only 54 per cent of Cayman households had building insurance in 2006, according to Economic and Statistics Office figures.
‘…I find the low numbers concern me and they should concern you as well,’ he said. ‘I challenge the industry to find ways of bringing more people into the fold.
‘Some insurance at a price people can afford would be better than none, so perhaps it is time to review the famous, or infamous, principle of underinsurance.’
However, changing the principles of underinsurance and averaging is not likely to happen.
‘These are two very basic tenets of insurance,’ said Nigel Twohey, chief marketing officer of Island Heritage Insurance and president of the Cayman Islands Insurance Association.
‘It is the principle that everyone contributes to the common pool in proportion to the risk that they bring. So if everyone on your street insures for the correct amount and you only insure for half the correct amount, then your neighbours are contributing to paying for your insurance premium and contributing to the payment of your loss – this is not fair.’
To rectify the imbalance, insurers use averaging to pay claims of underinsured properties. If a home is only insured for half of the cost to replace it, then insurers will only pay half of the loss.
Mr. Twohey said there is some speculation concerning the ESO estimate that nearly 50 per cent of Cayman’s properties are uninsured is not accurate.
‘This needs more investigation,’ he said. ‘After Ivan, we reckoned about 25 per cent [were uninsured] – mainly the wealthy at the top and the poor at the bottom. Most people in the middle have mortgages, so they should have insurance because of the bank demands.’
Wealthier property owners sometimes make the decision to self-insure. But many low-income residents often simply can’t afford to insure to the proper level, if at all.
‘The difficulty is money,’ said Sagicor General CEO Danny Scott. ‘The higher insurance rates are now creating an even greater strain because there are other commodities that are equally high. Something has to give.’
British Caymanian Insurance General Manager Derry Graham agrees partially with Mr. Ridley’s comments, but not that insurers should abandon averaging.
‘We agree with his statement that some insurance is better than none and that means that a policy subject to average may not be ideal, but it is better than none at all.’
There is no law that prevents a homeowner or insurer from purposely underinsuring a property so that the premiums are less, said Mr. Twohey.
‘If we think someone is underinsured at the time they take out the policy, we explain average to them,’ he said. ‘If they persist, then we have a disclaimer that they have to sign if we agree to issue the policy. If the underinsurance percentage is too high, then we do not offer them insurance.’
Mr. Scott of Sagicor General said, however, that purposely underinsuring can lead to image problems to the insurance industry.
‘If someone comes to me and says they want to insure their $200,000 house for $100,000, I’ll ask them ‘which half of your house do you want me to insure’.’
Giving an example, Mr. Scott said if a person only insured their $200,000 home for half of its value and there was a claim for $40,000, then the insurance company would only pay out $20,000, less the three-percent deductible of the value of the home. In this case, another $6,000 would be subtracted from the pay-out, leaving the homeowner with a $14,000 final settlement on $40,000 of damages.
It was these kinds of averaged partial claims that many homeowners were upset with after Hurricane Ivan.
However, there are some alternatives to underinsuring for homeowners on a tight budget.
The standard Cayman deductible in Cayman is three per cent of the value of the home, Mr. Twohey said.
‘If you have a lot of equity in your house, then you may opt for a five per cent deductible.’
Other higher deductibles could be possible, too, especially for people who do not have mortgages.
‘Some people even use 50/50,’ Mr. Twohey said. ‘What it means is that if something terrible happens – like Hurricane Ivan – then at least you get some claim payment. Also you get excellent savings on your premium because of the risk sharing proportion.’
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