Question: I recently got quotations from three different companies to insure my family home. It has reinforced concrete block walls and a Decramastic tile roof. The house covers an area of 2,800 square feet and is in Kingston 6. The estimated cost of rebuilding is $35 million. Annual premiums range from an eye-popping $157,500 to $192,500 plus GCT. I did not realise that they would be so high. What can I do to get lower premiums? Is self-insurance a realistic option?
− H.C., Kingston 6.
Answer: A few years ago, I was engaged in a self-insurance project. The sponsors wanted to set up their own insurance company. One of the first things we did was to prepare a list of all their insurable assets. It included a full description of all buildings, meticulous construction data, floor area, location, etc., as well as information about the contents. When the inventory was completed, team members had to go through a painstaking process of calculating the new replacement values of those assets. This was just one of many basic things that we had to do at the start of a long and costly journey to examine if self-insurance made sense.
A family home stores wealth. This means that the asset can be passed from one generation to the next. If this store of capital is damaged or destroyed wealth will go up in smoke − literally. In my experience, many persons often overlook this basic fact. They spend money to buy comprehensive insurance on motor vehicles – assets that decline in value – and choose not to buy coverage for their houses where the market and replacement values tend to rise over time.
Your $35 million replacement value estimate appears low. It assumes that the average rebuilding cost per square foot is $12,500. How accurate is this rule of thumb? What was its origin? I did a quick Internet search and found information from Caribbean-based quantity surveyors, professionals that are recognised as experts in building costs, and located data that suggests that a more realistic estimate for a house of ‘modest quality’ in Jamaica ranges from a low of US$80 to a high of $130 per square foot. They said in 2018 that those “costs are driven from our year-on-year escalation calculations and the range is intended to provide readers with data to 95 per cent confidence intervals from our data analysis”.
If the mid-point between the high and the low was used, US$105, the new replacement value of your house would be J$40 million, that is: 2,800 X US$105 x 135 = J$39,690,000. I have tried, in the absence of professional valuation, to get a reasonable estimate of the rebuilding costs of your house, to demonstrate two things. The first is to give you an indication of the wealth in your house at today’s prices. This information also provides an approximation in dollars and cents of the value that is at risk.
The second reason is to minimise the effect of the average clause that applies to all property insurance policies. In the event that you were to suffer a loss, it would come into operation. Most persons rail against the average clause. Few ask how its impact can be limited. This approach is designed to achieve that. Any other approach is like buying a bun and wanting to keep your penny.
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