Creating awareness and educating customers on the need for adequate insurance protection at optimum cost is a subject on which hardly anybody talks or writes. With more than 50 years’ of experience in the insurance industry, and over 20 years with a leading insurance and re-insurance broking company in Kuwait, Ramesh Kohli who currently heads Aarkay Insurance is an indisputable expert on all matters related to insurance.
In this informative piece, Mr. Kohli attempts to create awareness and educate readers on the importance of having adequate insurance protection at optimum cost.
He begins by saying that besides comparing premium costs, potential customers should take heed of several important areas while proceeding with insurance.
Fixing and reviewing sums insured: At every annual renewal, a review of sums insured under various insurances is a must, failing which either their coverage may become inadequate or over insured thereby incurring higher premium cost.
This raises the question of what is adequate sum insured? The answer lies on the chosen insurance sum and the terms of the insurance policy. In general, the following are available for different types of insurance:
a) Market Value in respect of Property Insurance/ Motor Comprehensive Insurance.
Adequacy of market value is required to be on the date of loss for full indemnity. Hence it is important to not only review the sum insured at renewal but also during the period of insurance contract to ensure that all additions and deletions in value at risk at any time be advised to insurers.
Special ‘Declaration condition’ allows automatic adjustment in fluctuating values of stock etc., during the year, which need be opted where stock fluctuations are common due to seasonal demand and supply etc. It is also possible to have automatic inclusion of additions in property sum insured up to an opted limit. Such options are charged on pro rata additional/ refund premium and optimize the premium cost.
b) Agreed Value Insurance for Marine Cargo Insurance
Here the basis of insurance is an agreed value irrespective of its market value on the date of loss.
Basis of insurance is normally equal to declared value plus a certain percentage, depending on the terms of sale such as C&F+20%, CIF+10% etc. The addition takes care of the cost being incurred on customs duty, insurance, clearing and forwarding charges, local transport cost etc. Loss is settled on agreed value basis.
c) Reinstatement Value Insurance for Property, Plant and Machinery.
Special ‘Reinstatement clause’ in such policies can be opted to ensure that in the event of unfortunate loss or damage, the property or plant and machinery is replaced/repaired, with similar capacity and construction without any depreciation for new for old , or residual market value.
Sum insured for Plant and Machinery insurance under Contractors’ Plant and Machinery (CPM) policy stipulates that sum insured is equal to reinstatement value and any shortfall shall penalize the insured, for under insurance.
Under the Reinstatement Policies, actual reinstatement is compulsory for availing full benefits. Alternatively only market value or depreciated value indemnity is available.
Even enhanced sum insured can be opted to take care of escalation in replacement costs due to time period of reconstruction or reinstatement, with index linkage, for large plants or buildings. The important factor for consideration is proper assessment of the reinstatement value by experts so as to ensure optimum premium cost.
d) Sum insured for Interruption (Loss of Profit) Insurance
Business Interruption policy, which provides indemnity for loss of Gross Profit on happening of a loss event, requires very careful selection as per definition of ‘Gross Profit’ under the chosen Policy wording. Selection of sum insured should be based on the estimated Net Profit / Loss plus Standing charges. The assessment should be done by accountants well-versed with full information of previous year’s profit and loss figures and projected budget figures for the year under consideration.
Another important feature is option of the ‘period of indemnity’ to be chosen by the insured. It largely depends on maximum possible period for which a loss event can interrupt or reduce business turnover thus causing a loss in Gross profit. It could range from 3 months to 3 years, depending on the quantum and scope of loss and its effect on turnover. Insurance experts can assist in such calculations.
Deductible / excess under policies of insurance: On many occasions an insured is surprised with deductions or denial of liability by Insurer’s on account of deductible or excess under the policy. Ignorance causes this surprise and displeasure.
Insured is well advised to be aware of Deductible / excess under their policies.
The following chart provides indicative customary deductibles under some policies:
Motor Balance of Risk (Comprehensive):
a) High value cars of more than KD15,000/- and cars with more than 3 year old models -Excess depends on insured’s claim record.
b) Commercial Vehicles –Excess KD50/- for small vehicles and KD100/- onward for large vehicles.
a) Fire policy: Deductible of KD250/- for each loss event other than by fire / lightning
b) Business interruption- First 7 to 15 days deductible while calculating the number of days of interruption.
Marine Cargo Insurance:
a) Marine cargo – a specified amount or percentage of the value insured for each loss, depending on the nature of cargo.
Contractor’s All Risk/ Erection All Risk Policies:
Different deductible levels are prevailing for different type of contracts and activities. The range of deductibles depends on type of contract, underground work like excavation, length of trenches, vertical boring etc. It is possible to opt for higher deductibles to reduce premium cost.
Umbrella policies obtained by principals for large contracts normally have very high deductible level ranging from KD100,000/- to KD250,000/- each event. Where sub-contractors are also provided cover by principals, sub- contractors should be careful to ensure of this high deductible level, since they may remain uninsured for large losses. As a solution, they should opt for alternative insurance.
Insured is well advised to opt for reasonable deductible even if it means paying slightly higher premium to ensure adequate indemnity.