Sunday, October 31, 2010

Rental Value Insurance in a Post Subprime Mortgage Crisis World

Given that the “American Dream” of home ownership had turned into a mortgage nightmare, has rental value insurance economically indispensable in our post subprime mortgage crisis world?

By: Ringo Bones

Born out of the need of a standard fire insurance policy protection to deal with indirect losses by endorsement, rental value insurance has now been seen as an economically indispensable policy in our post subprime mortgage crisis world. Given that fires could occur regardless of the prevailing financial climate, rental value insurance allows the tenant not to be required to pay rent depending on his or her lease or because of the operation of state law.

Protection against loss of rent on account of fire may be obtained through rental value forms. One of these forms provides that the company is liable for the loss of rent whether the premises are rented or not. However, there is no coverage for any portion of the premises which the insured could not have rented when the loss occurred because the season of the year or any other valid reason.

A special rental value policy is available for seasonal risk where the property has been leased to others subject to a written lease. Should the insured occupy a portion of the building, the form would also provide coverage for such premises in case of inability to occupy on account of fire.

Ever since it went global, the subprime mortgage crisis had shattered everyone’s dreams of home ownership and / or commercially lucrative real estate property ownership by sending home and real property equity down 50%, thus, turning the “American Dream” of home ownership into a mortgage nightmare. But can rental value insurance really prove economically indispensable in our post subprime mortgage crisis world?

In practice, such insurance policies only makes economic sense in locales where fire codes are sensibly enforced and fire control systems in buildings – like fire extinguishers and automatic fire sprinkler systems – are mandatorily installed. Or at least our 50% down home equity won’t go up in smoke without us being justly compensated. At least situating your own business in a property you don’t own seems economically sensible now thanks to rental value insurance.

Wednesday, October 20, 2010

Insurance Standardization Sells: But Who’s Buying?

Even though we – the policyholder – are eternally at an economic disadvantage, are existing standardized insurance policies just a mere triumph of clever marketing?

By: Ringo Bones

For all intents and purposes, an insurance agreement is normally just a contract of adhesion. That is, one that’s not open to individual negotiations. Policy forms are often standardized – except for the opportunity of selection among various basic forms and endorsements, the buyer – i.e. you and me – in most instances has only the choice of taking insurance on the insurer’s terms or declining it altogether.

Ever since the start of the modern insurance industry, the average insurance buyer has always been at a bargaining disadvantage due to his or her limited range of choice, his or her inferior economic position and his or her inferior understanding of insurance in comparison to the insurance provider. Ordinary freedom-of-contract principles have, therefore, been qualified in ways favourable to the insured. For example, in cases of ambiguity, which the courts have been assiduous in finding, the contract is usually interpreted against the insurer.

Standardization of insurance contracts was accomplished mainly by the initiative of the insurers, singly or in cooperation. Such private initiative is still a very important factor, but the methods by which standardization is now achieved include legislative adoption of policy provisions under legislative authorization, administrative approval or disapproval of forms presented by insurers, and legislative or administrative disapproval of particular policy provisions.

Standardization cuts down the range of choice of the individual buyer of insurance, but has compensating benefits. It provides an approximation of the insurance needs of most persons based on accumulated underwriting experience, makes it easier to find an appropriate basis for premiums and – most important of all – makes possible the economy of mass marketing.

Insurers are often held liable for a loss occurring to the insured before his or her receipt of a formal insurance policy. Believe it or not, oral contracts of insurance are valid in most circumstances, though seldom used except in the in the form of an oral binder for a brief period pending preparation of a written policy. A temporary contract that’s good until a permanent policy is issued may also be made in writing. An agent who purports to make a temporary contract, oral or written, but is without power to bind the insurer he or she pretends to represent, is held liable personally as if he or she were the insurer in the event of loss. Another basis on which many courts have imposed liability is unreasonable delay by the insurer in acting on an application.

Customarily, the terms of a life insurance policy make it effective only upon delivery of the policy, unless a binding receipt for temporary insurance has been issued. In some instances, however, delivery is found to have taken place when the policy has reached the hands of another, often the agent, to be held for the insured. This is true despite the fact that the insured has not received it.

So what does this all mean to the average insurance policy holder – i.e. you and me? Given that we are for all intents and purposes at an economic disadvantage, the wide choices available out there by competing insurance providers now places the average consumer at a better economic advantage – even when compared a few years ago due to the wide variety of policies being offered. Some are even seem to be tailor made to what we're looking for while being offered at mass market policy holder prices.

Thursday, October 7, 2010

A Surfeit of Natural Disasters: Good for Insurance Companies?

It might seem counter-intuitive, but does the recent increase in the number of natural disasters provide profit opportunities for insurance companies?

By: Ringo Bones

Insurance company Lloyds had recently dubbed 2010 as “The Year of Natural Disasters”. In retrospect, even before the year is out, it does seem that 2010 could be the year of natural disasters. Like the tragic earthquake in Haiti at the start of the year, followed by months later a much stronger earthquake in Chile and the more recent one in New Zealand. Not to mention the extreme monsoon floods in Pakistan back in July and the wildfires brought about by a prolonged drought in Russia. Thus making 2010 a year of natural disasters, but how is this good for insurance companies?

The earthquakes in Haiti, Chile and New Zealand, the extreme monsoon floods in Pakistan and the prolonged drought that started a fire in Russia might have resulted in a 57% drop in forecasted profits this year for Lloyds of London due to insurance payouts. But the famed insurance company’s ability to pay it’s policyholders through thick and thin had resulted in more corporations availing themselves of more insurance policies against natural disasters. Doesn’t more policies – in other words capital input – usually translate to more potential profit?

Anyway you look at it, most of the existing insurance companies – if they play their cards right – could probably profit from the opportunities provided by the “Year of Natural Disasters” through increased capital input in the form of new clients / new policyholders. Corporations that avail themselves of natural disaster policies with guaranteed payouts can be one sure way to hedge their assets against potential risks. It is only logical that more issued policies usually translate themselves to more profits for the insurance company providing them.

Monday, October 4, 2010

Self –Insurance: Insurance of Choice of Big Corporations?

Currently made famous during the course of the BP Gulf of Mexico oil spill investigation, is self-insurance the primary insurance of choice of big corporations?

By: Ringo Bones

With the scope of the catastrophic oil spill necessitating in the replacement of British born chief executive Tony Hayward with the American born Bob Dudley, BP had recently thrust into the media limelight the concept of self-insurance – albeit for all the wrong reasons. Given the billions in payouts BP will eventually give away to one of the most litigious countries in the world affected by the catastrophic April 20, 2010 Gulf of Mexico oil spill, is self-insurance still the ideal primary insurance of choice of big corporations?

As far as it became available, everyone in the insurance business already have a consensus view that self-insurance is practical only for large organizations and / or corporations with widely separated risks – as in multi-national corporate firms. Very useful when the firm using self-insurance must be prepared to pay losses as they currently occur. A firm wanting to avail themselves of self-insurance may purchase excess insurance so as to avoid the effect of catastrophic losses. Although large corporations can handle the relatively higher-cost premiums of self-insurance, will there be any unforeseen pitfalls if they elect to avail themselves to this sort of insurance?

Given the risks and the certainty of catastrophic losses that the oil company BP faces on its day-to-day operation must be important enough to warrant self-insurance, the steep premiums of such insurance has recently made everyone closely watching the BP Gulf of Mexico oil spill investigation wonder whether BP diverted their safety budget to pay for self-insurance premiums in order to save money; Even if such a move have resulted in catastrophic accidents to occur, like the 2005 Texas City BP Oil Refinery explosion.

From spending millions in PR adverts that could have been more useful being used to compensate fishing industry workers affected by the catastrophic April 20, 2010 oil spill to whether slashing their safety budget to prop-up their bottom line, BP’s current economic viability might still be in doubt. Only time will tell if the company’s choice for self-insurance will actually pay-off so that they can be profitable again as they move on from the catastrophic Gulf of Mexico oil spill – which now has overtaken the Exxon Valdez spill of 1989 as the worst oil spill disaster to occur in US territory. If BP manages to stay afloat despite of the billions in pay-outs, then self-insurance could be the best profitable choice for big corporations.