THE CONSUMER AND REINSURANCE

How is it possible for an insurance company to insure a property valued at many times over the company’s net worth?

The magic and mysterious word is reinsurance. When an insurance company decides to accept a piece of business, it keeps, or as they say in the trade, it retains for its own account only a small portion of that business.

For instance, on a P2.0 million fire insurance policy, the insurer may decide to retain only 10%, or P200,000. If the building burns down, the most the insurer will pay out of its own pocket is P200,000.

The 80% balance is paid via reinsurance. Before issuing the policy, the company arranges with other companies take the balance.

These companies, called reinsurers, are usually specialists, doing reinsurance business only, and are called – what else? – reinsurance companies.

Or, the reinsurers can be other insurance companies. The company issuing the original policy becomes the reinsured.

The company resorts to reinsurance in order to expand its capacity to do business without unduly exposing its net worth. The maximum retention on any one risk allowed under the Insurance Code is twenty percent of net worth. Actually, companies operate way below this limit.

In the early days, reinsuring on a policy-to-policy basis was the only way to pass on whatever the company could not afford to carry on its own. This is called facultative or retail reinsurance.

As the business of insurance grew and spilled across national boundaries and spanned oceans, it was no longer enough to seek the help of friends down the street but, more important, also of the big fellows on the other side of the world – in London, Munich, Zurich, and other places.

This led to the invention of the reinsurance contract, or as they say in the trade, treaty.

For example, under a fire insurance treaty, the reinsurer or a panel of reinsurers, agrees to be bound automatically to a specified share of every fire policy the insurance company issues within the scope of the treaty.  If the P2.0 million policy mentioned above falls within the treaty, the reinsurers are bound up to 80% automatically.

With the invention of the treaty, which is really reinsurance on the wholesale basis, the need for facultative reinsurance was restricted to insurances outside and beyond treaty limits. Yet, facultative business, especially in the Philippines, remains a major activity.

Of course, for taking a share of the policy, the reinsurer is entitled to a proportionate share of the premium, less an allowance to the insurance company for overhead expenses.

So, what has all the reinsurance mystery got to do with the consumer? Plenty. When an insurance company in Binondo phones his friend in London for reinsurance support, and this chap says yes, the manager can be absolutely certain that if a loss occurs even before the papers can be drawn up, London will come across. London is equally certain that, in the fullness of time, they will get their share of the premium. All these because of three venerable principles: reinsurance is an utmost good faith relationship, it is an engagement entered into by people of honor, and the reinsurer always “follows the fortunes” of the reinsured.

When you accept an insurance policy, you also accept, albeit tacitly, that the company has arranged proper reinsurance backup. You just have to trust the insurance company, because you have no access whatsoever to the reinsurance contract, treaty or facultative. You are not a party to it. If a reinsurer fails to pay his share of your claim (this sometimes happens, very rarely, you can be sure, even among the most honorable of men) you cannot sue him.

If you feel you must ask about reinsurance arrangements of an insurance company, more out of suspicion than curiosity, do not buy from that company.

LIABILITY INSURANCE

The Glorietta incident (an explosion in a restaurant at the Ayala shopping mall that killed several customers) has spawned a lively discussion, even among insurance professionals, over the kind of liability insurance policy that must have been in force at the time of the incident.

The most well-known third party liability policy is the Compulsory Third Party Liability (CTPL) that the law requires of motor vehicle owners. But, there is a raft of lesser-known policies that covers almost any risk known to man. The latest insures environmental risks.

The Americans being a highly litigious race, third party liability insurance is one of the largest lines in the U.S., and for that matter, Canada. But, here, third party liability outside of the CTPL is a minor line.

For commercial establishments, the most common insurance policy here is the Comprehensive General Liability (CGL). Basically, the policy indemnifies the insured of all sums he may be held legally liable to pay for (a) bodily injury to third parties, and/or (b) damage to property owned by third parties.

Please notice the term “legally liable.” In the Philippines, one can be held legally liable if he is grossly negligent. For example, if a customer trips over a loose board in the staircase and, as a result, breaks a leg, the restaurant owner is clearly liable. But, if the restaurant owner can prove that he had done everything expected of a good father to prevent the accident, he is free of any liability.

Then there is the contributing negligence of the third party. For instance, if the lady customer tripped because of a loose heel in her shoe, the liability of the restaurant owner would be less harsh.

In the U.S. and Canada, the rule is far different. There is no need to prove negligence. All you have to prove is that somebody hurt you.  For instance, if a customer at a bar gets drunk and meets an accident while driving home, the bar owner is liable for allowing the customer to drive while soused.

The CGL also pays for the cost of a suit against the insured. It is no small comfort to the insured that he has an insurance company to back him up in case of suit from a customer. If fact, some claimants would not push through with their complaints if they found out that they have to contend with an insurance company.

It is common for a lease contract to contain a “hold harmless clause.” The building owner and the tenant agree that the former is not liable – held harmless – for any accident that may happen in the rented premises. Every lease contract I have signed as a tenant in Makati over the last forty years has his clause.

It would be interesting to find out the wordings of the “hold harmless clause” in the contract between the restaurant and the Ayala owners.

If the restaurant does not carry a CGL policy, or even if it does, but the policy limits are not high enough, Ayala would be held secondarily liable. Ayala’s policy will then respond if properly written, as I assume it is.

I am assuming, or course, that the restaurant was grossly negligent and, is, therefore, legally liable.

For a restaurant, the CGL policy should also insure against “products liability” – in effect, against food poisoning.

I hear some city councils are toying with the idea of requiring commercial establishments in shopping malls to put up CGL policies as a prerequisite to a mayor’s permit.  Our well-meaning politicians should go slowly on this idea. This idea usually leads to high premiums from insurance companies duly “accredited” by the city council. Graft and corruption will then reek to high heaven.

WHAT YOU SHOULD KNOW ABOUT EARTHQUAKE INSURANCE

How do I buy earthquake insurance?

The standard conditions of a fire insurance policy exclude damage directly or indirectly caused by earthquake. If you want earthquake to be covered, your fire insurance policy must be extended and, of course, you have to pay additional premium.

From the technical standpoint, the risk of earthquake is broken into two components:

• Earthquake fire – fire damage due to earthquake
• Earthquake shock – shock damage without fire damage.

You cannot buy earthquake shock insurance unless you also have earthquake fire insurance for the same amount.  You cannot get earthquake fire insurance unless you also have the basic fire insurance policy for the same amount.

The reason for all this is that, during an earthquake, a fire can conceivably start independently of an earthquake, but it may be impossible to distinguish the shock loss from the fire loss… Also, the shock can cause a fire, and if the property is not insured against fire, who will be able to figure out from the rubble which is the shock damage and which is the fire damage?

The only way you buy earthquake shock insurance without also having to buy earthquake fire or basic fire insurance is when you want to cover a foundation, swimming pool, pier, water tank, underground tank, or a self-contained industrial furnace. The reason for this is that these items are not exposed to the risk of fire.

Loss of damage resulting from earthquake shock only is subject to a deductible. From your claim, the insurance company will deduct the equivalent of two percent of the actual value of the insured property.

The standard motor vehicle policy also excludes earthquake. But, you can cover against earthquake only as an extension of the basic motor vehicle and lumped with the risks of flood, typhoon, volcanic eruption and other convulsions of nature. All these risks are available to you at the combined rate of one percent of the insured value of the vehicle.

While earthquake premiums, both in fire and motor car insurance, are regulated by the Insurance Commission, there is actually a lot of haggling in the market. Ask your agent or broker. He should be able to get you a good deal.

WHAT YOU SHOULD KNOW ABOUT TYPHOON INSURANCE

Can I insure my house against typhoon and flood?

Yes, you can insure, not only your house, but also the contents, including your clothes, but only if you have insurance against fire. The typhoon and flood coverage is an extension of the basic fire policy. You will be charged an additional premium, of course.

The term “typhoon” means a typhoon or storm recorded by the PAGASA as such. The term “flood” means the entry of water into the premises insured, from without, due to the inundation of land not usually covered by water by reason of (a) an extraordinary high tide or (b) following a typhoon, cyclone, and/or windstorm or (c) the bursting or overflowing of rivers, reservoirs, canals and the like.

You are required to exercise all ordinary and reasonable precautions for the safety of the property insured.

Technically, you can buy one or the other. I recommend you buy both. Besides, most insurance companies sell typhoon and flood insurance always tied together.

Basically, typhoon insurance covers only wind damage. Loss or damage caused by rain, whether driven by wind or not, is not covered “unless the building insured or containing the property insured shall first sustain an actual damage to roof or walls by the direct force of a typhoon.” The company shall then be liable “for such loss or damage to the building or insured property therein as may be caused by rain entering the building through openings in the roof or walls made by the direct action of such typhoon.”  Water damage as a result of doors, windows, transoms or roof lights being left open is not covered, notwithstanding the existence or presence of a typhoon.

What flood insurance does not cover are loss or damage caused directly or indirectly by landslide, subsidence, explosion whether incidental to flood or not, theft whether occurring during or after a flood. The following do not come under the scope of the definition of flood: overflowing, bursting or leakage of water tanks, pipes, gutters, downpipes, and public water supply mains, backing up of sewers or drains.

While we are on the subject, the standard Comprehensive Motor Car policy does not cover “any accident, loss, damage, or liability directly or indirectly, proximately or remotely occasioned by, contributed to by or traceable to, or arising out of or in connection with flood, typhoon, hurricane.” Some companies are willing to cover these perils at an additional premium. Some do not, at whatever additional premium.

Personal accident policies usually do not cover against tidal wave.

There is sometimes a Catch-22.  Some companies will cover you against typhoon only if your house is of concrete under galvanized iron roof, or against flood only if your house is located on high ground. It is best to let your insurance agent or broker work things out for you.

ROBBERY INSURANCE

Can I insure my household things against robbery?

To start with, a definition of terms. When someone breaks a window to get into your house to cart away your stereo system, that’s robbery. When your maid walks out of the house bringing with her your microwave oven, that’s theft. When someone pulls a gun on you to get your diamond ring, that’s robbery. When someone picks up the diamond ring that you left on top of a dresser in the ladies’ room, that’s theft.  Of course, there are grey areas but, as a rule, whenever force is used, either on a person or a thing, that’s robbery. Without force, that’s theft.

You can insure against robbery, but not against theft. Also, you cannot buy a policy against robbery only. You have to buy a fire policy, or one of those comprehensive homeowner’s policies, and expand it to include robbery. If you already have a fire insurance policy on your household things, then you can ask to have robbery included in it, at an additional premium, naturally.

Robbery insurance, as an extension of a fire policy, does not include jewelry or cash. There are other policies specially designed for these items.

One way to insure against robbery is to pick out your most valuable and “stealable” items, such as the stereo, TV, Betamax, and cover each item at specific amounts. This keeps your premium down, while covering each item at full value, but you carry the risk of losing an item you have not included in the list.

The other way is to pay robbery premium on the lump sum insured on all your household contents. But the insurance company puts a cap on the claim on any one item, say, five percent of the total sum insured. All items are covered against robbery, but the maximum limit set for the loss of any one item may not be enough to pay for your loss, if the robbers happen to pick your most valuable piece.

Either way, the insurance company will not give full coverage. One company may apply a deductible; that is, a fixed amount, say P1,000, will be deducted from each and every loss. Another company may specify that it will pay only eighty percent of each and every loss. In theory, the companies believe that, since the insured will always bear part of any loss, he will probably be more protective of his property.

Robbery insurance is expensive, but it is wise to have it, even in a limited way.

Companies do not fight over robbery insurance as they do over prime business such as fire insurance. There is no dog-eat-dog competition in robbery insurance. It is an accommodation line, a product that is kept in stock but is not advertised at all, something that companies grudgingly provide their most valued clients whom they cannot afford to refuse or antagonize. In fact, most companies stay out of the robbery business completely.

Companies that are in robbery insurance, conduct business in the most careful way. There are certain areas in Metro Manila where companies simply refuse to issue robbery insurance. In places where they do provide the cover, a thorough inspection of the owner’s premise is almost always required.

The way the companies conduct robbery insurance business is a sad but true commentary on the times we live in.