Peta-Gaye Clachar/Staff Photographer
Globe Insurance Company team members (from left), marketing officer Nadia Mitchell, managing director Evan Thwaites and general manager of marketing, Gordon Arnold, in conversation just before the presentation of the new 'Choices Home Insurance' product launched Tuesday at the Terra Nova hotel, St Andrew.

Sabrina N. Gordon, Business Reporter

Globe Insurance Company, providers of property and liability coverage, has pioneered a policy that throws out the 'average clause', which its research has identified as a disincentive to the property-insurance market.

The company expects to write at least 300-500 new policies within the first year of the policy, called 'Choices', said general manager for marketing, Gordon Arnold.

The average clause was introduced almost 20 years ago, in the wake of Hurricane Gilbert, which smashed the island in 1988, wiping out roads and bridges, homes, businesses and agriculture.

Risk exposure

The mechanism was meant to reduce risk exposure to underinsured properties.

"The average clause imposes a penalty if the sum insured does not match the replacement value, should the policyholder suffer a loss," said Evan Thwaites, managing director of Globe.

Essentially, the penalty equals the proportion of uninsured value. For example, the policyholder whose house is valued at $10 million but insured for $7 million - or 70 per cent of its value - would, in the event of damage, be paid only 70 per cent of the estimated loss under the average clause. Assuming damage is estimated at $8 million, the policyholder would be entitled to $5.6 million. The penalty or portion of the loss borne by the homeowner would be 30 per cent.

Other deductibles would reduce the paid-out claim even further.

Globe estimates that only about 30 per cent of Jamaican homes are insured, saying Tuesday, that some of the decline in business was linked to the clause, specifically, the financial burden it imposes on policyholders via the sharing of the cost of claims.

Globe's new policy, called 'Choices', throws that out, offering instead, entitlement to the full amount of the insured loss, depending on the terms of the policy. Choices also lowers the deductible payable on claims.

"As far as I know, this is the first for the industry," said Thwaites.

"By removing the average clause, we are removing the uncertainty and penalty, so the insured does not have to worry."

Added Arnold: "Given that the policy is a first-loss policy, the first of its kind in Jamaica, then the average clause does not apply. Average clause does not normally apply in first-loss policies."

The Insurance Association of Jamaica (IAJ), while congratulating Globe on its product, made a similar point Friday, saying that, as designed, the average clause would not have kicked in for the Choices policy, which offers clients the option of insuring dedicated sections of their property.

"The removal of the average clause in these policies is to be expected as the sum insured is not intended to be for the full value of the property, hence the average clause would be inappropriate," said the IAJ.

Implied risk

The association also warned that policyholders should be aware of the implied risk of not having full insurance.

"The concept of a policy with a 'first loss' sum insured or 'loss limit' is a longstanding and well-tested alternative for insuring property," said the IAJ.

"However, it is not without limitations and conditions and must be well understood by those persons considering it as an alternative to full-value insurance. It is not appropriate for everyone, but it is a valuable alternative in certain situations and it is for the customer to decide what is appropriate for themselves."

Insurance consultant Cedric Stephens says the average clause has been a bone of contention for consumers since its introduction.

Regulators, in response to those concerns, amended the provision in the Insurance Act of 2001, he said, requiring insurance companies to provide information on the nature and effect of the average clause.

He sees promise in Globe's innovation.

"This is a definite advance for the consumers on any policy, bearing in mind that when a loss occurs, they are normally hit with the average clause as well as the two per cent deductible," said Stephens, who is also writer of the 'Insurance Helpline' column published weekly in Sunday Business.

"Sometimes you will end up with very little or nothing when it comes to making claims," he said.

Average clause remains

Globe Insurance, which is positioned among the top-five general insurers in terms of gross premium income, is not exploring the elimination of the average clause from any other product.

The clause, as it turns out, is not so easily dropped.

It is "not only imposed by the insurance companies but by reinsurers as well," said Nadia Mitchell, marketing officer at Globe.

Globe, a subsidiary of conglomerate Lascelles de Mercado, posted net premium income of $757 million in the year ended December 2007, and reported total assets of $4.2 billion.

sabrina.gordon@gleanerjm.com