Cedric E. Stephens IAJ should do more to help consumers
LAST WEEK’S article, ‘Insurance literacy matters’, was placed next to one by my colleague Yanique Page – ‘Profiting from ignorance of small business’. Alert readers, like my editor, saw the link between the two.
A lack of knowledge or a knowledge imbalance (ignorance) between negotiating parties creates information asymmetry. The side with more information enjoys an advantage over the other.
Some lawyers, banks, insurers, and other service providers often exploit (or, to quote Yanique, profit from) their customers’ illiteracy (ignorance).
Section 120 of the Insurance Act was drafted over two decades ago. It was aimed at neutralising the effect of the much-disliked average clause.
Lawmakers recognised the knowledge gap between insurance buyers and providers. That section of the law was to be used to combat insurance illiteracy. It reads: (1) ‘Where a contract of insurance contains a pro-rata condition of average, the condition is of no effect unless, before the contract is entered into, the insurer informs the insured in the prescribed manner of the nature and effect of the condition. (2) the section shall not apply in respect of a contract entered into before the appointed day.’
The powerful insurance lobby, the Insurance Association of Jamaica (IAJ), disliked Section 120. The costs associated with compliance needed to be lighter. They persuaded regulators to ease the burden.
Lawmakers recommended pre-contract disclosure of ‘the nature and effect of the condition’ using what marketers called the ‘Rifle Approach’. The industry substitute was a series of recurring What You Should Know About the Average Clause newspaper advertisement using ‘the Shotgun Approach’. The regulatory authority mistakenly assumed the lobby group’s shotgun tactic and lawmakers’ rifle approach were alike.
Neither method addressed the root cause of why the average condition was initiated centuries ago. Furthermore, people should have considered why pre-contract disclosure of information about the nature and effect of a particular condition was limited to property insurance.
Are not other policy conditions that involve compensation for the loss of human lives and bodily injuries unimportant? For example, motor insurers are not obligated to tell prospective policyholders that court awards often exceed the statutory limits in the Motor Vehicles Insurance (Third-Party Risks) Act. This omission leads to some accident victims getting less than court-approved payments.
The local approach to the average clause is arbitrary, old-fashioned, and inappropriate for the 21st century. The IAJ advert is focused on the symptom, under-insurance. The average clause was invented to address inflation.
Disclosing information about the nature and effect of the average condition pre-contract does not prevent inflation or solve the problem that property owners face.
According to the Bank of Jamaica, ‘inflation effectively reduces the quantity of goods that can be purchased with a given amount of money. Since everyone uses money, everyone stands to lose in an inflationary environment. Against this background, inflation takes money out of our pockets; it robs us by reducing the amount of goods we can purchase with a given amount of money.’
Global insurers, in the meantime, are talking about ‘consigning under-insurance to history’. Maintaining up-to-date and accurate valuations is essential for tackling high inflation and underinsurance.
Zurich Insurance Group Ltd is a Swiss insurance company. It is headquartered in Z?rich and is the country’s largest insurer. As of 2021, the group was the world’s 112th-largest public company.
Susan Fallon is Zurich’s global head of property (insurance). Four months ago, she wrote, ‘Inflation is a top concern for businesses, with higher prices for goods and services, soaring energy costs, labour shortages and supply chain disruption squeezing margins and threatening profits. It is also of primary concern for the insurance industry, which shares the risk of rising costs through increased future claims costs.
‘As a result, it is becoming more and more expensive to repair damaged properties due to higher labour prices, materials, equipment, and movement of goods. The price of key materials and components – such as steel or timber used in construction – have seen prices surge over the past year or so.
Construction costs, for example, have increased 19 per cent in Germany since the third quarter of 2019, 10 per cent in the UK, and 25 per cent in the United States, according to Zurich’s Construction Cost Indices.’
The Planning Institute of Jamaica says that the inflation rate in the local economy between April 2022 and January 2023 was 5.6 per cent. No information was available about how construction costs had moved between 2022 and 2023.
‘Costs may also rise further following a natural catastrophe. This can trigger a surge in demand for construction materials and labour. A major property loss, such as a fire or natural catastrophe, can also drive prices higher where supply chain disruption causes a shortage of critical components or materials.’
The IAJ’s What You Should Know About the Average Clause message does not help consumers understand how inflation affects insured values, causes under-insurance, impacts claims and hurts claimants and insurers. It does not promote insurance literacy.
‘Inflation’, Ms Fallon writes, ‘is a key issue for insurers and insureds, especially when inaccurate or out-of-date. Inappropriate valuations can result in under-insurance, a long-standing problem made worse by rising prices and supply chain disruption. If not addressed, under-insurance will widen the protection gap for companies and undermine the value of insurance …. it is critical to ensure valuations and appraisals are accurate and kept up-to-date. Policyholders should consider the rising costs for everything involved in rebuilding or repairing a property, including materials, labour, new equipment, and restoration of contents.’
I hope that new leadership in the Financial Services Commission will bring new thinking, a less technocratic approach and a more consumer-friendly approach to their job. Putting insurance literacy on the front burner is a good place to start.
– Cedric E. Stephens provides free counsel and advice on managing risks and insurance. If you need free information counsel to help you solve a problem, write to The Business Editor at business@gleanerjm.com. Or contact Mr Stephens directly. Letters and emails will be edited for clarity and length.