Insurance is Mandatory
The Nigerian Insurance Act of 2003, mandates a compulsory insurance cover for vast asset holdings and for all buildings. However, evidence available from our records as a surveying valuation firm, indicates otherwise. Available data shows a very low compliance level, as a negligible number of buildings are insured or adequately covered, by both the public and private sectors of the economy.
Why is this the situation? There are various reasons, adduced by our clients, for the observed low compliance, some of which are a reluctance to engage professional valuers, whose fees they consider an unnecessary additional cost to the insurance premium. This reluctance is based on the public notion that insurance companies fail to meet their obligations on most occasions. It is claimed that the insurance companies delay payment, and most times seek exit clauses. Added to this is the allegation that, where they do pay, the sums are inadequate, and usually never meets the cost of reinstatement/replacement/rebuilding the item/structure.
These views are verified by Daily Independent correspondents Apata Oyediran (+2 others); in their article titled ‘Fire Disasters:Public Apathy to Insurance Benefits’. They found that a high percentage of those interviewed showed apathy towards insurance because “compensations may not be worth the bother as only costs over excess are paid”. The article includes Lagos State Survey findings from a target group of 2000 persons, aged between 18 and 79 years. The respondents indicated that they neither report fire incidents to the fire services nor insurance companies, for the fire service are slow to respond, while the insurance companies delay and make insufficient payments. People therefore resort to self-help by putting out fires themselves.
A Punch Newspaper, March 4, 2020 article titled; ‘Endless Fire Disasters, Frustrating Business Owners, Fueling Unemployment:’ Mr Farinloye NEMA South West coordinator, did state the opinion of the traders which indicates that “..some of them expressed disappointment with insurance companies. They said agents would come to collect money from them but would not remit it to the companies”. This formed the representative opinions of traders with whom he had a one on one with, following NEMA, launch of thier risk management strategy, code named: “Fire Prevention, Mitigation and Integration of Insurance Policy in Market Places launched at Oke-Arin market, on March 4, 2020.
Why do insurers make inadequate compensation for losses? Flowing from above, inadequate payment by insurance companies is attributable to a lot of factors, chief of which is under insurance. In an attempt to maintain the lowest possible premium payable on the insured asset, most insured may choose a wrong plan for the asset type, insure for indemnity instead of replacement, fail to review the insured sum and often accept “averaging” – a marketing strategy by insurance companies, to sell a product.
Leadway Assurance for example, as indicated in its website offers Basic and Silver Householder plans, to cover a building and its content at cover limits of 5 Million and 10 Million respectively. The above stated figures, must have been based on “averaging” for a target market. A niche market, considered able to afford insurance cover. The sum based on available data on building costs and values, falls short of reinstating a house and its content.
Some asset owners may, in compliance with the law, and in consideration of paying low premium, buy such a product. He then runs the risk of, underinsuring. He will invariably lack capacity to rebuild and reinstate himself in the case of a fire disaster.
Would an individual knowingly buy an inadequate policy or deliberately under-insure? As stated earlier, underinsurance can be deliberate, for those who purchase policy just to fulfill the law, especially when such a purchase is viewed from the perspective that insurance is wasted expenditure. Ignorance or refusal to engage building valuation professionals for proper advice before buying a policy can be considered a deliberate error by the public, the consequences of which is underinsurance, a lack of capacity to recoup a loss after a disaster, a situation the insured must take adequate precautions to avoid.
Minimizing underinsurance: with an increase in the number of strategic structures both private and public, that have gone up in flames through fires and bomb blasts within the last 8 weeks, putting in place effective mitigating strategies is the way to go. A situation, where the government is made to offer relief to victims as a result of policies obeyed in breach and or compulsion is neither the ideal nor best practice. It is also inimical to economic growth. It is the responsibility of the insured to provide the accurate value sum for his asset, for which a premium will be paid. Failure to do so will authorize the insurance companies to apply any method, especially market sourced “averaging” as the basis for the policy cover.
Can an Open Market Valuation be useful for insurance? Market value, which includes land values in its estimation is a reflection of transactions within the property market at a given time. Insurance valuation is exclusive of land but is building specific and based on the isolated cost of reinstating a particular building to its pre-destruction condition. The main purpose of insurance is a transfer of risk of loss. To be effective as a risk management tool, the insured value must be accurate. An accurate value will of necessity be arrived at, using the right professionals and methods for such valuations. Insurance values are not meant for open market transactions, but as an asset protection tool that requires the experience and knowledge of the estate surveyor and valuer to arrive at an accurate value that has factored in the peculiarities of the asset type. The value derived gives parties the confidence that a risk is fully covered.
What can be done? As a first step, the public needs to be sensitized on the advantages of having a professionally calculated building insurance valuation for their policies. This can be achieved through, an awareness campaign championed by estate surveyors and valuers in partnership with insurance providers governments. Surveyors as value opinion experts are well positioned to lead this campaign, given their position as professionals versed in and in possession of land services data (from acquisition, management, valuation, asset records) critical information required for effective risk mitigation management. Their role will go a long way in presenting the benefits of their services in the reduction of the incidence of underinsurance, hopefully renewing trust in the insurance system. Such awareness campaigns would focus on the benefits accruable to the functions of such professional engagements.
A valuation certificate besides providing confidence for the insured and insurer, will form a basis for an “Agreed Value” policy. This being a baseline for periodic updates of insured sum, it is useful for loan leveraging, ensures total risk coverage and asset protection, and most importantly ensures availability of adequate funds to rebuild.
Last thoughts. For a vibrant economy driven by confidence and capacity to continue business, or live a meaningful life after a loss, the insurance of buildings, a critical asset in any, commercial, industrial, public or private endeavor, must be fully encouraged. To be meaningful for insurance purpose, the asset values must be based on valuations executed by professional estate surveyors and valuers. To achieve the best result, the Estate surveyors and valuers should lead a coalition of Insurance Companies, Government parastatal and establishments, viz Fire Services, NEMA, in a public awareness campaign. The objective is to encourage the public to see these groups as working together for the benefit of the public.
It is safe to conclude that when the insured purchase a policy without accurate value based on professional impute, they face a double jeopardy from loss of asset and a waste of the premium paid.