Household insurance – a neg lected Cinderella

(1)Hindsight is always 20/20. However, without a doubt the personal tragedies evoked by the loss of property during the floods could have been alleviated by a suitable type of insurance. Do you have it?

Household insurance that protects immoveable property against all risks imaginable, such as burglary, floods or fire, has existed for decades, and compared to the price of accident insurance for passenger cars, it is quite reasonable. “For each million of the potential insurance settlement, people pay about one thousand crowns per year. Of course this depends on location and several other parameters,” explains Jiří Žid, an insurance broker at Broker Trust. Unfortunately, standard insurance tools are used relatively little in this country. Until recently, the number of those responsible – or insured – was even declining. While ten years ago 2.26 million households were insured, at the beginning of the 21st century this number dropped by over a half million apartments and houses. Interest in insurance didn’t even increase after the Moravian floods of 1997. “For example, in northern Moravia, not even a fifth of the households with property insurance had arranged insurance for coverage against flood risks at the time of the floods,” says Jan Kábrt of the Czech Association of Insurers. According to research conducted by the association in 1998, only 3% of respondents had recently arranged household insurance covering flood risks.
“Not only are the clients who take the risk making a mistake, but so are the insurers, whose campaigns had clients feeling the company only wanted to make money off them, and seldom convinced clients that it is a serious business,” argues Jiří Žid. Looking at insurance as a bet, though common around the world, is still the exception in this country. “It’s as if the owner of a house who paid insurance against floods bets with the insurer on whether the water will wash away the house or not. If it doesn’t wash away – and this is very probable despite the recent floods – the owner loses the premiums (the bet). But if the house collapses, the insurer must pay the agreed upon part of the damage (paying off the winnings),” says financial consultant Emil Dočkal, explaining the commonly held view of insurance.

Jiří Žid

Costs will grow

All domestic insurers, for whom the flood damages will mean a total of over CZK 30 billion in costs, according to preliminary estimates, speak of an increase in insurance premiums. “It is possible to assume that the frequency of floods will increase in central Europe,” says Ladislav Bartoníček, head of Česká pojišťovna, the largest player in the insurance market. “According to meteorologists, the weather in this country is getting close to monsoon types, so we should start getting used to floods. Of course this will be reflected in the policy of our reinsurers, who will increase the prices for catastrophic reinsurance,” he adds.
Reinsurers, or insurers of insurers, will have a decisive influence on the appraisal of risks and the creation of prices, since most damages resulting from natural causes are paid by them in the end. “In the case of the Moravian floods, they paid 80% of the total insured damages,” estimates Ivan Špirakus, partner at Portfolio Alfa insurance company. In October, the representatives of insurers and reinsurers have their regular meeting to bid on next season’s prices. It is clear that the reinsurance companies will want to retrieve some of this outlay, and this will be reflected in the price of insurance premiums for households and companies. The increase will probably not be across the board but be rather selective. In the future, you will pay insurance premiums several times higher in regions that are marked as risky on flood maps than in regions that are not on these maps at all.

Ivan Špirakus

Watch out for falling planes

While flood risk is included in the basic package offered by insurers to households, this is not the case for companies. The basic insurance plan covers windstorms, fire and even falling planes, but firms must arrange insurance against high water separately. If the risk against floods is included in the basic package in the future, it would make it possible for the insurers to better diversify the risks and structure the prices. On the other hand, excluding insurance against floods enables an attractive increase in premiums for the insurers.
The floods showed that insurance is irreplaceable, especially to entrepreneurs and company representatives. “It is too early to give numbers, but according to the reports from agencies, we have certainly registered higher interest in insurance and information,” says Marek Vích of Kooperativa, number two in the Czech insurance market according to size, confirming the increase in interest. “In recent weeks, we have noticed a growth in interest for insurance. Many clients who purchased an apartment half a year ago now realize that they should arrange insurance for it. We expect that people and companies will realistically evaluate the risks and adequately insure their property,” adds Špirakus. A healthy, prejudice-free relationship of Czechs towards property insurance is only now beginning to evolve.

ABC’s of insuranceInsured risks
Each insurer determines through his insurance conditions which risks are insured. The settlement is paid only in the case that the item was damaged, destroyed or stolen in a manner stated in the insurance contract, most frequently by:
a. misappropriation of the item through theft, burglary or robbery
b. intentional damage or destruction by a third party
c. water from a water main (e.g. broken pipe)
d. inundation or flood
e. a bolt of lightning, explosions, fire and plane crashes
f. windstorms, hail storms, landslides, avalanches, fallen trees or poles, heavy snow or ice, earthquakes

What is insured
Insurance covers items which are physically placed in the household or in other spaces specified in insurance conditions. If the item leaves the household, its insurance ceases to exist. In contrast, items newly located in an insured household are automatically insured. The total amount of the settlement depends on the agreed upon sum insured and is sometimes limited for individual types of property. An aspect of household insurance could also be liability insurance for its members on damages caused. So if you forget to turn off the tap or if the washing machine betrays you and you unintentionally flood your neighbor, the damage can be compensated through your insurance policy.

What is not insured
Most often, household insurance does not relate to:
a. items that serve gainful purposes
b. motor vehicles and similar equipment, including trailers and accessories
c. airplanes and other flying equipment
d. boats and other vessels
e. some less than usual exotic animals that are not commonly bred
f. data on CDs, tapes, diskettes, and other recording media
g. property of tenants
h. items that are insured by other insurance policies
If you wish to insure an item to which household insurance does not relate, you have the opportunity to arrange supplementary insurance for the particular item with special limits on the insurance settlement.

Settlement limitations
The maximum amount of the settlement paid by the insurer is limited for some groups of items. The maximum amount of the settlement is usually stipulated by a specific sum – mostly in tens of thousands of crowns.
Items with a limitation on the amount of the settlement include:
a. audio-video equipment
b. computer technology
c. musical instruments
d. bicycles
e. jewelry, antiques and artistic works
f. money and valuables
Insurers usually make it possible for an individual increase of limits on these selected items, or for additional insurance with higher sums.

The level of household security
An ordinary lock on doors is sufficient for the lowest insurance sums. Very often, insurers require a safety lock at least. As the sum insured grows, the minimum level of security required grows as well, from safety locks through various additional locking systems, or alarms, to bars, or a specially resistant door. For some selected items – for example valuables and larger sums of money – you must have a safe.

Sum insured
It is in fact the value of insured items that the client himself stipulates. This sum then determines the maximum amount of the settlement paid by the insurer. This means that the higher the sum insured, the more money you can get from the insurer in the case of an insured event. However, on the other hand, the higher the sum insured, the more the premiums to be paid.

Replacement or current value
With insurance to so-called “replacement value”, the insurance settlement is based on costs necessary for the purchase of the new item, of the same parameters, in the time closest to the insured event. In contrast, insurance to “current value” takes into account wear and tear on the item during its use. The amount of the settlement will be based on the price of a new item reduced by tabulated wear and tear.

Is it good to combine your mortgage?Instead of paying off your mortgage in installments, you can just pay the interest, deposit the money in life insurance and pay off the loan from that in the end. But is this truly advantageous?

Petr Vykoukal

The indisputable advantage of this combination is that it is always necessary to arrange life insurance along with a mortgage. If you want to pay through regular installments, the bank will require term assurance. When you combine a mortgage with capital life insurance, you only pay the bank the interest (which you can deduct from taxes), and the payments on principle to the insurer. After the policy’s time limit, the mortgage is paid off from it. The disadvantage is the constant amount of interest paid, and so during the mortgage’s amortization period, you will pay more in interest.
In order to truly make money on this combination, at the moment when the mortgage matures you must have more money on your life insurance policy than what you have to pay for the mortgage. This does not mean you would have to make any additional payments, but instead of surpluses in the hundreds of thousands on your life insurance, you may just get a few crowns. For calculation purposes, those who offer this combination often use the rate of added value for reserves, about 6-8% (resulting in an enormous surplus on the insurance policy). However, the rate guaranteed by insurers amounts to roughly 3% (the premium is exactly enough for payment of the debt), and because of the conservative nature of the investments made by insurers, one should not expect much more.
In both variants, you can apply tax reductions from interest paid on the loan. However, the amount paid to the insurer (up to CZK 12,000 per year) can only be deducted in the case that you are over sixty when the insurance policy (and mortgage) matures. Today, most mortgage banks offer this product in cooperation with insurers. But clients may still wonder whether they will have a surplus on the insurance policy, or just an unnecessarily expensive mortgage.

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