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Home insurance and the more remote risks

Insurance is almost a unique service in the commercial world. Can you think of any other product or service you buy and hope you never have to use? The motive for buying it is actually very complicated. We're all selfish animals. We want to keep what we have. If the worst should happen, we want to replace what was lost. Yet we all resent having to pay against the hopefully remote risk we will lose our property. We also know all the horror stories of people who have had their homes burn or blown down, and still have wreckage on the plot months later. Insurers are not viewed in the most favorable light. Many seem to find a whole range of reasons to delay paying out on claims. Indeed, were it not for the people who lend us money on the security of our real property, we might self-insure, hoping the tornadoes or storms will carefully miss our homes. Yet, in our calmer moments, most of us accept the need to buy cover against the more obvious and common risks. We see violent weather on our television screens and think, "This could be us." But what about the more extreme risks?

On 9/11 we all realized the possibility of a terrorist attack on our soil was real yet, when we looked at the list of exclusions in our insurance policies, we discovered loss and damage caused by terrorism is almost always excluded. Today, if you live next door to a building or installation that could be a target for a terrorist attack, what options are open to you? This area is something of a metaphorical minefield because it mixes politics into the hard world of insurance. Actuaries hate to assess the risk of anything that has such a poor track record. There are thousands of claims every day covering vehicles and homes. This gives them a good statistical record to analyze. Fortunately, there are not many terrorist attacks. The Terrorism Risk Insurance Act introduced the federal government into the equation. The government has committed itself to be the insurer of last resort until 2014 at which time, the private sector is expected to have come up with its own answers. For these purposes, it's currently up to the Secretary of Treasury to certify whether any particular event is "terrorism". If the total value of claims exceeds $100 million, the federal government will reinsure the risks up to a maximum of $100 billion in any single year. This pays 90 cents on every dollar of claim approved by the insurers. Why is this Act in place? Because it's currently mandatory for private insurers to offer commercial property cover including terrorist risks.

You may therefore think there's something rather unfair going on. If you are living next door to a major piece of infrastructure that's insured against a terrorist outrage, you can watch it rebuild while you sit in a tent getting nothing. Except, of course, this would be political dynamite and FEMA could probably rush in with emergency aid for you and your neighbors. Home insurance should cover the same risks as commercial policies. If this is not possible for some reason, we should be reassured the gaps in our homeowners insurance will be covered by federal government.

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