Insurance about the Real Estate Development Industry - Research Paper Example

? Insurance Research Paper about the Real E Development Industry Table of Contents 2.0 Topic Insurance in Real E Industry 4 2 Quotation 4 2.2 Perils Covered Under Insurance 4 2.3 Additional Benefit 5 2.4 Perils Not Covered Under Insurance 5 3.0 Topic 2. Risks Involved in Real Estate Insurance 5 3.1 Suspending Insurance 5 3.2 Coinsurance 5 3.3 Perils 6 4.0 Topic 3. Physical and Moral Hazards 6 5.0 Topic 4. Information Regarding to Risk 7 6.0 Topic 5. Disclosure Agreement 8 7.0 Topic 6. Case Study 8 8.0 Topic 7. UAE Insurance Regulations 9 9.0 Topic 8. Economic Crisis Affected the Insurance Companies 10 Works Cited 11 This report will try to throw some light on real estate industry of Dubai the second largest emirate in UAE. Dubai has international reputation due to its cosmopolitan nature, multi cultural society, excellent infrastructure, stable political environment and last but not the least the city is business and tourism capital of UAE. Economic policy of the city has undergone tremendous strategic and structural revamp in last two decades. The city has been witnessing a GDP growth rate of eleven percent for the last two years while economic policy makers have targeted to achieve GDP of US$108 billion within next three years. Colliers International (real estate consultant) has underlined that real estate industry of the city will show growth rate of more than fifty percent over next few years. Real estate industry of the city contributes twenty four percent of annual GDP. Industry insiders have mentioned following reasons for strong real estate boom in the city. Population in emirates is growing at a rate of more than seven percent annually. As a result of population boom demand for new housing project has increased rapidly. Average people ratio per dwelling is 5.5 which is way more than average standard of developed nations. The city has relatively low mortgage to GDP ratio of twenty three percent which helps the population to consider applying for fresh home loan. Financial institutes are also assisting common people to take new home by easing the terms and condition of home loan. Free economy in terms positive environment for foreign direct investors has helped real estate industry to grow stronger in last few years. Demand pool for real estate industry has increased due to various reasons of zero tax rules for foreign investor, strong international and domestic marketing campaigns, high rental on residential property, residence visa facility by property developer and speculation on short term market gain (Kumar, Agarwal, & Khullar). 2.0 Topic 1. Insurance in Real Estate Industry Real estate property dealers or common residents need to submit various documents like Police Report of burglary or any kind of criminal activity caused property loss, report about estimated damage or loss, surveyor report about property condition and relevant papers required by insurance company to get insurance cover. 2.1 Quotation Dhs.1, 500/- is deducted by insurance company from the claim amount on every loss while quotation value depends on the location and building condition of property. Insurance company and real estate property developers decide quotation amount after mutual agreement. In accordance with Dubai Islamic Insurance & Reinsurance Co, proposal for real estate industry following insurance covers can be used to answer the question. 2.2 Perils Covered Under Insurance Building and all inside fixtures are protected by insurance cover, Loss of Rent due to fire accident, Sign Board of the company or any kind of hoarding, fixed metal plate work and glass work inside the building. Standards perils like Fire, Malicious Damage, Storm, Flood, Impact, Earthquake, Riots, Strikes, Lightning Explosion and Bursting of Pipes are also covered by insurance scheme. 2.3 Additional Benefit Additional benefits like Debris Removal, low Architect and Surveyors fees and reimbursing Fire Extinguishing expenses are also offered by some insurer to property developers. 2.4 Perils Not Covered Under Insurance Perils like Willful misconduct, Nuclear Risk, War and Terrorism, Pollution, Leakage and Seepage, Existing Damages Cracks, Consequential Loss, Normal Maintenance fault and Political Risk are not covered under insurance (Dubai Islamic Insurance & Reinsurance Co.). 3.0 Topic 2. Risks Involved in Real Estate Insurance 3.1 Suspending Insurance Many of fire insurance policy emphasizes on the clause of suspension of the policy due to various chance factors like increase of fire due to owner’s activity, buildings are unoccupied after predetermined timeframe, in active alarm system. In this case real estate dealers are the worst sufferer and they don’t have any choice but surrendering the policy. Insurer is not responsible to provide insurance to new owner of house if there is sudden change in ownership and this case new does not get insurance cover until insurance company gets confirmation from underwriters. 3.2 Coinsurance This policy is often misunderstood. Normally eighty percent of above the ground property can be insured by coinsurance but remaining twenty percent depends on actual cash value of property. It is noticed that value of the construction changes in accordance with the ongoing inflation rate while flexible insurance cover covering risk of inflation is still rare. 3.3 Perils Perils like Willful misconduct, Nuclear Risk, War and Terrorism, Pollution, Leakage and Seepage, Existing Damages Cracks, Consequential Loss, Normal Maintenance fault and Political Risk are not covered under insurance are not covered by insurance policy while this incidents can severely damage or at worst destroy property (Kyle, Baird, and Spodek). 4.0 Topic 3. Physical and Moral Hazards Physical hazards like destruction or damage caused by wrong application of power tools (liquid fuel, electric pump and hydraulic machine) can be classified for threat for the industry. Improper use of scaffolding can cause injuries and fatalities among construction worker of real estate property. Many real estate constructors do not use proper trenching system or protective measure in the construction site although these issues are potential form of physical hazard. Moral hazards can be understood from the view point of economics. Moral hazards like taking loan from financial institutions without having proper securities, deceiving tax law of government, risk taking by real estate lenders beyond their capacities not only decrease government revenue but increases financial instability of the country. Economist Paul Krugman has described moral hazard as pernicious disease for civilized society. Insurance companies try to decrease financial loss by giving policy benefits or incentives to prevent the act of moral hazard by real estate property developer or common people (Heimer 35). 5.0 Topic 4. Information Regarding to Risk Underwriting is a term that can be used for various purposes. Underwriting is defined depending upon the nature of work. In general it refers to a type of risk management, mainly used by the financial entities. On the other hand underwriters are the person who identifies the risks associated with a policy. The risks are mostly financial risks. In the context of an insurance industry, underwriting is a process of selecting, classifying and rating the risks. The underwriters follow the aforementioned steps to determine the risk. In the selection process the underwriter evaluates the available resources and information to settle on the fact, how the risks will be classified. In simple words it determines whether it is a standard or substandard risk. Once the classification is accomplished, the risk is rated according to the value of the insurance or the premium that will be charged from the applicant. Therefore it can be portrayed that the principal aim of an underwriter is to gather information from several sources and evaluate it to determine whether to accept a particular applicant or not (Mishra 87-88). The underwriters have a number of sources from where they can obtain information. Some of the sources are as follows:- • The policy application • Inspection Reports • Information from the insurance agent • Medical examination report and medical history • Information from Medical Information Bureau (MIB). 6.0 Topic 5. Disclosure Agreement A disclosure agreement is defined as a confidential or non-disclosing agreement that averts a party to disclose or indecently exploits information which is being provided by the other party. The disclosure agreement consists of the information that can be disclosed to the third parties. Also there is no agreement to protect the information. On the contrary in a non-disclosure agreement, both the involved parties are restricted to disclose any information. Moreover the information remains protected by an agreement. 7.0 Topic 6. Case Study In coinsurance clause, it is clearly specified that insured person needs to maintain insurance amount equal to pre specified percentage of his/her property value. On the basis of this clause insurer will cover only proportionate share if the insured failed to maintain pre specified percentage. There is a formula to calculate recovery cost. Total Recovery= Actual Loss* (Amount of insurance/Coinsurance %*Fair Market Value of the property at the time of loss) This formula is applicable for general case and even in the case where insured fails to maintain pre specified insurance amount. Recovery amount is lower than the actual loss where insured fails to maintain insurance specified in the coverage. This formula is not applicable when there is complete destruction of property. Suppose, on October 21 Mr. X’s store house complete cracked by fire. At that time fair market value of the property was $500,000 and it was insured against fire peril for $300,000. The policy is complemented with 80% coinsurance clause. Due to total destruction coinsurance clause will not be applicable and Mr. X will recover $300,000 as face value. On partial destruction of property (in this case it is store house) Mr. X will recover only $225,000 while total damage might be of $300,000. This recover amount is calculated with the help of above mentioned formulae. Coinsurance clause will decrease the recover amount ($225,000) from the actual face value ($300,000) of the insurance policy (Delaney 896). 8.0 Topic 7. UAE Insurance Regulations The new surge in wealth and demographic changes, the Middle East countries like UAE, has depicted high interests on insurance for the purpose of minimizing the risks. Despite early issues regarding the acceptance of insurance in UAE, it is now considered as the economic and social necessity throughout the country (“Insurance regulation in the Middle East”). However there are certain regulations and requirements for insurance. Similarly insurance pertaining to real estate also consists of some regulations. The presence insurance law of UAE highlights that an insurer would require two different undertakings in order to embrace life and non-life insurance business. However the new law has failed to offer any guidance regarding how both these undertakings can be achieved. The primary rationale behind the enforcement of separate undertakings is to refurbish the solvency rule for the insurance industry of UAE. The article 25 of the UAE insurance law illustrates that an organization will not be able to conduct any form of fund gathering operations, any life insurances, liability insurance or any property insurance correspondingly. The federal law of UAE 2007 was established for the purpose of providing a framework of regulating insurance in UAE. The law provides responsibility to the Insurance Authority (IA) to regulate the insurance industry of UAE. Regulatory Framework: - The regulatory establishment in DIFC (Dubai International Financial Centre) is about the succession of legislative steps. The Dubai law formulated the scope of DIFC and new bodies, which is an obligatory thing. The Dubai law also passed several other laws, which includes property law, employment law, company law as well as insolvency law. Regulatory Bodies: - 1. Dubai International Financial Centre Authority (DIFCA). 2. Dubai Financial Services Authority (DFSA). 3. DIFC Judicial Authority (DIFC Courts). 9.0 Topic 8. Economic Crisis Affected the Insurance Companies The present financial crisis may be regarded as a banking crisis, but there are hardly any possibilities of the solvency of the insurance industry. However to a certain extant the insurance industry on a whole has been affected by the ongoing financial crisis. To be more specific the insurance companies which are mainly involved in the real estate insurance also got hugely impacted. Mostly there have been adverse effects were adverse for the companies. The financial crisis had a visible impact on the insurance companies, principally due to their investment portfolio. Meanwhile as the crisis further spread, the valuations of the financial market worsened drastically. Apart from that a number of strenuous exposures were also reveled in the form of market and credit risks. Hence during the crisis it is clear that on a whole the insurance industry may have least impacted, but certain sectors of insurance were tremendously affected. One such segment is the real estate insurance. The real estate insurance companies, during the midst of the crisis period were finding it difficult to sustain, due to extreme downward pressure. The real estate insurance companies are generally large investors and they highly depend upon the long term investment prospect, unlike banks and other financial institutions (Schich 1). Owing to the fact that declining household income reduces the demand of various products, similarly the demand of real estate insurance has greatly reduced due to the crisis. Furthermore, the financial crisis has also abridged activities pertaining to real estate. This has automatically minimized the need of the real estate insurances. Thus it can be concluded that the ongoing financial crisis did impacted the insurance companies which insured real estate to a large extant. Works Cited “Insurance regulation in the Middle East.” Inhouselawyer. n.p., n.d. Web. 27 Sept. 2012. Delaney, Patrick. Wiley CPA Examination Review 2007-2008, Outlines and Study Guides. Hoboken, New Jersey: John Wiley & Sons, 2007. Print. Dubai Islamic Insurance & Reinsurance Co. “Fire and Allied Perils.” aman-diir (2012). Web. 27 September 2012. Heimer, Carol. Reactive Risk and Rational Action: Managing Moral Hazard in Insurance Contracts. California: University of California Press, 1989. Print. Kumar, Rajesh, Abhas Agarwal, and Rajat Khullar. “Real Estate and Construction Sector in the UAE: Growth Strategies.” Centre for Case Studies 3227(2007): 1-19. JSTOR. PDF file. Kyle, Robert, Floyd Baird, and Marie Spodek. Property Management. Chicago: Dearborn Real Estate, 1999. Print. Mishra, Kaninika. Fundamentals of Life Insurance: Theories and Applications. New Delhi: PHI Learning Pvt. Ltd, 2010. Print. Schich, Sebastian. “Insurance Companies and the Financial Crisis.” Financial Market Trends 2009.2 (2009): 1-31. PDF File. Read More