Insuring a Two-Property Saudi Holding: A Worked Sum Insured Example

A worked example in SAR of setting sums insured across two let properties, including reinstatement cost, loss of rent and the arithmetic of being underinsured.

Owners insure for the price they paid, which is the wrong number. Cover should reflect what rebuilding would cost and what income would stop. This example takes two illustrative let properties, sets the sums insured properly, and shows what happens to a claim when the figure is too low and the policy applies a proportional reduction.

The situation

An overseas owner holds two let properties: a small apartment building and a single commercial unit. Cover was arranged years ago on the original purchase prices and never revisited. The owner wants to set the sums insured on a defensible basis and understand what their current position would cost them in a partial loss.

Assumptions (illustrative)

• Property A, apartment building: illustrative purchase price SAR 6,000,000, of which illustrative land value is SAR 2,400,000.
• Property B, commercial unit: illustrative purchase price SAR 3,000,000, of which illustrative land value is SAR 900,000.
• Illustrative rebuilding cost today, including demolition, professional fees and compliance with current requirements: SAR 4,200,000 for A and SAR 2,600,000 for B.
• Illustrative annual rent: SAR 420,000 for A and SAR 260,000 for B.
• Existing sums insured, set at the original purchase prices: SAR 6,000,000 for A and SAR 3,000,000 for B.
• Assumed rebuilding period after a total loss: eighteen months for A and twelve months for B.

Step 1: Strip the land out of the insured value

Property A: SAR 6,000,000 less land of SAR 2,400,000 leaves buildings of SAR 3,600,000. Property B: SAR 3,000,000 less land of SAR 900,000 leaves SAR 2,100,000.

Land does not burn down and does not need rebuilding, so insuring the purchase price overinsures by the land element. The owner has been paying premium on SAR 3,300,000 of land across the two assets.

Step 2: Replace book figures with reinstatement cost

Reinstatement for A is SAR 4,200,000 against the buildings element of SAR 3,600,000, a shortfall of SAR 600,000. For B it is SAR 2,600,000 against SAR 2,100,000, a shortfall of SAR 500,000.

Although the purchase prices look generous, the buildings element is below what rebuilding would actually cost. The owner was simultaneously overinsured on land and underinsured on buildings.

Step 3: Set the loss of rent cover to the rebuilding period

Property A: SAR 420,000 multiplied by eighteen twelfths equals SAR 630,000. Property B: SAR 260,000 multiplied by twelve twelfths equals SAR 260,000. Combined loss of rent sum insured: SAR 890,000.

Cover for twelve months would leave six months of Property A's income uncovered, which is SAR 210,000. The indemnity period should follow the realistic rebuilding timetable, including approvals, not a default annual figure.

Step 4: Calculate the correct sums insured

Material damage: SAR 4,200,000 plus SAR 2,600,000 equals SAR 6,800,000. Loss of rent: SAR 890,000. Total declared values across the programme: SAR 7,690,000.

This is the figure to present to insurers, with the basis explained. A declared value supported by a cost assessment is also easier to defend at claim stage than one the owner estimated.

Step 5: Price a partial loss under the current cover

Assume a fire damages part of Property A, with repair costing SAR 800,000. The buildings were insured for SAR 3,600,000 against a reinstatement cost of SAR 4,200,000, so the insured proportion is SAR 3,600,000 divided by SAR 4,200,000, which equals 85.7%. If average applies, the settlement is SAR 800,000 multiplied by 85.7%, which equals SAR 685,600, leaving the owner to fund SAR 114,400.

Underinsurance does not only matter in a total loss. Where a policy applies average, every partial claim is reduced in the same proportion, so the shortfall shows up on the first incident.

Step 6: Compare the cost of the correction with the exposure

Correcting the programme reduces insured land of SAR 3,300,000 and adds SAR 1,100,000 of buildings cover plus SAR 890,000 of loss of rent. Net declared values fall by SAR 3,300,000 and rise by SAR 1,990,000, a net reduction of SAR 1,310,000. Against that, the avoided shortfall on a single SAR 800,000 partial claim was SAR 114,400, and on a total loss of Property A it would have been SAR 600,000 plus up to SAR 630,000 of uncovered rent.

The correction reduces the values being insured while removing the largest exposure. Premium depends on the insurer's own rating, so ask for terms on both bases and compare, rather than assuming better cover always costs more.

What changes the answer

• If rebuilding costs have risen since the cost assessment, the sums insured drift downward in real terms and the averaging problem returns, which is why the figures need periodic review.
• If approvals extend the rebuilding period beyond the assumed timetable, the loss of rent indemnity period runs out before the income resumes.
• If a policy does not apply average, the arithmetic in step five changes entirely, so the clause has to be read rather than assumed either way.
• If part of the building is vacant at the time of loss, the recoverable rent is lower than the declared figure and the basis of the loss of rent cover matters.
• If a lender has an interest in either property, its own requirements may dictate the basis and the minimum cover, and those take precedence over the owner's preference.

What the numbers tell you

• Insure reinstatement cost, not purchase price, and take the land value out of the calculation.
• Set the loss of rent indemnity period from a realistic rebuilding and approval timetable.
• Ask whether the policy applies average, because that single clause decides what a partial claim pays.
• Have the reinstatement figure supported by a cost assessment so it can be defended at claim stage.
• Review the sums insured annually, since construction costs and rents both move while the policy figure stays still.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira builds the numbers on a Saudi property with you before you commit: rent and cost evidence, condition and capital expenditure, the appraisal and the sensitivities that decide whether the deal survives a bad year. The investment decision stays yours, and so does the advice of your licensed tax and legal advisers.