# Methodological Proposal for the Development of Insurance Policies for Building Components

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## Abstract

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## 1. Introduction

## 2. Description of the Problem

## 3. State of the Art

## 4. Materials and Methods

#### 4.1. Context

#### 4.2. Types of Models Proposed for Service Life Prediction

_{w}), used to quantify the physical and visual degradation observed in a given building component. This index [12] encompasses the extent, condition, and cost of repair of various potential defects in the building component under analysis, as shown in Equation (1):

_{w}represents the severity of degradation of the building component, expressed as a percentage, k

_{n}is the multiplying factor of defect “n” as a function of their degradation level with range K = {0, 1, 2, 3, 4}, k

_{a,n}is the weighting factor corresponding to the relative weight of the anomaly detected (k

_{a,n}Є R+. When no instructions are provided, it is assumed that k

_{a,n}= 1.), A

_{n}is the area of the element affected by a defect “n” in m

^{2}, A is the façade area in m

^{2}and k is the multiplying factor corresponding to the highest degradation level of an element of area A. In this general framework model, five degradation conditions are considered from level A—a building component without visible degradation (the most favourable condition) to level E—a building component with generalized degradation (the most serious degradation level).

#### 4.3. Model Parameters

_{w}thresholds and include a specific maintenance action: cleaning (C) is performed, before S

_{w}reaches x%; major intervention (MI) is performed, before S

_{w}reaches y%; replacement (R), before S

_{w}reaches z%. The condition levels x, y, and z must be defined according to the stakeholders’ level of demand, influenced by the buildings’ economic and social context, legal requirements, and even the funds available for maintenance actions. Naturally, more demanding stakeholders and contexts will adopt stricter levels sooner by performing the maintenance actions for lower levels of S

_{w}than stakeholders that accept higher degradation levels. During the periodic assessments, the insurance company registers the S

_{w}value in a detailed report. Based on this, the insurance entity decides whether to approve the repair budget.

_{w}. The component’s estimated service life is the same before and after the intervention; (iii) it is assumed that the insurer performs no periodic building maintenance; (iv) for multi-flat buildings, the insurance is equally shared, and each owner pays the same premium.

#### 4.4. Calculation of the Insurance Premium

_{C}, t

_{MI}, and t

_{R}are the periods to perform the cleaning (C), major interventions (MI), and replacement (R), respectively. In these periods, money has different present values. The insurance entity expects a replacement cost (negative cash flow) of C

_{t}Euros at the end of year t with a discount rate r [18]. The present value of this future payment is calculated by Equation (2):

_{t,nom}

_{(C)}, C

_{t,nom}

_{(MI)}, and C

_{t,nom}

_{(R)}correspond to the nominal costs of the maintenance actions of the different degradation thresholds (t

_{C}, t

_{MI}, and t

_{R}, respectively), indicating the years, in which those costs occur, and r

_{nom}represents the nominal discount rate, which includes the global inflation risk, opportunity costs, and other costs. In Equation (3), the terms C

_{t,nom}

_{(C)}, C

_{t,nom}

_{(MI)}, and C

_{t,nom}

_{(R)}account for the effect of inflation. The way inflation affects the nominal discount rate is explained by Fisher’s theory [18], as in Equation (4):

_{s}) and a global inflation rate (i

_{g}) should be adopted. To simplify the presentation of results, real values are used. The present value of the costs is presented as Equation (5):

_{t,real}

_{(C)}, C

_{t,real}

_{(MI)}, and C

_{t,real}

_{(R)}are the real costs of the maintenance actions of the different degradation thresholds, equal for all proposed models; t

_{C}, t

_{MI}, and t

_{R}are the respective years, in which these costs occur; r

_{real,cost}is the real discount rate, the same for all the models and obtained by Equation (4). The discount rate applied to the cost is presented in Equation (6), which solely accounts for the inflation rate i

_{s}:

_{t,premium}is the annual premium in €/m

^{2}, which is the main result obtained from these models. The value of r

_{real,premium}represents a real discount rate equal for all the models. This value takes into consideration not only the rate i

_{s}but also the rate i

_{g}, as seen in Equation (8):

## 5. Results, Discussion, and Limitations of the Proposed Models

## 6. Conclusions

- In residential condominiums, the insurance can be issued by sharing risks within the households and resulting in a reduced premium for each household; it promotes more durable and sustainable building construction with higher quality and performance levels, since the insurance discourages inadequate options in materials and construction practices;
- Insurance companies schedule and perform the “examination”, when the claim is made, unlike what happens in most of housing. As they have no interest in delaying building maintenance, the insured units gain a renewed look, benefitting the image of the neighborhood and city at large;
- The insurance product developed in this fashion can be summarized as a service given to the clients, so its usefulness raises the global value of the building having coverage. This allows commercializing the insurance by real estate promotion, apart from the usual distribution channels (e.g., internet, banks, brokers, and agents).
- This product can also be especially interesting to specialized maintenance companies, since it allows for an additional degree of protection against the risk of early degradation of materials.

## Author Contributions

## Funding

## Acknowledgments

## Conflicts of Interest

## References

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**Figure 1.**Scheme of the methodological approach to determining adequate construction insurance coverage.

Insurance Company | Insurance Type | Duration | Type of Building | Coverage |
---|---|---|---|---|

Evolution Insurance Group | Building Warranties & Latent Defects Insurance | 10 years | Residential and commercial | Partial or full reconstruction against construction defects or structural anomalies Repair of roofs, façades and windows |

BLP Insurance | BLPSECURE | 10 or 12 years | All types | Partial or full reconstruction against construction defects or structural anomalies |

BLPSECUREPLUS | 10 or 12 years | All types | All of the above plus replacement of non-structural elements within their expected service life | |

BLPASSET | 6, 10 or 12 years | All types | Partial or full reconstruction against construction defects | |

Local Authority Building Control (LABC) + MD Insurance Services Ltd | LABC New Home Warranty | 5 years after construction + 10 years = total coverage of 15 years | Social housing, Residentia, | Protection against insolvency of the contractor Protection against construction defects. |

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**MDPI and ACS Style**

Macedo, M.; Brito, J.d.; Cruz, C.O.; Silva, A.
Methodological Proposal for the Development of Insurance Policies for Building Components. *CivilEng* **2020**, *1*, 1-9.
https://doi.org/10.3390/civileng1010001

**AMA Style**

Macedo M, Brito Jd, Cruz CO, Silva A.
Methodological Proposal for the Development of Insurance Policies for Building Components. *CivilEng*. 2020; 1(1):1-9.
https://doi.org/10.3390/civileng1010001

**Chicago/Turabian Style**

Macedo, Miguel, Jorge de Brito, Carlos Oliveira Cruz, and Ana Silva.
2020. "Methodological Proposal for the Development of Insurance Policies for Building Components" *CivilEng* 1, no. 1: 1-9.
https://doi.org/10.3390/civileng1010001