By Amanda Morrall
Following a dramatic hike in house insurance premiums, the industry is adopting a new pricing policy that could have major implications for householders.
AA Insurance announced last week it would be the first out of the gate to change from square metre replacement cover calculations to a "sum insured" amount set by the policy holder. The move is meant to give reinsurers greater guarantees about their potential liabilities in the event of another major natural disaster.
While the change also gives policy holders certainty over the amounts they can expect to receive, it also shifts the burden of responsibility for doing the sums properly squarely onto their shoulders. To assist with the calculations, AA Insurance will on Monday be posting to its website an industry calculator that was independently developed to help determine sum-insured amounts based on variable inputs.
In a Double Shot interview Suzanne Wolton, head of distribution and customers relations for AA Insurance, said while it was a significant change for the New Zealand insurance landscape, sum-insured policies were standard practise in other parts of the world. She said reinsurers were insistent upon the change as a result of their exposure to the Canterbury earthquakes.
"Our reinsurers have basically reassessed their view of New Zealand over the past three years and realised the risk here is greater than they originally thought and they're now trying to develop a way of understanding how much they would have to pay if there was another event in New Zealand,'' said Wolton.
"One of the most important lessons out of Canterbury is that we simply can't make an accurate guess about how much it takes to rebuild a home based on square metreage alone, there are many variables that need to be taken into account,'' she added.
Importantly, policy holders will be required to continually update and review their coverage to make sure the specific sum-insured amount keeps apace with inflation and any building cost increases.
'Annual health checks'
Wolton said policy holders will be prompted to do "annual health checks" to ensure their replacement cost calculations are kept current.
"It is incumbent upon us to educate our customers and tell the public why we are doing this and what they need to do because it is a big change.''
Wolton said a benefit of the transition to a sum-insured model is less disputes between private valuers and insurers over payment amounts and swifter processing time for claims.
"Another big learning from the events in Canterbury is that people want an opportunity to get on with their lives as soon as possible," said Wolton.
"With the square metre insurance (model) a lot of work has to go into assessing, and scoping out and negotiating with customers about the rebuild costs. Moving to this new sum-insured (system) allows the customers to know, in the event of a major disaster, what the sum-insured of that house is and what they could expect."
Industry wide change
Following AA Insurance's announcement, Vero, State, AMI and NZI indicated they would be following suit.
"I believe it's going to be an industry wide change over the next six months to a year. I think it's the responsible thing to do to keep insurance available and affordable,'' said Wolton.
While the insurer would have "one or two guides" to determine whether the customer supplied sum-insured figure was "reasonable, for the most part the nominated amount would be taken at face value, said Wolton.
"We would strongly advise people to read their policy thoroughly and ensure that they are absolutely clear about what is covered and what's not. But at the end of the day this is something that should be seamless for most people.''
New policy holders will see a change effective December 16 while existing AA Insurance customers will be affected when their policy renews after July 1, 2013.
7 Comments
Not really, you just could pay the same but not get enough to rebuild.
Realistically though it means every year you have to over-price the value in order to guarantee the $s would be enough for the next 12months costs. Build costs with GST are more than an existing house is worth sometimes. So for a 100k GV house you have to allow $115k....not sure about site clearance costs either. Also the new building standards are higher meaning more hidden costs.....
Also this October year (say) the house is $100k but with CPI at say 5% you have to that in before you see that gain....so pay on $105k.
The answer is probably keep an eye on the market, so OK AA wants to do it this way, move to someone who does M2. If customers vote with their feet then the companies might bin this idea.
regards
uh....there is cost to build and cost to build.
1) So to re-build, ie say clear the site and start from scratch that may take more than the GV....how can a household owner properly determine what that cost is? "we" are not experts...
2) Also in the event of the size of Chch's earthquake the limited skilled labour pool means the cost to repair is in a bubble territory....how do you allow for that?
3) Does it guarantee a cash payout of this value?
So really its one huge pass the buck / cost by professionals to the very ppl who rely on said professionals. It strikes me as an un-fair contract..
Doesnt surprise me of course....my house insurance has climbed 25% this year alone....
regards
I'm a registered valuer, and can perhaps shed come light on the process.
This proposal is really an extension of the work we already do for commercial & industrial building owners. The best way to estimate replacement cost is to use a Quantity Surveyor, though the fees involved would be prohibitive - so a QS is rarely used.
Valuers are often enaged on a two or three yearly basis, to estimate replacement cost, as they have a working knowledge of building costs and values, and the requisite professional liabilty cover to provide the insurance industry with this data.
An insurance valuation is typically broken down into five components:
1) Replacement cost of the asset - at current prices, including an allowance for professional fees, service connections, site improvements etc. Typically we use rates / m2 over the different building components such as garages, balconies, patios etc. Where it gets quite complicated is for high spec homes or historic buidlings. Your 'run of the mill' GJ Gardner home or similar is rather more straight foward.
2) Inflationary provision - An insurance policy applies to the 12 month period of cover ahead. Now if the building is destroyed on the last day of the year, it won't be replaced for several months - while demolition, site clearance, consents etc and the actual build are undertaken. So the current replacement cost needs to be adjusted to reflect the expected increase in build costs over the period ahead.
3) Indemnity value - This is not the replacement cost, but that which takes account of depreciation. We need to estimate the remaining physical life of the structure, and decide how far through its life it is currently. I.e If a house will last 80 years, and was build 20 years ago, it will be 25% depreciated. Sounds simple. But how would you treat a villa built in 1910? How much life is left in that???
4) Inflation again - an estimate of the change in the indemnity value over the insurance period. This will not account for re-build delays, as the indemnity payout is for your actual loss - it is not there to replace the asset.
5) Demolition - an estimate of likely demolition costs. These have increased significantly in the past 2 years as a result of Chirstchurch and were often under-estimated.
As you can see, there is a bit to it... and it would be a shame to take a DIY approach to this, as people typically underestimate costs - and over-estimate value :) Of course you can be over insured, which is a waste of premiums, and I doubt whether the insurance industry would want to create a 'moral hazard' where the public were incentivised to destroy their assets!
The cost of an insurance valuation for a house would typically be $400 - $500 + GST, though subsequent updates would be cheaper. Time will tell, but I expect you could get a valuation initially, and then update it every few years.... Of course if this policy is rolled out by all of the insurers, economies of scale may see the valuations costs come down.
Beachside: Good post. On first read of these proposals by the insurance industry, it seemed it would be a massive free kick for the quantity surveying industry (thanks for coming). However, as you point out it would be more economic to use valuers instead. Now, that conveniently ties in with the stated aim of the banks (last year) to take in-house their own valuation processes and thus bypass and gut the independents ... hmmm .. guess who majority owns the insurers .. hmmm
All too easy .. it's consistent with previous reports elsewhere of the insurers exposed to christchurch, buttoning down all the available geo-technic-engineers within range of christchurch, preventing them from contracting out their services to private victims needing their own independent assessments.
Another example of the powerful exploiting the less-powerful
Beachside. Thanks for your post. That's really useful information. Can you email me please if you see this.
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