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Graham Matthews says recent and significant changes in house insurance will have a big impact on homeowners

Posted in Personal Finance
New rules are now in effect on how 'sums insured' apply to house insurance.

At the end of April the rules regulating how domestic home insurance policies are calculated changed.

Previously, most policies were based on the size of the dwelling, but from the 28th of April, the policies of major home insurers changed, so that the sum insured is now based on how much the property would cost to re-build.

See these announcements: State, AMI, Lumley, Vero, NZI, AAInsurance, Tower.

This will mean potential additional costs and risks for the homeowner.

For many homeowners this could have far-reaching implications and mean that some could end-up substantially under-insured.

Graham Matthews, Oceania Chairman of the Royal Institution of Chartered Surveyors and director of property consulting firm, Hampton Jones, says “These changes may appear insignificant, but anyone with home insurance should beware. Someone who is currently insuring a small, but well-designed and appointed house may find that they are under-insured under the new rules, especially if construction costs go up.”

The approach that the insurance companies are taking will require homeowners to provide re-instatement construction cost estimates, so that their property is insured for the correct amount, and this will need to be updated at least every two years to ensure the value of cover keeps pace with rising construction costs.

“There is some confusion between property value and reinstatement cost” states Matthews.

“Getting a property valuation will provide you with an indication of what a property might be worth if sold, but this is completely different from how much it would cost to re-build. Someone taking insurance based on open-market value would risk insuring for a higher sum than necessary.”

The risk of providing an accurate re-instatement cost is firmly on the homeowner, and for larger or more complicated houses this may even require the services of a Chartered Quantity Surveyor.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

17 Comments

There's been a lot mentioned

There's been a lot mentioned about this change. But perhaps the biggest help would be to have the names of the insurers who are still offer replacement insurance. FMG do for a start.

There is also the issue of

There is also the issue of demand inflation. A quantity surveyor can tell you how much it will cost to rebuild your house today. The question though is how much to rebuild your house if 10,000 houses are destroyed and 100,000 are damaged in an earthquake? The insurance industry wants to transfer this risk to the customer. But what good is insurance if you are not fully covered if disaster strikes?

Sorry the term is demand

Sorry the term is demand surge, here is the information from a very good Andrew Hooker article http://www.interest.co.nz/personal-finance/63862/you-settle-quake-claim-make-sure-your-insurer-has-included-enough-costs-deman

Compulsory insurance coming

Compulsory insurance coming our way? 
If the risk of insurance is passed onto the homeowner, why have insurance in the first place? Unless one has a mortgage insurance is not compulsory, but the question is: How long before it is made compulsory? 
HGW

I now pay approx $1000 for

I now pay approx $1000 for unlimited cover on my house. Unlimited is clearly a very large number, and I haven't got time to type it in, so lets subsitute the approx GDP of the world's ecomomy, which is very much less than unlimited (70 Trillion). This equates to an insurance cover of $1 of premium = $70 B of cover.
Now that my cover is restricted to approx $500,000, surely my premium must reduce to a fraction of a cent?
Wonder how much leaky home syndrome on my 3 bedroom house I'd need to claim 70T? (oh that's right - not covered)

Let me get this straight -

Let me get this straight - insurance companies appraoch us and say "that our stuff faces risk of loss or damage from various causes. For a fee, we will take on that risk for you." Then to cover their own risk they take re-insurance cover just in case their own risk assessment was in error. Over the years they have manage to fleece society in general of billions if not trillions in premiums, revelling in huge profits. Now when they have a couple of bad years they are trying to make us pay for their loss of profits for this period. Am I the only one who sees the disconnect here?

Maybe you are ... The actual

Maybe you are ...
The actual loss ratio data for the NZ insurance industry, by sector type, is here >
http://icnz.org.nz/statistics-data/general-insurance/

Sadly such is life these

Sadly such is life these days. Every year the insurance companies make huge profits they do nothing. Every year they actually have to pay out on some claims and bear some costs then they bump up the costs for the future. Its a win-win for them.
Despite being one of the biggest events to ever happen in NZ the CHCH earthquakes didn't harm them, only AMI had trouble, the rest were just fine, most didn't even make a loss from it. Yet every normal year they rake in huge profits supposedly to cover for the worst of times. It seems thanks to re-insurance they don't even need to worry about that and they just pass on re-insurance cost increases to us too.
If it didn't require such significant initial capital to be in the game everyone would be doing it.

StuartM - the major players

StuartM - the major players were all hit hard. Most would have followed AMI had they not been able to quietly shuffle funds over from parent companies in Australia. Due to misunderstandings of the way EQC works the reinsurers were hit harder than they expected as some were under the impression that all claims carried a $100,000 payment from EQC, not just dwellings. On top of that from a reinsurance perspective we are lumped in with Japan  and Australia so we would have felt a big hit even without the Christcurch earthquakes.  Your main point still probably holds true though, that the previous years of profits count for nothing and the reinsurers will take their pound of flesh to cover the risk as they see it now. Maybe the rates will settle if we have a quiet couple of years but don't hold your breath... 

Frankly I can only see

Frankly I can only see benefits from this shake up, bearing in mind NZ I understand is only country in world that still had Full Replacement Insurance.
For a start it will stop those with lower valaue properties  with same floor size as their nieghbours subsidising them: in the past two homes of 200Sm paid the same premuim but the quaility of one could have been superior so replacement cost would have been more but hey paid same premium. Its a bit like paying the premium on your car based on CC rating,  whether in was a Toyota or BMW of same CC rating.
A story from Christchurch were two very simler homes by floor space in Hills area: both were about 250 sm and paid similer premiums: First one cost to replace circa $450k, other one $1m plus as its had a $600k retaining wall and associated earth works thta no one knew about (and wasn't asked about when appling for insurance).
As far as the Insurance Company though and its reinsurers it was up for about $450k for each property and priced its premiums on that. Clearly that is not he case as full replacement meant repalcement for everything even if retaining wall costs another $500k to reinstate.
Sum assured will mean everyone is aware of its potential liability, able to price for it and stop one set of home owners subsidisng another insurance bill.
You insure for car and contents for sum insured so why not your house.

Re you insure your car and

Re you insure your car and contents for sum insured so why not your home. The problem is the major reason kiwis want home insurance is for disasters like earthquakes. And with sum insurance your house is not adequately insured. You could get your house professionally assessed prior to a major disaster for its replacement cost and then find because the disaster is so huge requiring hundreds of thousands of claims that the replacement cost has inflated significantly. Then you might be in a situation where you cannot afford to repair your damaged house.
 
Full replacement policies provide peace of mind, sum insured policies do not.

Full Replacement Cover may be

Full Replacement Cover may be give best peace of mind but as Christchurch has discoverd the Insurers simply didn't know (or understated) their liability. I suspect if Full Replacement Cover was in place then the premiums would go through the roof and in any event calulating simply off floor size as it is now would not exist. You would essentially need to calulate a replacement cost and then it would be calualted into a primium taking it account all the items being covers like swimming pools, retaining wallls, number of bathrooms, tennis courts, type of construction and the list would go on.
PS What Kiwis want and want the rest of the world get in terms of cover have been poles apart.
If we want Full Repalcement Cover then be prepared to pay for it but with Christchurch being one of the 5 biggest insurance claims of all time I doubt we will ever see it again in our life times.

Insurance companies will need

Insurance companies will need to be very careful how they advertise this change. All those peace of mind ads are not possible.

The retaining wall cost was

The retaining wall cost was however a one off.  So the Insurance company probably insures the value at an average replacement cost, say $600k...so the $450k house cost them less, the $1M house more...per hundred claims, no biggee.  Im sure next time of course the retaining wall wont be covered unless specifically so.
Thing about a car is if its written off you can go out and choose another from amongst the car yards.  After a major earthquake you cannot do that., there is market scarcity.   This is about shifting the cost of replacing your house after a major event in an inflated environment onto the ppl who are least able to understand and deal with it. One we are left no options on as its supposed to be the re-insurers. Of course that means as a house holder you have to say my $500k house in such an event has to be insured for 20% plus....so I need to pay for $600k's worth of insurance. So in effect for all non eq events you will be significanty over-insured.
For a "money man" you seem sadly un-informed.
regards

If we want replacement

If we want replacement insurance where the Insurance companies and underwriters does not know its potentoa liability then be prepared to pay large increase in premiums.
Its pretty simple. The Insurers need  know their maximum liability then they can cover and price for it.
PS I am not un-informed and if you knoiw so much about it tell me where else in the world we can get Full Repalcement Cover.
Also Full Replacement Cover if fairly new in New Zealand, being avialable for less them 30 years when Sum Insured (or Indemnity) was the only insurance avaiable.
Sum Insured requires the insured to have the right cover from day one and no doubt insurance companies will have inlflation adjustted options as well.
PS The retaining wall example is on the extreme but the principal is the same (and there are multiple examples of this like $50,000 swimming pools so all this adds up to the final bill) . The insurers did not excacly what was being covered and no doubt didn't price for it.
By not pricing for it meant they didn't have reinsuance in place nor the reverse.
The other ket issue to consider is that Market Value of your House is not the replacement value to cover it as well.
So when considering Sum Insured amount is not what my house is worth but what will it cost to rebuilt it. Its cost may be more or less than its market value (excluding land).
 
 
 
 
 

Unless one is prepared to pay

Unless one is prepared to pay ongoing surveyor fees, every 2 years there is no way to establish the likely rebuild costs. The programme fair Go illustrated this perfectly.
Now if one is under insured the insurance companies cap their potential payout, so what happens if one over insures? Do they say they will only pay to rebuild what was there in the first place. But surely the new system is insuring a specific monetary payout amount and is not a contract to physically rebuild, it is simply a contract that should pay out this specific amount in the event of a particular insured event taking . I cannot see what the actual rebuild cost would have to do with it
 
If I insure for $ 100 I pay the premium based on that amount of cover, the insurance company is liable only for $ 100. Similarly if I insure for $ 2 million and pay the premium that is what the insurer should have to pay out. From a fee income point of view over insuring is an insurers dream until of course there is a claim, but then again potential finacial risk v financial return is what insurance is all about is it not?
Of course insurers seem to include "sweeteners" to encourage an actual rebuild such as council costs and debris clearance charges (does anybody seriously think these are not factored in the premium equation?). Insurers want people to rebuild especially if the insurers handle the process (economies of scale and the muscle they have with building firms etc)  as this enables them to reduce their maximum exposure.

Insurance..oh yes...that's

Insurance..oh yes...that's where wgtn and marl residents pay a premium but are up for 5% of the repair costs when  quake damage happens...since $400K is probably an average cover...that'll be the first $20,000 you pay and guess what...the insurance company determines the repair cost!..,.haha