Move to 'sum insured' makes sense because home owners are best placed to know about their own homes, says AA Insurance boss

Move to 'sum insured' makes sense because home owners are best placed to know about their own homes, says AA Insurance boss

By Gareth Vaughan

The insurance industry had no idea the Christchurch earthquake scenario would be as complex as it ultimately turned out to be, AA Insurance CEO Chris Curtin says. He also says insurers must make sure insurance remains available and affordable, suggesting more initiatives like the move to sum insured from full replacement cover are needed.

Curtin told in a Double Shot interview the insurance industry had learnt a lot after being caught by surprise by the series of Christchurch earthquakes, starting in September 2010 and including the February 22, 2011 one that tragically killed 185 people.

What made things complex, Curtin said, was having a series of big quakes one after the other, how the Earthquake Commission (EQC) related to the insurance industry, how land repair work has been conducted, and how zoning has panned out.

"All of those complexities were really not thought about upfront," said Curtin.

"And I think if we had have thought about those things, and the possibility of such a complex thing happening, we would have been in a better position - I think - to be upfront with customers, explain to them what the timelines were likely to be, talk to them about what they can expect next, and to try and get in a position where we can settle those claims a lot quicker."

"If we had our time over again I think what we would have done is to have developed deep relationships with the other parties involved so central (and) local government, the EQC.
But really the truth is we had no idea it was going to be that complex even to the extend of how our own policies were going to respond to our customers when you're talking about multiple events in a short timeframe and how that would work with the EQC,"Curtin added.

Risk & responsibility

Since the Christchurch quakes AA Insurance has led the way in a significant shift in home insurance to "sum insured" from full replacement cover. This means home owners must now calculate their own rebuild cost. Asked whether this had shifted risk to customers from insurers, Curtin said it had shifted responsibility to customers but argued they're the best people placed to know about their own home.

"In a sum insured environment where customers are working out how much it costs to replace upfront, before the event, (this) is a much more effective way of doing things," said Curtin. "And I think in a sum insured environment if we had another Canterbury situation, god forbid, we'd be in a position to be much quicker in terms of settling those claims, particularly those people that wanted to take a cash settlement."

He said it was important for New Zealand to remain a highly insured country because the fewer people who take out insurance, the higher the costs for those who do.

"The key to that is that we (insurers and reinsurers) work together to make sure that insurance remains available and affordable by looking for opportunities like the sum insured situation that we've put in place. We need to find more solutions like that," Curtin added.

Suzanne Wolton, AA Insurance's head of distribution and customer relations, told last December the move to sum insured was coming after reinsurers reassessed their view of New Zealand realising the risk is greater than they previously thought.

'Open ended replacement completely unsustainable'

Curtin said Christchurch has shown "open ended replacement" was "completely unsustainable."

"Because the reinsurers didn't have a really good view about what their risk exposure was. So when it comes to sum insured I think this will be more helpful."

One of the surprising things about the Canterbury quakes was issues thrown up about the types of homes insured.

"For example, we had very limited information about a customer's home. We might have had the year it was built and the size. But when you put two homes together that are approximately the same size, clearly House A and House B may be completely different."

"So House A may have been built on a flat section, it may have been a pretty standard spec home. Whereas House B might have been a kauri villa, marble floors in the bathroom, a plumped in barbecue situation out the back. Now clearly those two homes are completely different," said Curtin.

"So what we're doing is we're asking the customer to take responsibility for establishing what the sum insured is up front rather than after the event. And I think that's a good thing.
So are we shifting the responsibility to the customers? I think the answer is to a certain extent we are. We have worked really hard to put calculators in place for people to be able to do that, and of course customers can go and get a valuation."

"But when you think about it there's no one better than the customer in terms of knowing about their own home. So it does make sense that the customer does know more about their own home and should be able to establish their sum insured upfront," Curtin said.

He said AA Insurance had sorted out about 67% of customers' home claims stemming from the Canterbury quakes, and had finished all its content claims. Overall there were about 1,400 claims still outstanding.

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This means home owners must now calculate their own rebuild cost. Asked whether this had shifted risk to customers from insurers, Curtin said it had shifted responsibility to customers but argued they're the best people placed to know about their own home.
Nonsense - I am as knowledgeable about building structures as I am about brain surgery - this outcome means another layer of grasping middle class New Zealanders have their hands out assessing the value of my real estate rebuild costs in addition to the insurance premium - the annual cost plus rachet effect of fees added to other costs will push weak owners into premature sales to vultures.

You know where this is going - you know who has their fingers in the pie, right up to their armpits - about a year maybe two years ago, the major banks were expressing dissatisfaction with valuations of properties submitted for mortgages, and were intent on (a) establishing their own beholden valuation operation (b) doing a deal with the Institute of Valuers, or (b) taking them over??
One way or another they were going to muscle in on the profession - much the same way they have muscled in on the insurance industry - you might now wonder who is doing the lobbying for the responsibility for valuations to be shifted onto the shoulders of the insured - perhaps bienial valuations? Can you buy shares in the industry?
You will note there has been silence since

Absolute rubbish.
The insurance industry has hundreds of year sof data and profesional know how. (Comment edited to remove personal abuse. Stick to the issues please, Ed. You can see our commenting policy here - 

Key sentence is "the reinsurers didn't have a really good view about what their risk exposure was".
No idea of exposure = build in a buffer against this uncertainty.
At least sum-insured has a dollar liability figure to play with.  'Replacement' has not, which is really what the article is all about.
My own leetle cul-de-sac is quite instructive.  Eight houses all around including mine. Overall area is all TC2. None over 50 metres linear, away.

  • One demolish and rebuild.  Garage fllor slab parted company with house (no rebar).  Prob around $350K rebuild.
  • One cracked floor slab, patched. Plus exterior replaster and repaint. Plus internal ditto.  Prob $80-120K.
  • One (rental) indeterminate but probably minor, say under $50K.
  • One still awaiting detrmination but well under EQC cap.  Prob $20K.
  • One complete exterior re-plaster and paint.  Cash to interior re-do.  Prob around $50K.
  • One cash payout under $10K, exterior repaint by owner, no other damage at all. (Mine)
  • One with minor interior jobs still to cost but nothing major, prob under $30K.
  • One with nothing apparent so far, but let's allow $5K for some plastering/painting.

Hard to generalise, eh?

But is it really sum-insured? Say it costs x to rebuild my house today. But being a canny insurance customer I want the cost inflation of a big disaster to be insured for too. So I insure my house for 30% more than x.
But what happens if my house burns down tomorrow and I claim my full sum insured amount? Will the insurance company pay out 1.3X? Are the building costs really wholely my responsibilty or are there some circumstances where the insurance company is interested in finding the true rebuild cost? Where the insurance company will only pay out x even if I am insured for more than x.
If the insurance company does not check costs would I have an incentive to light that fire myself?

No they will only pay the x1.
and that in itself would be a bunfight as chch is proving.
The x1.3 only applies in a chch like event, not that common so the extra insurance shouldnt be that big......yeah right.

So all that stuff about the customer knowing the rebuild costs better than the insurance companies is a nonsense.
This is all about Insurance companies minimising their payouts for big disasters.
Given big disasters are one of the main reasons for having insurance you have to wonder if insurance is worth it?

You are missing the point Brendon.  A sum insured, pays X. only and always.

As was pointed out to insurance comapnies and reps who were selling the open ended policies in the beginning, they're taking on a huge undefined risk - but they said they were the professions, the had the risk evaluation equations, and they knew everything.  Business reality always treats people like that the same way - Gamblers Fallacy.

With a sum insured, then they aim premiums at their risk, not at some airy fairy guess based on the idea they can beat down the construction/rebuild costs on the day.  So they are insuring an amount of $, not a complex fixture (building/grounds/services).

It does introduce an element of moral hazard, the classsic insure your dump for a million, then burn it down.  But that is easily enough kept to a minimum by a little due diligence on the behalf of the insurance company.  To ask for a recent independant valuation, and make sure the amount is no more than that.

Sum Insured, is much easier on paper work, so that will reduce costs.  It also allows introduction for partial cover (eg 80% insure, 20% self-insure) for those that want to reduce the risk but are willing & able to take on a small amount of it.

also sum insured is good for bth parties as the insurnace company is removed from the construction industry, and so the customers perception (hint: the salespersons' promise) won't be a "new house, just take the key" - the customer will know they have to do the work themselves and allow for it.

Cowboy the moral hazard issue is not so easily avoided. As I said I could want to insure my property for more than it costs to replace today because I am concerned that if ten of thousands of properties need to be repaired or replaced from a major disaster then their will be significant cost inflation.
Insurance is meant to allow you to continue you life as you were before the event. But sum insured based on current replacement costs does not provide that 'insurance' for a major disaster due to the problem of cost inflation.
Insurance companies deal with this issue repeatedly around the world and can estimate what sort of building cost inflation will occur. They are the ones who should manage this risk not the customer.

Insurance is ALL about risk assesment. They got it wrong in ChCh, AMI big time, and guess who pays for their mistakes, BigTime.
To say it was to complex is a cop-out, what happened was exactly why we suckers pay insurance and the privately owned big companies have failed policy holders in the worst way.

You are so right. What is very rarely admitted to in public is that Christchurch City Council mapped out the whole earthquake scenario in the early 90's. They predicted the impact on utilities, the liquefaction, the whole nine yards. The scenario was based on a M8 rupture of the Alpine Fault but the practical outcome in Christchurch was the same. Civil Defence at Ecan, CCC, and all the other councils in the region used that scenario regularly for planning and training purposes.
The only surprise in the quakes (apart from the exact timing) was the location of the fault. The outcomes had already been predicted for twenty years. I am also reasonably certain all of our geologists predicted a series of major quakes in the wake of the first one and that that wasn't a surprise either. Possibly the only surprise was how inept EQC turned out to be.
BTW the M8 rupture on the Alpine Fault is still "overdue".

what the geologists couldn't predct is how insuarance companies and personnel in the government could monetise the event to their advantage....

The discussion is interesting but I think the railing against insurance rip-offs is way off beam.

  • It ignores the possibility that some insurance companies are mutuals (e.g. FMG) - owned by their policy-holders.
  • Most if not all policies were written for a single event.  Few to none contemplated a series of incrementally damaging events, and untangling the contractual side is not for the faint-hearted.  Let alone the 'apportionment' - assesing which events caused what % of damage.
  • There is considerable merit in the idea of 'subsidiarity':  the notion that the locals know their immediate area best.
  • So once subsidiarity is acknowledged, then a simple hierarchy of knowledge suggests itself:
  • The homeowner is best placed to guide (say) a QS or valuer through the show and point out features which contribute to a sum-insured assessment.
  • The immediate insurer is best placed to asses the general area suburb by suburb and assess obvious risks.  As Kumbel notes (and I worked with one of the engineers responsible for the infrastructure survey in the early 90's in  Christchurch) most of the detailed work about where liquefaction and related damage would occur, had been figured out for those who knew where to look.  Doing summat aboot it - another story.  So the insurer should be expected to be able to asses locale-wide risks and aggregate them.
  • The re-insurer (e.g. Munich Re, General Re, Swiss Re - there's only about six or so of 'em worldwide) is then able to bundle/offset disparate risks taking the overall view.

Having a definite dollar value at the bottom of this hierachy is simply good economic sense....

Even if the new underwriting method makes perfect sense there is still no excuse for the buggers muddle all of our insurance companies find themselves in now. We both know it is no surprise that CCC's engineers could identify all those nasty impacts from earthquake all over Christchurch then have their own planners consent subdivisions in the heart of those bad areas.
But, even if the Lifelines document didn't get the airplay it should have, there is no excuse for ignoring the public advice of the Ministry of Civil Defence and Emergency Management. In 2002 MCDEM advised the incoming government that a major earthquake was imminent in the South Island. Every executive in every insurance company and EQC had about 16,000 work hours each between the issuance of that advice and the September 2010 quake to contemplate what the gnarly problems would be and how they might handle them. There is no evidence that even 1 of those hours was spent wisely.

Interesting that you should mention mutuals there waymad. I stand to be corrected, but as far as I know the mutuals are all finished in ChCh, certainly they would appear to have done a better job. Sometimes bigger and cheaper is not a saving.

It seems that in the past the insurance companies have not been able to correctly set their premiums.   Is that because they haven't been given enough information about the house they are insuring?  Or haven't adked for it perhaps?  Their new system is not necessarily a better one because as opposed to the insurance company working with swings and roundabouts now the customer has to cope with it on property by property.  Has Mr Vaughan (or Mr Curtin) put their own house through this calculator they have worked really hard to put in place?  I've put mine through five [Cordell] calculators with five different insurers, that is my own plus four others, plus two or three other properties, and I get five different answers top to bottom on the main one varying by $90,000.  What do I do?  Take the highest take the lowest or take the average? It needs very careful use; the companies ask some different questions, the way square metreage is worked out is not the same with each as some include internal garages in the area some don't, a flat roof can become a pitched roof, only one asked for underfloor heating, one asked for number of kitchens and it goes on and on.  Plus you need to watch carefully for GST.  I think the data Quoteable Value records on floor area is overall footprint and I think that is what most of us would believe is the actual area but with two of the five calculators I tried you have to remove the garage space.  
Insurance companies say get a valuation?  Why should that be necessary when their own calculators ask enough questions that a figure can be struck?  As the calculator is doing but for the house owner not the insurance company.  Is it because they know their calculators are inconsistent and Cordell have sold them different versions?  Otherwise if all of us put our places through the calculator the insurance company should be able to pay the replacement cost whatever it is, with some swings and roundabout protection because of the inconsistency of the calculators.  

It's a contract - you choose the level of risk/$ you are prepared to pay for.
The calculators are just that - a guide to your own risk assessment.  My own example above, of eight quite distinct reactions of broadly similar houses in a 50 metre radius circle, to the 12000+ quakes - just shows how variable the effects actually are.  There's simply no way even a top-flight insurer could have predicted that. 
Earthquakes exert dynamic forces, but most data about houses is static:  plans. elevations, descriptions.  Trying to figure out the actual effect on a single structure (and hence its cost), is like trying to predict a car's road-handling (dynamic) from the specifications of a single shock absorber (static). 
And good luck with finding a company that will actually offer you 'replacement' because that's the essence of this entire (seismic, sorry) shift.  The burden of figuring out how much (or how little) risk you wish to assume, lies now with you the homeowner.  Self-service.  Specified Sum Insured.  That's all that's on the table.

With the houses in the waymad cul-de-sac if there were 1,000 houses not eight and they were designed under same Building Code and of same construction type and on same TC2 ground then while the actual damage to each may not be identical the average damage derived as a percentage of value would be a robust figure.  Which insurers could calculate their expected losses with,  However, if they didn't have proper values to start with the result would not be perfect.
I'm just saying that the calculator(s) released by my insurance company and at least four others don't seem to be giving reliable results either plus it is likely the lower rather than the higher values will be selected by anyone checking with more than one insurer's calculator.  And we have no way of knowing which is the most correct i.e. nearest to the proper figure.
Insurance companies as the article says expect the owner to establish the replacement value; fair enough.  But they, the insurers, cannot all agree on an identical calculator, tested in NZ for the owner to use.  I recall reading sime months back that more than half the people are just accepting their insurance company's default sum insured.  How good is that when the article says the insurers didn't have a good view of what their exposure was?   

What I can't understand is why IAGs calculator is giving a rebuild vale that is 4x the capital value of our RV. That's a major difference.

Bugger - householders are going to be bankrupted servicing property costs sooner than latter. Luckily I bought a cheap house with a great sea view, that could be written it off in expectation the TPTB were intent on recovering excess wealth passed to the middle classes.