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.