Andrew Hooker questions whether sum-insured policies actually work, calls for better underwiting standards

Andrew Hooker questions whether sum-insured policies actually work, calls for better underwiting standards
Andrew Hooker compares the no-sum-insured and sum-insured approaches.

By Andrew Hooker*

There has been considerable publicity surrounding the decision by many New Zealand insurers to require customers to nominate a sum insured when insuring their houses.

Previously insurance cover was commonly based on full replacement of the house to an agreed square meterage rather than a fixed sum insured limit.

In previous articles the insurance industry was criticised for blaming the Christchurch earthquakes for the change of position.

Instead it has been suggested that the losses suffered by insurers may be more closely associated with sloppy underwriting practices than unexpected earthquake losses.

The fact that insurers such as FMG and MAS (notably both co-operative insurers owned by their members rather than profit driven corporates) have continued to offer 'no-sum-insured' cover may tend to support the "sloppy underwriting" thesis. If smaller, non-profit driven insurers have not lost their shirts when the large corporates have allegedly been forced out of the no-sum-insured market, it is clearly possible to write this type of cover without taking a financial hiding.

Tower Insurance recently announced that it was putting its big toe back in the no-sum-insured market by offering to give no-sum-insured cover for fires, but not other types of damage.

The initial reaction is of course to congratulate Tower for stepping up. As is always the case, insurance is cyclical and what starts out as a no go zone ("the industry just can’t offer they type of cover") falls victim to healthy competition with insurers fighting for the marketing edge. 

However closer consideration raises some questions.

One important question is whether Tower’s gesture is an admission that sum insured policies simply don’t work.

If your sum insured is adequate (as I am sure most people and insurers hope it is) then why do you need no-sum-insured cover for fires?

The flip side is that you only need no-sum-insured for fires if your sum insured for other types of damage is inadequate.

In order for such an offer to provide real benefit would be if the insurer offering it was aware that the sum insured was inadequate. 

Granted, fire is probably one of the most common types of major loss. But what about flood, storm and the plethora of other catastrophes than can destroy your house?

What sort of comfort is there in knowing you are all good for a fire but maybe not for other events.

And if you have gone to the trouble of making sure your sum insured is adequate, why would you need no-sum-insured for fires?

Taking such a cover may be like admitting that you have inadequate cover for floods, storms and the like.

This brings the whole debate in a full circle.

If insurers underwrote policies more carefully, as indeed companies like MAS do (with detailed questionnaires) then perhaps we would not be in this position.

Many years ago, when no-sum-insured cover was first launched, the insurers only offered this cover to people whose houses were carefully assessed and often inspected. Yes, the insurance companies paid for people called "inspectors" to visit people and check on what they have insured with a lesser cover offered for unsuitable risks.

All this has been lost, as corporate insurers reduce staff numbers and save costs in a push for profit (or perhaps $11 mln pay packages for their CEOs).

Insurance should not be about share prices, or bonus and pay packages for executives.

It is a necessary commodity, not a luxury and it is worth asking again, whether it is time for a not-for-profit major insurance corporation to focus on quality of offering, not profit.

Or maybe the Government needs to look more closely at this sector and start to regulate more closely the provision of this essential commodity.

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*Andrew Hooker practices as a specialist insurance lawyer in Albany on Auckland's North Shore. He is also director of Claims Information Specialists Ltd, an insurance information website.

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?

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27 Comments

More anti-industry hysteria from Andrew. Sum Insured products were the direct result of the >$20bn ChCh repair bill paid by private insurers - not sloppy underwriting.

If insurers had been more careful about what they insured instead of offering full replacement to anyone with  a pulse, they would not have lost their shirts.  The earthquake caused losses.  But the amounts of exposure the insurers suffered was because they offered no sum insured cover in circumstances where no such cover should have been offered.  Full no sum insured replacement for an unrestored 120 year old villa is sloppy underwriting.  So is full no sum insured cover for a standard 2000 sq ft house with millions of dollars of landscaping.  Both these are real cases and simple examples.  If the insurers had bothered to inspect these risks they would not have provided no sum insured cover.  But instead insurers offer cover with the click of a mouse or over the phone without proper underwriting and then complain when the claims roll in.  The industry was always going to take a caning over the earthquakes.  But the fact that they were forced to withdraw no sum insured cover after the earthquakes is because of sloppy (or non existent) underwriting.  Hy hysteria, just evidence based observations.

But the fact that they were forced to withdraw no sum insured cover after the earthquakes is because of sloppy (or non existent) underwriting.  Hy hysteria, just evidence based observations.
 
Didn't Cam Preston emphatically prove IAG was fastidious in it's endeavours to protect profitability, but an accounting arrangement showed otherwise and hence the pretence of losses attributable to NZ operations? Read more

However, surely these 2 examples are outliers?  Statistically most claims should be falling into a more reasonable set with many houses post WW2?   On top of that for the former its not like the 120year old house isnt a known possibility and then the insurer knows they have to build a property of the same sqM but meeting modern regulations.   For the latter, the  "landscaping" does seem utterly unreasonable on the face of it but again just how many examples are there of this?
What about the effects of inflated labour from a chch sized event? isnt that more relevent as its across the board?
So really I cant help but feel that the professionals took chch as an opportunity to remove much risk onto the insured and get more $s.
As an insured I guess I am stuck between a rock and a hard place.
regards
 

Great article. If not for sloppy underwriting prior to the Chch earthquake, why would this result in a change in underwriting after the event? Of course a big event like the Chch earthquake will put a major dent on insurance companies, but this doesn't explain the change to sum-insured going forward. This must be a result of recognising a fault in the way policies were underwritten prior to the event.
Fundamentally, insurance is a group of people pooling their savings together to spread the risk of things going wrong. For someone to take a huge profit from this pool of people's money doesn't seem right to me.

"Insurance should not be about share prices, or bonus and pay packages for executives", This illustrates the simple naievity with which those outside the financial industry in general view the motives of those in it.
There is only 1 reason for involvement in the industry and it is for gain. Even the "not for profit" organisations support healthy executive packages, who cares about profit. It can only simplify and cheapen things if you do not have to explain yourself to shareholders, taxman and other busybodies, it works well as an advertising play and makes your products very attractive to victims.
Almost all of us now are so caned into believing in the necessity of insurance or are compelled by law or commercial conditions that it is almost unavoidable, the joy of the insurers.
It works in exactly the same fashion as the TAB. They decide how much they wish to keep and charge that on top of how much they will pay out. If you suggest that risk of higher payout comes into it, the only variable is how much more is tacked on to allow future events and to recoup from past events.
It is less work than milking cows and selling the milk, but the net effect is the same, Profit or gain.

I guess we all reflect when we see insurers increasing premiums because of losses in the earthquakes, then reporting HUGE profits and paying executives 8 figures.
It is a simple fact that the only two insurers in NZ who continue to offer full no sum insured cover are both mutuals, not profit driven corporations.

To my admittedly limited knowledge they also finished paying out on their ChCh earthquake obligations a long time ago. And there should be a lot more talk around that and one hell of a lot more action from insurers, it is appalling, you've taken the premiums now front up.

FMG won't insure houses on TC3 land in Christchurch.

Actually I dont think the problem is just sloppy under-writing. The scale of the chch disaster and the limited numbers builders available to rebuild has meant huge inflation in prices that wouldnt occur in a one off claim.  I also wouldnt be surprised if materials are also seeing inflation due to "opportunity"?
So for instance friends who are self-employed builders here in Wellington went to chch because their hourly rate could jump to $45 instead of $30 (if they were lucky).  Partially offset by their accomodation costs however.
So the Q for me when looking at my sum assured is in a normal event is the sum enough? yes I think it is.  In a chch sized event? no but then how long is a piece of string? 
What I would like to see is true agreed sum assured,  such that in the event of a claim the Insurance company is obliged/forced to write a cheque for that amount and not a lesser one, freeing up that family to leave or re-build as they choose.   Otherwise this is a farce IMHO.  It is more of a cap which leaves the insurance companyw with even more power in an already un-even playing field.
regards

That could be a product worth promoting or even legislating. Have a minimum, no questions asked payout amount, or percentage, made available in a prescribed timeframe. The balance only being subject to the kinds of reviews which normally frustrate victims.
The ability to move ahead is what most would want and if the whole claim is tied up, this cannot begin.

Yep, I mean if its a real guaranteed sum assured then I fail to see why subject to proof the house has to be totally rebuilt why there isnt simply a "write a cheque" moment. 
The devil is in the detail as they say.  Also with this max capped sum assured that is for a total write off, so if the house is "merely" damaged say 50% the insurance company should still be forking out that total cost of repairs and not say 50% of the "under-insured" amount.
or maybe Im just becoming cynical in my old age.
regards
 

"a minimum, no questions asked payout amount" goes totally against the grain of what insurance is all about, the principle of indemnity must always prevail.   

Except Im being asked to,
a) Guess the agreed max amount and
b) pay insurance for a maximum amount but in most situations that will never be paid. 
c) Qualified by, in the event of the max amount being needed there is no way to determine what that would be as the costs after a major event like chch would be out of control in effect.
So to guarantee c) I need to look at a fair/true cost and then guess what the labour premium would be in extremis and pay to be insured for that.
Meanwhile the professionals on the other side of the table who are best positioned to work out such factors effectively wash their hands of much duty, care and risk, but get to pocket a bigger premium.
Yes that seems fair and balanced, not.
regards
 
 

It would appear to be a guessing game, with costs to one side, till disaster strikes, and then the other side tries to limit its cost. Lose-Lose all.

A major issue in the ChCh Insurance/EQC debacle is delay and insurers requiring the insured to prove thier contents loss but preventing the insured proving their material damage loss. The Courts have been extremly slow and narrow in judgments most of which fail to set the precedent necessary to allow many claims to be settled. Legislation simialr to the US is required to proscribe settlements - eg with a clean claim, ie a Quake were there is no doubt of the cause or involvement of another party being liable, settlement in normal terms should be 30 days with compound interest accruing therafter at commercial rates moving to penal rates  - say commercial plus 50% after say 90 days with automatic judgement for failure  - no excuses no hearing just like the IRD.For widespread disaster a longer period  must be allowed say 6 months but therafter insurers should be required to make interim payments say 50% of estimated cost adjusted later with compound interest for under values so the insured has some measure of financial relief. Texas & Florida have almost draconian legislation and still the insurers act badly whihc shows just how awful the industry act even in the face of tough legislation and NZ has practically no regulations and no sanctions for the unconsiouably behaviour of the industry generally.
The move by Tower likely reflects the loss of customers following their appalling claims handling - stories may be anecdotal but there are so many and a quick look at the ChCh Quake court list indicates Tower are over represented fro their market share. 

Full Replacement seems an odd insurance for houses.
If you house burns down you only need market value to buy a similar house in your neighbourhood or pay off the mortgage. If you do rebuild, most people will choose something better at their own cost.
If there is a major disaster the government will red zone your suburb so you cannot rebuild and only pay you the ratable value.

You obviosuly missed the context.  As a one off event, yes indeed, though just how easy it is to get a cheque and just go buy is questionable?  As a chch sized event where in effect it is complicated on who's paying what plus the wage inflation due to too few builders and too few houses left.  Good point on rateable value, though if its three years old and due to be re-valued v just re-valued?  I guess there are always winners and losers, some more than most.
regards

the fact Andrew that Insurance Co's  in NZ & all over do not make underwriting profis any more  (ie,  claims are less than premiums) means that their profitability  is now derived from activities outside of their core income stream, capping sums insured's becomes important when these guys go to the casino table as the house always wants to know the value of thier bets, additionally the underwriters role has been replaced by that of  income stream generators, the industry has lost it's way,

That is not correct. You can find the industry data here:
http://www.icnz.org.nz/statistics-data/industry-data/
 
That shows that apart from earthquake since 2010, every class of insurance in NZ (and earthquake before 2010) recorded more annual premium than annual claims, usually by a wide margin.

The re-insurer should have kicked in to prevent significant losses to the NZ insurer. 
 

You make a circular argument Andrew - if insurers should not have offered Full Replacement in extreme circumstances (unrestored villas, high value landscape features) the alternative would have been a sum insured policy - the product type you are now questioning whether they will actually work?
I wonder if the industry's move away from laborious questionnaires reflected customer demand to simplify the process.
Try insuring your house at MAS if you're not a High Net Worth professional or at FMG if you're not a farmer. That leaves a heck of a lot of NZ left to be insured by someone other than your be-loved Co-op insurers.

It would appear that house insurance in NZ is built on the premise of insure first without questions, collect premium, and ask all questions at the time of claim to disallow claims and get out of the commitment. 

Get quotes for a range of options. You will find that raising the sum insured by a big amount will not add much to the cost.

For "redcows" re insurers meeting their obligations.
After a bout of hysterical laughter I have to wonder what planet you are from.
The Christchurch rebuild is appallingly slow, and many residents are still out of their homes and stuck in arguments with their insurers.  Yes, things are happening, but the actual progress on rebuilding and repairing of peoples homes is taking a lot longer than anyone thought possible.
 
 

I can fully understand your hysterical laughter, I had to re read what I'd written just to check.
I was referring to the mutual companies having paid out and completed, as opposed to the other  slow as we can, drag it out, make em sweat, bunch of $&$@56$. And the fact that there has been very little conversation or pressure around that fact, with some even wanting these whinging cantabs to quieten down and a government that seems intent on building monuments to their own egos  and ignoring the go slow on insurance. The governments only intervention for the insured householder was in AMI and I'm sure there are lots of Southern Response policy holders who wish they had just let the receivers go in. A 75% payout 3 years earlier would be worth more than the 100% of nothing that 75% have got now. 

Thanks redcows.  You clearly understand the situation, and your comments are well made.
Yes, there is a clear distinction between the 2 mutual companies, and the others. Its not all perfect, but generally they have behaved well, and are not guilty of the McKinsey type claim management strategies that the others demonstrate.  With Southern Response there is an impression that their attitudes changed from early on. They tightened the chokehold on people until they screamed, as evidenced by the public demonstrations, then they reluctantly loosened it a little bit. (Peter Roses "Qualitative easing" ) 
The governments notable public absence from the discussion on the residential insurance debacle is clearly because EQC has set a very low bar, which the insurers have been able to hide behind.