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

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.

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.

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

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.

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,

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.

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.