House insurance is changing, but most of us haven't caught on yet.
A survey giant insurer IAG (owner of the State, NZI and AMI brands) shared with me showed two in three people are unaware that in future they, not their insurer, will be responsible for working out how much to insure their home for.
It is the great "sum insured" insurance shift, and despite what the insurers say, many of us will not find it an easy transition.
Previously we told our insurer our address, paid our premium and should the place burn down, shaken, demolished by a meteor, etc... they'd pay to rebuild it.
This was the era of replacement cover, a comfortable time of certainty.
In the future it will be the homeowner's job to estimate how much it will cost to rebuild their home. Based on that, we then tell our insurer the maximum payout needed should our house be destroyed.
Welcome to the era of sum insured, or capped insurance.
What does the change mean for you?
The Christchurch earthquakes revealed the captains of the insurance industry weren't great at assessing rebuild costs. Neither were the international reinsurers with whom the New Zealand insurers insured themselves.
Never again, was their cry as they surveyed their ravaged balance sheets after the Canterbury shakes. They vowed to always know their maximum exposure and they could only do that by making policyholders do the estimating, and assume the risk of getting it wrong.
So how do you accurately estimate the cost of rebuilding your home?
Insurers have created some nifty online calculators to help. You plug in the rough specs of your home, and the calculators spit out a figure which represents the likely cost. Note the heavy legal disclaimers attached to the calculators. If the sum they produce turns out to be wrong, you can't sue them.
If it turns out they set their insurance cap too low, the policyholder would have to put up with a smaller home being rebuilt in place of the one destroyed, or pay the difference to get what they had.
For those with simpler homes, built in one go, the calculators are pretty good. But some are concerned about their accuracy for homes built up over generations. An alternative is to pay for a professional insurance valuation to help you decide on your sum insured.
As much of the value your property is in the land rather than the house, and as it is the Earthquake Commission and not your private insurer which insures the land, don't use things like market price to set the sum insured. Nor should you rely on Government valuations. Nor should you assume the cost to build it three years' ago is still accurate.
It seems to me people will build in a margin for error to ensure they haven't got it wrong, or in case there was a surge of building cost inflation as happened in Australia after the bushfires and floods.
I suspect this will lead to some underinsurance, which won't cost the insurers a cent, and quite a lot of modest overinsurance, which is money for nothing for the insurers.
The most they will ever pay is the cost to rebuild your home. If you overinsure, they won't be rebating your premiums to you.
GOLDEN RULES
- Take this seriously. Sum insured is here to stay
- If you are not satisfied with the calculators, get an insurance valuation
- The responsibility to get it right is all yours
Rob Stock is a journalist with the Fairfax Business Bureau and Money Editor of Sunday Star-Times
- ? Fairfax NZ News
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Source: http://www.stuff.co.nz/business/money/8442531/Navigating-house-insurance-changes
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