• Average sum insured
  

Average sum insured

For the insurers surveyed in 2006, the highest average sum insured was $277,519 and the lowest average sum was $184,000. The average sum insured across all insurers in 2006 was $225,858.

The percentage increase in average sum insured for each insurer from 2005 to 2006 varied from 1.6% to 12%. The average overall percentage was 7.9%.¹⁸ There was some regional variation in the pattern of average increases with 17% in the Northern Territory, 14% in Western Australia and 10% in Queensland and Tasmania.

Insurers with high percentage increases in average sum insured had correspondingly high indexation amounts of 6% to 7.5%. These insurers also conducted educational campaigns in renewals, mail outs and websites, to encourage the consumer to review their insured sum.

Increase in average sum insured probably reflects the increase in:

• the percentage used by insurers to update sums insured, and
• education measures targeting consumers

Chart 3: Comparison of sum insured in 2005 and 2006

Chart 4: Percentage increase of average sum insured from 2005

Premiums

Our 2006 survey revealed that 11 insurers structured their premium rates so that the percentage of premium proportionally decreased for higher sums such as $300,000-that is, to get an increase in cover of 30%, from $300,000 to $390,000, they would not have to pay another 30% in premium. However, at least three insurers did not adopt this approach.

A 2000 survey of consumers found that many consumers were prepared to pay a further $75 to increase their cover by $90,000.¹⁹ These consumers may therefore be able to obtain a higher level of cover for less than they think, either through their own insurer or by shopping around, depending on the approach taken by their insurer to charging for increases in cover.

Consumers concerned about their premium may also be able to reduce the amount they pay by agreeing to pay a higher excess in the event of a claim. The 2006 survey revealed that 11 insurers enable consumers to easily change the amount of excess online to reduce the amount of premium.

By shopping around the consumer may be able to obtain the same cover for less premium or a higher level of cover for a similar premium. Taxes on premiums for home building insurance policies can add significantly to the cost of the policy. A lower premium will also result in the consumer paying less tax on the amount of premium and result in greater overall savings to the consumer.

Adjusting sum insured during policy term

In the 2005 report we noted that the gap in time between the date the policy is taken out and the date that a claim is made may contribute to underinsurance. This will happen, for example, where rebuilding costs have increased during that time and the sum insured has not.20 The 2006 survey has revealed that 5 insurers adjust the sum insured during the policy term. The sum insured is increased by a percentage according to the number of months since the policy was taken out.

Educating consumers about underinsurance

Insurers are using different educational measures to inform consumers about underinsurance. These measures include:

• Enhanced information targeted messages in mail outs and renewal notices (as discussed above), and on websites, including messages, where applicable, encouraging homeowners to refer to an insurer's web-based calculators in order to check their level of cover.



• Research into the behaviour of consumers, based on consumer surveys or reviews of claims data. This enables insurers to provide targeted messages that consumers are more likely to respond to.

General Insurance Code of Practice

The new General Insurance Code of Practice should also have a role in reducing the risk of underinsurance.21 In the 2005 report we noted that it is difficult for consumers to understand exactly what costs are covered by their policy and the extent of those costs.22 This code commits general insurers to provide better and clearer information to consumers regarding what is covered in their policies.

¹⁸ One insurer introduced a 2-tier rating structure to make premiums more attractive on higher sums insured. Rates are reduced for amounts over $150,000 or $175,000 depending on type of policy. This may have encouraged consumers to insure for a higher amount.

¹⁹ 2005 report, p. 64.

²⁰ 2005 report, p. 45.

²¹ The General Insurance Code of Practice was launched in July 2005 and came into force on 18 July 2006.

²² 2005 report, p. 47.