• Estimating the sum insured
  

Estimating the sum insured with web-based calculators

Consumers generally need specialist assistance to estimate rebuilding costs but it is often impractical to refer to builders, architects or quantity surveyors. Many insurers now provide consumers with access to webbased calculators. There are two types of web-based calculators used in Australia:

• Cost per square metre-this calculates the cost of rebuilding based on the size of the house and type of building materials.
• Elemental estimating method-this seeks information in approximately 30 categories including the size of individual rooms, ceiling heights and the period of construction.

One of the main recommendations of the 2005 report was the adoption of more sophisticated web-based calculators.⁸ This type of calculator uses the elemental estimating method that we believe provides a more realistic estimate of rebuilding costs than the cost per square metre calculator. In particular the cost per square metre calculator does not identify, or take into account, increases to building costs resulting from features such as the slope of the land or high quality internal finishes.

Of the 16 insurers surveyed in 2006, 5 did not provide for a web-based calculator to help consumers determine an appropriate rebuilding cost.⁹ There are now 7 insurers using the more comprehensive web-based calculator. However, 4 insurers still provide consumers with a calculator that estimates rebuilding costs based on a simple formula where the size of the house is multiplied by the type of materials.

We reviewed the operation of web-based calculators by testing the estimated results for a house in the ACT. It was one of 5 houses we had already tested in the 2005 report. The house is a small single-storey 50- year-old fibro home, with 3 bedrooms, 1 bathroom and medium-sized veranda built on a flat block of land:¹⁰

• In the 2005 report the variation between the lowest and highest estimates of rebuilding costs for this house was 103%¹¹ with the lowest estimate at $80,000 and the highest value estimate at $162,445.
• In 2006 the variation between the lowest and highest estimates obtained by using web-based calculators in 2006 was 54% with the lowest estimate at $116,725 and the highest value estimate at $180,000.¹²
• The lowest estimate increased by 39% from 2005, and the highest estimate increased by 21%.
• The 2 lowest estimates were produced by a cost per square metre calculator.

The degree of variation has been significantly reduced. However, a figure of $116,725 obtained with a simple calculator would still leave consumers at grave risk of being underinsured. This indicates a continuing risk of underinsurance for consumers with the 4 insurers that still supply only a cost per square metre calculator.

Chart 1: Comparison of sum insured between six calculators for fibro house in Ainslie ACT

The accuracy of any calculator also depends on how frequently the cost information it uses to make its calculation is updated.¹³ In our 2005 survey of insurers, we found that while one insurer updated its calculator every 6 months, the majority updated them annually and one insurer updated it every 18 months.¹⁴ The 2006 survey found that calculators are now updated more frequently. Of the 11 insurers that used a web-based calculator, 3 were updated every 3 months, 1 every 6 months and 7 every 12 months.

The insurance companies that are monitoring usage indicate that less than 10% of their consumers use the web-based calculator, with one company indicating that the amount of usage is closer to less than 0.5%. More insurers are, however, making these calculators available on their web sites for their customers with an increase from 3 insurers in 2005 to 7 insurers in 2006. Insurers are also directing customers to their websites in targeted materials. One insurer noticed a sizable lift in use of its webbased calculator as a result of targeted messages it had sent to its customer base about underinsurance particularly since January 2006.

⁸ 2005 report, p. 30.
⁹ AAMI used a complex web-based calculator until 30 August 2006.
¹⁰ Further characteristics of the 'Ainslie-Fibro' home are set out in Table B.1: see 2005 report, p. 76.
¹¹ 2005 report, p. 32.
¹²One insurer's calculator estimated an amount of $97,250 but this did not include supplementary costs so was excluded from this comparison.
¹³ 2005 report, p. 35.
¹⁴ 2005 report, pp. 35-36.