|
How insurers are helping consumers to reduce the risk of underinsurance
Since the 2005 report, most insurance companies have made a significant
number of improvements designed to help address the problem of
underinsurance. In general, the insurance industry has recognised that
consumers need access to better policies and better information if the risk
of underinsurance is to be addressed systematically.
Changes in policy cover
In the 2005 report, we encouraged insurers to explore different types of
policies with a view to minimising or removing the problem of
underinsurance. In particular, we encouraged insurers to explore whether
it was commercially viable to offer the following policies:6
- Total replacement policies-The insurer agrees to pay all rebuilding
costs, not just those costs up to a specified amount.
- Extended replacement policies-The insurer will meet potentially
higher rebuilding costs higher than the nominated sum insured where
the house is destroyed in a mass disaster.
Total replacement policies
Estimating the precise cost of rebuilding is complex; it is also impractical
for consumers to obtain estimates from architects, builders or quantity
surveyors.7 A total replacement policy avoids this problem by shifting the
onus of estimating rebuilding costs from the consumer to the insurer.
At the date of writing, two insurers have introduced total replacement
policies. This type of policy is common in New Zealand and the United
States, where they are called 'guaranteed replacement policies'.
One insurer, under its total replacement policy asks each consumer 9 specific
questions about their home relating to the construction of walls, year built,
number of floors, roof type, number of bedrooms (average size or large),
number of bathrooms, garages and carports (number of cars accommodated)
and any other improvements (e.g. pools, tennis courts, decks, granny flats).
These questions do not require any expertise on the part of the consumer
and the consumer does not need to refer to other experts to answer them.
The answers to the 9 questions are fed into a new calculator, which is
invisible to the consumer and allows the insurer to determine an
estimated rebuilding cost.
Another insurer with a total replacement policy still requires the consumer
to estimate a sum insured but this will only be relevant in the calculation of
the premium. Consumers are referred to the web-based calculator and call
centre employees to determine an appropriate sum insured.
The introduction of total replacement policies will significantly address
the problem of underinsurance by providing for the full replacement cost
of the home.
However, consumers should read the exact wording of these policies, as
there may be a small risk of a gap between the amount paid out and the
actual costs of rebuilding when:
- there is a cash settlement and a period of time passes between the
time of cash settlement and the time of rebuilding, or
- building codes change after the loss and before rebuilding,
particularly in response to a disaster.
The extent of this risk will depend on the length of time before the
consumer commences rebuilding.
Extended replacement policies
Under an extended replacement policy, the insurer will pay up to a
certain percentage over the sum insured if necessary to meet the costs of
rebuilding. Typically, the additional amount is 20%-50% above the sum
insured. This type of policy is the current standard policy in the US.
Two insurers have adopted extended replacement policies that provide an
additional 25% or 30% above the sum insured. While this type of policy
would offer some relief for consumers who suffer a loss in a mass disaster,
we note that after the ACT bushfires building costs increased by 50%
between November 2002 and January 2003. Similar increases appear to
have been experienced after Cyclone Larry.
One of the insurers offering an additional amount of 30% as an optional
feature requires the consumer to obtain a written building cost valuation
from a licensed builder or quantity surveyor in the last 6 months. The
consumer will have to obtain a new valuation every 6 years.
We estimated the cost of a valuation for an average home to be between
$400 and $600. This is likely to be a major barrier to consumers taking
up this option.
At the time of writing, we are aware that 2 other insurers are considering
introducing a total replacement policy and 4 insurers are considering
introducing extended replacement type policies.
6 2005 report, pp. 47-48.
7 2005 report, p. 19.
|
