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Updating the sum insured
In the 2005 report, insurers indicated that they used a range of different
methods to revise the recommended sum insured on renewal. The 2006
survey indicated that this is still the case. Methods used include the
Consumer Price Index (CPI), Cordell Housing Price Index (CHIP),
Housing Building Index (HBI), Rawlinsons Building Price Index (RBPI),
and by way of a fixed amount.
Percentage increases on renewal in 2006 varied from 3% to 8.6% with 2
insurers using CPI alone to update the sum insured by 3% and 3.6%. We
believe that there is a greater risk of the consumer being underinsured
where the annual increase on renewal is based solely on CPI or the RBPI.
We note that one insurer in the 2006 survey commented that over the past
6 years the percentage increase in housing costs has been more than
double the percentage increase in CPI, primarily as a result of a shortage
of skilled tradespeople.
We consider that CHIP is likely to produce a more accurate estimate of
rising costs as it tracks both changes in the costs of materials and labour
both by city and region.15
Generally, insurers have increased the percentage figure used to calculate
amounts on renewal since the 2005 report. One insurer increased its
percentage yearly increase from 3% to 6% from May 2006, and 5
insurers increased their percentage yearly increase from 2005.
In the last 12 months to June 2006 building costs have increased by an
average of 4% Australia wide.16 Higher indexation rates do not
significantly tackle the problem of underinsurance.
The 2005 report found that:
- most insurers did not inform consumers about the method by which
the suggested increase was determined, and
- only 3 insurers suggested in renewal notices that consumers may
wish to review their level of cover.17
The 2006 survey revealed that 7 insurers now take the opportunity to
educate customers about underinsurance on their websites and/or in mail
outs and renewals. One insurer includes a separate notice alerting
consumers to the risks of underinsurance on renewal. Consumers are
directed to its web-based calculator to check the adequacy of their sums
insured. Of the insurers surveyed, another 6 insurers are also considering
educating their consumers about underinsurance on their websites and/or
in renewals or mail outs within the next 12 months.
Most of the insurers surveyed indicated that they are not in a position to
provide consumers with individual advice about the adequacy of the sum
insured. However insurers provide consumers with access to generic
tools such as a calculator and/or recommend the consumer pay a licensed
builder or quantity surveyor to estimate rebuilding costs. We note that a
total replacement policy avoids the limitations in this approach.
In the 2006 survey, 6 insurers disclosed to some extent that the insured
sum had been increased. Consumers are generally told that annual
percentage increases in the sums insured are made to keep in line with
inflation, rising values and costs. One insurer disclosed the percentage
increase on renewal of 5% with another disclosing an increase of 3%, 'to
account for increases to the cost of living'.
Chart 2: Percentage increase of principal sum on renewal from 2005
15 2005 report, p. 42.
16 Reed Construction Data Cordell Building Indices-Cordell Housing Index Price
(CHIP) state figures as follows: NSW 2.1%, WA 5.4%, SA 6.6%, Vic 2.3% QLD 3.8%.
17 2005 report, p. 41.
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