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Friday, December 7, 2012

AA Insurance changes – important for everyone with house insurance

Stuff (here) has reported that AA Insurance will no longer provide a full replacement policy option – instead they will offer only a “sum assured” policy. Existing policy holders will automatically switch to the sum assured style of policy on the 1st of July next year (if you are an AA customer there is more info at the bottom of this blog entry).

The change to a fixed-sum policy can be expected to occur across all companies as it is becoming a requirement of re-insurers, who do not like having to cover a risk of unknown size.

AA Insurance have a media release here. The release puts a positive spin on the change, claiming faster resolution and greater certainty for policy holders. While this may be true in part, it is clear there will be crucial areas of uncertainty, and the end result will inevitably remain the same – claimants at risk of being denied what they were insured for.

As discussed in the Stuff article, establishing the rebuild value of a property will be difficult and there will be uncertainty how to adjust it over time.  AA Insurance put it this way:
With a Sum Insured policy the customer will be in control of establishing the value of their home and keeping it up-to-date, should they make any improvements or extensions.
Fine, but how is this to be done? AA suggest the use of on-line cost calculators (they will have one), or getting a valuation from a quantity surveyor, valuer or builder. I am sure insurers will be happy to accept these figures for the purposes of setting premiums, however will they also be accepted at face value when a claim is made? Will AA, and others, seek to review the valuation in the event of serious damage or total loss? If so, which recent history has shown to be inevitable, how will this be done and on what basis? AA have made no mention of this.

When things go wrong what will you get? This is not yet clear but the AA media statement says: “The rebuild value is known as ‘Sum Insured’, and is the cost to rebuild a home to the same size with similar materials at today’s rates.” Is it safe to assume that this includes to the same design? AA’s latest policy document (online here) is not clear about this. There is no indication whether a new policy document will be released on the 16th when the changes come into effect. What follows is based on the current policy document (which is undated).

Even if the same design is included in the insurance policy, there is one snake-oil aspect already evident in the detail of the policy announcement.
The snake-oil starts with:
By moving from square metres to Sum Insured, our customers will know upfront the most their insurer will spend to rebuild their home, in the event it does need to be rebuilt. They will also know they are paying the right price to insure their property, and that the specifics of their home have been taken into account.
Is it really both the right price and the right amount of insurance pay-out?  At the moment the answer seems to be no. No, because reading the latest AA policy document (online here) there is no definition of Sum Insured but there is a definition of Reinstatement value expressed as:
Reinstatement ValueThe costs to repair or to rebuild the home to a condition as similar as possible to when it was new or last enhanced, using common materials and methods, to a specification, size and standard comparable to the condition of the home immediately before the accidental damage occured, less any discount available to us
To begin with a few points of detail arise. What is meant by “similar as possible”, “common materials”,  “(common) methods”, and “comparable to the condition... immediately before…”? Does this mean substituting pine for rimu panelling, particle board for kauri flooring? With the new policy, if you paid for rimu and kauri, and whatever else, should you not expect that it will be supplied, especially as media statement says “the specifics… have been taken into account”?

The current policy has a limited number of definitions, and critical terms and expressions are undefined.  Such expressions need to be defined in the policy, as the Canterbury earthquakes have shown them to be at the heart of both confusion and conflict. Hopefully AA will be releasing a rewritten and better defined insurance policy when the changes come into effect on the 16th of this month.

A more important criticism relates to the last part of the definition where the Reinstatement value is adjusted downwards to reflect the amount of discount the insurer would expect to get (“less any discount available to us”).  If the insured is obliged to provide an accurate valuation which, as the media release states, becomes “the most their insurer will spend to rebuild their home”, will AA then apply a discount via a policy definition? Does this mean that the insured pays a premium for a sum the insurer has no intention of making available (a compulsory profit margin)? Unless changed this would seem to be a matter for the Commerce Commission to consider.

For AA customers from the AA media release:
What do customers need to do?If customers are taking out a new policy with AA Insurance, they’ll need to provide an up-to-date estimate of their home’s rebuild value. There are some simple ways to do this. One way is to use an online building calculator such as those that have been in use for many years overseas and are now available in New Zealand. These calculators enable details of the home to be entered before providing a general estimate of the rebuild cost to work from. Another way is for customers to provide their own valuation by their quantity surveyor, valuer or builder.
However if they’re an existing AA Insurance home insurance customer, from 1 July 2013 they’ll need to check their renewal policy to approve the Sum Insured figure. An estimated Sum Insured figure will be automatically generated based on the existing policy for the customer to review, and will be adjusted each year to include inflation and general increases in rebuilding costs.
If their policy was renewed before 1 July 2013, customers can either wait until the following year for renewal, or change their policy over to the new Sum Insured at their discretion.

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