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Sunday, December 9, 2012

IAG and Vero go for “sum insured” insurance instead of full replacement

Stuff today reported (here) IAG and Vero have announced they are going down the “sum insured” route to replace all “full replacement” house policies. This is very much a nationwide political issue that has arisen out of Canterbury’s earthquake insurance experiences.

While it is a sensible and potentially lucrative business model for insurers and reinsurers, there are major pitfalls for policy holders and the government. Based on Canterbury experiences it is easy to envisage a not too distant future where practically every major damage or loss claim, no matter what the cause, will now be more open to the practices refined by insurers in Canterbury. At every opportunity, where costs might be reduced, policy valuations and the claims being made are likely to be subjected to insurer-friendly assessments (or reassessments) of both the sum insured and the insurance company’s view of the replacement cost.

At this stage the extent and detail of the risk to policy holders isn’t clear (the new policies aren’t yet available for scrutiny), however a quick first cut of the issues are on the blog, in regard to AA insurance, here. Not mentioned in that blog entry is the issue of who will be the losers of the “sum insured” approach. Two things come to mind.

The first relates to the risk of premium cost escalation, and applies particularly to those on fixed or low incomes. The annual rebuild price inflation adjustment has the potential to ratchet policy values and premiums quite quickly.

If insurers offer an on-line calculator, how will it work and will the underlying assumptions and values be available for scrutiny or negotiation? How robust and fault-free will it be? If an automatic policy adjustment approach is offered, this could become very onerous should the insurer take the route used by life insurers, some of whom have an automatic adjustment mechanism that increases premiums based upon a percentage rate (e.g. 10%), or the rate of inflation, whichever is the higher.
Depending on the quality of assessment needed to meet the insurer’s requirements, especially for high value properties, valuations and regular re-evaluations may have to be done by suitably qualified assessors and will add significantly to the cost of insurance.

A major risk here for any future disaster is the number of households that will have become unintentionally, or of necessity, under-insured, or have flagged away insurance altogether, because it is too complicated to understand or genuinely too expensive.  What might the social cost of this be? Has the government any idea? NOTE: -at one stage the expression “self-insured” was used politically and within CERA to describe those without insurance. This is merely denigrating propaganda and not a fit description. To be self-insured involves making that decision based upon free will and a range of choices; being uninsured is a situation dictated by circumstances beyond the individual’s control. Hopefully this abuse of those in an intractably hard place won’t continue, and officials and politicians will bring greater integrity to bear on their analysis of the future of property insurance throughout New Zealand.

The second concerns those in affluent suburbs. Under “full replacement” there was little wriggle-room for insurers – lose a house, get another one built. The new approach means every major claim on a high value property is an opportunity for insurers to challenge the integrity of the valuations upon which the policy was based, and seek a means of reducing or even denying a claim. In addition there will be opportunities to quibble over whether the property was fully or under-insured, dispute whether special or expensive features were properly disclosed or valued, what the rebuild cost actually is, and the value of the insurance company’s liability. For the policy holder, any or all of these are likely to mean they will receive less than the cost of having the property rebuilt. Disputes and litigation will be likely, expensive, and time consuming. What will be the downstream impact of this be? For example how might it affect the courts’ system which is already struggling with civil cases?

As this issue affects the whole country it is imperative government becomes involved to ensure home insurance remains affordable, and that policies are in plain language documents which mean exactly what the plain language says (the Australians are heading down this track). In addition, current insurance dispute procedures need to be vastly improved with much greater openness and efficiency by insurance companies, quick and full disclosure of information held by insurers on a claim and claimant, and the financial limit set on the Insurance and Savings Ombudsman (currently $200,000) significantly increased and inflation adjusted (as policy values and premiums will be).

The relatively rapid introduction of this change, with no attention yet to how it will work and what safeguards will be available, indicate insurers aren’t concerned about a smooth transition or it’s effects. AA Insurance’s “sum insured” policies start being issued on the 16th of this month – what disclosure has there been about the nature of the contracts, the level of information to be provided by property owners, and in particular what constitutes a satisfactory rebuild valuation for the property being insured?

As of today the Insurance Council of New Zealand has nothing on it’s website about the issues surrounding this major change in property insurance (or even that it is happening), and in particular there is nothing about suitable methods for calculating property values under a “sum insured” policy.

Insurers just want to reduce their risk as rapidly as possible, irrespective of the consequences to policy holders and the government.
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