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Friday, 22 March 2013

More on AA Insurance’s sum insured house policies

AA Insurance have updated their Sum Insured FAQs (here). More topics are covered and additional information has been provided.

The topics covered are:

  • What are the changes happening to your home insurance?
  • Why the change?
  • What is the effect on my home insurance premiums?
  • When will the change happen?
  • Do I need to check and revise the Default Sum Insured on my renewal notice?
  • On what will my insurance be based?
  • How do I work out my Sum Insured?
  • Why can't AA Insurance work out the Sum Insured for me?
  • Who is Cordell? What is the Cordell Online Calculator?
  • What do I need to do?
  • Who is responsible for keeping my Sum Insured up-to-date?

This is important stuff no matter who your insure with as all insurance companies are following this path.

There are a number of issues for homeowners, as raised earlier on the blog, that aren’t covered by insurers. Extracts from them are below, if you click the link.

From Dec 9 2012

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 (see below). 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).

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

From Dec 7 2012

Stuff 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 in 2013.

AA Insurance’s media 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 there is no definition of Sum Insured, but there is a definition of Reinstatement value expressed as:
Reinstatement Value  The 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)?

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