Anne Gibson

Property editor of the NZ Herald

Insurance timebomb

House owners risk debt disaster by ignoring change in way policies set rebuilding values.

600,000 or more home owners could be unable to rebuild their houses after a disaster because they are under-insured.
600,000 or more home owners could be unable to rebuild their houses after a disaster because they are under-insured.

Hundreds of thousands of home owners could be under-insured and would not be able to have their houses rebuilt to current values after a disaster.

New Zealand's biggest insurer revealed this week that 60 to 75 per cent of its 800,000 homeowner policy holders have not responded to new estimated house values the company sent to them.

IAG New Zealand - which owns NZI, State Insurance and AMI Insurance - said home owners might not realise they could be left with crippling debts if disaster struck and they had not covered the full replacement cost of the house.

AA Insurance, which has more than 300,000 customers, said 75 per cent of its policy-holders had not made any changes to the estimated figure sent to them.

Almost 90 per cent of the rest had increased their cover, and early claims suggested these higher valuations were correct.

In several cases seen by the Weekend Herald, the insurer's estimated value was only half the actual replacement cost.

The problem also concerns the Insurance Council, which is planning a meeting this month to discuss what to do next.

The new "sum-insured" system started last year, after the Canterbury earthquakes revealed to insurance companies and their re-insurers that they had little idea of their true liability because no dollar values were put on houses. They were merely insured for full replacement cost.

Re-insurers now demand accurate values reflecting the cost of rebuilding or replacing a house.

In many cases, this means a big increase in values and premiums, particularly in Auckland.

Customers were told of the change and given estimated values as policies came up for renewal over the past year.

IAG's head of corporate affairs, Craig Dowling, said the company did not know why so many home owners had not responded to the estimated values, which were based purely on location and floor area.

"It's still an area of concern. We don't know if they've reviewed it and are comfortable with it."

Rohan Havelock, a barrister and senior lecturer in insurance at the University of Auckland, said this was unlikely.

He found it hard to believe so many house owners had not responded, because the valuations given by the insurance companies were "just desk-top calculations" and did not reflect the true value of insured homes.

"If you don't do anything, you're leaving yourself vulnerable and exposed. If you have a mortgage and the house burns down, the bank will still want to be repaid."

Mr Dowling said IAG was also concerned about home owners who had made improvements to their houses since setting their insured valued.

IAG's New Zealand premiums for the last half of last year rose only 4.7 per cent to $1 billion, up from $956 million in the last half of 2012.

Mr Dowling said some people had tried to minimise premium increases by reducing their cover or taking higher excesses - an option promoted by many insurers to help with affordability problems.

Consumer NZ says the new schemes unfairly require owners to estimate how much it would cost to rebuild their homes, an area in which most have no expertise.

"There's a big risk that you might get it wrong," said research and testing manager Hamish Wilson.

Homeowners could find themselves "thousands or even hundreds of thousands of dollars short" if they insured their homes for an incorrect amount.

Insurance Council chief executive Tim Grafton has recommended homeowners who do not know their property's replacement value should hire a builder or quantity surveyor to produce an accurate figure.

This can cost from $400 to more than $1000.

The problem

• Insurance companies used to pay the full replacement value of a house, but the Canterbury earthquakes revealed all our houses were insured for unspecified "full replacement cost" - meaning insurers had little idea of their true liability.

• Global re-insurers, who back NZ insurance companies, demanded the liability be established so their true exposure could be calculated. Home owners must now pay
premiums based on specified house values, known as "sum-insured".

• In many cases the house's value will be higher than under the old system, leading to big annual premium rises.

• Home owners can work out their home's value by using free online calculators or paying for an expert assessment.

- NZ Herald

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