Michael Naylor: Underinsurance - $650 billion estimate a bit low
Income protection is not suitable for lower income families who earn close to Winz benefits, says Naylor. Photo / Chris Skelton
On Monday the Financial Services Council released a report called "Exploring Underinsurance within New Zealand". I was one of the Massey University researchers who modelled the data to quantify the extent and the cost of underinsurance in this country.
We calculated that New Zealanders were under-insured (compared to ideal insurance levels) by about $650 billion. Accountant Bruce Sheppard has been quoted in the media saying that this figure is overstated. Having crunched the numbers myself, I strongly disagree.
Mr Sheppard has argued that the $650 billion figure is too high because only some people need insurance, and only some kinds of insurance (in the New Zealand Herald); and that $650 billion was too high a percentage of national GDP (in an interview on Radio New Zealand).
It seems Mr Sheppard has not actually read the report, and I'd like to refute his claims:
•While the Massey estimate of $650 billion should be regarded as a ball park figure and is subject to many assumptions, it is in the right ballpark - the true, unknowable figure will be similar or higher.
•The estimate was based on a complex needs analysis model, which divided the results from the survey into eight family groups. It estimated the likely insurance needs of these family groups, based on international standard insurance practice. It took account of the rich, the poor, the childless, levels of assets, debts, number and age of dependants, government welfare, and so on. The methodology was one the most advanced ever used internationally. We were conservative in our assumptions, and used a substantial drop in current family living stands as our baseline, so we probably underestimated. All the factors Mr Sheppard expressed doubt about were known by us and adjusted for.
•Mr Sheppard's comparison of our estimate to national GDP is faulty. Our estimates were based on the financial vulnerability of families over their life cycle, using present value of future needs from current age until retirement. As a result, you would expect insurance needs to be a multiple of current family income, and therefore a high percentage of current national income. Our estimates are on the low side for international research. Mr Sheppard is confusing a "flow" of income with a "stock" of financial vulnerability.
•Mr Sheppard regards "income continuance insurance" as the only essential kind, but all types of personal risk insurance (life, income protection, trauma, total permanent disability and health) are useful to particular sets of families. For example, life insurance is vital to most Kiwis who have dependants.
Income protection is not suitable for lower income families who earn close to Winz benefits.
The majority of New Zealand families are currently extremely vulnerable to adverse events relating to the death, disability or illness of the income earners. The vast majority of single New Zealanders are vulnerable to adverse events relating to long-term disability due to sickness.
The majority of the personal insurance cover Kiwis do hold is faulty in terms of the type and sums insured. This is in sharp contrast to insurance cover for houses or cars, items far less valuable than an individual's ability to carry on earning a living.
This is an area of New Zealand family life that needs a lot more attention and awareness. Commentators, like Bruce Sheppard, do not help the debate. Instead, they simply confuse people.
Dr Michael Naylor is a senior lecturer in insurance and finance at Massey University.
for 4.5 million people? (4,500,000)
so we're underinsured by $144,444 each?
are you sure?
*my primitive arithmetic may be rather rubbish*
Every year or two someone (usually from the insurance industry) trots out that NZers are underinsured, but i never believe them. People are insured to the level they want or perceive they can afford. If not they would go and buy some more. So they are insured at the right level for their circumstances, even if this isn't the level that the insurance industry would prefer.
For myself I only insure anything that I can't, or don't want to, afford to lose. My guiding principle is that insurance companies make money, so I'm better off self insuring anything I can afford to, or living with the risk, because unless I'm very unlucky I'll lose out in the long term (I haven't been unlucky so far).
One thing that I couldn't understand when watching the coverage of the CHC quakes was the number of people in nice homes, perhaps paying rent who were grossly under insured and lamenting the loss of so many expensive items in their house. They didn't pay insurance but have since had assistance from the government to covers various losses. While some of the other residents of CHC have been battling insurance companies, but will eventually be paid out.
Just how stupid are NZers?
The coffers are empty, if we have another major disaster their is no money left to pay out for the willfully uninsured.
So much of what is reported and commented on in the press in NZ is about a complete lack of personal responibility, combined with pitiful pleas of sympathy. When did we become so slack and pathetic?