Do you understand your insurance policies? Experts say industry needs a shakeup

Many people admit to having no interest in reading their insurance policy documents. Photo / Getty Images

Calls to shake up the insurance industry are gathering momentum as promises from the Government in 2019 to review the law still haven't been introduced to Parliament.

Consumer NZ says it is pushing for better protections as its research shows ''there are significant problems for consumers in this market''.

The news comes as the Insurance Council of NZ is trying to raise awareness as many consumers admitted to having no interest in reading their policy documents.

In a written statement, the council said it launched the revised Fair Insurance Code in 2020.

Minister of Commerce and Consumer Affairs David Clark said the Government recognised many consumers find insurance policies difficult to understand and there were other issues with New Zealand insurance law.

Officials were working on an exposure draft Insurance Contracts Bill to implement these changes, and the draft bill was planned to be released for public consultation this year, he said.

Insurance Council of NZ chief executive Tim Grafton. Photo / NZME

Insurance Council of NZ chief executive Tim Grafton said its research showed Kiwis had a disturbing lack of understanding of insurance.

Only 54 per cent of those who completed the survey claimed to know what their insurance covered them for.

Grafton said the council believed the number was much higher, with ''many admitting to not having any interest in reading their policy documents''.

Research from Australia revealed people had apathy for reading their policies, spent too little time on it, and had an overconfidence in their understanding.

''If you don't read and understand the cover your insurance provides you, you may not have the right insurance for your needs or have a nasty experience at claim time.''

Three of the most commonly misunderstood parts of insurance were the sum insured, excesses and the difference between sudden and gradual damage.

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Consumer NZ head of research Jessica Wilson said the organisation was pushing for better protection in the insurance market.

In 2019, the Government agreed to review the law, ''however, progress has been slow and legislation has yet to be introduced into parliament,'' she said.

Its research showed there were significant problems for consumers in this market.

''Our latest survey found just 13 per cent of consumers felt confident insurers could be trusted to give good advice. Only 18 per cent felt they fully understood their insurance policy.''

One in four consumers had also experienced a problem with their insurer.

''The most common complaint was having a claim unreasonably declined, followed by poor customer service.''

Consumer NZ wanted changes made, which included making cover clearer, fixing unfair terms, dealing with disclosure, improving price transparency, publishing complaints and cleaning up commissions.

Te Ara Ahunga Ora Retirement Commission personal finance lead Tom Hartmann. Photo / NZME

Te Ara Ahunga Ora Retirement Commission personal finance lead Tom Hartmann said insurance policies were a form of managing risk and avoiding financial ruin if something unexpected happened.

The commission wanted people to be in the best position they could be when they reached retirement, and to grow their financial position ''over your entire lifetime''.

''So what do we do in order to stay on track and keep ahead financially is we transfer that risk of the unexpected. So when we put insurance in place and when that product works well, it gives us peace of mind.''

Its surveys revealed Kiwis struggled when it came to understanding and comparing financial products like insurance.

''Insurance policies, as a product, have gotten so complex and because you can set them up in so many different ways they have become very hard to understand and compare.''

He said that meant nowadays it was advisable to seek professional help and those experts could assist with finding the right policies for your budget and also deal with any claims.

Craigs Investment Partners head of private wealth research Mark Lister. Photo / NZME

Craigs Investment Partners head of private wealth research Mark Lister said unfortunately, insurance is ''boring'' and pretty ''dull'' and not the ''most exciting thing to sort out''.

''It's kind of a necessity but like many people, insurance isn't something I've personally looked at as closely as I should, as a customer. I've got to admit never really reading past page one of a policy.

"So, for those of us who have not taken a strong interest, we might not always know what we are paying for or what sort of loopholes there are,'' he said.

Lister said, in his view, there was a belief that some insurance companies ''will use any opportunity to get out of paying."

He believed some insurance companies had a reputation of trying to "weasel" out of things, he said.

Lister said people probably shopped around for the best price, but that this didn't necessarily mean they were getting value for money.

''If you are getting the cheapest price but there are more exclusions or potential loopholes, that might mean you aren't necessarily getting the best deal.''

Tauranga Budget Advisory Service manager Shirley McCombe. Photo / Supplied

Tauranga Budget Advisory Service manager Shirley McCombe said she estimated less than 20 per cent of its clients had insurance.

''The great majority of our clients struggle from week to week and they do not have the money for today – never mind tomorrow.''

Cost was a huge barrier while others may not have the confidence or skills to seek information about insurance.

She said some clients had contents, car, funeral or life and medical insurance.

However, she said while insurance was an important part of protecting your financial wellbeing, for many it was just not an option.

In her view, it was important to seek independent advice because not all insurance policies were created equal, and sometimes people were lulled into a false sense of security by a policy that did not provide for them when they needed it.

Rotorua Budget Advisory Service manager Pakanui Tuhura. Photo / NZME

Rotorua Budget Advisory manager Pakanui Tuhura said clients with mortgages were required by the banks to have house replacement insurance and usually mortgage repayment insurance.

The importance of insurance was an individual decision.

''What is important for me to insure is different to what others believe. All I can say is people should shop around and take the best option for them.''

Tuhura said the main issue he had with insurance was the length of the agreements and clients not understanding what they are covered for and any exceptions.

''It would be nice to have a one-page insurance document in plain speech that tells the client exactly what is covered, what isn't and the cost and benefits.''

Commerce and Consumer Affairs Minister, David Clark. Photo / NZME

Minister of Commerce and Consumer Affairs David Clark said the Government in late 2019 agreed on changes to insurance contract law that included requiring insurance policies to be written and presented clearly so that consumers can easily understand them.

Reforming the duty of disclosure - the current law requires policyholders to disclose all information that would influence the insurer's assessment of risk. If a consumer does not disclose something, an insurer can cancel the contract and decline all claims, even if the non-disclosure was trivial and unrelated to any claims.

It also sought better protection for consumers from unfair contract terms in their policy by addressing the current insurance-specific exceptions for these terms.

This work was slowed during 2020 due to the Covid-19 response. Addressing these issues with insurance law remained important. However, the bill covered complex areas, so it was important to take the time to get this right, he said.

''In the meantime, I have also been progressing the Financial Markets [Conduct of Institutions] Amendment Bill. The bill is currently waiting to complete its second reading.

''One key focus of this bill is to set a principle that insurers must treat their consumers fairly. It also requires insurers to comply with regulations that will ban certain types of sales incentives.''

Clark said he was committed to "progressing these changes to ensure consumers are treated fairly and insurance policies work as expected''.

''All New Zealanders are entitled to expect that their insurer, and their products, will do what they say they will.''

NZ Insurance Council by the numbers

• Its 28 members represent over 95 per cent of all general and fire insurance in New Zealand, accepting the risks of more than NZ$1 trillion of New Zealand's assets and liabilities.

• During 2020, ICNZ members paid more than $248 million to support New Zealand's recovery from extreme weather events, making it the costliest year for severe weather.

• Insurers were there when customers needed them with about 13,600 claims paid during the year.

• Each event was a poignant reminder that the unexpected can happen – and just how important it is to have insurance to help you get back on your feet in times of need.

Consumer NZ advice about insurance

• Regularly review your insurance cover and the risks you need to insure.

• If you run into a problem with your insurer, complain.

• All insurers have to belong to a dispute resolution scheme. These schemes are free for consumers to use.