Diana Clement: Shop around for insurance, but with care

Some homeowners affected by the Christchurch earthquakes have found their insurer in trouble and unable to pay out. Photo / Sarah Ivey

Shopping around for insurance can save a lot of money. It's something that everyone ought to do.

Almost everyone's insurance premiums are set to rise across the board thanks to the Christchurch earthquakes - so there's even more reason to shop around this year.

Insurers' perceptions of the risk to property in New Zealand from natural disasters has changed since September 4 last year, when the first Christchurch earthquake struck.

They also need to recoup their losses from the quakes and will have to pay higher reinsurance premiums in turn to ensure they are covered for the next big one.

Changing insurers shouldn't be done lightly, however. Choosing and/or changing insurers is fraught with its own risk.

Some of those dangers have come home to roost thanks to the Christchurch earthquakes. Although AMI's policyholders have been lucky, because the Government has stepped in to provide support to the beleaguered insurer, policyholders of Western Pacific are in a dire situation.

It's possible that many of Western Pacific's current claims won't be paid. What's more, policyholders lose the rest of their year's insurance cover and will have to fork out a second time to insure elsewhere.

Some have found that premiums have shot through the roof for them and in many cases the new cover is greatly restricted. Most are between a rock and a hard place and will have to put up with what they can get.

If you've lost your house thanks to the earthquake, you'll still get an Earthquake Commission (EQC) payout, although it's unlikely that will be enough to cover rebuild and contents replacement costs of most houses. If you're a commercial property owner, you're not covered by the EQC.

AMI customers are more fortunate than Western Pacific's because their insurer, despite struggling to weather the financial impact of the earthquake, is being propped up by the taxpayer and it would appear that claims will continue to be paid.

Consumer magazine told its members this month there was no reason for alarm.

"The Government's back-up financial support package for AMI means that the company can continue to carry on as normal and pay out claims and continue to service existing policyholders and seek new business."

Insurance industry insiders say both companies were undercapitalised and didn't pay enough in reinsurance premiums to cover themselves for "the big one", which hit twice in Christchurch.

It shows that cheap isn't always good, says Iain Tulloch, deputy managing director of broker Aon Insurance Services.

Aon, which places clients' business with insurance companies, has to "submit endless financials to London" when it wants to do business with a new insurer.

"We are a multinational company and we can't just have one of our brokers doing business with a Mongolian mutual." Western Pacific simply didn't pass that test, says Tulloch.

The average Kiwi can't differentiate between the likes of Western Pacific, with its fancy website and marketing material, and an international giant such as Allianz.

This lack of ability to differentiate has echoes of the finance companies where thousands of Kiwis trusted their life savings with puny companies owned by some Johnny-come-lately with little financial backing and no independent governance.

Before choosing an insurer it's worth looking at its Standard & Poor's credit rating, which can be found on http://tinyurl.com/3hsgnfc, and making sure you understand it.

Interestingly Western Pacific's "about" page on its website said: "Western Pacific is rated by Standard and Poor's". It failed to mention that it was rated bottom equal for New Zealand insurers along with Nationwide Insurance.

The reality was that both companies were rated "B/Stable", which meant that they were just below being "prone to changes in the economy" and just above "currently vulnerable". So - not that great.

The financial robustness of insurance companies is important. So too is the need to understand what you're buying when you shop around. It can be difficult comparing apples with apples.

Some people compare "bronze policies" from one company with "gold cover" from another, rather than comparing like for like, says Tulloch.

Understanding the wording of a policy is vital. The detail really is in the fine print of policies and it's not always easy to understand the convoluted wording that insurance companies like to use.

It's also worth considering how good the insurer is at paying claims - something that Consumer surveys regularly. Waiting months for a payout or having your claim turned down on a technicality isn't fun.

Way back in my university holidays I worked one summer temping for a company called Swann Insurance. I was charged with going through motorcycle claims with a fine-toothcomb looking for the tiniest excuse to reject them. I also did a stint at Sun Alliance Insurance (now Vero), which didn't bare its teeth in quite the same fashion. The point is that it's not much use having insurance if you're not going to be paid at claim time.

One issue to be aware of with health-related insurance is the practice of "underwriting at claim time". That means only asking the really tricky questions when a claim arises. It's more profitable that way. They don't want to see your medical record up front because they're keen to get your premium and don't want to waste money determining whether you'll actually be covered or not in the event of a claim.

The Insurance & Savings Ombudsman's files are littered with instances of underwriting at claim time, which is common in health and critical-illness policies, and can show its ugly head with life and travel insurance policies.

The issue is that if you have developed precursors to an illness and change policies, you will not be covered should that illness occur.

If, for example, symptoms of a condition are noted on a person's medical records before he or she changes insurer, the new insurer will reject a claim for that illness should it arise under the new policy. It doesn't matter whether or not the person was aware of the symptoms or what they might develop into.

The condition would have been covered if the person stayed put with the original insurer.

With all of these pitfalls, it can make sense to use an insurance broker. They get commissions from insurance companies for placing business, and should act in the best interest of the client.

Usually a broker will have a certain number of favoured insurance companies and/or policies, which they can compare for a client.

The broker should explain to the client why a certain policy is recommended.

They can also identify if bog standard cover is suitable for a particular policyholder and advise on more appropriate policies.

A client may, for example, work from home from time to time and need cover for expensive equipment, which would be limited under a standard household policy.

Or the person is a keen cyclist with a $5000 bike that needs more than standard cover.

It's not unheard of for Joe Bloggs, one-man-band builder or electrician without suitable liability cover, to inadvertently burn down a multimillion-dollar building and lose all of his or her personal assets.

A broker would have advised the need for liability cover, which some tradespeople have no idea they need.

The advantage of using a broker is that you have an expert who understands the ins and outs of insurance on your side and he/she can argue your case in the event of a claim.

Brokers have a vested interest in seeing their clients' claims paid out and will usually handle the claim from start to finish, which can be real peace of mind for clients.

The disadvantages, as Consumer found out during a mystery shop, was that brokers can have a conflict of interest, thanks to the commission they earn, and they don't always want to spend time with a client if it isn't bringing in a commission directly.