How our insurance policies are going to change, get more complicated, and likely to cost much more.

As this year progresses insurers are changing all existing house insurance policies from “full replacement” to “sum assured”. The change means no one will automatically have a “like for like” insurance policy. The change will require each home owner to work out how much it would cost to replace their house, and insure it for that amount.  It won’t just be the quality of your house that affects the cost of rebuilding it, there are also factors such as the land it is on (e.g. on a slope or a hillside, access ways, retaining walls). Replacement cost will be totally separate from rateable value or market value. If the amount you insure your house for is too little, you won’t get it rebuilt the way it was (and you might even be penalised for being underinsured). Insure for too much and you will being paying too much money and only get what you had. Year after year the sum will need to be adjusted for increasing building costs (they never come down). Do you get the house re-valued each year, or accept the recommended increase provided by your insurance company? Get this wrong and again you may be underinsured. The vicious underside of this new policy approach is that in a falling housing market building costs may still rise while market values decrease: your policy payments will continue to increase while the value of the house drops. Invariably cost inflation increases are far ahead of wage and salary increases, which mean insurance policies will become less and less affordable. Against this background you can visit IAG’s brand new insurance website need2know.org.nz (here). The website is designed to help policy holders from all companies understand how the new approach will affect them. The following is an extract from IAG’s guide to the changes which can be downloaded from the website:

What is the cost of rebuilding? An estimate of the cost of rebuilding a home should be based on what it could cost to rebuild the house on its current site and based on its present size, standard and type of construction. It should include other structures such as decks, driveways, sheds, garages and fences. While building costs will be a significant portion of the estimate, it should also take into account the demolition and removal of debris, site preparation, professional fees and compliance costs. The need2know.org.nz** calculator provides some allowance for these factors when estimating a home’s likely rebuilding cost. The estimate should also include any retaining walls, Recreational Features (tennis courts, permanent swimming pools, and spa pools), and features defined in our home policy as Special Features. Check your policy wording for details about the level of cover you have (if any)

Visiting IAG’s website (here) could be very important to your financial and emotional health. Other issues associated with the house insurance policy changes were recently blogged here.

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)?

More on the new “sum assured” house insurance policies

Diana Clements, writing in the New Zealand Herald today (here), has an article about the future of property insurance as companies go along the Sum Assured or Fixed Sum route. This is the future for all of us, and has very serious implications for everyone with a house insurance policy.  The article is an important read as preparation for when you have to renew your insurance policy during the year. A few points not evident in the article:

  1. there is no clarity yet about what the technical terms in the new policies will mean. There may be a wide difference between insurer and policy holder as to what the policy document will mean in practice. An ideal scenario for a plain English policy document approach.
  2. there is no certainty that insurance companies will accept the value of the agreed sum should the property be damaged or destroyed. Christchurch’s post-earthquake experience shows that some insurers will endeavour to find points to re-interpret or dispute, to reduce the cost of the pay-outs they have to make.
  3. there is no certainty that the new policies will give claimants sufficient rights to protect their interests should a dispute arise.
  4. the article discusses the role of the Insurance and Savings Ombudsman in neutral and uncritical terms, missing the point that the ISO has been relatively ineffective in the Christchurch situation.

There are two previous post on this form of insurance, for AA insurance here, and IAG plus VERO here. .

IAG and Vero go for “sum insured” insurance instead of full replacement

Stuff today reported (here) 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, here. 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).

The relatively rapid introduction of this change, with no attention yet to how it will work and what safeguards will be available, indicate insurers aren’t concerned about a smooth transition or it’s effects. AA Insurance’s “sum insured” policies start being issued on the 16th of this month – what disclosure has there been about the nature of the contracts, the level of information to be provided by property owners, and in particular what constitutes a satisfactory rebuild valuation for the property being insured?

As of today the Insurance Council of New Zealand has nothing on it’s website about the issues surrounding this major change in property insurance (or even that it is happening), and in particular there is nothing about suitable methods for calculating property values under a “sum insured” policy.

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

AA Insurance changes – important for everyone with house insurance

Stuff (here) 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 on the 1st of July next year (if you are an AA customer there is more info at the bottom of this blog entry).

The change to a fixed-sum policy can be expected to occur across all companies as it is becoming a requirement of re-insurers, who do not like having to cover a risk of unknown size.

AA Insurance have a media release here. The 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 (online here) there is no definition of Sum Insured but there is a definition of Reinstatement value expressed as:

Reinstatement ValueThe 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)? Unless changed this would seem to be a matter for the Commerce Commission to consider.

For AA customers from the AA media release:

What do customers need to do?If customers are taking out a new policy with AA Insurance, they’ll need to provide an up-to-date estimate of their home’s rebuild value. There are some simple ways to do this. One way is to use an online building calculator such as those that have been in use for many years overseas and are now available in New Zealand. These calculators enable details of the home to be entered before providing a general estimate of the rebuild cost to work from. Another way is for customers to provide their own valuation by their quantity surveyor, valuer or builder.

However if they’re an existing AA Insurance home insurance customer, from 1 July 2013 they’ll need to check their renewal policy to approve the Sum Insured figure. An estimated Sum Insured figure will be automatically generated based on the existing policy for the customer to review, and will be adjusted each year to include inflation and general increases in rebuilding costs.

If their policy was renewed before 1 July 2013, customers can either wait until the following year for renewal, or change their policy over to the new Sum Insured at their discretion.