One of the most significant changes to New Zealand’s insurance market is underway and is potentially going to have a dramatic impact on every home owner in New Zealand.
The majority of New Zealand insurers are moving from actual replacement policies to sum insured policies. Until recently, the majority of insurance policies for New Zealand houses were based on actual replacement value. Actual replacement value was calculated based on the square metres of the house. There might be some distinction between garaging and living areas, but in substance the insurer was agreeing to construct a house of a certain square metreage on the site in the event of total loss.
The Christchurch earthquakes changed all this. New Zealand insurers and overseas reinsurers took a hammering. The overseas reinsurers (who insure the insurers) formed the view that they needed to know the maximum possible risk they could be exposed to in New Zealand. The collective response has been to adopt the new sum insured model. This allowed the New Zealand insurers to report to the overseas reinsurers what their total risk was.
A new approach to property insurance
Insurers who have adopted the new sum insured model are now advising each of their existing customers of the sum insured that they believe is appropriate for each home owner. This figure is calculated based on databases of information held by that insurer or obtained externally.
Once the new sum insured policy is in force, the sum insured will then be the maximum sum that an insurer is obliged to pay the homeowner in the event of total loss. If the sum insured is inadequate to rebuild the property, the house owner will have the option of either building a smaller property within the funds available, or to fund the shortfall from their own resources.
I recently received a letter from my insurer which set out in very plain text the need for me to fully consider the implications of the sum insured value that they had placed on my property. My immediate reaction was that it was grossly inadequate and as such I immediately instructed a valuer to provide an insurance valuation on my property.
That insurance valuation is broken down into multiple parts including:
- replacement of the house itself,
- replacement of any driveways and pathways,
- replacement of retaining walls and demolition costs,
- an inflation adjustment.
This is a buffer that the valuer recommends be included in the sum insured to allow for inflation in replacement costs from the time the sum insured is agreed.
The value of your property will change
It will be important to revisit the sum insured on a regular basis. It is my view that many residents in the Wellington, Lower Hutt, Upper Hutt and Kapiti regions are under-insured for their contents policies. We accrue a substantial amount of assets during our lifetime and the cost of total replacement would be significant. I have been an advocate for people reviewing their contents policy coverage to ensure that they have adequate coverage.
The introduction of the sum insured policy will require home owners to regularly review whether their level of cover is an accurate reflection of their property value. Increasing the sum insured will increase the premium payable. In the event that the increase in premium makes the policy unaffordable, the premium can be reduced by increasing the excess payable in the event of a claim.
It’s tempting – especially for first home buyers – to make the assumption that the insurer has got it right. However, the data that the insurer is using to calculate the sum insured will in many cases be erroneous. It’s crucial that each property owner gets a full valuation of their property to ensure that they have adequate cover.
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