By now you have probably seen the adverts with the talking letter boxes warning us about the changes sweeping the insurance industry in New Zealand.
The aim of the campaign is to help inform and educate home owners about the move from unspecified open ended replacement insurance, based on size (sqm), to maximum specified sum insurance policies, commonly known as Sum Insured policies.
Within the next couple of months, all new home insurance policies provided by the majority of insurance companies in New Zealand, will be on this Sum Insured basis. Existing policies will automatically move across to Sum Insured on their next renewal date.
In order to ensure you have the protection you need, in the event your home is damaged or destroyed, it is important that you are aware of these changes and know exactly what the cost of rebuilding your home would be.
Most homes insured in New Zealand currently have a total home replacement policy. This means that homeowners pay for their house cover by square metre, which typically involves telling the insurer the size of the house and a premium being worked out largely on that basis. If the home is totally destroyed in a fire or an earthquake, the insurer is responsible for demolishing the wrecked building and building a new house to the same size and specification as the previous one, with no limit to the amount they have to pay.
New Zealand is one of the last countries in the world where homeowners can pay for their insurance in this way.
A Sum Insured policy on the other hand, sets out a maximum amount the insurer will spend if a house needs to be rebuilt.
When setting up a new policy, or on the next renewal date, homeowners are going to be asked to state the dollar amount they want to insure their home for, in much the same way as they would insure their contents. Essentially, under Sum Insured, they will now be insured for the actual cost of rebuilding their home.
Why the change?
The change has been driven by the insurance companies and their international re-insurers (the companies that insure the insurance companies). For homeowners, the era of Full Replacement has been, as one journalist put it, ‘a comfortable time of certainty’; for the international re-insurers however, it has proven to be the opposite.
Prior to the Christchurch earthquakes, the re-insurers (in the New Zealand context) had no idea what their overall liability was and (rather naively) never thought they would need to know. In the wake of the earthquakes, they are beginning to find out, and it is scaring them.
As a consequence, the re-insurers are now seeking greater certainty around their maximum level of exposure to natural disasters and seeking to bring New Zealand closer to international standards of best practice.
The changes mean that life as a homeowner (in the short term at least) has just got a little bit harder, as the risk and the work associated with getting insurance coverage right, now lies with the homeowner.
If the homeowner gets the Sum Insured value wrong when setting up a policy or on the next renewal date, it may cost them, dearly.
Homeowners are going to have to be more involved and have a greater understanding of the cost of rebuilding their home in the event it is damaged or destroyed. They are going to need to have a better understanding of the effect inflation will have on the price of raw materials, and be aware of the implications that spikes in building costs, which often arise in the wake of widespread disasters, will have on their Sum Insured amount. It is also important to remember that the Sum Insured amount also covers the cost of site clearance, so they are going to have to factor that expense in as well.
If the Sum Insured amount is too small, the homeowner risks being unable to rebuild their house to the same size or standard it was beforehand. If they intentionally underinsure, they may find that any insurance payout they get for partial destruction (for instance if their kitchen is destroyed in a fire) will be reduced by the same proportion which they have underinsured the property.
It will be the homeowner’s responsibility to keep their insurance company updated upon each renewal. If they have completed any renovations or changes to the home in the previous 12 months, they will be responsible for updating their policy to ensure the Sum Insured accurately reflects the cost of rebuilding post renovation or change.
How should you calculate the Sum Insured
Do not use the market price or the Government valuation to determine the cost of rebuilding your home and do not rely on the sum which the insurance company will estimate, if you fail to provide them with a figure.
Use the online calculators which the insurers have created to help ascertain the rebuild cost of your home or employ the services of a professional, but be wary.
While the online calculators (which helpfully take into account inflation) are good for calculating the rebuild cost of standard sized, standard built buildings, they begin to show their flaws when used to calculate the rebuild cost of big, high value homes with special features such as gold taps and granite worktops for instance.
If you have a particularly complicated house or one with expensive fixtures and fittings, you may want to get a quantity surveyor to help calculate the Sum Insured.
Also be aware that the insurers offering the online calculators disclaim any liability for getting the sum wrong; leaving the homeowner with no one to turn to if they end up being underinsured.
If you are going to use an online calculator, generally, the more detailed the questions it asks, the better the calculator and the more accurate the result is likely to be. And try at least three. The more you use, the more accurate the sum you give your insurance company is likely to be.
If you want to engage the services of a professional, prepare yourself for the relatively hefty price tag that will accompany their inspection report. However, although the price may put many homeowners off this option, the cost of getting it right now, may save you money down the line. It is also worth remembering that you will have recourse to them in the event the Sum Insured is incorrect.
A recent survey suggested that one in three Kiwis are unaware that this change is taking place. Don’t be in that minority. If the tendency in the past has always been to file your insurance renewal documentation away either unread, or with a cursory glance only, do not be tempted to do that this year. Read it, carefully. It will likely include all the information you are going to need to ensure your transition from Full Replacement to Sum Insured is a simple one and to guarantee that if, God forbid, something should happen to your home, you have sufficient insurance in place to rebuild it.