Treasury report says underinsurance problem is widespread

Friday, 13 May 2016

New Zealand households may be underinsured by as much as $184 billion, Treasury says.

Since 2013, most New Zealand insurance companies have offered house insurance on a 'sum insured' basis. This means that home owners and insurers agree on the amount that the insurer will pay out in a disaster, rather than the insurer paying whatever it takes to rebuild the house.

The move was prompted by the Christchurch earthquakes, after which many insurers discovered their liability was much higher than had been expected.

But there have been concerns ever since that households have been underestimating how much they need to be covered for.

READ MORE: Homeowners still unsure about sum insured

Few have wanted to pay for the professional reports that would give them an accurate idea of the cost of a rebuild and the home insurance calculators that insurers offer only work well for standard homes without any unique features or tricky landscaping.

Treasury has released a new report by senior analyst James Sergeant which looks at the risks the change presented and whether the Government could end up exposed.

Sergeant said it was easy to see the benefits to insurers of the sum insured model.

'However, the new arrangements transfer responsibility for assessing rebuild costs to homeowners, and the evidence shows that many homeowners are not willing or able to calculate an accurate rebuild cost for their home,' he said.

'This can be a difficult calculation as, in the worst cases, the costs may involve total demolition, removal of the rubble and rebuilding a new home that is compliant with the current building code.  Therefore rebuilding costs often exceed the market value of the existing dwelling.'

He said if people found they did not have enough money to rebuild their homes, and the problem was widespread because of a natural disaster, there could be political pressure to provide assistance.

With information from insurers, brokers and valuation consultants, the report concluded that up to 85 per cent of homes could be underinsured by an average 28 per cent, or about $184 billion.

Sergeant said there was no sign that insurers were going to move away from sum insured policies.

He said the industry needed to work to help homeowners make informed decisions.

Gary Young, chief executive of the Insurance Brokers Association, said the figures were not a surprise.

But he said how to fix the problem was not clear. 'Insurance is a voluntary thing, people can decide how much to insure for. The issue is that most people have no idea how much it would cost to replace their home.'