Last updated 05:00 13/04/2014
Insurers are being urged to lift the figures they use to estimate
rebuild costs when working out the "default" sum insured they offer
homeowners, or many people risk not having enough money to replace their
houses if disaster strikes.
Leading quantity surveyor Construction Cost Consultants has just
completed a report that showed a wide gap between the per square metre
default rebuild costs assumed by insurers and the actual cost of the
rebuild as estimated by expert quantity surveyors.
Insurers must lift the per square metre rebuild cost figures they
use or that gap would leave many grossly underinsured if disaster
struck, said CCC general manager Gary Caulfield.
As many as three-quarters of people buying house insurance just
accept the default sums calculated by insurers, and for homeowners with
large mortgages, there's a risk they would find themselves in a negative
equity trap should their home be destroyed by the likes of fire or
natural disaster. Banks and other mortgage lenders have woken up to the
fact this could pose a risk to the money they have lent, particularly to
those with high loan-to-value ratios.
As many as three-quarters of people buying house insurance just accept the default sums calculated by insurers...
CCC studied rebuild estimates prepared for nearly 6800 homes of varying size and construction.
For homes estimated to cost $400,000 to $500,000 to rebuild, for
example, CCC's report showed an average per-square-metre rebuild cost of
just over $3530.
By contrast, insurers' square-metre rates used to calculate default
sums for homeowners ranged from nearly half that at $1850 to $2300.
The issue concerns all home-owners, though, because there has been a great swap of risk in the insurance game.
The scale of the claims flowing from the Christchurch earthquakes
came as a shock to reinsurers, who subsequently demanded a clearer view
of the financial risk of insuring New Zealand homes.
Sum insured house insurance policies, where the policyholder has to
nominate a maximum the insurer would have to pay them in the case of
their home needing to be rebuilt, came in to replace total replacement
policies. That switch meant homeowners now carry the risk of under or
over-insuring their homes. The higher the amount they estimate their
house is worth, the more premium they pay.
Policyholders have three main options when choosing their sum insured for house insurance.
They can accept the default sum suggested by their insurer - which
insurers warn against. They can use insurers' online calculators to
calculate a sum insured themselves, or they can go to a quantity
surveyor and pay for a rebuild cost assessment.
But Caulfield said with so many people just accepting the default
sums offered by the insurers, the big mortgage lenders had woken up to
the business risk that a wide-area natural disaster like the
Christchurch earthquakes posed.
In some cases, it is possible low sums insured could result in
people having to build more modest homes worth less than the sums owners
Six months ago, when CCC had meetings with the banks, it was with
their marketing, insurance, and mortgage people, Caulfield said. Now it
is with the banks' risk managers, worried about the adequacy of default
Caulfield said: "This leaves all parties - the homeowner, the home
loan lender and the insurer - exposed, and the insurers arenow telling us that they will be recalculating their square-metre
rate to produce a higher default sum for customers from the first
anniversary of the new guidelines on July 1, 2014."
He also predicted the big mortgage lenders would work harder to
encourage borrowers to ensure they are adequately insured. The company
is soon to announce a deal with one of the banks to make quantity
surveyors available at cheaper rates. "Banks and insurers know that it's
in their own interests to ensure that customers have comprehensive
cover, and that the increase in premiums that will result from a higher
default sum - unless the customer opts to lower the sum insured, which
they are free to do - will be balanced by a more accurate degree of
coverage in the event of loss," Caulfield said.
The Bankers Association said it understood some banks may be looking
at working with valuation professionals to provide free home
replacement valuations for customers.
Tim Grafton, chief executive of the Insurance Council of New
Zealand, said changes to default sums were likely from July. "We
wouldn't be surprised to see default sums rise when renewals come around
to reflect building inflationary costs over the previous year, but it
is a competitive market, so each insurer will make their own call on any
adjustments," he said.
An IAG spokesman said its companies (AMI, State and NZI) would "not
be arbitrarily lifting default sum insured amounts for home insurance
policy renewals", but would increase default-sum insured quotes by just
over 4 per cent to reflect building-cost rises.
He said: "Modelling does not suggest original calculations were
inconsistent with the purpose of the default sum insured amount - which
was to ensure existing homeowners were not left without any insurance
cover following the change to sum-insured policies, but had a ‘backstop'
to protect them."
But he warned: "We have worked hard to make it clear that the
default sum is based on the often limited, and sometimes inaccurate
information we have on individual homes and that it is important for
each homeowner to consider whether that default amount, or some other
amount is appropriate for their needs."
And he said there were risks to lifting the default per square metre
estimates. "Raising default amounts beyond what we understand to be
general rebuild cost estimates, including trending building-cost
inflation rates, could result in an unjustifiable premium increase to
homeowners when we know affordability is a major issue for some."
That could lead to people cancelling policies, he said.
Total rebuild cost estimate average cost per square metre based on CCC's estimates.
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