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05-269 Australian homes underinsured: ASIC report
Homeowners have been urged to consider the level of insurance they hold following the release of a report today by the Australian Securities and Investments Commission (ASIC) examining the underinsurance of home buildings in Australia.
ASIC launched a project to examine home insurance following the Canberra bushfires in January 2003 that destroyed 488 homes.
The ASIC report, Getting home insurance right – A report into underinsurance, suggests that Canberra homeowners affected by the fires were underinsured by between 27 per cent and 40 per cent on average.
‘It’s a tragedy to lose your home in a bushfire, or any disaster, and only made worse if you are unable to rebuild because your insurance cover is inadequate’, ACT Regional Commissioner and Deputy Executive Director of Consumer Protection, Ms Delia Rickard said.
The report found there are significant levels of underinsurance by Australian homeowners, especially against current rebuilding costs.
‘Whilst it is difficult to estimate with accuracy, surveys suggest that at least 27 per cent and possibly as many as 81 per cent of homeowners are underinsured by 10 per cent or more. The experience of victims of the Canberra bushfires suggests that the actual level is probably towards the higher end of this range’, Ms Rickard said.
The report also identified that those affected by the fires had placed a heavy reliance on their insurer to either set, or assist them in setting, the sum insured under their policy.
‘While the scale of the Canberra fires may have increased building costs, the primary source of consumer problems was earlier when the sum insured on their policies was set too low, or was not increased in line with increasing building costs over the years’, Ms Rickard said.
The report identified a number of causes for this level of underinsurance including the lack of access by consumers to reliable tools for estimating rebuilding costs.
‘Estimating how much it will cost to rebuild your home is an extremely difficult task, and most consumers require expert assistance’, Ms Rickard said.
The report also noted research which found that 24 per cent of consumers did not increase their insurance following renovations costing between $20,000 and $60,000.
‘An unknown number of consumers choose to be underinsured and it is likely that many of these are influenced by price’, Ms Rickard said.
Ms Rickard said consumers should remember some key points when considering home insurance, including:
- even if you think you have enough insurance, you should check your level of cover, particularly if you haven’t increased it for a number of years;
- online calculators are a practical way to work out how much to insure for but not all calculators are the same. The best calculators ask 20 to 30 questions about your home and take all the features identified into account in providing an estimate;
- if you think you can’t afford to increase your cover, consider changing your excess and using the money saved on the premium, or shop around for the cheapest cover by using websites to obtain online quotes and compare prices;
- if you have calculated your level of cover by taking the purchase price of your property, and deducting the value of the land, then you are at risk of being underinsured. This method generally produces a figure that is too low; and
- if you are doing renovations you need to increase your level of cover. Don’t wait until the next renewal.
While insurers provide web-based calculators to help people determine the level of insurance required, the calculators are of uneven quality and some may suggest figures that are significantly too low.
ASIC tested the calculators of nine insurers using five homes in the ACT, New South Wales, Queensland and Victoria. The test found the smallest variation between the lowest and highest estimates of rebuilding costs for the same house was 42 per cent, while the largest gap between the lowest and highest estimates was 169 per cent. That is, the highest estimate was more than two-and-a-half times the lowest estimate for the same house in the same location.
The more sophisticated calculators use a process called ‘elemental estimating’, which has the capacity to take into account features that increase the cost of rebuilding, such as whether the house is built on a severe slope, the quality of the finishings or the period of construction. This can reduce the risk of the consumer being underinsured.
Consumers can become underinsured over time as the sum insured under the policy, even where it is increased annually, does not keep pace with rebuilding costs. ASIC’s research found that the consumer price index (CPI) increased by 17 per cent between March 2000 and March 2005, while building costs increased by 33 per cent. Reliance on the CPI to determine the amount of the annual increase can cause a significant gap in a relatively short period of time.
ASIC also conducted a website review of premiums charged by insurers, using the characteristics of an existing home and a typical consumer. This review suggests that there is significant variation in cost. Some consumers, depending on their personal situation, may be able to increase their level of cover by $100,000 or more without paying a higher premium, simply by shopping around. Other consumers may be able to save between $100 and $150 on their premium for the same level of cover. They could use this saving to increase their level of cover.
The report also examines different types of insurance policies offered in other countries. These include ‘total replacement’ policies under which the insurer, rather than the consumer, takes on the burden of accurately estimating rebuilding costs, and ‘extended replacement’ policies that cover consumers against inflation in building costs that so often follows mass disasters.
ASIC will continue to address the issue of underinsurance through work with the Insurance Council of Australia, individual insurers and other parties.
A copy of the report and further information regarding home insurance can be obtained via www.fido.gov.au/underinsured or by calling the ASIC Infoline on 1300 300 630.
End of release
Download a copy of:
- 'Getting home insurance right – A report into underinsurance'
- Canberra bushfire insurance survey form
More information on FIDO, our website for consumers, about underinsurance