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07-15 Home insurers making improvements to reduce underinsurance
A report by ASIC has found that home building insurers across Australia have improved their policies and are providing consumers with better access to information about the costs of rebuilding.
The report, Making Home Insurance Better, examines the steps the industry has taken to improve its practices since the release of an ASIC study into underinsurance in 2005. That study was prompted by the 2003 Canberra bushfires, which destroyed 488 homes and revealed their owners were, on average, underinsured by 27 to 40 per cent.
‘It’s extremely difficult to estimate how much it will cost to rebuild your home, and most consumers require expert assistance’, said ASIC’s Executive Director of Consumer Protection, Mr Greg Tanzer.
‘Fortunately, recent steps by the industry to review pricing practices and the level of home insurance provided, have significantly reduced the risk of consumers being underinsured and not having enough money to rebuild their homes. The insurance industry is to be commended for these changes.’
ASIC’s report found:
- Two insurers have introduced ‘total replacement’ policies. These policies pay the rebuilding costs in full, rather than paying the ‘sum insured’. This ensures that consumers are not underinsured and that if their home is accidentally destroyed, they can afford to rebuild it;
- Two insurers have introduced ‘extended replacement’ policies, which pay 25 per cent or 30 per cent above the original ‘sum insured’;
- Many insurers have given their customers access to more accurate calculators to estimate rebuilding costs; and
- More insurers are providing consumers with educational messages about underinsurance, particularly on renewal.
The report also reviewed the effect of Tropical Cyclone Larry on homeowners in Innisfail and Babinda on the Queensland north coast in March 2006. ASIC’s review found:
- An estimated 50 per cent of houses in the cyclone-affected area were underinsured to some degree;
- Building costs were estimated to have increased by at least 50 per cent immediately after the disaster; and
- Many older homes did not comply with anti-cyclone standards in the current building code. This meant that rebuilding costs were higher as consumers had to rebuild their home to an improved standard.
‘It’s a tragedy to lose your home in a cyclone or bushfire and it’s only made worse if you are unable to rebuild because your insurance cover is too low’, said Mr Tanzer.
ASIC recommends that consumers check whether their home building insurance cover is adequate by:
- Reviewing their insurance cover – especially people in high-risk areas (cyclone, bushfire, hail). They should consider whether to increase the sum insured, or whether a total or extended replacement policy suits their needs.
- Using online calculators now offered by many insurers as a guide for determining an adequate level of cover and the costs of rebuilding. The more accurate calculators ask detailed questions and do not rely on a simplistic ‘size x cost per square metre’calculation.
- Checking the sum insured against current rebuilding costs – particularly for policies of 10 or more years. CPI increases in insurance cover may not keep pace with rebuilding costs.
- Shopping around and comparing policies. ASIC’s 2005 report found that consumers could nearly double the sum insured for the same price, depending on the insurer.
- Making sure their home is regularly maintained and repaired; failure to take reasonable care may result in insurance claims being refused or reduced.
Sum insured policies are the most common type of policy in Australia. These policies cap the insurer’s liability for rebuilding in the event of a total loss at a dollar value as specified by the consumer. The consumer is responsible for determining the sum insured, so if this figure is too low, the consumer will be underinsured. These are sometimes called ‘sum insured replacement’ policies.
Total replacement policies cover the cost of rebuilding, without any need to estimate the cost in advance via a ‘sum insured’.
Extended replacement policies pay up to a certain percentage over the sum insured if necessary to meet the costs of rebuilding.
Download the 2007 report: Making home insurance better from ASIC's consumer website, FIDO.