Frank Newman: Insurance shake-up

The Canterbury earthquakes are having huge consequences. Not only are the lives of residents in the area directly affected, but it is causing seismic changes to the insurance industry and that affects every property owner in New Zealand. You need to be aware of those changes – your house may depend upon it. 

 Traditionally house policies are insured on what is known as a replacement square metre basis. So if your house were to be destroyed it will be replaced to the same size without any dollar limit attached to the rebuild. According to an industry source companies have generally calculated house replacement values at $2,000 per square metre. So if you house was say 200 square metres they would estimate the replacement cost to be $400,000 and base your premium on that amount.

However, claims from the Christchurch earthquake have shown that rebuilding costs can vary significantly, and be much greater than the assumed $2,000 square metre. Some architectural homes are said to cost as much as $6,000 to $8,000 per square metre.

The open-ended nature of the liability has exposed insurance companies to claims they did not envisage when setting the premiums. Clearly insurers, and their reinsurers, are not very pleased about this. Their response is to pass that risk back to you, the homeowner.

Basically insurance companies want to be able to quantify the full extent of the potential claims that may arise. They are doing this by changing policies from a replacement square metre basis to a replacement sum insured basis. In other words, instead of saying we will replace your house to what it was and pay whatever that costs, we will only pay up to a figure that you nominate – anything above this is your liability.

There will also be sub-limits within each policy for specific items like swimming pools, spa pools, retaining walls, and tennis courts. So, as well as making sure your total housing package has adequate cover, you will need to break that down further into specific assets. If those specific assets are not adequately covered then you, the property owner, will bear the shortfall.

This is a massive change with very significant implications on each and every property owner. It is now your responsibility to get the sums right, not the insurance company. Previously property owners had the comfort of not needing to think much about the replacement costs of their home – that “problem” was passed onto the insurance company. Well, they have just passed it back to you!

In reality, most landowners will not have a clue how much it would cost to rebuild their property or specialist features should disaster strike – the insurance companies could not even get in right as Christchurch has shown!

As a result most people will take a stab at it and hope for the best. If their house is pretty standard and on a flat section in Normal Street then they may well be ok. But those with architectural homes or those with unique features and locations will need to take great care to get their insurance cover right.

To make that assessment a little easier a number of insurance companies have online calculators that estimate the replacement cost of your home. For an example have a look at crombielockwood.co.nz and click on “home insurance is changing”. There are a host indemnities attached to the report, including the comment that you should “check with an architect, builder, quantity surveyor, valuer or other suitably qualified professional for an accurate estimate”.

For some, paying an expert to assess the replacement value of your home will be the only way to get an accurate estimate, and even that may not be as accurate as one may wish.

The changes are being introduced at different times, depending on the insurance company. For Lumley General Insurance the changes took effect from 22 April for both new policies and renewals. In the case of NZI the changes will be effective from 20 April 2013 for new business and 1 July 2013 for renewals. For Vero, the changes will be effective from 1 July 2013 for both new business and renewals.

One thing is very clear – homeowners will now need to take a much greater interest in their insurance cover than they have previously. You can no longer assume your insurance company will make good your loss.