Check insurance to avoid another shake-up

It has been one year since the insurance industry's seismic shake-up came into force, but an alarming number of homeowners have not been stirred into action.

The change to "sum-insured" policies has been broadcast far and wide, with talking letter boxes on television, reams of letters from insurers and extensive media coverage.

Most homeowners know they now have to specify the exact amount of money they will need to rebuild their house. But many still have not taken the necessary steps to protect the roof over their head.

Rodney Russell reckons "99 per cent" of the houses his quantity surveying firm TRQ has assessed are underinsured, and sometimes by huge margins. "It is really scary," he says.

Never mind the layperson, even finance professionals do not necessarily have a clue.

"We did an assessment for a leading banking specialist, in a large bank," says Russell. "His default figure was $500k. He honestly believed he had enough [cover]."

By TRQ's calculations, the actual rebuild cost was $800,000, some 60 per cent higher than the estimate provided by his insurer.

The Insurance Council of New Zealand (ICNZ) has downplayed what it describes as "scaremongering". Its research found 76 per cent of policy holders did not have any difficulty calculating their sum insured, and over half said they found it easy or very easy.

But the numbers from its own members tell a different story.

AA Insurance is worried that 75 per cent of its customers have made no attempt to respond to the changes, despite its "extensive communications". Head of customer relations Suzanne Wolton said it was possible the vast majority had simply "put it into the too hard basket".

"This means they could end up underinsured, and either burdened with making up the shortfall to rebuild their home, unable to have their home reinstated to its current status, or worse, unable to rebuild at all."

IAG, which owns the State, AMI and NZI brands, reports that only 20 per cent of its renewal customers have bothered to adjust the default sum.

The insurers' estimates are based on an average rebuild cost, typically $2000 per square metre.

Registered valuer Jon Nanson says in the worst cases, the actual rebuild cost is twice the default sum, and typically 50-60 per cent higher. The sum insured has to be enough to cover demolition and clearance costs, improvements to the property, and inflation adjustments over time.

"It's those three elements . . . that just seem to be completely missing, and they can add up to quite a big figure," says Nanson.

Nanson is based in Wellington, where the abundance of hilly sections makes the cookie-cutter figures even less accurate.

Relying on the default sum provided is clearly not a safe option. More accurate are the "sum insured" calculators provided by banks and insurers.

Nanson says calculators do take into account improvements, the slope of the land, and some of the materials used. "They still seem to be coming out quite low, but it's certainly better," he says.

But Russell has no faith in the calculators at all: "If I can put it bluntly, they're crap," he says.

One of his customers put his house through five calculators, which spat out numbers in a range between $450,000 and $500,000. TRQ's assessment was double that, at $900,000. Russell says the house was on a flat site and did not even have any unusual features, other than being two storeys.

ICNZ chief executive Tim Grafton agrees the default sum will not be accurate for everyone, and says the calculator is only intended to be a guide.

However, he says it's the homeowner's responsibility to seek specialist help if they think they need it. Grafton also reckons the concerns being raised by the valuation industry are over-stated and "alarmist".

"The only conclusion you can draw from some of the scaremongering is that it's for commercial gain, that they're targeting the more vulnerable in the community by playing on their sense of uncertainty and confusion," he says.

Just over a quarter of the customers in IAG's research group have taken some sort of professional advice. But one of the main barriers to getting a registered valuer or quantity surveyor assessment is the cost.

Russell says a quantity surveyor's report will typically cost between $400 and $1000, which buys you about 24 pages of detailed rebuild costs.

"We say to them ‘the nails to build your house is $5216', or whatever the number is."

Most professionals also have indemnity insurance, which means they can be held liable for a botched valuation.

"Believe me, it costs a fortune, but it's worth it," Russell says.

Take a house that was valued at $800,000, but ended up costing $900,000: "You can then come back to me and say, ‘you guys stuffed up, I want the extra $100,000'," he says. "You can't do that with a calculator."

The Property Institute of New Zealand (PINZ), which represents registered valuers, says it's important to ask assessors what qualifications they hold, whether they belong to an industry body, and if they have indemnity insurance.

Valuers charge similar fees, and spokesman Daniel Miles says they are not unreasonable. "In the context of protecting a half-million dollar asset, a $500 valuation fee isn't actually a lot of money at all."

PINZ chief executive David Clark went as far as suggesting that one insurance company should subsidise the assessments, with predictable results. "We didn't hear back from them."

Naturally, any suggestion of compulsion or subsidies does not go down well with the ICNZ.

"Such a windfall for the assessment industry would cost several hundred million dollars that would inevitably be recovered through higher premiums for all," Grafton says.

Beyond the one-off fee, there is not much ongoing pain. People typically assume that if their rebuild costs are much higher than the default sum, their premiums will soar.

But extra cover is actually relatively cheap. AA Insurance's figures show for every $100,000 added to the default sum, customer premiums only increased by an average of $40.

Besides the cost factor, the other main obstacle is education. To the ICNZ's credit, it is working with organisations like the Citizens Advice Bureau, Age Concern and other community groups to target those who might require further education.

Clark says it is only right that the majority of the promotion should be done by the insurance companies.

"They had a very big campaign at the start, but they need to get it up and running again."

While there is a fair amount of bickering between insurers and assessors, the door is still open, Clark says. Those homeowners who do not get the message will inevitably end up learning the hard way.

Insurance Ombudsman Karen Stevens anticipates more issues about sum insured policies will arise. "A lot of people still probably haven't realised what they have to do, and how they have to do it, despite the publicity."

This story has been updated to correct the spelling of Jon Nanson's name.