Big changes likely for house insurance

Last updated 12:47 24/08/2012

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The way Kiwi homes are insured is likely to change following the devastation of the Canterbury earthquakes.

The move could commence within a year and would see a shift from guaranteed full replacement or undefined cover, to a defined cost of replacing a home which is destroyed.

It would also bring New Zealand into step with the rest of the world, Insurance Council chief executive Chris Ryan said.

"Homeowners shouldn't be worried. Full replacement insurance is not on the way out - you will always be covered," he said.

"It's just a different way of defining what the exposure is, what the actual cost of risk is for the insurance company and the reinsurers."

There would be upsides too, with owners of middle to lower-valued homes likely to pay less for full replacement insurance, he said. Those with more expensive homes would pay a little more.

Up until around 15-20 years ago New Zealand used the defined cost model for insuring homes for complete replacement. But because of the pressure of competition between insurers they began offering to guarantee full replacement of a home that was destroyed, irrespective of what it was worth.

The undefined cover approach which is used today is calculated on the floor area of a home. The problem was that a modern 100 square metre home would cost more to replace than a modest state house with the same floor size, Ryan explained.

A change to defined insurance coverage would set a maximum replacement cost for a home.

"The insured person and the insurer agree on what it would reasonably cost to replace the property and insure it for that amount," Ryan said. "So it's an agreed sum like a motorcar."

A shift to the defined cover method was prompted by reinsurers assessing their exposure following the Canterbury earthquakes.

"Reinsurers around the world found that in Canterbury they didn't know what their potential maximum costs were, because the implied guarantee or promise by the insurers was, 'we'll replace your house'," he said.

The insurers were assuming their costs might be $100,000 to replace most of the homes, but realised that might double as most of the homes were expensive properties, Ryan said. Defining replacement costs were therefore preferable.

"There's no date (for a move to defined replacement cover), there's no industry agreement," he said.

"If it happens it will happen over the next year to two years."

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