AAI moves insurance risk to homeowners

Homeowners who insure with AA Insurance are going to have to become rebuild cost experts.

From 16 December AA Insurance's new house cover policies will become "sum insured", meaning the homeowner specifies the sum they want their home insured for. For those with existing policies, the change will happen on 1 July.

In other words homeowners will become responsible for knowing how much it would cost to rebuild their home, and for making sure they update their coverage each year to account for any rises in the costs of building services and supplies.

If they do not, they face the risk of being unable to rebuild their home to a similar standard in the case of its destruction by fire or natural disaster.

Suzanne Wolton, head of customer relations, AA Insurance, said: "This is really about providing swift and certain resolution, and managing future affordability for our customers.

"The key learning from the [Canterbury] earthquakes is that after a large scale event our customers most want certainty surrounding resolution from their insurance – to know what is covered, and to be able to get on with their lives as quickly as possible."

While there are benefits to homeowners of moving to sum insured, as the new-style policies will make payouts much quicker, the big benefits are to insurers and their international reinsurers who will be much more able to understand their risks.

Insurance expert John Prendergast said people would have to be careful not to end up finding themselves underinsured because they had got the rebuild cost wrong.

"This is shifting the responsibility from the insurer to the insured," he said.

He also warned that people would need to consider that when a mass rebuild was taking place building costs could rise fast.

Prendergast said even insurance experts like himself would struggle to keep tabs on rebuild cost changes. "The cost of replacing your house might be half a million now, but in six months you might find it has risen," he said.

Commercial building owners tended to insure on a sum-insured basis based on annual valuations, Prendergast said.

As homeowners will have to have a similar understanding, there looks likely to be a boost to the valuations industry. Their only alternative would be to base their decision on online calculators estimating rebuild costs for houses of certain size and materials.

AA Insurance had placed a calculator on its site, which would be updated regularly by quantity surveyors from around the country, Wolton said.

The Canterbury events had changed the face of insurance in New Zealand.

"By moving from square metres to sum insured, our customers will know upfront the most their insurer will spend to rebuild their home, in the event it does need to be rebuilt. They will also know they are paying the right price to insure their property, and that the specifics of their home have been taken into account," she said.

The move was driven by reinsurers. "Over the last two years, we've seen reinsurance premiums and EQC levies rise in the hundreds of percent. Sum insured allows our reinsurers to calculate with confidence the appropriate premium we need to pay for our reinsurance cover," Wolton said.

She did not expect reinsurance costs to drop as a result, but the hope was they would not rise as fast in the future.

And she predicted other insurers would follow suit. "Our policies are changing as part of what is likely to be an industry wide shift that will help ensure that the average Kiwi can afford to insure their home."

Sum insured was common overseas, and there didn't appear to have been under-insurance issues as a result, she said.