Insurance changes creates winners - and losers
You don't have to put up with the shift to sum insured home insurance - well, not if you are a doctor or farmer.
New Zealand households have been told the shift to a specified sum insured is inevitable, forced by reinsurers shocked at how much they had to pay out after the Christchurch earthquakes. But the case of two affinity-group insurers appears to show that replacement cover is not as inevitable as the public has been led to believe.
Sum insured is a kind of insurance policy where the homeowner sets a maximum cap on the amount the insurer will pay out, ensuring they and the reinsurers never have to face an unexpected claims blowout.
The change represents a seismic shift in risk from insurers and reinsurers to homeowners.
However, the Medical Assurance Society (MAS), which provides financial services primarily to highly paid medical professionals, is continuing to write replacement cover for homes, a decision it took after the events in Christchurch revealed how hard it would be for members to work out a sum insured value for their homes.
Farmers Mutual Group (FMG) is also planning to continue providing replacement cover policies to its customer base which is heavily stocked with farmers and rural people.
"FMG has always offered clients the choice of full replacement or nominated replacement house and farm buildings policies and continues to offer both - with no plans to change," it said.
The reasons are the spread of properties it insures, and because it isn't anywhere near as focused as other insurers on selling insurance in towns and cities.
"We can keep full replacement because our client base is well diversified and geographically spread across rural and provincial New Zealand, we're in a strong financial position and we don't have the same concentrated urban exposures which most other insurers have."
That wasn't an issue for MAS or its reinsurers even though it draws most of its policy-holders from towns and cities.
MAS will also accept customers from outside the medical profession, and FMG will accept non-farmers.
Not everybody is surprised that replacement cover and sum insured can exist side by side. That was how it was seen when the first total replacement policies started appearing in New Zealand around 30 years ago, said lawyer Andrew Hooker.
Back then, Hooker said, total-replacement policies were fully underwritten, and issued only to people with suitable homes.
"If you wanted no-sum insured policies [total replacement], you had to jump through some pretty serious hoops," he said.
Fierce competition led the insurers to switch almost entirely to total replacement, including selling cover to people with older homes that can be more costly to replace. That contributed to unexpectedly large claims after the earthquakes in Christchurch.
"They didn't underwrite the risk properly," he said.
- Sunday Star Times