Choice of insurance options

Press, 17 June 1982, Page 12

Choice of insurance options

In Residence Patricia Herbert PROPERTY REPORTER

This week I begin a twopart study of the complexities of home insurance. This column deals with house insurance. and the next with the insurance of house contents. Homeowners’ insurance policies divide inio two broad groups-those providing indemnity value cover, and those offering total replacement. Most insurers recommend the latter policy. The difference is that with an indemnity value policy the company deducts for wear. tear, and depreciation when meeting a claim. Il is as if the company was buying the property at market value before the damage caused by the insured event . occurred. With "full." or replacement cover, however, it.will pay for the restoring or rebuilding of the house, subject to the provisions of the policy contract. The single advantage of an indemnity policy is that it is cheaper, particularly if the house is more than five years old. The difficulty with this kind of cover' is that it is easy to become underinsured unless provision is made for inflation and rising building costs.. Under-insured The New Zealand Insurance Council demonstrates the point with a case-study: A house which was bought in 1970 for $17,000 was insured bv the new owners for that

amount-its full current value. Three years' later, they increased tiieir cover to S22.(HXI. and in. 1977 they raised it again to $32,000. In the meantime, however, the actual value of the house had doubled to $34,000 and by 198(1 it had risen to $58,500. With insurance cover of onlv $32,000. thev were short by '525,500. “The situation could have been even worse if the house had not been insured for its lull value when the policy was first taken out." the council warns.

The gap occurs because many people simply do not know the market value of their homes, it savs.

The council recommends that policy-holders review their cover at’ least once a year, and suggests that they do this by multiplying the house area by the' current building cost’ per square metre for like properties in the same neighbourhood.

Most insurance companies attempt to protect their clients against the risk ol

under-insurance by including automatic "sum insured" increases when they send out their yearly premium demands.

The adjustment is presented as a suggestion—the policy-holder can choose tp renew for a greater amount, for a lesser amount, or on the same terms as previously.

It should be remembered, however, that although an inflation-indexed increase will help to maintain parity between the amount of cover and the market value of the property, it acts, only as a rule of thumb. Spirallitig costs Housie prices and building costs may rise at a’ faster rate than' inflation. To illustrate this the council has devised an example, based on official statistics, in which a property which was bought for $17,000 in 1970 had achieved a value of $71,370 bv 1981.

The effect of spiralling costs on. the insurance indus-

try is evident in the following profile, which is based on the experience of the State Insurance Office. The figures were prepared by one of its underwriters. Mr C. Murchison.

Comparing the past 12 months with the previous 12momh period, he found that the. office had received 12 per cent more claims, and that the average claim had risen by 22.5 per cent, causing an increase in total cost to the company of 37 per cent.

In the meantime, house prices had shown a 12 per cent increase, and insurance rates in the dollar had risen by eight per cent creating a rise of. 37 per cent in the average premium. The council recommends that replacement value insurance be calculated to include the clearance of the site! architects' and surveyors' fees, current building costs, and the cost of alternative accomodation while construction is underway.

It estimates that these expenses would add about 10 per cent to the total valuation. Nor easy House insurance does not permit easy generalisations because each company offers a different deal: it becomes a matter of comparing apples with pears. Using a case study house. I have canvassed four of the companies most active in the field. I asked them the premiums that they would charge on the most comprehensive policy that they offer.

The house is located in Christchurch, built of parmanent materials, and has a replacement value of $80,(100. For this property the State Insurance Office, which commands about 40 per cent of the market, would charge a premium of $129.60 (without government levies) for full

replacement cover with an excess of $2O.

It offers a single homeowners) policy with different levels of.cover-from indemnity to rebuilding-at a standard rate of about $2.47 for each sltioo insurance.

To qualify for ••full" cover, the policy holder must first insure the property at replacement value, and then arrange to have the sum insured adjusted automatically each year to match inflation. But. if in the event of loss the cover is found to be insufficient to provide for rebuilding, the client must accept the shortfall and meet the balance because the policy will pay for reinstatement or "up to the full value of the sum insured." The 'S.I.M.U. Insurance Association would charge a premium of $l2O (without Government levies) with no excess, to fully insure the same property.’

Its replacement policy entitles the holder to have the property rebuilt including any additional costs necessary to meet Government and local body regulations in force at the time of rebuilding. The client may choose to have the house built on another site, or to buy an already established property provided that the cost to the company is no greater. Nil-excess The importance of a nilexcess policy to the holder is that it covers small claims (broken windows for example). and it costs the insurer as much to process a $lO claim as it does one for $lOO. ■ The New Zealand Insurance Company, using the property valuation as the basis for assessment, would charge a premium of $134 (without Government levies) with a $25 excess clause.

Because this policy offers replacement cover without specifying a sum insured, the company will pay for the rebuilding of the house even if it costs more than the amount originally calculated. The policy is not. however, available to all comers. It is geared toward the upper end of the market, and the company offers it selectively, underwriting each risk. The National Insurance Company would charge $182.50 (without Government levies) to provide . replacement cover for the case study house, but only if it was’in an area with reticulated waler. If it was not. the premium would be higher because of the additional fire risk. The policy includes a $5O franchise clause. which means that it does not cover claims tor $5O or less. H’r/u range It is important to note that all of the companies mentioned provide a range of policies. Those discussed here are in each case the most comprehensive, and therefore the most expensive, that they offer. Included in the total cost to the client are the levies collecti'd on behalf of the Government bv the insurance companies to finance the Fire Service Commission and the Earthquake and War. Damage Commission. These amount to eight-and-a-half cents in every $lOO. and would add about $6B to the cost of insuring the case study house- less if the com-’ pany calculates the Earthquake and War Damage Commission’s levy on indemnity value instead of replacement. Because the commission only pays out at indemmtv. some insurers do this, others, the S.I.M.U. for example, subsidise the cost to the policyholder.