What is Under-Insurance?
Under-insurance is the result of nominating a value for an asset such as your home that is too low to actually replace it in the event that it is lost or damaged. In 2005 the Australian Securities and Investments Commission (ASIC) estimated that 70% of Australian homes were under-insured. Should the worst happen and an under-insured asset be lost, there is no capacity under the insurance policy to replace the asset.
Australia is one of the most under-insured nations in the developed world. Under-insurance is a serious problem in Australia with up to 81% of consumers being under insured by 10% or more. Insurers are now penalising under-insurance and if you're not careful, you might pay for less than you need and get less than you pay for. The could create a vast gap between what you need and what you get.
Consumer Tips from the Insurance Council of Australia
5 Things to Consider:
- Understand your policy. Ask for a fixed sum-insured, a sum-insured plus margin for increased costs, or a total replacement policy? Is your policy right for you?
- Each year before you renew your policy, review the replacement value of your property and your contents. Adjust your cover accordingly.
- Walk through each room of your property and make a list of your contents and their replacement value. Adjust your cover accordingly and take careful note of policy terms concerning high value items and exclusions.
- Check rebuilding costs for your property, to do this you can use web calculators offered by many insurers, or you can obtain advice from a local builder.
- If you have renovated or improved your property since your policy was taken out, ensure that you check your insurance to ensure that the value of the improvements will be included.
Who is Responsible for Choosing the Level of Insurance Cover?
Consumers who take out insurance are responsible for selecting the type of policy they wish to purchase and the value of their assets. Some factors that can contribute to under-insurance are:
What is the Insurance Industry Doing to Help?
The general insurance industry in Australia is highly competitive Initiatives by some insurers which assist to relieve under-insurance, can include:
A Gradual Accumulation of Possessions
The number and value of things that we own can grow significantly over time. For example, purchasing a new television, appliances, furniture, technology items and clothing. Add up the replacement cost of your possessions on a room by room basis, the total cost can often be a surprise.
Not Accounting for Upgraded Assets
Over time people tend to replace household items and belongings with better quality and more expensive items. After a major renovation or upon upgrading your household items, consider whether your level of insurance should be increased.
Some individuals may choose a premium they want to pay and then live with an arbitrary level of coverage that this provides. This is not the same as working out the value of your assets and then insuring for that value.
Increased Building Costs
The cost of building increases every year. New building regulations and by-laws may need to be complied with since the construction of your original building, adding further costs. You should also consider that after a major event impacting many households, trades may be scarce, pushing up the cost of your rebuild further.
Examples of Under-Insurance
If a home is insured for $200,000 and is destroyed by fire where that is covered by the policy, but the rebuilding and replacement costs equate to $350,000, the property owner may need to find at least an additional $150,000 to replace the property depending on the terms of the policy. Your personal belongings are also susceptible to being under-insured. If fire destroys the contents of your house you may find, unless you have been diligent in calculating your coverage needs, that the value you have nominated for your contents in your policy falls short of being able to replace all of your goods.
In 2005 the Australian Securities and Investment Commission estimated that 70% of Australian homes were under insured. Make sure you are insured to cover the replacement cost of your home.
Bear in mind that due to construction quality and cost increases, building degradation and depreciation, inflation, etc. the replacement cost might be higher than you paid.
Many insurance companies recommend you have your home independently valued every 10 years. The link below is to an online building valuer:
It’s always a good idea to review and update your valuation at least once a year so you can avoid the risk of being under-insured.
If in doubt, don’t hesitate to contact us to ensure that your property and contents are adequately covered. This is after all a small price to pay for peace of mind.
We have links provided below to assist you to ensure your sums insured are adequate in the unfortunate event of an insured loss.
Commercial or Strata Building Insurance
Need to ensure your Strata or business premises are adequately covered for replacement?
Washington brown have offices in most states and also several helpful Tools for helping determine the value of your premises.
The Australian market now offers several different types of policy that suit a variety of insurance needs in the community, for example:
The total value of the policy is selected by the customer and determines the maximum available payout. With this type of policy underinsurance can occur unless you diligently calculate the value of your assets. Some insurers automatically increase the sum-insured each year to account for projected rebuilding cost increases.
Sum-Insured Policies Plus Margin
Some policies offer additional coverage above and beyond the sum-insured selected by the policyholder. Additional coverage is generally in the vicinity of 10-25% and can help address under-insurance issues relating to increased rebuilding costs.
Total Replacement Policies
Some policies offer total replacement for your building, (not contents) reducing the scope for under-insurance. These policies require you to provide details about your home so that the insurer can assess its value. It is important that the representations you make about your building are accurate.