Busting house insurance myths
For many people, insurance is the ultimate grudge spend. Along with council rates it typically represents one of the most significant expenses associated with home ownership.
Because of the intangible nature of insurance, and its status as everyone’s most hated expense, the insurance industry often gets a bad reputation from the public. Currently, the insurance industry in New Zealand is facing all-time lowest levels of trust among the general public. Here at initio, we are challenging this and the traditional practice of insurance by making insurance easier and more accessible.
To help increase the trust we thought we would break-down the top house insurance myths we encounter:
A common grievance towards insurance companies arises from the customer’s responsibility to pay their excess come claim time. It may seem unreasonable to have to contribute the excess cost towards your claim when you have already paid for your premium. However; there are good reasons that insurance companies will charge an excess:
a) To avoid small claims
If there was no excess on insurance policies then people would rightfully be able to lodge small claims (think $80, $50 or even $10) that would make up a significant portion of total claims. Management, payment, and processing of claims is one of the largest operating costs of an insurance company. For example, for most clunky insurance companies to process a $150 claim, is more than the value of the claim itself. A high volume of such small claims would bloat the expenses for the insurance company, ultimately resulting in higher premiums for customers. Charging a minimum excess is the insurance company’s way of keeping premiums down while making sure they are covering the important stuff – not every broken toy or sock lost in the washer.
b) As a measure of self-insurance.
Insurers also give the option to customers of a higher excess above the minimum. This is a means of self-insurance where those that are more willing to cover additional costs towards a claim can get a reduction in premium via an increase in their excess. Initio for example provides the option of a $2,000 house insurance excess – which was as a result of customer feedback.
2. “Insurers will screw you over with the fine-print”
Whether it’s from a bad claims experience, or a general distrust for insurance companies – people often hold a grudge against insurers. Customers often think insurers are looking for a way out of paying claims and that they will use the fine-print to do it. This may reign true, however will usually reference back to conditions included in the policy wording – and hence the insurance agreement.
The problem isn’t the fine print, the policy wording didn’t change from when the cover was started. The argument is more around the interpretation of the policy and we are the first to agree that this isn’t always straightforward. Policy wordings need to get rid of the jargon and be written in plain english.
At initio, we are taking the Reserve Bank’s (New Zealand’s Financial Regulator) recommendation for clearer, more understandable insurance very seriously. We have prioritised easy to understand policy wordings, compiled to clearly show details of our customers cover, and published real life examples of claims we have paid and scenarios that are not claimable.
Whilst we don’t expect everyone to read each policy wording back to front, there are parts of our policy that are very important to be known to the customer. Therefore it is important for people to take time to get familiar with the useful policy information we provide so that they are not left surprised with unexpected conditions in the event of a claim.
To read our full Home and Contents policy wordings please visit the following links:
For a useful comparison between our policy wording and other covers across popular insurers in New Zealand, visit https://initio.co.nz/#comparison
3. “Insurance companies are just there to make profit not friends”
Perhaps the most truthful stereotype we hear is that people believe insurance companies are there to make money. While this is true; companies have an obligation to shareholders to return a profit, they also have an obligation to pay claims. If insurers were forced to pay out the same amount that they received in premiums and were essentially not there to make money, no insurance companies would exist. Like any business there are various operating costs for an insurance company that include managing claims, administration costs, reinsurance (insurance for insurance companies) and many more.
An insurance company will aim to adjust their price and policy so that the amount paid out for claims is less than that received in premiums. The proportion of this is called the insurer’s ‘loss ratio’. Historically, a domestic house insurer might set up their strategy and pricing to aim for a loss ratio of 60%. Then once the costs of operating the company (including significant re-insurance costs for widespread earthquake losses) are deducted, an approximate profit margin of 3-8% on the original premiums received might be earned by the insurance company – although this varies based on good and bad years.
When you purchase insurance you are buying a product that gives you peace of mind that you are covered when disaster strikes. Like any other product you buy, the seller needs to make a profit to survive. Effectively with insurance you are pooling your premiums with other customers to receive protection should something go wrong. The insurance company is the administrator of these funds and takes the risk (and the margin) of doing so.
4. “You’re better off not bothering with insurance and having your own emergency fund”
Perhaps a myth popular with those who most distrust insurance companies is that you are better off forgetting about insurance completely and putting away the money you save on premiums each year into your own ’emergency fund’. This is the most extreme case of self-insurance. This could certainly be a practical solution for the most disciplined people with a comprehensive approach to reducing their risk. However, there are some obvious pitfalls and major challenges to this approach.
You are likely to experience several years where you are effectively un-insured while you build up your fund. After a number of years have passed you might have saved enough to adequately cover minor losses. However, it will take many many years; if not your whole life, to accumulate enough for a worst case scenario loss. If you put aside $1,500 a year for 50 years at current interest rates you would save $127,000, which seems reasonable, but when you adjust for inflation, that $127,000 only represents $47,000 of todays money. Would that be enough to replace your home and contents in a total loss fire? And could you trust yourself not to ‘borrow’ from the fund? The decision to take out insurance can have a life changing effect on you in the event of a disaster – for the better or the worse.
Remember that when you purchase insurance, not only are you buying cover when things go wrong – but you are obtaining piece of mind to enjoy a less stressful life.
