A significant proportion of ‘insured’ residential property owners may not have sufficient insurance cover to rebuild their home in the event of total loss, new research commissioned by CoreLogic suggests
A new survey commissioned by independent property data and analytics provider CoreLogic NZ is giving detailed insight into New Zealand’s established problem of home underinsurance amid high construction cost inflation, rising insurance premiums, and wider cost of living pressures.
The research gauges the insurance attitudes, behaviours, and knowledge of New Zealanders who own insured residential property, and makes significant findings around insurance cover and confidence, and general knowledge about policies, including:
- Almost a third (30%) of respondents are not confident their property is adequately insured, with 91% believing this is due to a lack of knowledge.
- One quarter (26%) of respondents with complete rebuild cover are not confident they are fully insured for the rebuild of their home.
- More than one third (38%) of respondents don’t know what their sum insured amount on their policy is.
- The average New Zealand homeowner last reviewed their home insurance cover nearly 2.5 years ago.
- Despite one in ten (8%) respondents selecting their current insurance because of low excess, only two thirds (65%) know what their insurance excess amount is.
CoreLogic NZ Country Manager Simone Moors says while having a high home insurance rate of 96-98% across the market is a good thing, it may be buttressing a false sense of protection.
“People are paying for insurance, but if the sum insured is insufficient for the cost of rebuild, they are not fully covered and may only find out about this at the worst possible time.
“Even the most risk-averse consumers can be underinsured very quickly. This plays into the confidence issue identified in the survey, with lack of understanding about rebuild / construction costs (69%) or the cost of a rebuild (64%) being the two most common reasons why respondents don’t feel confident their property is adequately insured.
“This is not only a risk to the consumer, but for mortgaged homeowners there is a hidden risk sitting on New Zealand banks’ balance sheets.”
CoreLogic NZ’s Cordell Construction Cost Index (CCCI) for Q3 2022 showed national residential construction cost pressures have continued to escalate, with both quarterly and annual rates of indexed growth reaching new record highs.
The CCCI indicates the indexed cost to build a ‘standard’ 200-square-metre three-bedroom, two-bathroom single-storey brick-and-tile house in Aotearoa rose 3.4% over the quarter, lifting annual growth to 9.6%, the largest increase since the CCCI commenced in late 2012.
With home insurance premiums informed largely by the sum insured designated for the property – in other words, the amount an insurer would pay to cover the cost of rebuilding the property in the event of total loss – the survey provided important insights into how New Zealanders are assessing their sum insured for rebuild, and reviewing their existing cover, including:
- While around three in five (63%) New Zealand homeowners are insuring their property based on an ‘official’ or recommended method (a calculator on an insurer’s website, or a rebuild estimate or insurance valuation from a registered valuer or quantity surveyor), 22% used the average property value in the area to decide how much they needed to insure their property for, while 12% are basing it on a ‘best guess’.
- Respondents believe over the past 12 months the cost of building a new home has increased by an average of 45% with around one third (36%) believing it has increased by more than 50%.
- Despite respondents believing property values rose 31% and rebuilding costs increased by 41% in the past 12 months, more than half (56%) haven’t reviewed their home insurance cover in the last year, putting them at risk of underinsurance.
Giving further context to the survey results is a complementary white paper compiled by CoreLogic. The white paper, titled Solving the Home Insurance Problem in Aotearoa New Zealand, is directed at insurers and their partners, residential property investors and owners, and general consumers.
CoreLogic Head of Insurance Solutions Matthew Walker says industry experts were invited to probe beneath the survey findings and explain more about the serious and growing risk of underinsurance: that is, a significant proportion of “insured” residential property owners do not have sufficient cover to rebuild their home in the event of total loss, a problem amplified by the increasing occurrence and intensity of weather events connected to climate change and rising construction costs.
“Coupled with the ongoing risk of earthquake, the data and insights indicate many insurance policyholders are highly exposed, most of them unwittingly – not just to the loss of their home but to serious financial harm, given that for most homeowners their property represents the bedrock of their wealth.
“This white paper explores and quantifies this insurance gap and identifies possible solutions for insurers, their partners, and all those who are connected to or invested in the residential property sector.
“Our intention is that this research, insights and solutions can be applied to rebalance home insurance policies at a consumer level, inform insurer strategies to support policyholders, and contribute to closing the underinsurance gap.”
Further findings from the CoreLogic Homeowners Insurance Survey:
- Almost half (49%) of New Zealand homeowners who reviewed their home insurance typically increase their insurance when they review their level of cover, while 40% of respondents leave it unchanged and 2% reduce it.
- Men are more likely to increase their level of cover when they review it than women (Male 53%; cf. Female 43%), while Baby Boomers are the generation most likely to increase their level of cover when they review it (61%; cf. national average 49%).
- More than half (52%) of respondents used the guidance provided by their insurer when taking out their policy to determine the sum insured or total build replacement cover. (This guidance is not financial advice but suggested tools and methods to calculate insurance needs.)
- Millennials are most likely to use the guidance provided by their insurance provider (57%; cf. Gen Z 47%*, Gen X 49%, Baby Boomers 52%).
- More than half (52%) of respondents looked at the current market value of their property when deciding on their level of cover, while 24% took into account their current income/budget and 11% recent environmental factors.
- One in six (17%) New Zealand homeowners just automatically renew their cover.
