Third Party Cover-up

Sydney Morning Herald

Wednesday October 3, 2001

Anne Lampe

The spectacular collapse of HIH Insurance this year, and the knock-on effect of massive insurance underwriting losses arising from the recent terrorist attack on the United States have made insurance big news.The HIH collapse has generated two main developments in the marketplace, according to a recent survey by the Australian Consumers' Association's Choice magazine.

First, premiums have been rising in the wake of the collapse by more than just the rate of inflation. The extent of these rises is still the subject of an inquiry by the Australian Competition and Consumer Commission and may also feature in the HIH Insurance royal commission.

Second, consumer confidence in insurance is down. Many consumers are questioning why they should pay high premiums for insurance if there is the slightest risk that their insurance policies may be worthless when they make a claim.

It is up to the insurance industry to convince policy-holders who have paid their money that they will not be left in the lurch by a company collapse.

Not insuring one's property is not a viable alternative, regardless of these concerns. The insurance industry regulator, the Australian Prudential Regulation Authority, is still defending its actions in the wake of the HIH collapse and has been working on a revamp of the prudential framework.

That revamp includes a more rigorous valuation of insurance liabilities, more demanding standards for corporate governance, and capital adequacy requirements and reinsurance arrangements that are tougher and better tailored to the profile of each company.

Choice estimates 30 per cent of Australian households do not have any building and contents cover, and 40 per cent of those that do don't have sufficient cover to rebuild or replace their house or contents.

Without cover, if the house burns down, for example, the householder is left with just the value of the land the house sits on and tens of thousands of dollars in clearing costs. Then there is the cost of building another home and furnishing it. Having no insurance means putting one's biggest asset at risk.

In most cases, lenders insist that the borrower take out insurance that covers the amount of the loan in the event that the loan security (ie: the house) burns down.

But this only covers the value of the building, and only gets the lender off the borrower's back by extinguishing the outstanding debt. It does not replace the home most home buyers have saved to buy and pay off.

And it does nothing to replace the contents.

Insurance is necessary, but how much do you need?

If your house and land are worth $500,000 together, you don't need $500,000 worth of insurance, because at least half of that and probably more in the inner suburbs will consist of land value.

According to Choice, a good price guide for a 10-year-old freestanding three-bedroom brick house with deadlocks and window locks, but no alarm or security system, is $250,000 in NSW and $150,000 elsewhere.

A reasonable contents guide is $50,000, unless you have a lot of art or antique furniture which should be separately valued and listed on the policy.

With premiums rising, there is a temptation to underinsure by rationalising that not all of a house and its contents would be destroyed. Insurers counter this thinking by averaging the damage against the full value of the building and contents. So, if your house is worth $250,000 and the contents $50,000 and your cover is only $200,000 for the lot, you may receive a payout equivalent to only two-thirds of the damage suffered. This averaging clause is often hidden in the policy's fine print.

It is also wise to insure for replacement value and not just reimbursement for the damaged or lost goods.

If the house burns, or is damaged by water, you may need new floors or floor coverings, new furniture and new appliances. If you don't want to buy second-hand goods to replace the damaged property that went up in flames, it is worth paying the extra cover for replacement value.

Finally, who offers the best deal? This is a difficult question because of the many differences in policies offered, whether replacement or indemnity value is provided and whether multi-policy or loyalty discounts are offered.

Choice has rated policies, taking into account whether they cover floods, earthquakes, provide emergency accommodation, cover visitors' goods under contents, frozen food if it is spoilt as a result of a motor burnout and if they have a high level of legal liability cover.

For building policies, Australian Alliance Insurance, Australian Pensioners Insurance Agency, Westpac General Insurance, Australian Unity and CGU Insurance came out on top. NRMA Insurance Group was ranked tenth.

For contents cover, Australian Alliance was first, followed by Australian Pensioners, Australian Unity, CGU and HBA General Insurance, with NRMA in seventh spot.

© 2001 Sydney Morning Herald

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