Too often in Australia personal tragedy is made even harder by the simple admission: "I have no insurance." Victoria’s bushfires are no exception. Whether we’re talking about insurance to cover the loss of our homes, belongings, cars or more valuable assets such as ourselves, our family and our ability to earn an income, Australia has an ongoing under-insurance problem.
Research by the Insurance Council of Australia in 2007 found almost one in four households – 23 per cent – didn’t have home or contents insurance. An investigation by the Australian Securities and Investments Commission following the Canberra bushfires found anywhere between 27 and 81 per cent of consumers who did have insurance were under-insured by 10 per cent or more against current rebuilding costs.
A report last year by The Australian Institute of Superannuation Trustees and Industry Funds Forum found more than 50 per cent of industry super fund members were under-insured for death cover by $100,000 or more while 74 per cent were under-insured by $100,000 or more for total and permanent disability insurance and 45 per cent were under-insured by $1000 or more a month for income protection insurance.
An earlier report by the Investment and Financial Services Association found less than one-third of Australians insured their ability to earn an income and families with dependent children were particularly prone to being under-insured. It estimated that in 2005 parents with dependent children were under-insured by about $1370 billion.
Reasons for not buying insurance are obvious: cost, a perceived lack of benefit for the money invested, and more pressing demands on the budget. Not to mention the old "wing it and worry about the worst if it comes" approach. Or "it won’t happen to me".
But the scale of the latest tragedy has delivered a harsh lesson that the worst can and does happen. And when it does, it’s often unexpected. It’s a wake-up call for all of us to review our cover.
To a large extent, it is under-insurance rather than non-insurance that is the more insidious problem. The decision not to insure is a conscious one where you knowingly take on extra risks.
You may be counting on emergency relief efforts to meet the gap if disaster strikes but that won’t cover events such as burglary or having an accident that leaves you disabled. And you can’t know in advance how adequate any relief efforts will be.
But under-insurance tends to be unconscious. You might give careful thought to how much cover you need when you originally take our your policy but few give the matter any ongoing thought. We pay the premium each year as it arrives, trusting the cover will be there when we need it.
This doesn’t take account of changing circumstances. Renovations, new purchases and gifts should ideally be added to our home and contents insurance as soon as possible. But many of us overlook them entirely or only consider lifting the sum insured when it comes up for renewal.
Similarly, changes in your job, income and family situation can all affect the amount of personal insurance you need. But only a minority of consumers apply for their cover to be lifted as these events occur.
As the Canberra bushfires showed, standard home insurance policies also failed to keep pace with the growth in building costs. Many consumers who thought they had enough cover found their insurance would not meet the full cost of rebuilding as costs had grown faster than inflation, and then the high level of demand after the fire pushed building costs up even further.
Most insurance policies include some form of indexation but you can’t assume the increases will be enough. At the very least, we should review the level of cover each year when we renew the policy. In most instances, lifting the level of cover is relatively simple and inexpensive. Most insurers now have calculators on their websites to help estimate your insurance needs.
Many insurers now have total replacement or extended cover to protect customers against rising costs. The former provides for your home to be fully rebuilt, while the extended cover provides a buffer – typically 25 to 30 per cent above the sum insured – that the insurer will pay for rebuilding. That’s a big help but the onus is still on consumers to understand their policies and know exactly what they are covered for.
With home and contents insurance, are you covered for full replacement or the sum insured? Do you have cover for the additional costs you’ll incur if your home is destroyed, such as accommodation, removing debris and drawing up plans for your new home? What exclusions apply? Will your insurer pay for flood damage? How does it distinguish between storm damage and flood? Is the cover high enough?
If buying the cover you need from your existing insurer is too much, can you get a better deal by shopping around?
As the uninsured damage from both the Victorian bushfires and the Queensland flooding is counted up, pressure will also be on governments to do their bit to cut insurance costs and encourage more consumers to take out protection.
The Insurance Council estimates the combined effects of taxes on insurance can add more than 40 per cent to the cost of a residential premium in NSW. In its November mini-budget, the NSW Government added a further impost by announcing the State Emergency Service would be funded from general insurance premiums, in addition to the existing fire services levy.
No one is arguing emergency services shouldn’t be properly funded. But it’s a bit rich that only those who do the right thing and buy insurance have to pay. Cutting insurance taxes is an obvious first step in solving the under-insurance problem.
The original article can be found here.