Home & Contents Insurance

The home is the biggest purchase most people make in their lives and the accompanying home loan is the biggest financial commitment. Obviously we have to protect ourselves against loss of the asset through fire, flood or some other disaster, leaving us with a debt that can’t be secured and repayments that we can’t afford because we are now paying rent, and that we don’t want to make because the vacant land value makes repayments a waste. A clear path to bankruptcy. Home insurance is what protects us from this financial ruin. Your bank will require to see proof that you are insured before you draw down your loan.

(This is a repeat from the car insurance post if you have already read it)

Insurance is a spreading of risk across a community or some sub-set within the community. We know that a percentage of people will be hospitalised every year, or die or become incapacitated, or their house will burn down, or they’ll have a motor accident. We just don’t know which people. So the community contributes in advance by paying premiums to cover these and other risks. The premiums are pooled by the insurer and claims are paid out of the pool. The insurer invests the funds in the expectation of increasing the size of the pool and covers overheads and profit from it.

Most forms of insurance are risk weighted. This means that people are assessed for their risk, paying a higher premium if they are assessed to be higher risk. With life insurance, for example, you are assessed as higher risk if you have a serious pre-existing health condition, are overweight, smoke, are in a high risk occupation and you’re old. With that mix you would pay a very high premium or be refused cover altogether. Other types of insurance have different risk factors that effect the premium paid.

The exception is private health insurance which is community rated, meaning that everyone pays the same premium whether they are young and fit or unhealthy and aged.

The key to insurance is that your claim is paid if an event occurs for which the policy provides cover. These events are defined in the policy document and the product disclosure statement, together with the exclusions that apply to the policy generally or specific exclusions that might apply to individuals, like pre-existing health conditions. (The latter are most likely to exist in the life insurances.) What am I covered for, what am I not and how much do I get.

The fewer exclusions, the broader the cover and the higher the benefit paid, the higher the premium will be.

Risk is assessed and the premium set in the underwriting process. The underwriter, supported by the actuarial risk analysis, either accepts the risk (agrees to sell the policy) or not, and sets the premium and any special exclusions.

Unlike most products bought, with insurance you get no immediate good or service. What you receive is a promise that if a future event occurs, you will receive a payment. If the event does not occur you receive zero payment, even if you have been paying premiums for 30 years. Does this mean you have lost? No. The events by their nature are not good news and you have won by avoiding them. You have also had the benefit of peace of mind that if one of these undesirable events occurs you will at least receive some financial support. This enable you to get on with making the best of your life.

So, even non-claimants receive a benefit. Rightly, they expect the insurer to enforce the exclusions in the policy and require definitions of events to be adhered to, so that premiums don’t escalate. Sometimes this principle gets lost in the emotion of a refused claim.

The name gives it away. Home insurance provides cover for damage or total loss of the house through fire, flood, earthquake, storm or other events.

Contents insurance covers furniture, fittings, computers, clothes, electronics and other contents of the house for the same events plus theft and in some policies certain other events.

Home and contents insurance is usually sold as a package for owners living in a free standing house, but they could choose to insure their contents with another insurer. This can lead to complications over which insurer is responsible for what if there is a claim and it’s doubtful that its worth the trouble.

There are situations however where people would need only one form of cover or the other:

• Landlords for older properties might not take out contents cover, judging curtains and the like not to be worth insuring. In any even they should be taking out landlord insurance.
• Renters – not owning the property, they only need contents cover.
• Unit dwellers – with the building insured by the body corporate, they may only take out contents cover. Certainly this should cover the big risks but there can be some grey areas about what is building and what is contents.

Third party liability covering for serious injury or death of a visitor due to some negligence or flaw in your property (like a balcony collapsing) can be available through either.

• Policies cover you for replacement cost – to replace the building and contents you’ve lost. In other words they won’t expect you to buy a replacement 5 year old fridge. The cover is new for old. Likewise for building. But bear this in mind when you are estimating the $ cover amount.
• Most policies (there is one exception) require that you nominate the $ figure for insurance. You tell the insurer about the size and build of the property and they might refuse to insure if your estimate is way out, either way. If it turns out that you’ve underestimated the building figure by 10%, some will still cover the higher cost. But underestimate by 20% and don’t expect them to be generous. You won’t get any tolerance on contents.
• Both of these contribute to endemic underinsurance. Don’t be in the underinsured group.
• You are not covered for malicious damage by invited guests (this is covered in landlord insurance). If you have a party for your 300 closest friends and they trash the place, you will not receive an insurance payout.
• At claim time you can usually take the cash, rather than go through the rebuild, preferring to start again elsewhere after sale of vacant land.

Most common events are:

• Fire – including bushfires which are such a major issue in southern Australia
• Storm (inc. hail, strong winds, flash flooding) – all policies cover this risk, but of course price it into premiums, making northern Australian costly to insure.
• Flood – Caused major drama after the Brisbane floods in 2011. Many people thought, or wished that they had flood cover and did not. They had flash flooding – defined as flooding that occurred within 48 hours of a rain event that no more than 10km away, or some variation on this theme. They did not have cover for tidal surge or riverine flooding which is what happened in 2011. Policies have since been simplified to make what you are covered for much more understandable.
• Earthquake
• Theft – but not by invited guests
• Fusion and accidental – but often optional and expensive

Other events:

• Impact by aircraft, vehicles, passenger liners
• Riot and civil commotion

The premium you pay reflects the risk. The probability of you claiming and the likely $ value of that claim will determine whether you will be offered cover at all and the premium you pay. Teams of actuaries crunch the claims numbers.

The risk factors are a mix of factors that relate to you personally, the property and the level of cover sought.

Personally:

• Your claims history – could mean a higher premium or that insurance is declined
• Is there a loan over the property
• Age of the occupants – younger can mean higher premiums
• Pets – one insurer even wants to know how many, which tells them something about you, other than security of you property

Property:

• Age – older can mean more fire prone
• Construction – timber is higher fire risk
• Postcode – storm risk, high theft or otherwise high claim postcodes
• Address – is it flood prone
• Size of the dwelling – is it being over or under insured
• Security systems, deadlocks – to lower theft risk

Insurance sought:

• The $ amount of the insurance cover
• The level of cover – basic without fusion for appliances, accidental damage, low single item limits, etc will cost less
• Excess (the amount that you have to pay of any claim) – higher excess will reduce premium
• Paid monthly or annually in advance

There are number of ways to keep the costs down:

• Apply online for a discount
• Choose a higher excess – excesses save the insurer on handling large volumes of smaller claims. By increasing the excess you become a self-insurer for small claims, purchasing insurance for more life changing events.
• Install a security system or deadlocks
• Do you need accidental damage cover. Your contents are typically covered for fire or theft. But unless you take out accidental damage cover, not for dropping a bottle and shattering the glass coffee table. This cover is prone to high claims rates and therefore expensive. Not being covered will not change you life.
• Don’t take out fusion cover – it adds to cost. If the fridge blows out, you might be up for a replacement, but you won’t be out on the street.
• Don’t just renew every year. The insurers model your propensity to switch. If you look like inertia is the overwhelming force, you will receive a higher renewal premium. Always check by doing a few other quotes. The 5 star list is a great place to start.

And two things NOT to do

• Don’t cut back on your building $ cover. Some insurers will pay over the sum insured if you are within a reasonable tolerance, but if you are way below replacement cost, you will find yourself with a bigger mortgage after a catastrophic event. You can be little more flexible on contents and simplify you life.

Don’t tell a few little white lies – eg. I have deadlocks installed or I haven’t claimed in 83 years – as these could void your policy at claims time. Its too late to find out then.

(This is a repeat from the car insurance post if you have already read it)

Insurers fall into four categories

• Two huge multi-brand providers – Suncorp (GIO, AAMI, APIA, bingle) and IAG (NRMA, CGU, SGIC) – some of their brands are state based
• Other large traditional insurers – Allianz, QBE, Banks
• Challenger brands – Youi, Budget Direct, Real
• White labellers (an insurer manufactures the insurance product which is sold under another well known brand) – credit unions, Australia Post, Virgin, Coles, Woolworths

There are two other roles

• Underwriter – the party that guarantees payment of claims. It can be different from the insurer.
• Reinsurer – the reinsurer carries an overlay of risk to assure that a single event cannot send an insurer broke or unprofitable. The even could be a cyclone. The way it works is if the total losses from the insurer across all insurances (car, home, business, etc) from the one event exceeds a $ figure the reinsurer covers the excess.

(This is a repeat from the car insurance post if you have already read it)

Insurers make their money from premiums you pay and from investing your premiums, pending to pay out of claims.

Obviously they do well out of people who don’t claim. They do even better out of people who don’t claim and who renew their policy every 12 months without checking for better deals. Their repayment will go up every year. You will even find that a new customer will pay less than you with your driving record at your own insurer. Be part of the first group but not the second.

Insurers have great years when Queensland is storm free and southern Australia is bushfire free. These are the big natural disasters that dent insurers profits. It means that insurance can be a boom or bust business. Price for some storms and get none, you boom. Plan for some storm and get mega storms, you bust. Not quite bust, that’s where the role of the reinsurer.

After the mega storm season, your insurer renegotiation of the reinsurance contract will see the cost go up. Your premiums will follow, and it is likely to be across the market – it’s the same storm where you live irrespective of who you insure with.

(This is a repeat from the car insurance post if you have already read it)

Home and contents insurance has traditionally been purchased over the phone, and some insurers advise that around half of sales are still over the phone. However more and more purchasers are buying online, recognising that the product is not as complex as life or health insurance and taking advantage of the online discount and the superior opportunity to compare. In fact there are brands that only sell online.

Comparison sites are carving a niche in the market but that is all it is at the moment, and most have only a smattering of brands and/or are related to the brands listed. The industry has been slow to embrace comparison, having watched the race to a price bottom with commoditisation of car insurance in the United Kingdom. However the reality is that car insurance is less differentiated than other insurances and lends itself more readily to price comparison. Insurers aren’t likely to want to share their premiums with comparison which could keep buyers off the insurers’ sites altogether. Home and contents is a somewhat more differentiated product but still subject to the same pressures.

The process can be painful, working through ten or more screens before a premium quote is delivered. Contrast this with travel insurance where a quote is delivered after entry of country visited, age of travellers and timing of travel.

Premiums are generally monthly these days. Some insurers do this without any addition to the annual premium. Though you could argue the reverse that some insurers do not give a discount for paying annually which is upfront.

An issue to be conscious of is the potential for the policy to be voided, leaving you uncovered, if there are inaccuracies in the insurance application. The application is accepted on the basis of the accuracy of information given. It’s not smart to lie about those speeding infringements.

The two things to consider are return on your spend – the dollar value of the rewards you earn for what you spend on the card – and what form you prefer to take your rewards.

Flight rewards – Typically deliver the highest return. Better suited to higher spend levels – at annual card spend below $30,000 it takes too long to earn a flight.

Cash – Obviously the most versatile and flexible reward, but the return is the lowest of all categories.

Shopping vouchers – Near to cash when redeemable at a supermarket for the essentials of life. More a luxury when redeemable only at a high end department store. Select the programme compatible with where you like to shop. Reasonable return and suits smaller spends as well.

Merchandise – Deliver a reasonable return, but limited to the catalogue merchandise (how many toasters do you need!).

(This is a repeat from the car insurance post if you have already read it)

General insurers have faced the Banking Royal Commission in 2018.

The main issues on which they have been challenged are:

• Denial of claims
• Delay in handling of claims
• Policies that are not easily understood
• The high cost of insurance in cyclone prones areas like North Queensland