BUILDINGS INSURANCE:THE EXTREME FROST and snow in the early part of this year had barely melted before the insurance industry began preparing its damp and frozen customers for even more bad news in the form of premium hikes.
Stark estimates were released to the media indicating that the cost of claims arising from the burst pipes in January and the flood damage in November would exceed €500 million. Wringing their hands, the companies indicated that they would have no choice but to impose large premium increases on their customers.
However, when it comes to things which should have a downward effect on premiums, the insurance industry is not quite so fast-moving or vocal. Due to the construction industry downturn, the cost of rebuilding a house fell in the year to March 2009 for the first time in about 15 years. Builders were forced to cut their margins, and average rebuilding costs dropped by between 4 and 5 per cent, depending on the region.
New figures provided to The Irish Timesby the Society of Chartered Surveyors (SCS) show that this trend has accelerated. By February 2010, the cost of rebuilding a house had dropped by a further 7 to 9 per cent, which indicates that the total decline over the last two years is as high as 14 per cent.
So where it might have cost more than €300,000 to rebuild a three-bedroom house in Dublin two years ago, it would cost less than €260,000 to reinstate that same house now.
Such declines are significant because the building insurance element of household insurance policies depends on the ‘sum insured’, which should be the amount it would cost to rebuild the entire property (and not, as is often assumed, the property’s market value).
The responsibility of setting the sum insured at an accurate level rests with the individual policy holder. Ideally homeowners should review this every year to ensure that they are neither over- or under-insured, but many people never do so. In the past, many insurers index-linked the amount insured, so that it automatically increased in line with inflation each year. Now that inflation has turned negative (in fact, a deflation rate of 4.5 per cent was recorded in 2009), and rebuilding costs are sinking fast, one would be forgiven for expecting insurance providers to reverse this indexation policy, and automatically reduce the building sum insured, but this does not appear to be happening.
AIB, for example, was applying an indexation rate of 6 per cent this time last year to the sum-insured element of its house insurance policies but has now revised this down to 1 per cent. According to a spokesman for the bank, they “feed in a lot of data” when setting this rate, and rather than looking at the headline inflation rates, they would drill down to the building cost inflation. Whatever approach they use, it’s difficult to see how their indexation level is still in positive territory. Even the Department of the Environment’s House Rebuilding Cost Index, which only considers labour costs in the construction industry and building materials costs (and ignores other costs such as the developer’s profit), fell by 1.5 per cent over 2009.
Although some insurers such as Allianz have now set their indexation rate to zero, Brian McNeilus of the Irish Brokers' Association says that insurers seldom apply negative indexation. Yes, they encourage customers to check that they are insured for the correct amount. But the implication of this laissez-faireattitude is that, if they had to choose, insurers would prefer their customers to be over-insured rather than under-insured, which just happens to have the happy side effect of making them more money.
So the onus is on homeowners to check that they are not over insuring their property. The SCS publishes a useful leaflet on its website (scs.ie) each year that provides step-by-step guidance on calculating the minimum amount for which you should insure the structure of your house. However an SCS spokesman warned that their figures are based on estate-type houses built since the 1960s, so if your house doesn’t fit into that category it will be necessary to get a professional valuation.
If you discover that your house was, in fact, over-valued on your insurance policy, unfortunately that doesn’t necessarily mean that once you correct this, you’ll see your premium fall.
The chances are that it will simply mitigate the increases to insurance rates that are expected to be implemented by pretty much all insurers in the Irish market this year. Insurance rates are used when calculating premiums, and they depend on the company’s claims experience (not just in relation to the individual property being insured but the area in which the property is located and, indeed,across the company’s entire home insurance account).
According to Michael Horan of the Irish Insurance Federation, the cost of home insurance has already risen by an average of 14 per cent over the last year. This probably explains why the number of complaints received by the Financial Ombudsman in relation to premium rate hikes roughly doubled in 2009. Unfortunately, double-digit rate increases are likely to materialise again this year. However because the claims experience of competing insurance companies can vary widely, so too can premiums. As a result, shopping around before renewing your policy can easily generate savings of several hundred euro.
Another consideration to bear in mind if you are reducing the reinstatement value of your home is the knock-on effect this might have on the contents insurance element of your policy, which covers the damage or loss of house contents.
“In recent times people have insured their contents as a fixed percentage of the sum insured, so as the building value has gone up or down, their contents insurance level would fluctuate as well,” a spokesman for Allianz says. So, for example, rather than painstakingly calculating the individual replacement cost of the entire contents of their home, many people simply linked their contents insurance to, say, 30 per cent of the building sum insured. So if this sum drops, they must ensure that their contents are not under-insured.
According to the National Consumer Agency’s website, itsyourmoney.ie (recently transferred from the Financial Regulator’s remit), people tend to be over-insured for buildings insurance and under-insured for contents. But given that home furnishings have, in many cases, become cheaper, it’s possible that the replacement cost of your house contents could also have fallen.
