According to a new review by the Central Bank, an increasing number of homeowners are under-insuring their properties and putting themselves at risk of a reduced payout in the event of a claim.
The issue of under-insurance is becoming a problem in the home insurance market, according to a new review by the Central Bank.
Under-insurance occurs when the amount a property is insured for is less than the amount it would cost to rebuild or replace the property i.e. the rebuild cost.
When this happens, in the event of a claim, an insurer can reduce the sum it pays out in proportion to how much the policyholder is under-insured. In the insurance industry, this is known as the ‘Average Clause’.
So for example, if your home is insured for €300,000 but costs €400,000 to rebuild, you'd be 25% under-insured. This means any payout can be reduced by this amount (not just payouts about €300,000).
Let's say a fire ruins your kitchen and costs €30,000 to replace - only 75% of this amount would be paid out as you were only 75% insured overall.
According to the Central Bank, under-insurance in the home insurance market has increased from 6.5% in 2017 up to 16.5% in 2021. For those that have had their claim reduced due to under-insurance, the average reduction in the claim payment was approximately 19% in 2021, meaning that these customers would have incurred substantial costs to fully meet the cost of their claim.
Over the past year or so, inflation has shot up, particularly in the construction sector, which has undoubtedly led to more people being under-insured as it now costs significantly more to rebuild a property.
These rebuild costs are only expected to increase further after the Government recently announced a 5% levy on concrete products in the 2023 Budget.
Action
The Central Bank Review has found that not all firms are sufficiently highlighting the risks to consumers and must take further action.
The Central Bank is calling on insurers to improve their processes to help prevent under-insurance.
It says firms must communicate with all home insurance customers setting out the consequences of being under-insured, the reasons why this is currently a heightened risk and how policyholders can better estimate an adequate ‘sum insured’ value.
The Central Bank says it expects insurers to:
(1) Communicate the risk of under-insurance in a clear and understandable way, including by:
- Writing to all home insurance policyholders explaining under-insurance;
- Setting out the implications of being under-insured, the reasons why this is currently a heightened risk and how policyholders can better estimate the adequate sums insured value;
- Providing clear examples of the consequences of under-insurance; and
- Treating the risk of under-insurance as ‘key information’ and disclosing it as such to customers.
(2) Better manage the increased consumer risks, including by:
- Using the data available to them to identify and act on the risks associated with under-insurance and take action to protect consumers’ interests; and
- Strengthen their product oversight and governance of home insurance products to regularly assess whether products meet the needs and expectations of customers.
This review highlights the actions we expect of firms to ensure consumers are properly informed about the risk of under-insurance, and to provide them with relevant and clear information when taking out, or renewing, an insurance policy to ensure they are adequately protected. This is especially important at this time of increasing costs, which heightens the risk that consumers could be left without adequate insurance cover.
Director of Consumer Protection, Colm Kincaid
The Central Bank is also encouraging consumers to check that they have adequate home insurance cover in place when they are renewing or switching their policy.
When reviewing home insurance cover, you shouldn't just focus on the premium but also on the level of buildings and contents cover that is currently in place to ensure it remains appropriate. These details should be reviewed regularly, so check with your insurer or broker as appropriate, to avoid the risk of receiving a reduced payment in the event of a claim.
Check you're not under-insured
It's important that homeowners check that they have the correct rebuild cost on their policy documents, so they are not left underinsured and therefore financially vulnerable. You can see how much it would cost to rebuild your house using the SCSI’s house rebuild calculator.
Take a look at more home insurance articles
If you want to learn more about home insurance or you're looking to take out cover, check out the following:
- We recently wrote about why car and home insurance prices have increased.
- Here's a look at nine things to consider when taking out home insurance.
- If you're interested in taking out a home insurance policy, take a look at our home insurance Quickstart Guide.
You can read more home insurance-related articles on our blog and guide pages.
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