GENERAL INSURANCE URBAN MYTHS

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1 GENERAL INSURANCE URBAN MYTHS The material contained in this information sheet is designed to provide general information only and is not intended to provide personal or professional advice. Readers should not act on the basis of this material alone without taking appropriate professional advice relating to their particular circumstances. MAY MAY 2012

2 INSURANCE URBAN MYTH #1 ALL INSURERS ARE THE SAME IT DOES NOT MATTER WHO YOU ARE INSURED WITH The myth - All insurers are the same, there is no difference in products or price. The reality The Australian Pruden6al Regulatory Authority, the agency responsible for regula6ng insurers in Australia, reports that there are currently more than 100 general insurers licensed to operate in Australia. No two insurers offer exactly the same products and op6ons. Just as every individual and every business is slightly different, so are the risks they face and their appe6te to insure or manage their risks in other ways. For example, some individuals and businesses face flood risks, others face bushfire risks, others may face both. Some individuals may prefer paying a low premium with a large excess payment, others may be happy with a larger annual payment and very limle excess payment. Being able to choose what suits you best is important. The large number of insurers available to consumers and businesses in Australia means that there is a large choice of providers and products. Products offered by individual companies differ significantly in terms of coverage, terms and condi6ons, exclusions and costs. Consumers should shop around and find an insurance product that best suits their par6cular risks. For example, consumers with a risk of flooding should ensure that their product covers the risk of flooding. Consumers with a number of portable electronic devices in the household, should ensure that their insurance product covers those devices. 11 MAY 2012

3 INSURANCE URBAN MYTH #2 INSURERS DON T PAY CLAIMS The myth - Insurers don t pay claims The reality The general insurance industry exists to help policyholders recover from misfortune by paying valid claims. The Financial Ombudsman Service reports that more than 98% of insurance claims are paid without dispute. The Australian Pruden6al Regula6on Authority reports that insurers pay approximately $100 million in claims each working day to the Australian community. This significant daily injec6on of funds, compensa6ng individuals and businesses for losses, is oven described as the economic oil that keeps the community func6oning. Insurers cannot pay for claims that fall outside of the terms and condi6ons of the insurance policy, or claims that are made fraudulently. In order to be able to pay the claims that are valid, insurers have to operate within a government- regulated environment. Pruden6al management of an insurer s porzolio, like any business, requires that only the claims that are covered by a policy are those that are paid. If an insurer has denied your claim and you believe the decision is wrong, a dispute can be lodged with your insurer, in accordance with the industry Code of Prac6ce. This is called internal dispute resolu6on (IDR) If you are not sa6sfied with the outcomes of IDR, a free service exists for managing disputes with your insurer through the Financial Ombudsman Service. There are no costs for consumers for the process and decisions made by the ombudsman are binding on par6cipa6ng insurers. 11 MAY 2012

4 INSURANCE URBAN MYTH #3 INSURERS ARE RESPONSIBLE FOR MANAGING MY RISKS The myth - Insurers are responsible for managing risks on my property, for example overhanging trees that might one day damage my property. The reality Property owners are responsible for managing their own risks. Insurers compensate policyholders when an insured event occurs and typically require policyholders, as a pre- condi6on, to have managed the foreseeable risks and declared those risks to the insurer. It is common sense to ensure that your property is not facing any immediate risks, such as an overhanging tree, or gumers that are full and not able to move water away from your building. Some insurance policies require that the property is well maintained in order for the cover to operate. For example, hail can cause significant damage to a roof, but most roofing if well maintained is designed to resist major damage and to protect the internal part of your property (and you). If your roof has not been maintained, is rusted, structurally unsound or already damaged, it may fail to resist a hail strike and cause significant damage to the internal part of your property. In this example the claim might be denied because the policyholder has not maintained the property in order to manage the foreseeable risk. A tall tree that threatens, but has not yet damaged your property, is another example of a risk that is your responsibility to manage. Even though there is a possibility the tree may one day cause damage and lead to a claim being made, it remains your responsibility to ensure you have taken steps to manage the foreseeable risk. 11 MAY 2012

5 INSURANCE URBAN MYTH #4 I HAVE PAID PREMIUMS FOR YEARS I SHOULD BE COVERED FOR EVERYTHING The myth - Insurers have collected my premiums for years, they are therefore obliged to cover me for any damage whatsoever that I might claim to my house, car or business. The reality All policies have limita6ons and exclusions of one form or another. Without these limita6ons the cost of insurance would be astronomical because the policy would be required to compensate the policyholder for all manner of incalculable risks. Your annual premium is calculated on the probability of the covered risks occurring to you. Policy terms and condi6ons also exist to protect the consumer. It is important, for both the insurer and the policyholder, to carefully define and understand what is covered under the policy and what circumstances are not covered. No insurance policy will cover the policyholder for every imaginable risk without limita6on. Consumers should carefully research their insurance needs and then seek products that provide the desired insurance cover at a price the consumer is willing to pay. For example, some insurance policies exclude specific types of damage that can be claimed under the policy. Consumers who iden6fy that they need cover for specific types of possible damage should research different products un6l they find a policy that offers cover for that risk. Under Australian law insurers must make available a Product Disclosure Statement (PDS) to policyholders so these terms and condi6ons can be read. Policyholders are usually required to formally acknowledge receipt of the PDS and that they have understood the terms and condi6ons. Consumers should read the PDS before purchasing a product to ensure they understand how the product operates and what their en6tlements to make a claim are. 11 MAY 2012

6 INSURANCE URBAN MYTH #5 COMPULSORY THIRD PARTY INSURANCE COVERS DAMAGE TO YOUR OWN CAR The myth - I have Compulsory Third Party (CTP) insurance on my car, so the insurer must repair or replace my car if it is damaged or destroyed. The reality Compulsory Third Party insurance does not cover damage to your car. All states in Australia require that motorists purchase compulsory insurance (some6mes known as Compulsory Third Party insurance) prior to or with the renewal of a car's registra6on. It is unlawful to drive a car that does not have this insurance. This insurance provides compensa6on for bodily injury caused by your car to other people. An insurance policy to meet the cost of repair to vehicles damaged in an accident, or to third- party property, needs to be purchased separately. This insurance is commonly referred to as comprehensive car insurance or third party property insurance. It is not illegal to drive a car that does not have comprehensive insurance. However, if you have an accident and damage your car, somebody else s car, or somebody else s property you will need to finance the repairs from your own pocket. 11 MAY 2012

7 INSURANCE URBAN MYTH #6 I CAN T CLEAN UP UNTIL THE ASSESSOR GETS HERE The myth - I want to clean up my property and soiled items, but can t unel an insurance assessor has visited my property. The reality If there are damaged or soiled items on your property that are presen6ng an ongoing health hazard then you need to no6fy your insurance company that the items will need to be removed urgently. It is generally acceptable to photograph the items or make a list, with as much detail as possible, of what has been discarded. Insurers need to verify the existence and value of items that you are claiming. However, you should not put your health at risk by keeping them in the home. Store them in another loca6on, or record them with as much detail as possible and then discard them aver speaking to your insurer. 11 MAY 2012

8 INSURANCE URBAN MYTH #7 I DON T NEED INSURANCE THE GOVERNMENT WILL REPLACE MY LOSS The myth - I don t need insurance I have never experienced damage or loss to my assets. If I do the government will replace my assets or assist me. The reality Insurance is about protec6ng yourself and your family, or your business, from a loss that you would otherwise not be able to financially recover from. Most Australians do not rou6nely have enough savings to rebuild a destroyed house or pay off a mortgage. Some consumers may feel they have paid premiums for years without any need to make a claim, but insurance is about protec6ng yourself against large unpredictable financial impacts that may only occur once or twice in a life6me, if you are prudent. In recent years governments have offered limited financial assistance to non- insured individuals who are vic6ms of large disaster events. Insured individuals oven do not qualify for this assistance simply because they have taken prudent steps to protect themselves through insurance. There are two compelling reasons why you should spend money on insurance premiums to help yourself, irrespec6ve of the possibility or otherwise of obtaining any government assistance. First, the assistance offered by government to the non- insured is oven rela6vely small and will only cover ini6al emergency requirements. This support is taxpayer funded and is not designed to allow the individual to replace contents or rebuild a property it is emergency assistance only, designed to help with bare essen6als, such as food. Second, governments typically only offer assistance in large declared natural disasters, where there are considerable numbers of vic6ms and significant media amen6on. Government relief is not offered in events where single houses are destroyed or where your car is stolen from outside of your house. Insurance, or savings, are the best ways to effec6vely recover from such events. 11 MAY 2012

9 INSURANCE URBAN MYTH #8 INSURERS SHOULD HAVE KNOWN THE CONDITION OF MY PROPERTY BEFORE INSURING ME The myth - Insurers should have known the precise circumstances and condieon of my assets before agreeing to insure me. The reality Correctly designed and maintained proper6es help prevent damage occurring as a result of extreme weather events. If your property is not well maintained it can be at greater risk of damage. A failure to declare the condi6on of your property, or misrepresen6ng the condi6on, can some6mes result in your claim being denied. Maintenance is your responsibility. Insurers work with consumers to help them accurately detail the assets to be covered. Many insurers use online ques6onnaires, calculators and customer service representa6ves to assist consumers to do this accurately. Some insurers also carry out site inspec6ons for complex industrial and commercial premises, but to do so for every residen6al property or asset would make products more expensive. Ul6mately, property owners will always know more about their assets than the insurer and it is very important that all details are disclosed correctly. Insurers ask consumers ques6ons about the property that are required to be answered accurately. Some examples of ques6ons asked are: How old is the property? Is the property well maintained? What is the roofing material used? It is important that you take the 6me to answer these ques6ons accurately. The insurer makes actuarial assump6ons about the risks to your property based upon your answers and there can be implica6ons if the condi6on of the property has been misrepresented or not disclosed properly. 11 MAY 2012

10 INSURANCE URBAN MYTH #9 IT WASN T MY FAULT I CAN T LOSE MY NO CLAIM BONUS The myth - I made a claim for something that wasn t my fault I shouldn t lose my no claim bonus. The reality Some insurers offer no claim bonuses to policyholders for a variety of reasons and under circumstances that vary from insurer to insurer. The term no claim bonus should generally be interpreted literally. Under some insurance policies if you make a claim, regardless of fault, you may lose any no claim bonus offered by the insurer. Insurers do have different approaches to this issue and policyholders should refer to their Product Disclosure Statement or call their insurer for further informa6on on how a no claim bonus works for their policy. 11 MAY 2012

11 INSURANCE URBAN MYTH #10 INSURERS USE PREFERRED BUILDERS TO DENY WORK TO LOCAL TRADES The myth - Insurers use preferred builders instead of local builders so they can save money, go slowly on my claim, or deny work to local firms. The reality The primary goal of insurers is to re- establish your assets quickly and to the highest quality possible under the policy, consistent with what you had before the insured event and within the limits of the policy that you have purchased. To achieve this some insurers have strategic rela6onships with large builders, specialist suppliers and project management firms, selected on the basis of capacity, quality and performance. These firms are contractually responsible to the insurer for ensuring agreed works are carried out quickly and to the required standards. No insurer wants to revisit the property to fix defec6ve work or to put your family at risk. The large contracted builders used by some insurers oven sub- contract work to local firms where it can be guaranteed that work can be achieved at the required standard and within very 6ght 6me frames. Local trades and suppliers need to bid for contracted work with appointed builder. If they meet the individual builders requirements for quality, capacity, cost and availability, there is every chance that they will win the job. Some insurers offer policyholders the choice of a cash semlement so the policyholder can choose their own builder. Of course, where this happens management of the repairs and the final results may become the responsibility of the policyholder. Read your policy and see how your insurer handles this. 11 MAY 2012

12 INSURANCE URBAN MYTH #11 ALL PROPERTIES ARE COVERED FOR FLOOD The myth - All properees are covered for flood damage. The reality In general terms flood is water that overflows from a natural or altered watercourse, lake or dam. A standard defini6on for this hazard has been agreed recently and is in the process of being adopted over the next two years. In the mean6me check how your insurer defines this. Approximately 7% of property in Australia is threatened by this risk. Not every property owner needs flood insurance, but if you are part of the 7% at risk you should consider the benefits of having it. Flood is a devasta6ng event and without flood cover you may be facing a large repair bill. In 2011, more than 81% of building policies purchased by consumers had full flood insurance cover. Other policies offered in the market pay a limited sum (below the sum- insured) for the risk, or exclude the risk in its en6rety. In the future it is expected that it will be a government requirement for flood cover to be included in 100% of home building policies offered to consumers. Un6l this happens it is important to remember that some insurance companies do not currently offer flood cover as part of their policy. Check your policy or ask your insurer if you are covered for flood. Unfortunately, not every property owner in the 7% who has a flood exposure actually knows about the risk. If you don t know, you can ask your local council or catchment authority for advice on the exposure at your loca6on. 11 MAY 2012

13 INSURANCE URBAN MYTH #12 INSURERS WON T PAY FOR DAMAGE CAUSED BY AN ACT OF GOD The myth - Acts of God are excluded from home insurance policies. The reality This is nothing more than a rumour following disaster events and the subject of occasional Hollywood movies. Act of God is not a term used in Australian property insurance polices and has not been used for many decades. Insurers do exclude some specific types of damage from policies. But, where an exclusion exists it will be wrimen in your product disclosure statement in specific terms. You should ensure you are familiar with the exclusions in your policy and if you have any ques6ons about them you should ask your insurer for clarifica6on. The next 6me you hear somebody tell you their property claim was denied because it was an Act of God, tell them to re- read their policy in Australia it s a myth. 11 MAY 2012

14 INSURANCE URBAN MYTH #13 PREMIUMS ARE TOO EXPENSIVE AND DON T REFLECT THE REAL WORLD The myth - Premiums are too expensive and don t reflect the real world. The reality Insurance premiums reflect real world risk, the cost of providing cover and the costs of replacing your insured assets. Insurance works on the principle of placing a cost on the risk of an event occurring that causes damage to an asset owned by a policyholder. Insurers rely upon actuarial evidence to help determine that cost. Insurers invest heavily in capabili6es to understand and calculate certain risks, for example crime rates or the risk of flooding, hail, fire or cyclones. If the risks to an insured asset are increasing, then there will generally be a corresponding increase in the costs of accep6ng those risks. The premium charged also will also reflect the insured value of the asset. The premium charged for $500,000 of insurance cover will be higher than the premium charged for $200,000. If you have upgraded your home, or its value has changed, it will be more expensive to replace and therefore to insure. Insurance premiums in Australia are also heavily influenced by the cost of reinsurance provided by global reinsurers. These large companies insure local insurers and allow them to spread and recover the loss when extreme events occur. Without access to global reinsurance it would not be possible to provide insurance cover in Australia. When reinsurers view the risks of large losses in Australia as growing, the rates for covering those large losses will increase and this in turn will cause a corresponding increase in the premium charged to individual policyholders. 11 MAY 2012