Underinsurance has been on the rise in Ireland over the past few years. But what are the consequences of being underinsured? And what can you do to take action?
Catastrophic damage to your property is every homeowner's worst nightmare. Home insurance is an essential comfort blanket in the case of such an occurrence.
But with nearly one-in-six claims paid out being less than the amount required for repairs, many victims of building damage find themselves at a loss.
This is all down to underinsurance - the scenario whereby the amount of cover being paid for is less than the total rebuild cost of a property.
However, in an industry filled with complicated jargon, and the requirement for self-evaluation, it is little surprise that many Irish people find it difficult to work out the amount of coverage needed.
In this article, we will explore why underinsurance has been on the rise, how to work out if you are underinsured, and what to do about it.
What is the state of underinsurance in Ireland?
In September 2022, the Central Bank of Ireland released a stark warning about the threat of underinsurance.
The Central Bank found that in 2021,16.5% of all claims that were paid were less than the amount required to fully cover damage costs. However, in 2017, this number was only 6.5%, highlighting a dramatic increase in underinsurance.
Of these claims, the amount paid out was on average 19% less than the amount required for rebuilding - potentially leaving many households liable for huge costs.
Let's put this into perspective.
Of the tens of thousands of people who have got their home insurance from bonkers.ie, the average customer-stated rebuilding cost is €285,603.
Therefore, should an accident occur and the total rebuilding cost is needed, the average bonkers.ie home insurance customer, if underinsured, could be up to €54,265 short.
A bill of this size would put a major financial strain on nearly every household in the State and highlights how pressing the issue of underinsurance is.
According to research by Zurich, only 51% of people are correctly insuring their homes, meaning hundreds of thousands of households are currently living at a cliff's edge. A further 65% reported a lack of confidence in their insurance cover. Despite this, Aviva found that only 6% of customers alerted about underinsurance took any action.
Home insurance can be a complicated product, with many technical terms and specific jargon that can make it difficult to navigate. Therefore, it is no surprise that so many people are incorrectly insured, highlighting the need for clear and simple information on the subject.
Why is underinsurance on the rise?
There are two key factors leading to the rise in underinsured property in Ireland. These include:
- the complexity of home insurance as a product, and
- the broader economic climate.
A common issue raised by customers with our advisors here at bonkers.ie is a concern over how to accurately measure the value of the rebuilding costs for their home.
Many homeowners resort to guessing the potential rebuilding costs because they're unsure how to measure it correctly due to the lack of information available.
Research conducted by Zurich found that 36% of prospective home insurance buyers took no action to calculate the potential costs of a rebuild, potentially leading to wildly inaccurate cover, causing customers to either under or overpay for their premium. Aviva also found that 22% of homeowners didn’t know how to calculate the correct amount of rebuilding costs.
Inflation in the housing sector
The latest CSO inflation figures show that the cost of materials for repairing homes rose by 5.3% in the 12 months leading up to March, while repair services have become 9.3% more expensive on average over the same period.
Therefore, even if you use an accurate estimate of rebuilding costs for just last year when applying for home insurance, you could find yourself significantly underinsured.
With inflation looking to remain a feature of the economy for the foreseeable future, the impact of rising repair costs is unlikely to subside anytime soon.
Market value vs rebuild cost
For those who do attempt to calculate the rebuild cost, many tend to look at the market value or sale value of their property. This was the case for 36% of the respondents in Zurich’s research.
However, this will usually lead to your over insuring your property as the sale price is usually more than the rebuild cost. However, if property prices were to fall dramatically, using this method could potentially lead to you being under insured also.
So, how do you ensure you are part of the 51% of homeowners who accurately calculate the amount of cover they require?
What can you do to make sure your home is not underinsured?
The best way to prevent underinsurance is to get an accurate measurement of the potential rebuilding costs for your property.
Consult with a building surveyor
The optimal way to do this is to get a bespoke consultation with a building surveyor. That way, the hard work of calculating the minutiae of every aspect of your home is undertaken by an experienced specialist. This will likely result in the most accurate valuation possible. Zurich found that 15% of homeowners went down this route.
However, organising a meeting with a chartered surveyor is not an option for everyone. The cost of organising a surveyor usually costs in the hundreds of euros, and the timeframe required for organising and conducting a survey may not suit everyone.
It is worth noting that getting an accurate survey on your home will save you money in the long term, by having an accurate monthly premium and not facing a shortfall in the case of building damage. If you have the means, getting a bespoke surveyor is the best option.
But, there are ways of getting good estimates that don’t cost an arm and a leg.
Free rebuilding cost calculator
The Society of Chartered Surveyors Ireland (SCSI) provides a free online rebuilding cost calculator. It requires plenty of input from your side - such as manually calculating the square footage (or meterage) of your home, as well as working out the additional value of ‘above average fittings’.
Don’t let the additional time and effort required to get a free evaluation turn you off getting it done, it is well worth the time investment and will save you money in the long run. Currently, one in four people choose to go down this valuation route, according to Zurich.
Undertaking a proper assessment of the rebuilding cost of your home is a surefire way of knowing whether you have the correct cover.
The power of switching
When it comes to home insurance, it pays to switch.
In 2020, the Central Bank of Ireland found that Irish consumers are much less likely, on average, to review their home insurance policy than their car insurance. The primary cause of this was the complexity of the insurance market, increasing the reluctance of people to shop around.
This means that many home insurance customers are overpaying for their policies.
Taken for a ride
In 2019, the average premium for home insurance was €409 for renewal, and €319 for new business. Around 77% of policyholders chose to simply renew in 2019, meaning they are not benefiting from the lower rates available.
This is despite the fact that the cost of renewing a customer is 6% lower for the insurers compared to new customers.
The Bank cites this as evidence that insurers are subsidising switchers and new customers with lower premiums to attract new customers, while pushing the higher rates onto loyal customers. This is known as differential pricing, and is something that the Central Bank is attempting to clamp down on.
In essence, insurers want your business, and are currently punishing loyal customers to allow them to offer better deals to new customers.
In short, taking the time to evaluate your property and shop around the marketplace could lead to massive savings, both in terms of your monthly payments, and in the event of a disaster.
Check out our other articles on home insurance
If you found this article helpful, make sure to have a look at our other blogs and guides:
- If you’re considering a home insurance policy, make sure to look at our Quickstart Guide.
- Additionally, read our guide discussing key considerations when taking out home insurance.
- Are you moving away from Ireland or considering coming back? Check out our home insurance guide for expats.
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Central Bank of Ireland: Central Bank review identifies evidence of increasing levels of under-insurance in the home insurance market; Review of Differential Pricing in the Private Car and Home Insurance Markets
CSO: Consumer Price Index March 2023
Aviva: Almost 16% of home insurance claimants are underinsured
Zurich: Inflation leading to underinsured homes