The " Under-Insured " enigma !

The subject of " insurance " usually  provokes a storm of unhappy people with grievances about claim experience.   Most policies have exclusions in the fine print and there is always controversy about the legal difference between a " flood " and a " severe rain event " !

Australia has experienced a more violent weather pattern in recent years and as a result, insurance premiums have risen sharply.   The average renewal premium on house and contents insurance has increased 110% in the past five years - and more people are simply not renewing because insurance has become unaffordable.

The insurance industry would like to see a hundred percent of homes covered by insurance and they are looking at how to lower premiums to make them more attractive - and to win back former customers.   High on the list seems to be increasing the excesses that apply.   This excess was low in the past, usually somewhere between one hundred and five hundred dollars which the policyholder paid on a claim before the insurance cover kicked in.  Many have increased to $ 1,000 - and a basic excess of $ 5,000 is being suggested.

This throws the spotlight on another vagary of the insurance industry.  An insistence that the policyholder must be fully insured.   If the contents of a house are insured for $ 50,000, but their actual value is $ 100,000 the insurance company can claim that they were under-insured - and pay just 50% of the claim.

This denies the policyholder the right to buy whatever level of cover his or her budget can pay for.  Obviously, the premium for $ 100,000 cover will be more than for $ 50,000 and what the customer is doing by under insuring is taking on a portion of the risk.    Looking at this from an insurance angle, the customer is buying a certain return - irrespective of the higher value of the insured - if total loss is incurred at a premium that is acceptable to both parties.

This is exactly the principle that applies when life insurance is involved.   The customer insures his or her life for an agreed sum of money in return for a premium required by the insurance company.   If a higher cover is required, it costs more for this by a higher premium.    There seems no reason why a similar arrangement could not apply to general household insurance.

The insurance industry has long dictated that insurance cover must not be over or under insured.   There seems no reason why an intermediate risk level could not be acceptable.   People on a very tight budget might decide that while their household goods were worth $ 50,000, they would buy cover of just $ 10,000 on the basis that the premium for that was within their capacity to pay.   They would know that total loss would be a financial catastrophe, but that at least they could make a new start with $ 10,000 to cover basics.
The insurer would be accepting a known risk - a payout of $ 10,000 - against the premium it's actuaries deemed appropriate for that risk.     That seems a perfectly normal commercial transaction !

The problem seems to be that insurance company thinking is still stalled a century or so back in time.   To be relevant today, it needs a new approach to the relationship between risk and premium !