Massive underinsurance amongst Irish homeowners, estimated to be around €39 billion, is being attributed to their failure to adjust their insurance coverage in line with the recent steep escalation in house rebuilding costs. This information comes from one of the country’s prominent insurers.
Aviva Insurance Ireland reported that 60% of its home insurance clients haven’t adjusted their rebuild costs upwards in the last three years, despite insurers and brokers continuously flagging this issue. The underinsurance situation is severe and presents significant problems should a home be destroyed, not withstanding any scepticism around insurers simply seeking higher premiums.
Construction costs for the typical three-bedroom semi-detached house in Dublin have ballooned by 35% since 2021, according to data from the Society of Chartered Surveyors Ireland (SCSI). A similar rise of 54% is observed in the northwest region of the country. Factors contributing to this include labour shortages and a surge in the prices of building materials concomitant with broader economic inflation.
The Central Bank brought this to the attention of leaders in the insurance sector in 2022, cautioning them about the perils consumers faced due to inadequate home insurance coverage given the climbing construction costs. Insurers were urged to ensure that clients were fully apprised about these risks at the point of policy initiation or renewal.
The regulatory authority acknowledged that insurers frequently do not adequately articulate to customers the practical implications of underinsurance. It added that insurance brokers should actively steer their clients towards appropriate policies.
An Aviva Insurance Ireland representative declared that tackling underinsurance is a major priority for the firm. In the past year, and indeed, over the recent years, multiple communication initiatives have been launched to alert their customers directly. These include reaching out to customers identified as being at a high risk of underinsurance. Additionally, the company is committed to constantly exploiting all available options to boost general awareness about this issue.
The ‘average clause’, a ubiquitous feature in most home insurance policies, often leads to misunderstandings. This clause is capable of decreasing the claim payout, corresponding to the percentage by which a policyholder has underinsured.
Let us take into consideration a home with a reconstruction cost of €200,000. However, if the home is insured for merely half the amount, €100,000, and sustains damage amounting to €50,000, the insurance company will only cover half of the damage – €25,000. Leaving the homeowner to bear the burden of the remaining cost.
Aviva, recognised as the third largest domestic insurance provider in the Republic, revealed that about 40% of its customers have revised their home reconstruction cost estimates upward in the past three years. Consequently, the mean reconstruction cost has seen a rise of 30% during this period, standing presently at €385,000.
Based on Aviva’s calculations, the quandary of underinsurance currently plaguing the entire residential home insurance market in Irish region clocked in at a staggering €39 billion. This estimate works on the assumption that Aviva’s 14% stake in the market is a fair representation of the sector as a whole.