What is underinsurance?

Underinsurance is a term that means your level of insurance cover is not enough to cover the costs when something goes wrong. That might mean you need to pay out of pocket to make up the shortfall.

With the recent high rates of inflation, the cost of replacing your belongings, or rebuilding your house has also risen – so you might not realise you are underinsured. If it’s been more than a year since you last reviewed your insurance policies, it’s worthwhile checking if you’re underinsured or not.

The problem of underinsurance

You can be underinsured across all types of insurance, including contents, house, car, life and income protection insurance. 

MAS offers area replacement cover, so MAS Members who hold a house insurance policy with this cover can rest assured they will be covered no matter the cost of repair or replacement. 

However, underinsurance is a significant issue in Aotearoa New Zealand. For example, research conducted by Core Logic in 2022 revealed some alarming facts about Kiwi property owners and their insurance:

• One third of Kiwis think their home is underinsured 
• The average time since a homeowner reviewed their replacement value was 2.5 years
• The cost to rebuild an average Kiwi home increased 9.6% during 2022 

In 2018, Lloyd’s of London ranked New Zealand as the second riskiest country in the world. The Insurance Council of New Zealand said this means we need to make sure that we don’t just have our assets insured, but that the policy coverage is enough to replace them. 

If you’re in the position where you need to make a claim on your insurance, it’s likely a stressful experience, and finding out you don’t have enough insurance to cover your claim will add to your stress.

Are your contents underinsured? 

Underinsurance occurs most commonly on contents insurance – especially as inflation increases the price of replacing your things. Consider reviewing the total value of your contents insurance at least once a year. Use MAS’s Contents Insurance Calculator to find out if you have enough insurance to replace all of your belongings.

Here are the biggest underinsurance risks for contents insurance:

• Underinsurance because of inflation
  Higher inflation is the new normal for Aotearoa New Zealand, and it means many things cost a lot more than they did a year ago. Some things are impacted by inflation more than others – so it’s important to regularly refresh your replacement value calculation.
• Underinsurance because you now have more things
  As we go through life, we inevitably acquire more things. Think about what additional possessions you now have compared to when you took out insurance. You might be surprised by the increase in the total replacement value of all your possessions.      
• Underinsurance because you now own higher quality things
  If you’ve been upgrading your possessions to better quality items, chances are they cost more and you need to increase the value of your insurance. You should also make sure that you specify any new items you buy that exceed the specific sub-limits on your policy. At MAS you need to specify any sports equipment, personal electronics, cameras or musical instruments worth more than $5,000; also any bicycles worth more than $8,000 – which is easy to exceed with an e-bike or top end mountain bike.  

Is your house underinsured? 

Inflation and construction material shortages have seen the cost of building houses increase dramatically over recent years – it’s vital that you ensure your house insurance keeps pace. 

The most vulnerable type of house insurance to underinsurance is agreed value insurance – where you and your insurance company agree on an upper limit of rebuild costs for your home. With building costs increasing so rapidly, this needs to be carefully monitored and regularly adjusted.

Consider area replacement house insurance for peace of mind 

The peace of mind house insurance alternative is area replacement house insurance – which is offered by MAS. Under a MAS area replacement policy, we undertake to rebuild a house of the same size and a similar standard as your current house – no matter how much the costs of building increase. MAS is one of the few insurance companies in Aotearoa New Zealand that currently offer area replacement policies. 

Is your car underinsured? 

At MAS, most of our car insurance policies provide cover at the market value of your car at any given time. That means if your car is written off in an accident or stolen, you’ll be covered to replace your car with a car of equivalent market value. 

In some cases though we do have agreed value car insurance policies, mostly where the car is a classic or vintage car and market value isn’t easily calculated. In this case you should ensure your policy value matches what you think your car is worth.     

Talk to us to check the limits of your cover today

If you’re worried about being underinsured then you should check the coverage limits of your insurance policies now. If you’re a MAS Member, get in touch with us to ensure you’re sufficiently covered. 

This is general information only and is not intended to constitute financial advice.