Over the next year, a major change will occur for most people in how their homes are insured. As a result of the Christchurch earthquake and other disasters around the world, reinsurers are now seeking to quantify and limit the risks they face by insisting that home insurance policies are based on a maximum specified amount, called a sum insured, rather than an unspecified replacement cost. If you specify a sum insured for your home that is less than the replacement cost, you may find you either have to pay for the shortfall yourself in the event of a disaster, or rebuild a smaller or lower quality home. On the other hand, setting the sum insured too high means you will be paying too much in premiums, because the insurer will pay no more than the replacement cost if the house needs to be rebuilt.
Determining a sum insured for your home that accurately reflects the replacement cost is therefore vital to avoid the potential of financial loss. Special features such as decks, swimming pools, fences and retaining walls will also need to be valued. This exercise has the potential to be very complicated or confusing, especially for elderly home owners or owners of high value homes.
Some insurance companies are providing free on-line calculators to help you estimate the replacement cost by answering a small questionnaire about the size and features of your home. While this may give a reasonably close estimate, in some cases it may be best to obtain an estimate from a builder or a registered valuer. All this will take time and is not something that should be left until the last minute. Contact your insurance company before your policy renewal to find out what support they can give you with determining your sum insured.