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Central Bank warns on under-insurance of homes

The Central Bank has told insurance companies that the must do more to warn customers about the consequences of under-insuring their homes.

This follows a review carried out by the regulator, which found that under-insurance in the home insurance market had been steadily increasing over the last five years – from an average of 6.5% of paid claims being under-insured in 2017, up to 16.5% in 2021.

Under-insurance is when the sum insured on a property is less than the amount it would cost to rebuild or replace the property.

If an under-insured policy-holder makes a claim, an insurer can reduce the sum it must pay against the claim in proportion to how much the policyholder is under-insured.

Pay-outs reduced by 19%

The Central Bank gives the example of a house with a rebuilding cost of €200,000 that is insured for only €100,000, or 50% of its value.

If there is partial damage to the house of €50,000, then only 50% of the €50,000 will be paid out by the insurance firm.

The regulator’s review found that the average reduction, due to under-insurance, in claims paid out in 2021 was around 19%, leaving consumers with substantial remaining costs.

The Central Bank carried out the exercise due to the rising costs of rebuilding, which will affect the level of insurance cover that people should have on their property.

‘Communicate clearly’

The review finds that there are differences in the way insurance firms present and provide key information on the issue.

“Firms do remind consumers of the need to review their sum insured; however, more could be done by firms to highlight the practical consequences of under-insuring their home,” the Central Bank says.

It adds that while some firms have proactively identified the risk to consumers, all firms must now act to “effectively mitigate” the risk to the consumer.

The regulator has now told insurers to communicate the risks of under-insurance “in a clear and understandable way” – including:

• Writing to all home insurance policyholders explaining under-insurance,
• Setting out the implications of being under-insured, the reasons why this is currently a heightened risk, and how policyholders can better estimate an adequate value,
• Providing clear examples of the consequences of under-insurance, and
• Treating the risk of under-insurance as ‘key information’, and disclosing it as such to customers.

Increasing costs

The Central Bank also wants insurers to use available data to act on the risks linked to under-insurance, and to strengthen their oversight of home-insurance products to assess whether they meet customers’ needs.

Colm Kincaid (Director of Consumer Protection, pictured) said that the issue was especially important at a time of increasing costs, which heightened the risk that consumers could be left without adequate insurance cover.

“We expect all firms to be proactive in identifying emerging risks to consumers and to support their customers in mitigating those risks,” he added.