Having insurance is an important part of being resilient. It puts you back on your feet when the unexpected happens so you can get on with your life.
Insurance is a product that you can buy to protect you against some risks.
When you purchase insurance, you transfer this risk to your insurer. Your insurer charges you a premium for providing cover for that risk. This is formalised in a legal contract known as a policy.
If an unexpected event occurs and it is covered by your policy, your insurer will either repair or replace the items that are lost or damaged, or pay you a sum of money.
When you take out a policy you will agree an excess. An excess is the amount of money you pay when you make a claim. Think of it like the small piece of risk you hold onto, with your insurer covering the rest.
You can insure yourself, your property, and your legal liabilities.
There are three main types of insurance:
- health insurance
- life insurance
- general insurance (such as property or liability insurance; sometimes known as fire and general insurance).
ICNZ only represents general insurers so the resources on this site are specifically about general insurance.
Insurance only covers sudden, unexpected and accidental events.
Unexpected events may include floods, earthquakes, a car accident, a house fire or theft. Insurance only covers things that happen suddenly, not gradually and is the biggest area of confusion for people.
A risk is a possibility of something bad happening.
It is important to understand what your risks are, what you can do to manage and minimise them, so you can have a plan in place if they happen.
Ask yourself what is important to you, what could go wrong, how likely is this to happen and what impact would it have on you. Then ask yourself what you can do to reduce or prepare for these risks, and where you have a gap that insurance can help with.
Ways to manage risk
There are four ways you can manage risk:
- avoid it
- accept it
- control it
- transfer it.
Imagine each of these in the context of a cellphone and the risk of damaging it. You can do any combination of these things to manage the risk of dropping your phone and each one has different costs and benefits.
- If you avoid the risk, it means either not buying a cellphone or not carrying it anywhere.
- If you accept the risk, you know you might drop it and what it will cost to replace if you do and you use your phone whenever you want to anyway. You may or may not put processes in place to save money for repairs.
- If you control the risk, you buy a case for your phone to protect it if you drop it.
- If you transfer the risk, you pay an insurance company to insure your phone, knowing that if you drop it accidentally then the company will pay to replace it for you (less your policy's excess).
A premium is the amount of money you pay for cover. There are many factors that are considered when calculating your premium, including:
- the characteristics of the asset being insured
- previous losses
- what is known about future risk/s
- reinsurance costs
- the influences of the global capital market
- the insurers’ own appetite for risk
- The insurers’ own costs of running its business.
How does your insurance premium reflect risk?
Natural hazard risks is just one factor that insurance companies take into account when calculating your premium. For home insurance, insurers will also be looking at things like the age of the property, how well it is maintained, and if wiring is up to date, for example. New Zealand has many natural hazards including floods, earthquakes, and landslips. Some places are riskier to live in than others, as they experience more natural hazards. Premiums reflect the future cost of covering an individual property.
An insurance policy is a legally binding contract between you and your insurance provider. It lays out what types of loss or damage the insurer will pay for and under what circumstances. It also outlines what sorts of events they will not pay for and what circumstances may result in them declining to pay.
It is important that you're honest with your insurer when you sign up for a policy. Insurers calculate risk based on the information you give them. If you choose not to tell them things that would increase the risk they're taking on, your insurer has the right to decline claims or cancel your contract. Likewise, if you don't tell your insurer about things that may decrease their risk, you could end up paying more than you need to.
If you're not sure what your insurer may need to know about, ask them.
The Fair Insurance Code (pages 8 and 9) sets out examples of the things your insurance provider will want to know.
Insurance is about putting you back to where you were before a sudden and unforeseen event happened.
Sometimes, to put you back where you were, insurers will depreciate items (have a portion of their original value removed based on their age or how much they've been used) to ensure you receive back only what you had before you needed to make a claim. In other cases, the amount paid out may be determined by how much it would cost to recreate what you have lost.
Our consumer guide on replacement and indemnity cover explains both concepts.
Insurance should work for you, so it’s important you regularly check it’s fit-for-purpose and covers what you need it to.
Check out ICNZ’s Insurance Health Check to walk you through what you should check for your house, contents and car insurance each year.
Because a policy is a contract, you have the right to complain if you believe your insurer has treated you unfairly or not honoured your policy. If you and your insurer can't agree on a resolution, you can take your complaint to a free and impartial disputes resolution scheme.