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.
What is insurance?
Insurance exists to protect against unforeseen loss or damage.
It takes the form of a contract where one person or business (the insured) agrees to transfer the risk that a range of unforeseen events may happen to a business (an insurer). In return, the insured pays the insurer a fee (a premium). This is formalised in a legal contract (a policy).
If an unforeseen event covered by the policy causes loss or damage to the insured or their property, the insurer pays for that loss or damage.
You can insure yourself, your property, and your legal liabilities.
An unforeseen event can be any event that the insured or insurer would not expect to happen. The more likely an event is to happen, the higher the risk taken on by the insurer.
Unforeseen events may include:
- natural disasters (such as a cyclone or an earthquake)
- a car accident
- a house fire
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There are 3 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.
Risk refers to the likelihood an insurer will need to pay for loss or damaged caused by an event. Risk is calculated based on the probabilities of events happening and takes into account circumstances specific to the insured.
If certain circumstances are statistically shown to increase the risk of an event, they will be taken into account when premiums are calculated. If statistics around those circumstances change, it may change the way premiums are calculated.
Ways to respond to risk
There are 4 ways you can respond to risk:
- avoid it
- accept it
- reduce it
- transfer it.
Imagine each of these in the context of a cellphone and the risk of damaging it.
- 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 reduce 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).
You can do any combination of these things to manage the risk of dropping your phone and each one has different costs and benefits.
Learn more about risk
My Risk is a tool on the Know Risk website that uses a range of self-chosen circumstances to help you discover the sorts of risks you may face. It provides articles and guides to help you learn to manage risk better.
If you're a 17 year old male, on a restricted license, and you want to insure your first car, then you may pay more in premiums than a 40 year old male would in the same circumstances. This is because young men are statistically more likely to get into car accidents than older men.
If you don't have any car accidents, then your insurer may decrease your premiums each year as you get older. When you turn 25, provided you still haven't had any accidents, you'll start paying the same premiums as other adult men in similar circumstances.
If you live beside a river, you may be paying more in premiums now than you did 10 years ago. This is because climate change has caused an increase in severe weather events, which can result in flash flooding. Houses beside rivers are, on average, more likely to be affected by flash flooding than those further inland.
An insurance policy is a legally-binding contract between an insurer and a person or business seeking insurance. 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 incredibly 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.
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No better or worse
Insurance is about putting you back to where you were before an unforeseen event happened. Failure to do this is called betterment.
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.
Check your cover annually
Insurance should work for you, so it’s important you regularly check it’s fit-for-purpose and covers what you need it to.
You should check your sum insured every year to make sure it's enough to cover the cost of rebuilding your house and outbuildings from the ground up should you suffer a total loss. Most insurers have sum insured calculators that will do the bulk of the assessment for you. These calculators take into account the price of materials and labour, as well as specialist services such as quantity surveyors and architects. As these costs change each year, it’s important to regularly update your sum insured. That way if the worst happens, you have what you need to get back on your feet.
If you’ve downsized your house, you may have downsized the amount you keep in it, too. Or possibly you recently bought some new furniture or jewellery. No matter what your situation, you should review your contents insurance cover annually. As time passes, we get rid of items we’ve previously owned and purchase or are gifted new ones. All these incomings and outgoings can change the value of contents you need to insure.
Many insurers have contents sum insured calculators on their websites. You can use these to get an estimate for the value of your possessions. And while you’re at it, remember to check what items should be specified under your policy and get updated valuations for them. Valuations for specified items should be updated annually to ensure they keep up with the price of precious metals, spare parts and changes in valuation technology.
Cars devalue year on year, so it makes sense to re-evaluate how much your car is insured for each year. If your policy states your insurer will pay you market rate, do some research on online sales sites and make sure the listed market rate is accurate. Your insurer won’t pay more than the going market rate at the time of an accident, even if you’ve insured the car for more. If your policy contains an agreed value, this is the maximum your insurer will pay regardless of market rate. If this is more than the market rate for your car and you’re looking to reduce your premiums, you could consider reducing this.
You have rights
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.