Central Bank review identifies evidence of increasing levels of under-insurance in the home insurance market

23 September 2022 Press Release

Central Bank of Ireland

  • Under-insurance in the home insurance market has increased from 6.5% in 2017 up to 16.5% in 2022

  • The Central Bank Review found that not all firms were sufficiently highlighting key risks to consumers and must take further action

  • Firms must communicate with all home insurance customers setting out the consequences of being under-insured, the reasons why this is currently a heightened risk and how policyholders can better estimate an adequate ‘sum insured’ value

The Central Bank of Ireland has written to insurance firms, outlining findings from a review of the risk posed to consumers of not having sufficient home insurance cover. The Review was undertaken because consumers are currently facing increasing rebuild costs, which affects the level of insurance cover that a consumer should have on their property. This can leave consumers at risk of not being fully covered for their losses if they have to make a home insurance claim. 

The Review found that: 

  • Under-insurance in the home insurance market has been steadily increasing over the last 5 years, from an average of 6.5% of paid claims being under-insured in 2017, up to 16.5% in 2021.   
  • For those that have had their claim reduced due to under-insurance, the average reduction in the claim payment was approximately 19% in 2021, meaning that those customers would have incurred substantial costs to fully meet the cost of their claim.
  • There are differences in the way insurance firms present and provide key information to consumers. 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.
  • Some firms have proactively identified the risk to consumers, and have taken some steps to help mitigate the risk of under-insurance; however, all firms must take action to effectively mitigate the risk to the consumer.

A number of areas were identified where further action is needed by firms to ensure proactive steps are taken to lessen this risk and make consumers aware of the implications of under-insurance. The Central Bank expects insurance firms to: 

  1. Communicate the risk of under-insurance to customers in a clear and understandable way, including by: 
  • 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 the adequate sums insured 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.

2. Better manage the increased consumer risks, including by: 

  • Using the data available to them to identify and act on the risks associated with under-insurance and take action to protect consumers’ interests; and

  • Strengthen their product oversight and governance of home insurance products to regularly assess whether products meet the needs and expectations of customers.

In relation to implications for consumers’ premiums and claims related to under-insurance in the current environment, insurance firms are required to act honestly, fairly and professionally in the best interests of its customers and the integrity of the market.

Director of Consumer Protection, Colm Kincaid said: “This review highlights the actions we expect of firms to ensure consumers are properly informed about the risk of under-insurance, and to provide them with relevant and clear information when taking out, or renewing, an insurance policy to ensure they are adequately protected. This is especially important at this time of increasing costs, which heightens 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. This requires firms to have a fully embedded, and fit-for-purpose, Consumer Protection Risk Management Framework to identify and manage the risks that the firm’s external operating environment, strategy, business model, internal processes and procedures pose to consumer protection. Taking a customer-centric approach to all issues ensures firms protect consumers’ interests and prioritise customer needs and outcomes.”

The Central Bank also encourages consumers to check that they have adequate home insurance cover in place when renewing or switching their policy. When reviewing home insurance cover, consumers should not focus on the premium alone but also on the level of buildings and contents cover that is currently in place to ensure it remains appropriate. These details should be reviewed regularly, checking with their insurer or broker as appropriate, to avoid the risk of receiving a reduced payment in the event of a claim.  

The Central Bank also asks that consumers fully consider any communications that insurance firms provide in relation to the risk of under-insurance, especially at this time. 

Notes to editor

The Central Bank’s Dear CEO letter requires regulated insurance firms that provide home insurance products to consumers, to take action and to drive improvements in the quality, and transparency, of disclosures to policyholders of the risk of having an inadequate level of home insurance. 

  • Under-insurance occurs, when the sum insured on a property is less than the amount it would cost to rebuild or replace the property (the rebuild cost, or reinstatement value). 
  • In the event of a claim, and where a policyholder is deemed to be under-insured, an insurance firm can reduce the sum it must pay against the claim in proportion to how much the policyholder is under-insured. In the insurance industry, this is known as the ‘Average Clause’.
Example: A house with a rebuilding cost of €200,000 is insured for only €100,000, i.e. only 50% insured. 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, equalling €25,000, leaving the policyholder exposed to paying the remainder of the cost.
  • The Central Bank considers the consequences of being under-insured to be key information for consumers and should be brought to the attention of consumers.
  • We expect insurance firms to take responsibility for monitoring inflation/deflation levels and to consider the effectiveness of any indexation levels used in mitigating the effects of inflation/deflation for consumers.
  • Insurance firms must ensure that their products are meeting the needs and expectations of customers and remain suitable for those customers over time. In cases where a policyholder renews with the firm, whether it be by way of auto-renewal or otherwise, the firm should consider more regular and targeted communications, to help mitigate the risk of under-insurance.
  • In line with Provision 2.1 of the Consumer Protection Code, a regulated entity must ensure that in all its dealings with customers, and within the context of its authorisation, it acts honestly, fairly and professionally in the best interests of its customers and the integrity of the market.
  • Key differences in the way insurance firms have presented and provided key information to consumers to-date include: the importance of having the correct level of insurance cover and the concept of under-insurance in general.
  • We expect firms to use the data that is available to them to align better with their Consumer Protection Risk Management Frameworks, and to help proactively identify risks posed to consumers and take action to mitigate the risk.
  • Where firms identify external risk factors, such as inflation, the impacts of these should not only be considered from the perspective of the firm but also from the perspective of the firm’s customers, where relevant.