The FSI referred to studies undertaken after natural disasters revealing inadvertent underinsurance due to consumers struggling to make an informed decision about the sum insured.  Survey results highlight that even when consumers take the time to read insurance documentation, including the product disclosure statement, many misunderstand it, scan it briefly due to over-reliance on sales staff, or fail to understand it due to its complexity.  By way of example, a survey by Caxton Legal Centre after the 2011 Queensland floods indicated that 51 per cent of consumers read the policy but misunderstood important exclusions or limitations.

The current regulatory settings allow insurers to provide guidance on the replacement value of home building or contents without needing to comply with the personal advice rules.  At present, the FSI believes this is not working and insurers are not typically providing guidance on replacement value.  The FSI believes that commercial disincentives mean insurers are reluctant to provide this type of guidance.  ASIC recently released its report number 415 which identified that most insurers operate on a ‘no advice’ or factual information model.

The FSI has stated that it wishes to encourage the general insurance industry to enhance existing tools and calculators for home insurance, including providing up-to-date information about building costs and building code changes.   The rationale is that underinsurance would reduce if, as standard practice, insurers gave consumers relevant information, guidance and advice on home building and contents insurance.

The FSI also recommended that the insurance industry should standardise the way replacement costs are estimated. To the extent this is limited by the existing regulatory regime, the industry should work with Government to resolve this issue.

Insurers in the home sector will be under increasing pressure to adopt sales procedures that seek to actively address under insurance. Innovative sales tools may be the means of demonstrating to regulators that more onerous advice led regulation is not required.