Insurance principles, risk and the role of insurance in the New Zealand market
What this domain tests
The principles that make insurance work, and how the New Zealand market's small size, catastrophe exposure and EQCover scheme affect insurers, advisers and clients.
Core principles
- Risk pooling and transfer. Many policyholders contribute premiums so the few who suffer loss are indemnified; insurers retain only risks they can measure and reinsure.
- Insurable interest. The insured must suffer a financial loss if the event occurs.
- Indemnity. The insured should be restored to the pre-loss financial position, no better and no worse. New-for-old replacement and agreed-value policies are exceptions.
- Utmost good faith. Both parties must deal openly; the insured must disclose material facts.
- Proximate cause. The dominant, effective cause determines cover when several causes combine.
- Subrogation and contribution. After paying, the insurer may step into the insured's rights against a third party; contribution allocates loss between insurers.
- Average. Where a sum insured is below the value at risk, a partial claim may be reduced proportionately.
New Zealand context
The market is small and heavily reinsured. Earthquake and weather risk dominate. Toka Tū Ake EQC provides EQCover for residential buildings and land for natural hazards, within caps and excesses; private insurers wrap around it. ICNZ represents insurers; RBNZ supervises solvency; FMA supervises conduct.
Worked example
A house is insured for $500,000 but would cost $600,000 to rebuild. A partial loss costs $120,000. Under an average clause: $120,000 × ($500,000 ÷ $600,000) = $100,000, less the excess. The client bears the shortfall because the sum insured was inadequate.
Traps
- Using market value instead of rebuild cost.
- Assuming EQCover covers contents.
- Treating indemnity as 'new for old'.
- Ignoring the difference between proximate and incidental cause.