Wednesday, October 26, 2016

Bond Insurance - a gamble not worth making.

We've recently found out about BondSure, a new company offering bond insurance, as well as bond loans and contents insurance. We do not think bond insurance is worth it for most tenants, unless you are exceptionally accident prone.
This guy. This guy needs insurance.
Let's consider the kind of insurance being offered. Your rental bond is already a form of insurance - the tenant pays a lump sum up front to ensure that if there is compensation due to the landlord at the end of the tenancy, the money is already there.

For most people insurance is about peace of mind – a protection against large, unexpected costs. This is exactly what your rental bond is!

It's not too different from paying insurance on a car, except that it is refunded at the end of the tenancy if you do not need to rely on it. And during the tenancy, it's held by the Rental Bond Board and there's the opportunity for your bond to be used for good.

So would you consider paying insurance on your insurance? It may sound a little odd, but that's the logic being offered by BondSure. Perhaps this reflects a view among landlords and agents that the bond is the tenants money in name only, and really it’s just waiting to go to its rightful home with the landlord. Is it a coincidence that BondSure is managed by former real estate agents?

So, how does this insurance on your insurance work?

Let's look at the insurance on a $2000 bond. The fees are $31.58 per month on a 12 month agreement, for a total of $378.96 for the year. You pay your fees, and if you need to make a claim, you pay your excess of $300 (Excess is 15% of bond or $200, whichever is higher). Coverage extends only to the bond amount, so the maximum claim you can make is your bond amount of $2000.

Now, because you have already paid the $378.96 in premiums, and $300 in excess, your insured $2000 bond effectively only gives you a benefit of $1321.04. The insurance does not cover anything above the bond, and it only covers "accidental damage". It does not cover many of the things that bonds often pay for, like rent arrears, utilities bills, or even most cleaning bills.

We know from the Rental Bond Board that the actual numbers of people losing their bonds are very low. Once you take out the stuff that BondSure's bond insurance doesn't cover, these numbers will be even lower.
Click for full size!
In the 2014-15 financial year, there were 266,856 bonds refunded. 53% of tenants received their bond back in full. If those tenants had held bond insurance, they'd have made a $378.96 bet and lost. This is where BondSure makes its money.

Another 38% received part of their bond back. Because of the excess of $300, the claim by the landlord has to be above $678.96 before it even makes sense to claim anything. If your landlord comes to you with a bill for damage of $150 dollars, you wouldn't spend $300 dollars to fight it, would you? So a large chunk of those tenants won't make the claim on the insurance, they'll just pay the landlord directly. So they'll have made a $378.96 bet and lost, on top of whatever "small" amount the landlord has claimed. This group end up paying both BondSure as well as their landlord, without actually obtaining any benefit.

If the claim on the bond is higher than $678.96, and only for accidental damage, then it becomes worth it for the tenant to have held their BondSure policy. They will start getting a payout that puts them ahead of where they would have been if they'd just saved their money. But that's assuming they've only been paying their premium for one year.

For those playing along, that leaves just 9% of tenants who lost their bond entirely in 2014-15. We know that many claims for the whole bond occur following breaches, such as rent arrears and the like, so only some would get the benefit of bond insurance. Those tenants often also owe more than the bond to the landlord, so they will still have costs above the payout.

If you are lucky(?) enough to be one of the small percent who had accidental damage that cost you exactly what your bond would cover (and nothing more!) then you get the full benefit of the insurance, and get your bond back. Happy days!

In considering all of this we haven’t included the cost of attending the Tribunal, which a bond insurance system discourages tenants from using. If your landlord's claim is high enough the "rational" thing to do would be to accept it and take the BondSure payout, even if you know the claim is false or an overreach. Without bond insurance it is usually worth it for a tenant to dispute a bond claim because the Tribunal forces agents and landlords to provide evidence for their claim.

As with all insurance, this is basically a gamble. Only around 1 in 4 tenants will get some benefit from a BondSure bond insurance policy. Most won't, and this is why when you gamble the house always wins. The house here is BondSure, who get paid either way, and if they do pay out make a relatively small loss. Using the proportions above, if everyone had a $2000 bond covered by BondSure they would make an average of $131 per client. Tenants, on the other hand, would spend an average of $319 by taking out insurance on their insurance.

Save your money, don't use bond insurance. If you really want to cover yourself for the unexpected loss of a rental bond, you'd be better off sticking $30 a month in an old jam jar.

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