Insurance 'the canary in the mine' as customers brace for hefty price rises

Friday, 3 May 2019

Wellington property investor Nick Gentle is bracing himself for his insurance bills to get bigger.

The cost of insuring one of his properties, a house split into two flats in Brooklyn, has gone up each year for the past three years.

This year, he's been quoted $3700, reduced to $3300 with a higher excess. Last year it was $3250 and the year before $2700. 'I'm not sure what it will be next year.'

There is reason to expect it might jump again because he is insured with IAG, which announced at the end of April that it was shifting to a risk-based pricing structure.

* IAG rolls out new pricing to reflect weather, natural disaster risk

* 'Collapse of disaster insurance market possible in Wellington'**

That means customers with properties in areas that are high risk for natural disaster - such as an earthquake - or severe weather will probably pay more for their insurance cover.

Even quite modern Wellington buildings failed in the Kaikōura earthquake.

Those in less risky areas could pay less. The changes will take effect as policies are renewed from July.

IAG operates the State, AMI, NZI and Lumley brands in New Zealand. It has almost half the general insurance market.

It follows a similar move by Tower last year.

It is understood that IAG is presently offering cover to existing Wellington customers, including for new properties, but it is reluctant to take on new customers and is prioritising 'good quality' risk over poor risks.

IAG's executive general manager of customer and consumer Kevin Hughes said the country's environmental risks had evolved over recent years and insurers had to take account of that.

'Every customer and every property is different and so every policy will be affected differently, whether that be a price increase or decrease.

'We realise these changes will be a challenge for some customers and we will work through this with them.'

Insurance expert Michael Naylor, of Massey University, said how big the increases would be in places such as Wellington depended on how 'deep' the insurers' algorithms went – 'do they use data on individual building type, the ground?'

He said indications were that they would rely on quite specific information, which would mean the results for individual properties varied a lot, even in areas with the same general risk level.

He said, if IAG wanted to decrease its exposure in markets such as Wellington it might not mind over-pricing to discourage households from renewing cover. 'The same will start to occur with flood or coastal erosion risk.'

Insurance premiums have been rising quickly. Stats NZ shows households spent an average $34.10 a week in the year to June last year on building-related insurance, up from $14.70 in 2008.

Concerns about Wellington's insurance market prompted mayor Justin Lester to call for a forum to discuss the issue.

'It may be that the Government needs to consider what insurance companies are required to offer in a market, and they may have to offer an affordable option where they operate,' Lester said.

'Insurance is crucial for a city. It has to be available and affordable for banks to lend, for businesses to operate efficiently, and for people to have peace of mind.'

Nick Gentle is facing an increasing insurance bill in Wellington.

But Tim Grafton, chief executive of the Insurance Council, which represents general insurers, said it was too simplistic to focus on premiums as the problem.

Action was needed to reduce the impact that climate change-related weather patterns would have on the country, and to confront what was required to create infrastructure and properties that could cope with New Zealand's seismic risk.

That could happen at local and central government level, he said, updating building regulations and specifications. 'Starting with not increasing the problem by consenting developments in flood plains.'

Work could also be undertaken to reduce the risk to existing structures and properties, he said, as had happened in the Netherlands, where 60 per cent of land is below sea level.

The recent Kaikōura earthquake's impact on Wellington had highlighted that even modern buildings were not immune to earthquake damage, he said.

It caused $1 billion of damage in the city, including the total loss of a number of buildings constructed within the last 20 years and fully complaint with the modern building code.

That had prompted risk modelling firm RMS to increase its estimate of the risk insurers took in New Zealand by 30 per cent.

New Zealand was a very risky country, he said, and was critically dependent on offshore reinsurers to support the insurance market. It could not afford to be complacent about increasing risks.

'Insurance is the canary mine signalling when risks arise. Why is it that so many buildings failed that were of recent construction? What can we do to ensure we are more resilient so we are more insurable?'

If measures to make buildings and infrastructure safer were effective it would mean more affordable insurance, he said. 'Any notion of trying to force the pricing issue will not be successful.'

If nothing was done, insurers would likely respond over time by increasing premiums and excesses. Some would be reluctant to issue new policies.

'There are areas where insurers will not want to take on new risks, even today… insurance is always a transaction around transferring the risk at a price. If the risks gets too high, the price may become a question of affordability and availability.'

Jeremy Holmes, an actuary at MJW, said he expected other insurers would follow IAG and Tower.

'Insurers don't want to have inferior pricing models to their competitors or they risk being left with only the highest risk properties. Of course, each insurer will have their own view on the underlying risks, and it may be the case that some insurers disagree for particular properties,' he said.

'There may be small pockets for whom insurance becomes very expensive.

'It's interesting to see the various stakeholders taking an interest in this now. There will no doubt be properties currently in very high-risk areas, where previously that risk may not have been properly understood when they were built. And I'm sure that we'll see a range of options being proposed to tackle this issue, from extending EQC, to having a state-owned insurer of last resort, perhaps insurance subsidies for some properties, or council buy-back schemes.'