All earthquake-prone houses could face insurance hike

Tuesday, 3 April 2018

Tower Insurance has announced it will start pricing premiums according to how at-risk a property is to earthquake damage.

A move by Tower Insurance to start pricing its premiums based on how at-risk each property is to earthquakes is expected to be a catalyst for an industry-wide change in pricing.

Tower, the country's third-largest general insurer, announced on Wednesday that thousands of its customers who live in earthquake-prone areas would face a premium hike, while those further away from active faults, including Aucklanders, would see premiums drop.

Richard Harding, the chief executive of Tower insurance said new pricing would come into effect from April 1.

Chief executive Richard Harding said the company would stop 'subsidising' higher risk properties from this week in order to send a clearer message to home-owners about the risks in their backyards, and to more fairly distribute costs.

Harding said the majority of the company's 350,000 customers would not see any significant change in their premiums, with less than 2.5 per cent receiving a hike of more than $250, and 1 per cent would see a hike greater than $2000.

Insurance council chief executive Tim Grafton said the pricing change could help people make better decisions on where to develop.

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'Customers receiving these increases will usually have high-spec homes in high-risk locations like Wellington, Napier and Gisborne,' he said.

Harding said the cost to cover a $1 million home in Auckland for earthquake-related damages was about $40 but the equivalent property in Wellington cost $5400 to insure.

The pricing of flood coverage would soon change according to risk as well, he said.

Jeremy Holmes, principal of actuarial firm Melville Jessup Weaver, predicted Tower would be the 'first of many' insurance companies to implement risk-based pricing.

'They'll sort of be obligated to because you don't want to be left as the one insurer who doesn't risk-weight, or you end up with the most expensive risks.'

Holmes was an author of research published in November last year that found there was no difference in the price of insurance for high risk locations compared to low risk areas in the Hawke's Bay.

'It just wasn't a clear picture of 'this place is high risk so insurers are charging higher premiums'.

'I would expect to see a different picture five years from now.'

Tower is one of a few New Zealand insurers using RMS, a California-based global catastrophe modelling firm, that looks at the risk and pricing for individual properties based off earthquake risk.

RMS' New Zealand hazard model was updated in 2016 for the first time in 20 years to include learnings from the Canterbury earthquakes.

Holmes said the model was 'very granular' and took into account factors such as distance from fault lines and liquefaction risk.

Insurer IAG also uses RMS' model to look at the risk and price of underwriting individual properties, but it is understood it does not use that information when setting premiums.

Insurance Council chief executive Tim Grafton said Tower's move could result in people making better decisions.

'We know that about $20 billion worth of assets and about 47,000 houses are within 1.5 metres of the high tide level today, so in the decades to come there is a significant challenge there around managing how those assets are protected in the future.'

At the moment, insurance pricing provided 'no clear indications' of whether or not development should be occurring in a particular area, he said.

'Increasingly we want to see communities around New Zealand are not undertaking developments that are just going to end up in social and economic disaster for people.'

Hastings said one of Tower's roles was to help change and influence community and government behaviour. 'The pricing of insurance for risk is one of these signals.'