Here's what you need to know about New Zealand's changing insurance market

Wednesday, 13 March 2019

Insurance is becoming more difficult to get in parts of New Zealand, and that could have a flow-on effect to house prices.

IAG, which operates brands including State and has almost half the New Zealand market, is restricting its coverage in Wellington.

A spokesperson said, because of the higher earthquake risk in that part of the country, people wanting new contents policies could find it difficult.

Megan Woods, the minister responsible for the Earthquake Commission, said she understood it was also turning down house insurance applications on a case-by-case basis.

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It follows Tower's move to 'risk-based pricing', which led to increases in the cost of cover in high-risk areas, such as Wellington.

WHAT'S GOING ON?

The insurance market in New Zealand is changing.

Insurers were hit hard by the Canterbury, Kaikoura and Wellington earthquakes and are trying to limit their exposure to it happening again. Jeremy Holmes, a principal at actuarial firm MJW, said shortly after an earthquake there was increased probability of more, which took years to settle down.

There are also climate risks to confront - the extreme weather claims bill for insurers in 2018 was $226m.

Cameron Bagrie says many people could be in for a surprise.

The past two years have been in the top three most expensive on record for insurers.

But they also have increasing amounts of data available to them about the risks they take on, which allows them to make more specific decisions.

Holmes said insurance pricing would usually sit somewhere between community rating - where everyone paid the same premium regardless of risk (think ACC) and risk rating, where people paid for the estimated risk they posed.

There was a domino effect - as some insurers became more specific about charging for actual risk, others had to follow suit.

'If, as an insurer, you don't risk-rate then you risk being selected against. That is, your competitors, if they do risk rate, will cherry-pick the safest risks and you will end up with only the higher-risk customers. This is why insurers need to do their best to estimate the true risk that each policyholder brings to the pool.'

Insurers are backed by reinsurance, a form of financial support that limits their losses when significant claims are made.

Holmes said writing more policies in Wellington would mean insurers needed more reinsurance - but sometimes it could be hard for them to find at a reasonable price.

'This is often the case in the wake of large events.'

Brad Olsen: 'Potential buyers without the ability to secure housing insurance, or who are faced with considerably higher insurance costs, aren't going to view the Wellington market with as much enthusiasm as they currently might.'

EQC

Changes to EQC cover are also having an effect on the market.

As of July, it will cover up to $150,000 for buildings, from $100,000 now. But will no longer offer any contents cover.

This means insurers' exposure to domestic building risk would decrease and contents risk would increase, which may affect insurers' appetite.

HOUSING MARKET

All this may well have an impact on the housing market.

If people cannot insure houses, they may be less likely to buy them. Banks wil definitely be less likely to offer mortgages on them.

Economist Cameron Bagrie, of Bagrie Economics, said people in parts of New Zealand that were susceptible to rising seal levels would also be in for a 'wake-up call'.

'It's not just insurance, it will be getting finance, too.'

Holmes said, if it became known that a particular property was very expensive or difficult to insure, it might reduce its market value.

Economist Brad Olsen, of Infometrics, also expected an impact, particularly in Wellington.

'Potential buyers without the ability to secure housing insurance, or who are faced with considerably higher insurance costs, aren't going to view the Wellington market with as much enthusiasm as they currently might,' he said.

'Banks won't lend on a house without insurance, forcing those who want to buy property in Wellington to pay another company a higher price to secure insurance. This higher cost of insurance could see greater reluctance to invest in the Wellington market.

'However, Wellington still has an under-supply of housing relative to the strong demand over recent years. So, with more people moving to Wellington, they're likely to accept higher insurance prices if it means they can secure a house, assuming they've already made the decision to move. Both owners and renters are also in the gun with lower accessibility to insurance, with contents insurance an important consideration for anyone who lives in a property to protect their contents.