Why some insurance premiums are about to go up

Thursday, 7 October 2021

Tower will lift premiums for owners of flood-prone homes mirroring its shift two years ago to charge higher premiums to insure homes at higher risk of earthquake damage.

“If you are living on reclaimed land in what was a mangrove wetland, but is now sitting there as a nice suburb, you are going to have higher flood risk,” said Blair Turnbull, chief executive of Tower Insurance.

“We led two-and-a-half years ago about earthquake [risk], and that’s because we had a lot of data on earthquakes.”

Lloyds researchers had ranked New Zealand as the world’s second-riskiest country for natural disaster behind Bangladesh, but it was not because of the country's earthquake risk, Turnbull said.

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The owners of floodprone homes are likely to face larger rises in insurance premiums than other homeowners.

“New Zealand is second on that list because of flood perils, and because we are surrounded by water, and water is rising.”

Tower had worked with risk-mapping company RMS and property data company CoreLogic to build its ability to risk-rate homes for flooding.

Tower insurance chief executive Blair Turnbull says the insurer will launch pet insurance before Christmas.

“We’ve done lot of portfolio analysis on flooding as well as earthquakes, and we will be able to share that in the coming months, and certainly looking into 2022, we will be sharing that with customers,” Turnbull said.

As with the shift to earthquake risk-rating for homes, some homeowners with lower-risk homes could find their flooding cover drop in price, while others would be charged more.

“If you are sitting on the banks of the [Buller] River, it’s going to be hard given that we’re seeing that an increasing frequency of these large storms.

Ōhau Village was devastated by a fire in October last year.

“We can’t keep building on flood-prone areas,” he said.

It has become more expensive to insure homes and cars in the last 18 months, with the Covid pandemic disrupting supply chains, and pushing up the prices of building materials, car parts and used cars, Turnbull said.

“Trying to get windscreens in at the moment through ports is really challenging. If you have to wait another month or two, it's another month or two with a courtesy car,” he said.

Both Tower and AA Insurance have seen an increase in house fires over the past year.

“Who would have thought that used cars go up in price?

“As an industry over the last year, you’ve seen between 3 per cent to 5 per cent increases in average insurance premiums, which is historically higher than what you would normally see.”

The claims cost pressures had coincided with an increase in extreme weather claims.

Bangladesh’s waterways are beautiful, and vital for transport and the economy, but flooding causes frequent disruptions to life.

“When we look back over the last decade, this year will probably finish on the highest number of large events New Zealand has had,” Turnbull said.

Recent extreme weather events included the fire that swept through Ōhau village, the Napier floods, the Motueka hailstorm, central Otago flooding, flooding in Canterbury, and even a tornado in the Auckland suburb of Papatoetoe.

Christchurch insurance claims consultant Dean Lester said risk-based assessment was nothing new, and insurers were using it to reposition their businesses after taking a hit from the earthquakes.

Some insurers seemed to be targeting customers with more valuable properties in Auckland, rather than Christchurch and Wellington.

He said there should be sufficient options for people wanting to switch from Tower, as insurers were always competing for customers.

“The challenge for Cantabrians is to consider how competitive the local market is. What New Zealand definitely needs is a more competitive insurance market.”

AA Insurance chief executive Chris Curtin said on average, house insurance prices had increased by more than the rate of inflation, but some customers with homes at greater risk of natural disasters had experienced even bigger rises.

“Over the past few years insurers have generally been moving prices to better reflect the underlying risk, particularly by region,” Curtin said.

“Insurers have also seen the damage caused by more weather events that have occurred over the last few years. Increasing house fires and Covid-19 related repair cost increases have emerged more recently.

“These changes won’t be fully reflected in insurance prices yet,” Curtin said.

Alistair Smith, chief financial officer of IAG, which owns the State, AMI and NZI brands, said supply chain constraints caused by Covid-19 did not necessarily automatically translate into premium increases.

IAG did not want to signal price increases.

Insurance Council of New Zealand data showed since 1968 flood claims accounted for more than 50 per cent of all loss events.

EQC Minister David Clark announced late last month that from October next year, the EQC payout cap would double, from $150,000 to $300,000.

This would add an extra $207 a year to homeowners’ premiums, but Clark expected insurers to drop their premiums to reflect some of their earthquake risk shifting to EQC.

Turnbull said Tower was expanding, and had launched into the boat insurance market and would unveil pet insurance before Christmas.

Turnbull said there were about 600,000 boats and 2 million pets, but many were uninsured.

“Why is it that people understand when they are behind the wheel of a car the importance of insurance and the risks, but somehow they get onto a jetski and go, ‘Hell’s Bells. I’m going to rip it up. Total disregard. I’m not going to insure this thing’.”

Tower was also going down the route of using technology and artificial intelligence to reduce operating costs.

On Wednesday, Tower announced a deal with Dutch company Friss to use its AI software to identify telltale signs of fraud in claims.