Reserve Bank warns owners of flood and fire-prone homes will pay more for insurance

Wednesday, 3 November 2021

Properties that are prone to flooding could be more expensive to insure.

Owners of flood-prone homes, and those at higher risk of wildfires will end up paying higher premiums for their house and contents insurance, the Reserve Bank Te Pūtea Matua has warned.

In its financial stability report, released on Wednesday, the central bank predicted insurers would move to risk-based pricing for flood and fire-prone homes.

That would see owners of flood and fire-prone homes paying more for their cover, while owners of less at-risk homes would have their premiums fall.

“We anticipate that insurers will respond to climate change with risk-based pricing models,” the Reserve Bank said.

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Already there were signs that about to happen with Tower chief executive Blair Turnbull signalling last month that the insurer had built its ability to risk-rate homes for flooding.

The Reserve Bank said the push to risk-rating individual homes on natural disaster risk was partially driven by international reinsurers, which insure insurance companies, so they can pay claims should massive disasters strike, like the earthquakes that struck Christchurch a decade ago.

Once one insurer moved to weather-related risk-based pricing, its rivals would have no choice but to follow, the Reserve Bank said.

Significant damage was done in Auckland’s Papatoetoe and Wiri suburbs by a Tornado in June.

Any insurer that did not follow would end up as the insurer of higher-risk properties, the Reserve Bank said.

Alistair Smith, chief financial officer of IAG, which owns the State, AMI and NZI brands, would not reveal if it planned to move in the direction indicated by Tower and the Reserve Bank.

But, he said: “A number of factors determine how we price our premiums, and these include location, past claims, cost and risk.

“We are closely monitoring the evolution of the external environment,” he said.

Chris Curtin, chief executive of AA Insurance, said it was becoming increasingly important for insurers to understand the impact climate change was having on claims.

But, Curtin said, the company was committed to ensuring that home insurance continued to be widely accessible and affordable.

The Reserve Bank highlighted two years of heavy weather-related claims events for insurers in the financial stability report, using figures collated by the Insurance Council of New Zealand Te Kāhui Inihua o Aotearoa.

In 2021 alone the cost to insurers of the largest eight weather-related events was just over $240 million, though that figure does not include damage that was not insured, or homeowners’ share of the costs of damage, including the excesses on their policies.

Already homeowners had seen the rollout of risk-based pricing on homes for earthquake risk, the Reserve Bank said.

That move began in 2018, with Tower having been the first mover.

Insurance premiums did play a part in informing customers of potential risks, he said, it primarily existed to aid recovery. IAG followed suit in 2019.

In October this year, Turnbull said: “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.

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