House insurance - how long will we be able to afford it?

Thursday, 24 March 2022

New Zealand beach houses are highly exposed to rising sea levels, but the problem is ignored by many Kiwis. (First published July 2020).

Like many homeowners, Tim Cox has had sticker shock when he opened his latest insurance bill. The Island Bay resident now pays about $3400 in premiums for his small two-bedroom house on a hilltop near the coast.

That’s not exceptional. Other Island Bay residents are paying as much as $6000 for insurance on a three-bedroom house on the flat.

“You don’t feel like you are getting good value for your money. It’s one of those things that you need, but never want to use, so it’s hard understand what it’s worth until you need to use it,” Cox said

Around the region – and around the country – insurance premiums are sky-rocketing.

Wellington’s terrain and relationship to major faults means its earthquake risk is higher than many other areas.

Just two decades ago you could insure an average Kiwi house for a couple of hundred dollars a year. Now, it would probably cost almost six times that amount, according Statistics New Zealand.

The cost of house insurance has increased by 600 per cent since 2001, compared with a 55 per cent increase in core inflation, as measured by the consumer price index over the same period.

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Insurance Council chief executive Tim Grafton said the nature of New Zealand’s risk landscape has changed over time.

There were a whole range of reasons house insurance had ballooned over the years, including earthquakes, surging house prices and more regionally-focussed risk assessments.

But the end result was that along with rising housing costs, ever-increasing council rates, and the cost of insurance, most New Zealanders were feeling the impact on their standard of living. Even those who did not have to pay insurance directly – namely renters – were being stung by relentless price hikes.

Lyall Bay in Wellington would be most affected by tsunami.

Tim Grafton of the New Zealand Insurance Council said a lot of the rise in insurance premiums could be explained by the increase in value of what’s being insured, thanks to the sudden jump in house prices.

“If you’ve moved from insuring an asset worth $200,000 to one that’s now worth a million or more, you’d expect the cost of insurance to increase,” he said.

But the rate of growth in insurance premiums has even outstripped that of housing.

According to Global Property Guide, the median house price in New Zealand in 2001 was about $177,000, which has increased to just under $800,000 at the end of 2021. Those property prices included increased land values, which would not ordinarily be calculated into an insurance rebuild.

Grafton said the risk landscape had changed a lot over time. “It’s also clear that there is a much better understanding of the risks being insured, especially, and devastatingly so, through the experience of major earthquakes.”

He also pointed out that the value of claims being paid out had also gone up. The total insured losses for in New Zealand over the five years to 2016 were just under $3 billion. For the five years to 2021, they totalled $3.7 billion – an increase of about 23 per cent.

Consumer NZ surveyed insurers and this table was their results for those insurers which offered sum-insured in July-August 2021. The quotes were for a standard home insured for $450,000 Credit: Consumer NZ investigative writer Nikki-Lee Birdsey

House insurance survey by Consumer NZ for sum-insured quotes for $800,000 house in July-August 2021. Complied by investigations writer Nikki-Lee Birdsey

The New Zealand Insurance Council provided a breakdown on the components of a typical house premium. The $1500 figure is just an example and does not represent the average.

Grafton said the best way for insurance to remain affordable was to reduce risk.

“Aotearoa New Zealand sits in the top three of the riskiest countries in the world in terms of natural hazards, but one of the best in the world in terms of insurance availability and affordability,” he said.

“To stay that way, it’s essential that there is community, local and central government action to actually reduce risks.”

What are people paying in premiums?

Consumer NZ carried out a survey last year comparing quotes from a range of providers for a standard house (insured for $450,000) and a large family home (insured for $800,000).

Their survey found Wellington was the hardest hit by price hikes. From 2020-2021, median insurance prices increased 16 percent for a standard house and 18 percent for a large dwelling.

For ease of comparison, we have only selected the figures of providers who offered sum-insured only (as opposed to full coverage) and only those which covered all regions including Wellington and Christchurch.

The 2016 Kaikōura earthquake gave Wellington a good shake too.

Are insurance companies gouging the public?

In short, no, because their premium is only part of the overall makeup of the bill, but their chunk has certainly increased considerably in dollar terms over the years.

Jon Duffy of Consumer NZ said there was no doubt that our society and our collective risk profile was changing as we became more aware of the likely impacts of climate change.

Competitive pricing and the ability for consumers to easily switch from one provider to another were critical in ensuring broad access to insurance, he said.

“And making sure that some members of our community are not locked out of fully participating in society, through home ownership, for example.”

Duffy said the difficulties home buyers have had switching insurance providers or obtaining insurance in certain areas in recent times have been well publicised.

The Earthquake Effect

House insurance premiums almost doubled in three years after the 2010-11 Canterbury earthquakes, with an average 43 per cent hike in 2012, according to Statistics NZ.

In the wake of those earthquake events most insurers changed their policies from full replacement to sum-insured, which meant houses were only insured up to the specified amount.

Reinsurance covered about 75 per cent of the cost of claims arising from the Canterbury earthquakes, and reinsurance costs tripled after 2012 and now accounted for almost 20 percent of the premium.

The 2016 Kaikōura quake caused significant damage in Wellington and the city was still feeling the flow-on effects of that event in their insurance premiums.

The cost of building has also increased dramatically in recent years so your sum-insured estimate won’t replace what it used to.

The insurance council said this event “revealed that the risks were far greater than previously priced and uncovered many problems around building standards”.

“It also caused many insurers and their reinsurers to pause and review the amount of risk they had on their books in the region.”

According QV, the average Wellington house had risen from $407,000 in 2011 to $1.086M in December last year.

Earthquake Commission costs set to rise

In September last year, EQC Minister David Clark said the commission’s cap on pay-outs would be doubled from $150,000 to $300,000 from October this year.

Clark said he expected insurers to lower their premiums as the government was taking on more of the risk. If that didn’t happen, the government might investigate.

Consumer NZ estimated this would add an extra $207 a year to homeowners’ premiums. The levy amount paid by each homeowner will depend on their sum insured, but will be a maximum of $552. The current levy amount is $345.

“Given the increased contribution the taxpayer is making to natural disaster cover, we think it would be worthwhile for the Government to review the impact this has had on premiums and whether the savings have been passed onto consumers,” Duffy said.

Rising build costs leave many underinsured

The insurance council said it was important to look at what each policy from each retailer covered.

One of the big reasons for varying quotes might be differences in coverage and homeowners needed to know how this would affect their unique situations.

The cost of real estate had increased in recent years but also the cost of building houses has risen dramatically. This meant the sum-insured total that homeowners had calculated a couple of years ago to rebuild their homes in the event of damage, would probably not be enough for a total rebuild today.

Grafton said under-insurance was a major concern for the sector given Stats NZ recorded an increase of 16 per cent in the cost of new dwelling construction in the December 2021 quarter.

“Just this morning, there was a report that the cost of building materials is set for an 11 per cent rise,” he said. “Regrettably, people not increasing their sum insured is more a function of people not taking the time to review their insurance at renewal time.”

Calculating premiums

Pricing insurance risks is a complicated process that relies on historical data and future forecasting.

Insurers use: previous claims data – both from the customer and from other customers insuring similar assets; statistical analysis; predictions of future likelihoods based on mathematical projections; natural hazard and building data records of past weather patterns and predictions of future weather events; other data that can help them understand the person and the asset or assets they’re insuring.

Homeowners are feeling it

Tim Cox said the upward trajectory in insurance costs could make it unsustainably expensive in the future.

“If it keeps going then there comes a point when potentially become unaffordable, or you will have to give up other things to keep it going.”

He suspected his house might be underinsured because they haven’t adjusted their sum-insured amount since buying the house five years ago.

Charlene Peters of Tawa has owned property in Wellington for over 20 years, and she has seen her premiums rise to the point of becoming unaffordable for many people.

She said the cost of house insurance was now “ridiculous” and she was now paying around $4000 per year for house insurance.

“If you break it down in chunks it comes to around $75 a week. When you put that on rates, which are skyrocketing, it’s unsustainable.”

Peters said the government talks a lot about steps to take to make housing more affordable but don’t address other big factors such as council rates and insurance.

“You should be talking about these things hand in glove. You can’t have one without the other.”

The average cost of council rates over the last 20 years has almost tripled which was adding to homeowners’ fixed costs.

Insurance increases hurting older people the most

Bruce McLachlan of the Wellington branch of Grey Power said many older people were struggling to meet the rising cost of insurance in general.

“My one biggest cost, aside from food and basic living expenses, is insurance.”

Of course, it’s not just homeowners who have to foot the bill for insurance. Renters will be indirectly covering the rising costs that landlords face such as increased insurance and rates.

Geordie Rogers of Renters United advocacy group said, even factoring in rates and insurance increases, rental rates have been climbing disproportionately in recent years.

“The price that renters pay is partially set by underlying costs, that’s really the foundation for the price, but the top level of rental prices we’re seeing at the moment are really a response to what’s in the market.”