Tower deepens risk-based pricing in response to crime, inflation, extreme weather and higher reinsurance costs

Friday, 26 May 2023

The quadruple impact of higher car crime, extreme weather, inflation and rising insurance costs have prompted Tower to increase the speed at which it is lifting premiums on house and car cover.

The insurer, which reported a $5.1 million half-year loss on Thursday, has also moved to broaden its programme of risk-based pricing.

Tower had lifted premiums for people with the most frequently-stolen models of cars, said chief executive Blair Turnbull.

But it had also started hiking premiums for people whose homes are at a higher risk of landslides, or coastal flooding.

Turnbull said the three changes followed earlier shifts to pricing homes individually for earthquake, and inland flood risk.

“We’ve seen the increase in motor crime double over the last year, from 7% to 14% of all our claims. It’s pretty material,” Turnbull said.

Thefts most frequently happened of vehicles with no immobilisers, often secondhand cars imported from overseas, he said.

One of the battlegrounds for the upcoming election has been crime, with opposition parties seeking to characterise the Government as soft on crime.

National’s police spokesperson Paul Goldsmith responded to Tower’s car crime claims spike saying the increase in car theft and damage were part of the wider increase in both retail and serious crime.

“They are what you get when the Government has as its only target in justice a 30% reduction in the prison population irrespective of what is happening on the street, and secondly an approach to youth justice where there are few consequences for serious crimes.”

Turnbull said thefts had increased beyond their pre-Covid levels.

Globally, car crime has been on the rise, with some of the blame being put on the rising cost of cars.

Tower was not experiencing a rise in claims after burglaries, Tower’s chief financial officer Paul Johnston said.

Tower chairperson Michael Stiassny said risk-based pricing was fairer from a customer perspective, but was also in the best interests of Tower shareholders.

“Risk-based pricing is Tower’s best protection when it comes to ensuring continued support from reinsurers,” he said.

The pervasive impact of stubbornly high inflation had flowed through into house, contents and car insurance, and had been contributing to a rise in premiums, as insurers passed on cost increases.

Premium increases, except for people who had their homes assessed as being at an elevated risk, had been tracking at around CPI, said Turnbull.

However, that had changed this year with Tower increasing house and car premiums rising more steeply.

A chart released to investors on the NZX sharemarket by Tower showed rolling 12-month premium changes on house and car contents spiking to over 20%.

Johnston blamed that on the rising cost of reinsurance.

Reinsurance is insurance for insurance companies, which companies like Tower buy from giant global reinsurers to help them cope with claims costs from extreme one-off events like cyclones or earthquakes.

On Monday, Tower said it had secured additional catastrophe reinsurance, but reinsurers were charging more for their cover.

“At the moment inflation globally, as well as weather events globally, has meant it's a very hard market for insurers,” Johnston said.

Turnbull said its large rivals were so far continuing with their community, and regional, risk-based pricing, and not pricing the risk on each home separately.

“We put earthquake in a few years ago. We put flood in, in 2020. Now we are looking to put in land slips and coastal inundation,” he said.

Slips in West Auckland in Piha and Muriwai, and also in some central parts of Auckland like Ōrākei, during the Auckland Anniversary weekend flooding highlighted the risk of slips.

While the earthquake and flood risk pricing was automatically-generated for customers, pricing for homes at higher risk of landslip, or coastal inundation, were being calculated by human risk experts at Tower.

Stiassny said risk-based pricing was intended to drive “careful risk selection”.

Some people with homes at higher risk of flood, landslip, or earthquake damage to their homes could find Tower quoted them a price for cover that wass much higher than that quoted by rivals.

At the moment, Tower had no embargoes on areas preventing it from insuring people’s homes, however, Turnbull said: “There are some risks that we will give a price, but it will be quite expensive because it reflects the underlying risks of that property.

“They may be better suited with another insurance provider.”

There are predictions that it will be “insurance retreat” that will drive the housing market away from flood risk, more than any government led “managed retreat”.

Insurance retreat is a term coined for insurers refusing to insure homes that are particularly at risk from inundation against flooding.