Premium shocks for homeowners, but insurers' shareholders buoyant before reporting season

Saturday, 5 August 2023

Francis Martin was shocked at the size of the premium increase for his home and contents insurance from State.

Aucklander Francis Martin paid $2620 for his house and contents insurance from State last year.

But when his renewal notice landed on the last day in July, he was horrified to be charged $3710.51 for the same cover.

It would have been higher, except he qualified for a multi-policy discount, a burglar alarm discount, a “linked policy” discount, and a “years of insurance” discount, which together reduced his bill by just over $614.

The increase was “just off the charts”, Martin said.

“I would have said nothing had it gone up by 10%, but it’s like 30%,” he said.

Like all householders, Martin has been coping with high inflation, which remains at an elevated 6%, however price rises for many unavoidable bills for homeowners are dwarfing official inflation.

A flood has hit Auckland for the second time in days, with houses and streets underwater. (Video February 2023)

Auckland water charges are up 9.5%. The “average” Auckland homeowner’s council rates have gone up by 7.7%, but many, like Martin, got bigger increases. Reserve Bank Te Pūtea Matua data shows the average one-year interest rate for people with more than 20% equity in their homes, rose from 2.21% in June 2021 to 6.88% in June this year.

It’s become much more expensive to own homes, and Martin is now shopping around to see if he can get a better deal on insurance.

Data from insurance comparison service Quashed shows it’s worth doing. Its founder, Justin Lim, said rising premiums had been accompanied by an increase in the difference in premiums quoted across insurers.

“That means consumers shopping for insurance would find a bigger difference in prices and potential savings,” he said.

Martin now believes it’s time for State, which is owned by giant Australasian insurer IAG, to follow Tower’s example, and introduce individual risk-based pricing for homes based on their risk of being damaged in earthquakes and flooding.

Under that model, owners of flood and earthquake-prone homes pay more, and owners of less risky properties pay less, while Suncorp and IAG spread risk much more on an area-wide basis.

When Martin bought his Beach Haven home in Auckland, he said he avoided low-lying, flood-prone, erosion-prone areas. He does not feel he’s being rewarded for his diligence.

“I’m basically paying for other people’s stupid decisions,” he said.

IAG is not a name familiar to many households, but the many insurance brands it owns are: State, AMI, NZI, Lantern Insurance, Swann Insurance, NAC Insurance and and Lumley.

But while policyholders like Martin are hurting, IAG shareholders, including many KiwiSaver funds, have seen the price of the shares they own rising in the past four months, indicating they have got over their dip in confidence following extreme weather events at the start of the year.

IAG’s share price had risen on the ASX market from a post-cyclone low of A$4.54 in March to A$5.88 on Thursday.

Post-cyclone, Suncorp’s shares dipped to A$11.43, but recovered to A$13.95.

Later this month, Australasian giants IAG and its rival Suncorp will reveal the full extent of premium increases in house, contents, car and business insurance in the 12 months to the end of June.

IAG owns State, NZI and AMI, while Suncorp owns Vero and a majority stake in AA Insurance.

Both insurers have faced high claims from policyholders whose homes, cars, possessions and business premises have been hit by the North Island floods, which struck on Auckland Anniversary weekend, and the devastation of Cyclone Gabrielle.

High inflation has also pushed up the cost of settling claims, and the two insurers are having to pay more for reinsurance.

The Government has announced a cash boost to help people affected by Cyclone Gabrielle and the Auckland Anniversary floods when insurance payments for temporary accommodation run out.

IAG told investors in June that the flood and cyclone were the second and third-largest insurance events in New Zealand history after the Canterbury earthquakes.

When the company released its half-year results in February, managing director Nick Hawkins said the Auckland Anniversary weekend flooding meant the company expected its insurance margin to drop to 10% in its current financial year, down from its previous range of 14% to 16%.

However, Hawkins cut a more bullish figure in June, at an investor day, saying the company was forecasting a medium-term insurance margin of 15%.

Insurance policies are renewed each year, giving the likes of IAG and Suncorp the ability to lift premiums quickly, with policyholders like Martin feeling the effect.

In June, IAG said it had been increasing premiums by around 20% on car insurance and about 20% to 30% on house insurance.

Suncorp chief executive Steve Johnston said in February that the company expected to still remain on track to hit its full-year targets.

As with IAG, it was the insurer’s ability to lift premiums on annually-renewable policies meant it had “recorded strong growth through targeted pricing increases to offset inflationary pressure on claims and increased reinsurance costs,” Suncorp said.

But there’s another factor that neither IAG, nor Suncorp, control that contributed to Martin’s big increase.

Of the $3710.51 State billed him, only $2619.33 is for State.

$127.20 was a levy to fund Fire and Emergency.

$483.98 was to go to Toka Tū Ake EQC for natural disaster cover, up from $300 last year, partly to cross-subsidise EQC cover for people in more earthquake-prone cities like Wellington.

And $483.98 was GST, up from $341.73 the previous year.