Owners of risky homes face higher insurance premiums

Thursday, 10 August 2023

Devastating flooding in some parts of Auckland in January was a wake-up call on where homes are allowed to be built.

Insurer Suncorp now has a systems in place in New Zealand to allow it to individually risk-rate homes in New Zealand for things like earthquake and flood risk.

That will see the insurer, which owns the Vero and has a majority stake in AA Insurance, follow Tower in charging higher premiums to people whose homes are at a greater risk of perils like flood or earthquake.

Insurers are facing a rising claims from extreme weather events, with Suncorp reporting a 30% drop in profits from its New Zealand insurance businesses as a result of claims from the Auckland Anniversary Weekend flooding in January, and Cyclone Gabrielle in February.

But Suncorp’s Climate-related Disclosure Report, posted on the Australian ASX sharemarket, revealed it was now able to assess the individual risks on properties it insured in New Zealand.

The insurer’s New Zealand chief executive Jimmy Higgins confirmed Kiwi homeowners would increasingly see that reflected in the premiums they were charged for their home and contents cover.

“It’s fair to say risk-based pricing will continue to increase in the coming period,” Higgins said.

“As we get more data points, and we understand – whether it be climate-related, topographical, building standards – all of the data points to understand the various perils that these properties are exposed to, will influence the decision on risk, and will influence the decision on pricing,” Higgins said.

“It will fair to say risk-based pricing will increase in the coming period.”

Already premiums on house, contents and car insurance have been rising fast.

In the year to June 30, Suncorp collected just over $2.4 billion in gross premiums in New Zealand. That was up from just over $2.1b in the previous 12-month period.

Tower, whose financial performance was hit by the extreme weather, was the first mover on individually risk-pricing homes leading to headlines as some people saw their house and contents premiums jump up, in some cases adding thousands to their quotes for insurance.

In May, Tower said it would expand its risk-based pricing model to include landslide and coastal hazards, as well as earthquake and flood risk.

Tower chief executive Blair Turnbull said: “We are proactively managing climate-related weather impacts through risk-based pricing and product innovations, keeping pace with inflation via targeted rating and underwriting actions and addressing increasing vehicle theft with rating and excess changes.”

Suncorp and its larger rival IAG, which owns State, NZI and AMI, have been reluctant to talk as frankly about the subject as Tower.

Both have acknowledged some of the premiums they charge on homes are the result of individual characteristics of those homes. However, when it comes to risks like earthquake, they continued to price homes geographically, rather than house by house.

But Sunrop’s climate report has lifted the lid on the insurers’ risk-based pricing plans.

The report is intended to show Suncorp investors how it is preparing for climate change, including managing risks, such as not charging sufficiently high premiums to compensate shareholders for the risk they are taking.

In Australia, Suncorp has moved faster down the track of building the systems that allow it to do that, the report shows.

'We need to develop a coordinated and united response to where and how we build,' says Jimmy Higgins, chief executive of Suncorp NZ.

“Over recent years, we have significantly enhanced our pricing capability and risk selection through the embedding of our customer and pricing ecosystem system across our Australian home and commercial properties, allowing us to apply increases in premiums that are directly associated with the risk level not just by geography, but at a specific individual risk address,” it says.

However, it says that capability has now been put into place in New Zealand in 2023 “for the first time”.

Higgins said as Suncorp continued to invest in systems to risk-assess individual properties, it would increasingly price homes for individual risk.

House insurance policies are annual policies, so insurers like Suncorp get to recalculate premiums once a year.

Increased risk-based pricing is pulling in the opposite direction to changes at Toka Tū Ake EQC, the state natural disaster insurance scheme, which insurers like Suncorp collect levies to fund.

Auckland homeowners saw their EQC levies rise, partly to cross-subsidise EQC cover for people in more earthquake-prone cities like Wellington.

Tower justified its move into risk-based pricing using two arguments. The first was that it was “fairer”, and the second was that it sent pricing signals that would influence where people choose to build, and buy homes.

For too long, insurers have argued, New Zealand has allowed homes and other property to built in risky areas like flood zones, and low-lying coastal areas.

“What you build, and where you build, and how you build, is critically important,” Higgins said.

“Fortunately, that message has started to get through. It’s unfortunate, it’s taken two weather events,” he said.

Higgins said Suncorp was investing in automation to run a more efficient business to help reduce the premium increases policyholders face as a result of insurers’ increased claims costs.

“It’s really important that we maintain a well-functioning insurance market in New Zealand, to provide affordable, and appropriate products to customers,” Higgins said.