Higher premiums coming for disaster-prone homes: IAG

Tuesday, 20 February 2024

Amanda Whiting, chief executive of IAG New Zealand, says the country’s largest insurer is moving down the path of great property-by-property risk-based pricing.

The country’s largest insurer says some homeowners in higher risk areas will get higher-than average increases in their house insurance premiums this year as it heads further down the risk-based pricing route.

Amanda Whiting, chief executive of IAG New Zealand, said that last year homeowners got premium increases of around 10% to 20%, but most wouldn’t face such large rises again this year.

“In general, you would not expect to see that same sort of increase, but some properties will see higher, because that risk-rating will start to climb now,” said Whiting, speaking after IAG revealed half-year results showing an 18.8% increase in the premiums it collected.

IAG owns the State, NZI and AMI brands, as well as providing insurance policies to customers of three of the four big Australian banks, and is the largest house, contents and car insurer in the country ahead of Suncorp, which owns Vero and has a majority stake in AA Insurance.

In 2018, smaller rival Tower led the way with risk-based pricing, charging owners of homes at higher risk of natural disasters like earthquake and flood more for their cover. IAG and Suncorp signalled last year they would follow suit to some degree as they built the systems necessary to quantify risk on a house-by-house basis.

“We are always building capability. It’s very important as an insurer to understand that,” Whiting said.

A year on from devastating flooding in West Auckland, Clover Drive resembles a ghost town, with most homes boarded up

“As we start to build our capability, and understanding of high-risk areas, that shift won’t necessarily apply to everyone.”

There is growing concern that some homeowners could fall foul of “insurance retreat” with insurers refusing to provide insurance to properties in the highest-risk areas for natural disasters like floods.

But Whiting said: “We absolutely don’t want to withdraw from any areas other than where there has been a clear remit from central or local government that there has been risk to life.”

Insurers had to hit the right balance on risk-based pricing and not raising premiums too high for riskier properties, she said.

“We really want to ensure consumers can remain covered. There’s always that balance between going too far on that risk pricing, and locking people out of the market, which is not what we are about at all.

Owners of flood-prone homes are facing higher premium increases, and in time may not be able to insure their homes against flooding at all.

“We want to protect Kiwis as much as we can,” she said.

Tower chairperson Michael Stiassny said late last year: “The unpalatable truth is that not everyone is, or will be, able to afford to insure their home in the way they do now.”

He said in the future some homeowners may only be able to afford to insure for some perils, for example, being able to get cover for all threats, except flood.

Stiassny also spoke about “parametric” policies, which is insurance that pays out a fixed sum should a defined event occur, such as a cyclone that exceeds a specified level of severity.

Whiting said IAG was also looking at developing “different” kinds of insurance.

“That won’t be this year, but we are making a sound start to that,” she said.

Whiting said the country needed to stop building homes in “dumb” places.

Insurers needed to start sending clear signals to the market, ideally by telling councils and developers what planned developments they would not be willing to insure.

“The ideal spot to get in is at consents time, and we’re really keen to get in with local government and say, ‘Can we have a look at what you are about to approve, and can we give you an early identifier of whether we are going to be able to insure in that area?’,” she said.

Property economist Ed McKnight says the financial value of land depends on what you can do with it.

“We need to send signals that we won’t insure you, if you build there,” Whiting said.

Ed McKnight, economist from Opes Partners, said that could have a big impact on the value of some land.

“You will find that some pieces of land won’t be worth a hell of a lot. The value of a piece of land is determined by what you can do with it. Housing is one of the highest-value uses of land,” McKnight said.

Whiting was hopeful the country was finally beginning to take climate adaptation seriously when it came to where homes are allowed to be built.

“I think we have got the right impetus. We have got a new Government, local governments who are still working through the remains of a pretty difficult time, and we need to stay hot on this, we can’t let it go back into people’s distant memories,” she said.

She said banks were supportive of change.

“We are very linked up with them to manage the long-term sustainability of the country,” Whiting said.

“We are ‘on risk’ for a year, whereas they are ‘on risk’ for 25 to 30,” she said.

That’s because insurers’ house insurance policies renew each year, unless the homeowner or insurer decides not to renew, while banks issue mortgages that last decades.