Insurer Tower collects 20% more in premiums

Tuesday, 28 May 2024

Cyclone Gabrielle caused extraordinary damage last year.

Big increases to insurance premiums on house, contents and car insurance helped Tower post a profit of $36 million in the six months to the end of March.

That was a big turnaround from a $5.1m loss in the same period last year, which followed extreme weather causing flooding and landslips in Auckland and parts of the North Island.

Tower collected 20% more premiums from its policyholders in the six-month period than it did in the corresponding period last year, despite seeing the total number of policyholders drop to 309,000 from 312,000.

The insurer said the increases were designed to “mitigate the impacts of inflation, crime and increased reinsurance costs following the 2023 catastrophe events”.

However, Tower chief executive Blair Turnbull said drivers and homeowners could expect to see smaller premium rises in the coming months as inflation was coming down, and so was car crime.

“We are expecting inflation to come down to lower levels,” Turnbull said.

Tararua District Council and local iwi visit the residents of Herbertville after Cyclone Gabrielle.

“We do see crime coming off its peak, but certainly, still at elevated levels, but we do expect to have lower levels of insurance premium increases as we look into the second half of the year,” he said.

The large rises in insurance premiums from Tower, and larger rivals IAG (State, NZI and AMI) and Suncorp (Vero and a majority stake in AA Insurance) have been blamed by the Reserve Bank Te Pūtea Matua as one of the factors that is keeping the overall inflation rate as measured by the Consumer Price Index high.

Turnbull said the insurer had delivered a strong half year result, driven by improved claims, digitisation and operational performance and positive customer experiences.

“The business is well positioned to deliver sustained premium growth through innovating our products and services and improved efficiencies, and ultimately attractive long-term shareholder returns.”

The insurer is hoping that the end of the financial year would not see the country hit by another extreme weather event, so it can release some of the $45m it set aside in case of further wild weather.

Tower insurance chief executive Blair Turnbull says the insurer has seen 3500 cancel car insurance policies as a result of premium increases.

Tower chairman Michael Stiassny said that “should the weather gods continue to look favourably upon us between now and 30 September, any unused portion of that $45m, which is $32m after tax, will directly increase underlying net profit after tax to improve the full year result”.

He said during the year insurers had paid out around $4 billion as a result of last year’s storms.

Some households could see changes in the insurance policies insurers offered them, and greater risk-based pricing, where households with homes that are at great risk of things like flood and earthquake pay more for their insurance, he warned.

In its Pacific Island business, Tower is offering its first “parametric” insurance policy called Cyclone Response Cover. It gives policyholders a quick cash payment should a cyclone of a certain strength hit the location where people have their homes and businesses.

Tower was a first-mover in increasing risk-based pricing, but its larger rivals are beginning to follow. Being an early adopter of risk-based pricing had helped the insurer by enabling it to avoid giving policies to owners of riskier assets.

That included providing fewer policies to people who have cars that are most frequently targeted by thieves.

Stiassny said there was no question that risk-based pricing gave Tower a competitive advantage by enabling more accurate risk selection and pricing, but it also clearly signalled to the market where to buy and invest.

Tower has gathered on over half a billion dollars in premiums.

“These signals are absolutely crucial if New Zealand is to successfully manage and avoid some of the financial risks posed by climate change.

“Despite this – what I would call common sense – for the longest time it felt like we were a lone voice and there were plenty of detractors,” he said.

“Happily, for the future of this country, it appears the tide is turning. To quote recent comments from the Reserve Bank: ‘Risk-based pricing can provide a strong signal to encourage the proactive mitigation and lowering of exposure to risks, which can be beneficial for society's overall risk management’.”

He also welcomed the Reserve Bank telling banks to develop their understanding of climate risk.

“The banks have been missing in action,” he said. “Seemingly reluctant to actively embed climate-related risks in their business operations and risk management frameworks, but nevertheless content to continue making record profits.”

He was looking forward to seeing how the banks choose to respond to the Reserve Bank’s challenge because “insurers can’t – and shouldn’t – be shouldering the burden alone”.

Tower had not yet finished paying claims from earthquakes in Canterbury more than a decade ago, and it continues to make refunds to customers it historically overcharged by failing to give them multi-policy discounts.