Public left out in hazard levies consultation

Wednesday, 26 February 2025

EXPLAINER: Treasury is consulting on lifting the levies homeowners pay for cover from the Natural Hazards Fund.

But neither homeowners, or the wider public, were asked for their opinion, despite the proposed levy and cover changes potentially adding hundreds of dollars to their costs each.

One major insurer told The Post it was surprised the public wasn’t included in the consultation, that closes on Friday.

“That is a lot of money for homeowners,” a senior figure at the insurer said.

The rises would also fall evenly across homeowners in different locations regardless of the level of natural disaster risk they faced, and that was something attitudes may have changed to since the policy was reconfirmed in 2022 with levy rises then.

Why is the consultation taking place?

A Treasury report published last year indicated the current Natural Hazards Fund levies were not high enough, and were likely to leave the fund slipping into the red.

The fund (which used to be referred to as the EQC Fund before the old tarnished name was retired) backs the provision of the Natural Hazards Commission’s capped insurance coverage for homes and (some) residential land against a range of natural hazards including earthquakes, tsunami, volcanic and hydrothermal activity, and landslides.

It is first call disaster cover, after which homeowners’ private insurance kicks in, and it is designed to ensure the availability of natural disaster cover in a country that is ranked second in the world by reinsurers for natural disaster risk.

But, the current levy of 16 cents on every $100 of private insurance cover is too low to cover the expected costs of the natural disaster claims to the fund.

That’s a problem because the fund’s ability to pay claims is backed by a government guarantee, so underfunding it means greater risk for taxpayers, both those who own homes, and those who do not.

Options included lifting the levy to 24c or 25c from July next year, which would lift the maximum levy for homeowners to $720 or $750 per year, a rise of $240 or $270.

The increases would mean the fund stayed in surplus, unless there was a catastrophic disaster like the 2011 Christchurch earthquake.

It could be more, if the other proposal in the consultation is decided on: to lift the Natural Hazards building cover from $300,000 (plus GST) to $400,000 (plus GST).

Why haven’t you been asked for your opinion?

“Ultimately it is not a complicated question,” says David Seymour, associate finance minister.

“People would like to pay less if possible, but NHI (Natural Hazard Insurance) also needs to raise enough in premiums to pay for disasters when they happen. Consulting more people will cost more, but it won’t shed more light on this very simple but difficult situation.”

Insurers and other organisations are included in the targeted consultation, along with the Insurance Council of New Zealand, banks, and Consumer NZ, which could be viewed as a representative of the public.

Consumer NZ chief executive Jon Duffy says: “Our view is that it is finely balanced. It is clear the scheme needs more funding to work effectively, but that is a tricky ask in an environment with already skyrocketing home insurance costs.

“We have concerns that we are already seeing a trend towards a reduction in insurance as costs mount. Treasury needs to balance the risk that people opt out of the scheme with the costs to run it.”

Is the question so uncomplicated?

It depends on your perspective.

The country is trying to move to a more sensible future, where we stop allowing development in areas at high risk of natural disaster, and politicians are contemplating how “managed retreat” may happen, a term that essentially means abandoning, or moving some homes.

Treasury’s consultation paper says there has been an overall decrease in insurance affordability in recent years, especially in high-risk areas due to more granular risk pricing.

That was a result of insurers like Tower, IAG (State and AMI) and Vero moving to more granular risk-based pricing, where owners of homea at higher risk of natural disasters pay more for their cover compared to owners of similar homes in safer places.

Insurance price increases have the potential to place financial pressure on the owners of properties in high-risk areas, and to have an impact on their insurance uptake and, ultimately, their wellbeing, Treasury says.

But if the Natural Hazards Fund takes on more risk, and spreads the levies evenly across owners of homes in risky, and less risky places, then it dampens the pricing signal that the insurance market sends to homeowners on the risks faced by their properties.

“Increasing the building cover cap could decrease insurance premiums for those in high-risk areas as a greater proportion of the premium would become community rated,” Treasury said.

Is this a good thing?

Perhaps a more public debate would help thrash out the question although, ultimately, the Natural Hazards Insurance model we have essentially says “We are all in this together” so debating whether Wellington homeowners should pay more than Auckland homeowners may be somewhere it’s best not to go.

Is a learning moment lost?

There’s also an interesting perspective from Treasury’s 2019 guidance note on effective consultation for impact analysis.

It speaks of five benefits from wide consultation.

Among them are increased scrutiny of officials’ analysis and advice, and durability of policy decisions, as better designed policies are less likely to need amendments once introduced.

But it also says consultation can result in increased public acceptance as stakeholders are more likely to accept a proposal they have been involved in developing.

The guidelines also suggest consultation can provide learning moments for the public, who might come to better understand what the Government is trying to achieve.