Photo: RNZ
Consumer NZ says New Zealand is facing a “really serious” situation with insurance becoming increasingly unaffordable and potentially inaccessible – and a new review needs to urgently tackle the problem.
It was revealed this week that the Council of Financial Regulators has been asked to conduct a review of insurance affordability for households, and the Commerce Commission has been asked for an initial market assessment.
Plans to introduce new levies as part of the Natural Hazards Insurance Act have been paused until the review can happen.
It comes amid reports that AA Insurance has pulled back from offering home policies in some South Island towns.
In a cabinet paper recommending the review, Treasury said home insurance premiums had grown at three times the rate of the consumer price index since 2011, and there had been a 40 percent rise in the past two years.
“Premiums have grown even faster for some people in high-risk areas. Insurance remains largely available, but access is becoming more difficult in areas facing both high earthquake and flood risk. With improved scientific understanding of seismic and climate risk, further increases are expected, and coverage may soon become unavailable for some people at any price.”
The first stage of the insurance review is expected to take six months and will be followed by a second phase, of policy development.
Treasury said there was some evidence that insurers had higher profit margins in New Zealand compared to Australia.
Jon Duffy
Photo: Jon Duffy
“New Zealand’s higher risk profile is likely a contributing factor, with investors demanding higher returns for the higher risk. However, it could also indicate weaker competitive pressures in New Zealand.”
Consumer NZ chief executive Jon Duffy said he would be surprised if the Commerce Commission did not conclude that there were the same issues in insurance as were seen in the banking sector and the supermarket sector. “And others they’ve done market studies on that are problematic from a competition perspective.”
He said it was likely that a broader market study would be justified. A market study would allow more rigourous economic analysis of the profitability of insurance businesses as well as the factors that might make the market unique.
New Zealanders seemed to be getting a tough deal from insurers.
“Wellington is the most expensive place in the country to live. We live on multiple fault lines, we live close to the sea… increasingly it’s becoming too difficult for people, especially apartment dwellers in Wellington to afford what is the basic of living in a first world economy. You need to be able to insure your property. There are lots of factors that go into it but one of them appears to be that Australian-owned insurers – there’s really only two players in the market in home insurance, IAG and Suncorp – appear to be earning higher returns in New Zealand than they do in Australia.”
‘A prudential risk for banks’
He said he hoped to see some urgency from the government, and for it to accept it was an interlinked problem with climate adaption and the fundamentals of the market.
“The banking sector needs to be made aware of this, because if suddenly insurance isn’t available on a whole lot of properties that have mortgages over them, and that means those mortgage holders could be in breach of their mortgage terms and conditions, what happens where those mortgage-holders default? Or there is a natural disaster, and suddenly all of those mortgages can’t be called in.
“That’s a prudential risk for the banks, especially in an economy like New Zealand, where it has been a housing market with a small economy tacked on. This is really serious stuff, and I guess that’s why the Treasury’s kind of woken up and gone, actually, we’d better do something here.”
Infometrics chief executive Brad Olsen said it was not surprising that premiums had increased.
“Does anyone remember Cyclone Gabrielle a couple of years ago? Those increases are very much being driven in many regards by reinsurance costs and the risk factors New Zealand has.”
He said the rate of annual inflation in dwelling insurance peaked at 25 percent in the March 2024 quarter, and contents insurance lifted by 28 percent in the same year.
“Before then, there was a bit of a burst in dwelling insurance that peaked at 18 percent back in 2018.
“We noted as well, though, last year, the level of rising challenges that you’re facing out there in the environment, the number of states of emergency continuing to lift… we’ve seen a 237 percent increase in the number of days that parts of New Zealand spent under a state of emergency in the last 12 years compared to the previous 12.
“So there’s a much more sustained level of pressure that’s putting pressure on the insurers who need to be able to pay for all these claims.”
He said in 2006, total insurance costs were 1.7 percent of overall household spending.
That increased to 3.16 percent in 2020.
He said there had also been a shift towards dwelling insurance and away from other types such as life insurance.
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