It’s been a busy week for the journalists covering insurance in Wellington, with several new breaking stories concerning the changing face of insurance cover in Wellington and a number of calls to me for comment. As well as being a participant in the sector in my role as insurance lead for CoreLogic NZ, I’m also a home owner and therefore insurance customer, so I’ve seen firsthand the steady rise in premiums in the past few years. 

Whilst insurance has always been risk based, the level of granularity of the risk assessment is rapidly changing. Go back a few years, and risk was assessed using Cresta Zones - large areas made up of adjacent postcodes. But this meant that your risk was assessed the same regardless of whether you were on the side of a hill in Wadestown or on the flat in Tawa.

Tower got the ball rolling with its per property risk based pricing in April 2018, and last month IAG followed suit. Whilst the effects these changes won’t be felt for some time yet, until renewals start hitting the letterboxes, the media were certainly quick to pick up on disgruntled Tower customers and report the odd extremes where premiums had shot up by tens of thousands for particularly "risky" properties. According to Stats NZ household spending on property related insurance has risen from an average of $ 15 a week in 2008 to $ 34 a week in 2018. With the rises in the EQC and Fire Service Levy this year pushing this up this year, but there is no doubt that this will rise again as more risk based premiums come into effect.

The announcement from IAG has so alarmed Wellington Mayor, Justin Lester, that he called for more regulation and an Insurance Forum, saying that insurers have a social responsibility to provide insurance cover that is affordable for all.  He also referred to the ACC model and implied we should look at a state run insurance model for property. Maybe we could call it "State Insurance". Oh...wait.

I understand the Mayor's concerns, but do insurers have a social responsibility? 

New Zealand is unique in that it has EQC – a government backed insurer of the first $ 150K of natural hazard damage.  EQC holds a socially responsible position - for example they decided to run the Canterbury Earthquake response as a centrally managed repair as they believed the social outcome would be better than making cash payouts with the associated risk of price gouging and a free for all for builders. EQC also charges the same levy for any dwelling anywhere in the country.

Private insurers are in a different boat, however. They aren’t subject to a government guarantee and have a corporate responsibility to be financially prudent in their risk appetite and the financial return on that risk. Whilst insurers do want to provide cover to Kiwis, it's entirely logical to take account of the likely risk at an individual property level. They also have to buy reinsurance on the global market which certainly doesn’t view insurance as a social responsibility – they exist to price and cover risk in return for premiums.  That means that Wellingtonians will begin to pay higher premiums commensurate to the actual level of risk they face.   A compounding effect is that insurers also have to hold additional capital reserves or reinsurance to cover the costs of a 1 in 1,000 year event for property within 50km of the Beehive. Whilst not a new requirement, that's still very real cost of doing business in Wellington, especially with building costs rising by nearly 5% per annum according to the Cordell CHIP Report.

It’s not just Wellington, though. It also means that other parts of the country that face risks such as regular flooding, with all indications that the severity and frequency are increasing with climate change, or are on the coast with the increased risk of erosion from storm surge, will also attract higher premiums. In order to retain cover, insurers may opt to provide higher excess for specific events, or exclude them altogether. If your house has flooded three times in four years, why would any sane business continue to offer cover for future flood events?

Even councils are stepping away from commitments to protect homes against the rising tide of climate change and coastal erosion. Last week the Mayor of Kapiti indicated that they only had a limited responsibility to help over 1,800 coastal home owners and ultimately they were on their own, commenting on the general costs of coastal protection: "How long can we mount a defence, how much will it cost and who pays? These are the challenging questions now and especially into the future." A similar story in the Taranaki where the council won't extend a seawall protecting several homes.

Whilst insurers try and operate with social responsibility, they also have financial responsibility as well.  As I pointed out to a colleague – would you be happy if your bank was making poor lending decisions that might impact on the amount you pay for your mortgage and the stability of your lender should those loans go bad? Sure, insurers are in the business of covering risk, but like any business they have to ensure they have a sustainable balance between risk and reward.

Aucklanders, of course, may see the benefits of this southwards shift in risk pricing with improved premiums.  A friend up there recently switched to a risk based insurer and saved over $ 1,500 in their annual premium for the same cover with the same excess.

So, what does this mean for Kiwis? 

Firstly, premiums will continue to rise – that’s a certainty – especially in higher risk areas. Let’s stop trying to be King Canute against the rising tide of higher risk and climate change.

Secondly, consider insurance early on in the home buying process. When you’ve been to an open home and have fallen in love with a house, check out how much insurance cover will be. Jump on an insurer’s website and use CoreLogic’s Cordell Sum Sure to estimate the rebuild cost and get a quote for cover. Get two or three quotes for comparison. Look at that number and bear in mind it will increase, so factor that in to your budget, along with increasing interest rates. If a property is returning a high premium, but you still want to make it your home, maybe factor the future cost of insurance in to your offer? And definitely make that offer conditional on satisfactory insurance and don’t leave it to the last minute!

Now, I mentioned Apartments in the heading. This is another fascinating topic which I'll cover in my next article.

If you want to understand how CoreLogic helps Kiwis locate, acquire and protect their homes, get in touch with me.