Australia and New Zealand have experienced significant natural disasters in recent years. The floods in Queensland, earthquakes in Christchurch and Kaikoura as well as bushfires in South Australia highlight just how vulnerable residents can be to these massive unforeseen events and how much they reply on insurance to protect themselves, their properties and their belongings.

When you’re at the whim of Mother Nature, having an appropriate level of home and contents insurance is an absolute necessity. Nevertheless, living in a hazard capital means insurance comes at an ever-increasing price.

We only have to look to Wellington as an example to see how recent regulatory change (following amends to the Earthquake Commission Act) and a more granular approach to risk management have seen insurers re-evaluate the risks they are taking on. As a consequence, premiums have been steadily rising and this presents a raft of challenges for homeowners across the region. The following synopsis of the changing face of insurance in Wellington could be of interest to you as a fellow Tasman resident, and give an insight into what happens when a market moves from generalised to granular risk based pricing.

As well as being a participant in the sector in my role as insurance commentator for Australian and New Zealand, and leading the NZ insurance business, 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 of these changes won’t be felt fully for some time yet, until higher renewals start hitting the letterboxes or people move and seek new policies, 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. Whilst examples of $ 12,000, or greater, increases were thrown around, Tower were quick to respond that only 1% of their premiums were rising by more than $ 2,000 per annum.

However, 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 Across other insurers.

In March, IAG hit the headlines, announcing that it would take a "conservative approach to writing new business in Wellington due to the high earthquake risk in that part of the country". This 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 for any property that holds a domestic policy with Fire Cover. 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. Recently the Mayor of Kapiti indicated that they only had a limited responsibility to help over 1,800 coastal homeowners 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. Climate change is estimated to bring more severe storm surge events which will further cause issues over insurance cover for coastal properties and many coastal owners may find their stunning beachfront views uninsurable.

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, buyers should 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 the highest premium and assume that all premiums will rise to that level in the next few years, 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.

Another emerging effect of these changes is that lenders are beginning to consider how these changes might affect them and their risk. If they have a 25 year relationship with the home owner, but the insurer only has a 12 month commitment. Rising premiums and a possible retreat from cover in some areas could certainly affect lenders.

The other question is, how will these changes affect Australia?

Whilst there is certainly a level of risk based pricing here, climate change, which is likely to result in more storms further south, increased storm surge, resulting in more flooding will certainly affect how insurers price risk and what they are prepared to cover. Added to that, many insurers and brokers operate trans-Tasman and so are clearly impacted by changes across the ditch.

That aside, now is as good a time as any to review your cover whichever side of the Tasman you live on, and make sure you’re getting value for money across your home and contents insurance.

Richard Deakin