Premiums for car and house insurance will rise by between seven and 10 per cent across the board over the next year, a senior insurance executive is predicting.
Insurers have come under increasing cost pressure as a side effect of Covid-19 as supply chain issues and a tight labour market have pushed up the cost of construction while the cost of replacing written off cars has risen with the second-hand car market.
Jeff Wright, chief financial officer at insurer Tower, told investors this week that supply chain issues for new vehicles had driven up the value of second‐hand vehicles by 13 per cent year on year, significantly increasing the cost of total loss motor claims.
"While the inflationary impact on motor parts and repairs hasn't been as dramatic, the full impact may be yet to be felt, with significant delays in completing repairs due to supply chain issues with motor parts."
On top of that Wright said the cost of building materials had become a global issue with double-digit inflation common. In New Zealand the most recent CPI data showed construction costs had risen by 12 per cent in the year to September 30.
Asked how these inflation pressures would feed into house and motor insurance premiums Wright said it was inevitable that insurers pass on those costs to their customers.
"We have had 7 to 10 per cent increases in motor costs and house costs. You can expect to see rate increases in that order and that is being evident across the industry.
"At the end of the day we do everything we can to try and minimise that. We try and optimise our supply chains and the likes so we don't have to pass through the full amount - and that is certainly what we are spending a lot of our time doing, particularly in the claims area is to ensure whatever we do pay out is as efficient as possible to minimise those increases.
"But you are going to see that kind of level - the 7 to 10 per cent across the industry over the next 12 months."
Maree Hammersley-Myers, a financial adviser specialising in general insurance at Thorner General Insurances, said insurers had a policy of continuously reviewing their premium structure for domestic insurance policies.
"Like any business they need to remain profitable and equally as importantly an insurer needs to remain solvent and retain the ability to pay claims. With that in mind there has been ongoing pressure on insurance premiums for some years."
But Hammersley-Myers said unfortunately Covid had brought with it unintended consequences and pressures on claim costs.
"Delays caused by the ongoing Covid-19 pandemic has disrupted the global supply chain with delays affecting both the automotive and hardware industries in particular. This disruption is likely to continue for the foreseeable future; this has meant building costs are steadily increasing with demand exceeding available resources resulting in both labour and material costs increasing significantly."
She said there were major delays in sourcing materials as they became scarce and often labour resources were stretched thinly with many tradesmen booked several months ahead.
"A consequence of that is we have many clients having to extend their contract works policies because the construction is taking a lot longer to finalise."
Hammersley-Myers said along with those issues advisers were being told by insurers that repairs and replacement costs to household appliances, computers and mobile phones were increasing due to expensive technology in the latest models, as well as costs for personal use items, such as eyewear and audiology.
"More newer vehicles on the road with advanced technology features (i.e. sensors, cameras etc) means the average cost to repair such vehicles is much higher. Repair costs for everyday claims such as windscreens, mirrors with this technology have increased substantially."
Asked about their view of the forecast 7 to 10 per cent rise, other insurers also indicated they would be putting prices up but did not say to what extent.
IAG New Zealand chief financial officer Alistair Smith said it regularly reviewed its pricing to ensure customers were paying a fair and appropriate amount for their insurance.
"A number of factors determine how we price our premiums, and these include location, past claims, cost and risk. We expect rising costs in the supply chain to lead to increases in our premiums.
"We are closely monitoring the evolution of the external environment. Our priority is to continue to be there for our customers when misfortune strikes."
Chris Curtin, chief executive at AA Insurance, said its customers may see premium increases across their insurance products when they receive their next renewal notice.
"The increases are based on AA Insurance's understanding of the full impact of trends, including Covid-19's effect on supply chains, over the past 18 months and into the future.
"These impacts include an increase in the volume of claims, particularly large claims and those related to natural disasters, as well as longer repair times and rising costs associated with supply chain and labour shortage issues."
He said the temporary reduction in car insurance claim numbers during lockdown, mainly in Auckland, were considered to be short term.
"These are expected to be outweighed by the longer-term effect of supply chain issues and inflation, which are likely to continue for some time.
"Because of these influences, it is important that premiums move appropriately to continue protecting what matters most to our customers and offer peace of mind that AA Insurance is financially strong and sustainable for the future."
He said increases would differ across products and may be different for customers, based on their particular circumstances.
"Although these increases have been planned for some time, we appreciate increases in premiums can never come at a good time."
Combating the cost rises
Hammersley-Myers said it could be difficult to combat premium increases given the reducing level of competition.
"When premiums rise there can be a tendency by people to underinsure or not insure at all which we would highly advocate against doing.
"We would argue that it's best to be fully insured and that people need to consider an insurance policy as operating best when there is a major disaster, a fire, or storm or earthquake, those small things that go wrong - the broken windows, the broken spectacles – yes they are covered but they aren't going to cause financial disaster."
She said ways to reduce costs included opting for the highest excess possible to reduce the premium, keeping your policies with one insurer to take advantage of package discounts, regularly reviewing the cover and shopping around.