How insurers are rethinking New Zealand’s risk

Insurance premiums have doubled in the past decade according to Reserve Bank analysis, as insurers rethink their approach and pricing of risk.

The increases to date have been due to many factors, including the impact of Cyclone Gabrielle and flooding events, higher construction repair costs and, importantly, pressure from global reinsurance companies.

In a wide-ranging discussion about how the insurance industry operates, IAG (owner of State and AMI) and Fidelity Life independent director Scott Pickering told Markets with Madison there was a shift towards adopting risk-based pricing methods, using land information such as seismic risks to assess property policies, however, it was not widely adopted yet.

“I think it would be an intent for the market to move in that direction,” Pickering said.

“But, clearly, in order to be able to put together a risk-based pricing, you need to ensure that you’ve got sufficient data and information in order to be able to individually target and price individual risk.”

That was a complex formula that also took into account the cost of capital to cover the risks associated with our country, which was becoming a harder sell.

“Reinsurance costs have increased quite significantly over recent times.

“Last year we had number two and number three of our highest insurable losses for natural catastrophes occurring within 10 days of each other.”

Earlier this year, IAG announced a new five-year reinsurance deal with a number of global reinsurers including a subsidiary of Warren Buffett’s Berkshire Hathaway.

In total it had deals with about 40 global reinsurance companies, Pickering said.

Late last year, listed insurer Tower also renewed its reinsurance programme, securing a backstop limit of up to $750 million for catastrophic events.

Data showed insurers had increased premiums to help pay for it.

According to the Insurance Council of New Zealand they collected $9.5 billion in gross written premiums in the year to September 2023, however, they also paid out $4b in claims, netting a loss ratio of 70% compared with 50% in 2019.

Scott Pickering was chief executive of the state Accident Compensation Corporation for eight years and is now on the board of Fidelity Life and IAG. Photo / Cameron Pitney

“Insurance companies, at the end of the day, do need to make a profit,” Pickering said.

“Because when things do go wrong ... You need to know that that company is going to be there to support you through that.”

The Reserve Bank of New Zealand’s analysis of insurance earlier this year suggested the availability of policies could become an issue, which may pose a risk to our financial system given houses are often tied to loans.

Pickering said policies were currently available and many insurers had been operating in New Zealand for a century, despite its risks.

“But, as time goes on, and if we start to see increasing levels of climate-related losses, we may see some changes to the way that insurance is either sold and or consumers do buy it.”

He added optimism by pointing out that weather conditions had been benign so far this year, which would help keep a lid on premium price growth.

“From what I’m seeing, I think there is a level of stabilisation occurring.”

Watch the interview with Scott Pickering above to understand how insurers cover consumers and their own earnings.

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Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.

Madison Reidy is host and executive producer of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.