Home owners face up to $400 a year insurance hike as Treasury consults on Natural Hazards Insurance Levy for disasters amid funding shortfall

Minister Responsible for the Natural Hazards Commission David Seymour will have more to say on levy hikes in mid-March. Photo / Alex Burton

Home owners could be asked to fork out up to about $400 more a year to prop up the country’s state disaster insurer.

Treasury is consulting with a small group of stakeholders on whether to increase the Natural Hazards Insurance Levy, previously known as the EQC levy, which is tacked on to home insurance premiums.

It is also seeking feedback on increasing the amount of cover the Natural Hazards Commission (NHC) provides for residential buildings from $345,000 to $460,000 (including GST).

The most its proposals could cost home owners is $948 a year (including GST), 72% more than the current maximum.

Cabinet is expected to decide on a path forward in July, and changes would be implemented from next year.

Treasury, in its consultation document, warned the NHC is so underfunded, there’s only a 37% chance its levy income will meet its costs over the next five years.

The NHC must cover the first $2.1 billion of claims related to an event before it can tap into the $9.2b of reinsurance cover it has. However, it only has $550 million in its kitty.

So, in the event of a major disaster, it’s likely the Crown will have to step in to help cover its costs.

The NHC has struggled to recover following the 2010/11 Canterbury earthquakes. It also faces high future claims costs, with new modelling lifting the likelihood of an earthquake, construction costs soaring post-pandemic, and the reinsurance market hardening.

The NHC provides cover for capped portions of buildings and land damaged in earthquakes, landslides, volcanoes, hydrothermal activity, tsunamis, and storms and floods (land cover only), leaving private insurers to cover the rest.

One of the options Treasury is consulting on to make the scheme more resilient is lifting the amount home owners pay in levies on every $100 of building cover from 16 cents (plus GST) to either 22c, 24c, or 25c.

At 24c, the likelihood of the NHC being able to cover its costs within the next five years would rise from 37% to 66%.

However, the maximum cost to homeowners would rise from $552 to $828 per year (including GST).

Another option is lifting the cap on cover for buildings to $460,000 (including GST) and hiking the levy rate to 20.6c per $100 of cover (plus GST).

The most this would see home owners pay is $948 per year (including GST).

Treasury recognised there were trade-offs to consider when deciding whether to lift the level of cover.

Passing more risk from private insurers (which price according to risk) to the NHC (which doesn’t) benefits high-risk customers.

While this would make insurance more affordable for some, it would remove some of the incentive for people to make their homes more resilient to disasters, if not move to less disaster-prone areas.

Minister Responsible for the NHC David Seymour declined to share a view on the matter while it was still being consulted on, as he didn’t want to predetermine an outcome. He expected to have more to say in mid-March.

Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.