Cost of insurance may rise 20pc

John Key says that the Earthquake Commission levy which forms part of premiums is to double. Photo / Jason Dorday

The cost of household insurance could climb out of the reach of many people thanks to the AMI Insurance crisis, the Christchurch earthquakes, and new regulations, the Insurance Council fears.

The insurance industry's bill for the second Christchurch quakes may be as high as $16 billion and it is seen as inevitable that insurers and the giant overseas "reinsurance" firms who stand behind them will increase premiums to recoup their losses.

Insurance experts say the uncertainty around AMI Insurance's ability to make good on its claims from the quakes - which forced the Government to come to its aid this week - will add to the upward pressure on premiums.

On top of that, the Earthquake Commission levy which forms part of premiums is to double, says Prime Minister John Key.

All up, insurance premiums for households may rise by 20 per cent or more, Consumer NZ chief executive Sue Chetwin said yesterday.

That could put the price of insurance beyond the ability or inclination of many homeowners to pay.

"Our concern is that with all these increases coming through people are going to stop insuring," said Insurance Council chief executive Chris Ryan yesterday.

"What happens then is the responsibility goes back on to government or local authorities to help out people that are not insured."

In comments that echo the criticisms of AMI's rivals, Credit Suisse insurance analyst John Heagerty said it was inevitable reinsurance costs for all New Zealand insurance companies would rise as a result of the Christchurch quakes.

"It's unfortunate for the New Zealand insurers that the Japanese earthquake happened at the same time.

"The reinsurers themselves have taken quite a beating over the last quarter."

Mr Heagerty said while he believed the reinsurance companies were sound, their recent losses would have wiped out their profits for the year.

"They'll be looking to recoup those losses through significant rate rises.

"We're talking probably 20 per cent in the Asia Pacific region."

Reinsurance costs typically made up about 10 per cent of retail customers' premiums, he said.

Mr Ryan said another big driver of premium hikes would be the rising cost of repairing damage to people's properties.

Building material and labour costs were likely to be driven even higher in coming months by the huge rebuild in Japan and Australia.

Further upward pressure on premiums would come from the new prudential regime for insurers under which the Reserve Bank requires insurers to hold money in reserve to meet future payouts.

While the Insurance Council supported the new regime, chief executive Chris Ryan said it meant insurers would have to keep a higher proportion of their reserves in lower risk investments.

In turn that would result in a reduction in investment income which firms would have to offset by increasing premiums.