People who own properties prone to earthquakes or natural disasters may find their insurance becomes more expensive reducing the value of their home in the future, the Reserve Bank is warning.
And the central bank says that may only get worse as climate change risks become more acute, making insurance expensive and more difficult to obtain for those with properties at risk of rising sea levels and coastal inundation.
Insurer Tower moved to risk-based pricing in April last year, switching from spreading the costs across its customers to charging more for those insuring property in high earthquake and natural disaster risk areas.
Insurance Australia Group, the country's largest insurer, is set to follow suit from July, rolling out risk-based pricing based on risk to earthquakes and natural disasters as policy-holders hit their policy anniversaries.
In the Reserve Bank's Financial Stability Report the central bank said it was likely risk-based pricing will become more widespread over time.
"Owners of particularly high-risk assets should be aware that their insurance costs are likely to rise and the level of cover that they can obtain may become more limited in the future."
The report noted that currently only a small proportion of insurance customers face materially higher prices and very few were unable to get cover.
"But the precise impact on the overall availability and price of insurance is uncertain, reflecting limited information on the reinsurance costs for New Zealand and insurer strategies."
The Reserve Bank said it was engaging with insurers and reinsurers to better understand the evolving position in more detail.
Governor Adrian Orr said one of its concerns was how the finance industry was taking climate change into account.
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A recent survey of a sample of New Zealand insurers and banks found all banks, 90 per cent of non-life insurers and 60 per cent of life insurers considered climate change to be a risk to their business.
But the report found survey responses provided little evidence that concerns about climate change risks were influencing day-to-day business decisions.
"Management and boards must consider all material risks when setting the strategic directions of their businesses," the report notes.
While New Zealand currently enjoyed good access to general insurance, that could change as banks and insurers progressively factored climate change risks into their business decisions, it warned.
"The availability and pricing of financial products could alter significantly for some communities and individuals. As banks and insurers respond to climate-change risks, some risks may ultimately end up with other parties, such as central and local government."
Orr said insurance would have to evolve and people needed price signals to help them make decisions for a smooth transition.
He said "sunlight was the best disinfectant" when it came to ensuring insurers were not price-gouging customers by changing risk-based pricing to justify premium increases.
"But on the outside of it as well we don't want to see prices rise in some areas and not alter in others."
Orr said the onus was on customers and on businesses themselves to fully explain how they were behaving and why they were making the changes.
Although it was a competitive industry Orr said the bank would like to see it become even more competitive.
"It is quite a highly concentrated industry in this country."
In the year to September 2018 the three largest companies accounted for more than 80 per cent of the gross premium revenue from residential insurance.
For commercial insurance the three largest accounted for just over 60 per cent.
Orr said the global reinsurance market was well aware of the issues and as New Zealand was just a small country its insurers were able to diversify across a broader portfolio.
"So we are not seeing any particular drama going on in the background of the reinsurance market."
Orr said people were already questioning what they could insure, for how much and how long.
"I think that should be front of mind for all consumers, and investors as well."
Orr said its biggest challenge on the prudential front was to make sure insurance businesses were lending in a sustainable way and that they had adequate liquidity and capital provisions.
"On the one hand we are very eager for them to think about these issues but likewise we want an efficient insurance sector and want transparency around how these prices are happening. We are on both sides of the equation."
Falling solvency ratios
The Financial Stability report found the solvency of New Zealand's insurers had fallen despite the sector being profitable.
All insurers, apart from collapsed CBL Insurance, were meeting their minimum solvency requirements.
"Overall, solvency ratios have fallen for larger insurers but held steady or increased for smaller insurers."
The report said some insurers should increase their solvency ratios to improve their resilience to financial shocks.
The Reserve Bank will consider whether insurers need to maintain solvency buffers as part of a review of the Insurance Act 2010.