The Insurance Council has defended skyrocketing premiums in Wellington, saying the industry simply acts as a canary in a coal mine by indicating actual risk through pricing.
Chief executive Tim Grafton has acknowledged the significant increases in earthquake premiums over the past 10 years.
He said that was because insurers' understanding of risk prior to the Canterbury earthquakes was based on modelling that grossly underestimated potential losses.
"In effect, premiums at that time were significantly under-pricing the underlying risk, so a price adjustment to better reflect actual risk was inevitable."
Grafton rejected claims that risk-based pricing was unfair, saying what would be unfair was charging lower-risk properties more to subsidise higher-risk ones.
He made his case for the industry in a letter penned to Wellington Central candidates following a public meeting they attended on issues for apartment owners in earthquake-prone buildings.
The Inner City Wellington (ICW) residents' association is lobbying for earthquake-prone building legislation to be reviewed to have multi-owned residential buildings removed from it.
On top of massive strengthening bills, owners are facing the reality of not being able to secure insurance until the work is done followed by increasing premiums even after it is.
Grafton said in his letter that insurers should be able to signal risk, and if affordability issues arose, then these should be addressed though social policy mechanisms available to the Government.
"There is a need to develop a comprehensive approach to risk management, rather than readily blame the insurance sector and reach for short-term measures."
He warned a high-risk country like New Zealand needed to continue to attract reinsurance support.
"The very last thing we should be doing is giving signals that may deter that support."
Last month current Wellington Central MP and Labour candidate Grant Robertson took a swipe at the insurance industry saying he didn't like the way the city was being treated and it was unfair.
"What's happened over the last few years is people have worked really hard in the city to get their buildings up to earthquake standards and earthquake codes only to discover that makes no difference whatsoever to their insurance premiums, and to me that's disappointing," he said.
Buildings rated less than 34 per cent of the New Building Standard (NBS) are considered earthquake prone and in need of strengthening within a specific time period.
But many owners are finding buildings now need to be strengthened to 67 per cent to secure insurance, almost double that of the earthquake-prone threshold.
Grafton said the NBS was a life safety factor for buildings and not a clear measure of the building's resilience.
Despite this, property owners have clearly been under the impression that strengthening their buildings to a higher NBS rating would address structural resilience, when this may only be partially true, Grafton said.
"Sadly, this has resulted in significant investment and the expectation that this would lead to a premium reduction."
Grafton said NBS ratings needed to be redesigned to also reflect structural resilience.
He acknowledged better communication about risk between the insurer and insured was needed, as well as between the Government and building owners about what NBS ratings measured.
"From the insurers' perspective, we were never consulted prior to the assertion that upgrades to NBS on structures would result in a premium decrease being made. In almost all instances, insurers and likely insurance brokers would not be aware that such investment was occurring until it was completed", Grafton said.
But ICW spokeswoman Geraldine Murphy said that was disingenuous and she was aware of brokers taking a proactive approach on identifying buildings that may need strengthening work.
She argued it was not unreasonable that owners expected strengthening would result in a reduction of insurance premiums.
Murphy claimed inadequacies of the building standard as being a factor in high premiums was only publicly discussed by the Insurance Council since 2019.
"Previous messaging was about the global hit on reinsurers from a number of events that was impacting on NZ premiums, she said.
"Even base isolation, which has been talked about as the 'Rolls-Royce' of seismic resilience solutions does not guarantee any better insurance premiums."
Murphy said changes to the NBS may be justified, if the Government wanted to achieve economic resilience.
"But higher standards cannot continually be retrospectively applied to all existing buildings, particularly multi-owner residential buildings - it will be even more unaffordable and uneconomic than the current situation is", she said.
Grafton said insurers based their underwriting decisions for a commercial property on information including soil types, when the building was constructed, material used and its height.
Insurers might also take into consideration the state of adjacent properties as the collapse of less resilient buildings may affect more resilient ones, he said.
Another contribution to costs was the requirement for insurers to progressively increase their probable maximum loss from a 1 in 250 year event to a 1 in 1000 year event, he said.