Feature
Why are insurance costs rising? Premiums are rising across most parts of New Zealand, and a multitude of factors here and overseas will determine how the trend plays out during 2021.
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s a small island nation prone to natural disasters, New Zealand is a difficult place for insurance underwriters. Over the past year, insurance premiums have begun to rise across the country following a series of natural catastrophe events, as insurers seek to maintain their profit margins. The Northland floods last winter, the devastating Lake Ohau bushfire, and Napier floods in November have all caused losses for insurers over the past years, leading to rising premium rates and a reassessment of underwriting books. Across the globe, insurance commentators have declared the arrival of a long-awaited hard market, with demand still high but supply and appetite dwindling. The conditions have made it challenging for brokers and risk professionals purchasing and renewing policies. The outlook for the NZ insurance market is for more of the same. According to analysts at Jarden Research, insurance premiums are poised to rise by between 3-5% in the first half of 2021, continuing a trend which has led to higher risk transfer costs for businesses and individuals across NZ. Insurance premiums are rising due to higher reinsurance costs, with the NZ market covered by relatively few reinsurers compared with most global markets. As the reinsurers pick and choose their exposures in this market, costs are passed through 16
March 2021
to insurers and ultimately, clients. The investment landscape has also affected premium costs. With interest rates plummeting to record lows following the Covid-19 pandemic and subsequent financial crisis, insurers are making less money on traditional investments such as bonds. Higher prices are offsetting the shortfall. The recent financial reporting season indicates that insurers are keeping their profit margins intact. IAG’s premiums increased by 2.8% to $1.47 billion, with increased rates and new business bolstering income. IAG said business premiums had risen by 4%, while consumer rates rose by 2%. Rival group Suncorp, the owner of Vero and AA Insurance, increased profits by 19% in the six months to December. It said rates had risen by 4% for commercial customers, with individuals paying about 2% more over the period. The figures back up claims of a hard market, a phenomenon seen across the world. As the pandemic bites and local loss events such as the Black Summer in Australia cause further damage, carriers here are likely to adapt accordingly. Sam Kerr, an Auckland-based insurance broker at SHARE NZ, says some markets have seen rises of nearly 10%: “Where you are seeing premium increases, almost the whole market is moving, because there is a limitation of capital in that market
or significant exposures. Whole markets are rising 5-10%." Kerr notes that insurance premiums have risen across material damage business interruption policies, body corporate insurance, and home contents policies, with increases “driven by natural disaster components”. NZ insurance will continue to be volatile for natural disaster risks, he says. “We’re built on a series of fault lines, and that is significant, even with the EQC (Earthquake Commission) being the first line for insurance,” he says. It’s easy to explain to clients why rates are rising when a large event like the Kaikoura or Christchurch earthquake has happened, whereas now we are explaining that it is aggregate losses, with smaller events,” Kerr says. According to Kerr, there is a difference in pricing depending on where the client is based. People based in the higher risk centres of Wellington and Christchurch faced a sharper rise in premium than other areas. Granular factors continue to affect insurance premiums in the capital. The topography of Wellington, and the different soil quality across the city, can affect prices, Kerr says. He says insurer competition has kept rates flatter in Auckland. “On the flip side, Auckland has been quite soft,” he says. “Auckland doesn’t necessarily
