However, brokers know many policyholders who have experienced much larger increases in Wellington, some as high as 300% or 400% over the last ten years. Significant increases, greater than those stated in the Consumer report, are also evident elsewhere in New Zealand where property is exposed to moderate seismic hazards, coastal subsidence or flooding.

Insurance brokers are well aware of the affordability crunch being experienced by their clients, whether they arrange cover for a household or a business. But brokers are also mindful of their responsibility to give suitable advice and while controlling the premium is important, it is equally important to recommend cover that protects valuable assets and liabilities.

Insurance is a global business. By that we mean major insured events like cyclones and bushfires in Australia, storms in Europe, hurricanes and wildfires in North America, and any other major catastrophe that affects a wide area of insured assets, are largely paid for by catastrophe reinsurers.

Insurers, wherever they are in the world, do not have sufficient cash-on-hand to pay the large cost of claims that accumulate following a major catastrophe, for example approximately $2 billion for each of the Auckland storm and Cyclone Gabrielle in early 2023.

Insurance companies set the price of insurance products. Brokers then negotiate reductions based on favourable risk factors (when they exist) that the insurer may not be aware of. They also have a variety of discounts available: for example, voluntary excess amounts, combining policies with the same insurer and burglar alarms. To reduce the premium further the broker must rely on their ability to negotiate with the insurer by bringing to mind a long period of loyalty, no claims, restricting the increase to something more manageable, or simply persuading the insurer to reduce the premium.

But despite the negotiation that occurs, insurers need to cover the cost of their reinsurance arrangements (reported to be $2.1 billion for one of the major insurers in New Zealand), their operating costs and, of course, the cost of claims. Each of these elements have been subject to large increases over the last two years and that is being passed on to policyholders.

As a consequence of these factors, we believe premiums for house and contents insurance, as well as commercial property, will continue to increase in the future. However, the rate of increase will moderate provided the incidence of catastrophic events diminish.


Prevailing Market Conditions 

Commercial Property & Profits Policies

In our September 2023 commentary we reported that insurance claims associated with the Auckland storm and Cyclone Gabrielle would exceed $3.5 billion.

Eight months later and with the opportunity to settle or more accurately assess the damage caused by these two events, the Insurance Council of New Zealand has estimated the cost for insurers will be more than $3.75 billion.

The scale of the 2023 events, costing $3.75 billion, is evident from the average annual cost of extreme weather events in the preceding three years, $0.27 billion.

As stated earlier in this commentary, the cost of reinsurance, to cover catastrophic events, is one of the largest expenses for an insurance company. Suncorp (trading as Vero Insurance in New Zealand) has reported their annual reinsurance costs (approximately $2.1 billion) increased by 12% or $250 million for the coming year. Other insurers have experienced similar outcomes for their reinsurance negotiations.

Apart from the increased cost of insurance for clients, a shortage of capacity (or less stock on the shelf in a trading context) is rapidly becoming a problem for commercial clients. This shortage of supply worsened last year for high hazard businesses and those in the Wellington region; Canterbury to a lesser extent. More recently the capacity shortages are apparent throughout New Zealand.

Reducing the amount of cover an insurer is willing to provide for a particular client is usually a mechanism to reduce the insurer’s region-wide exposure. For example, the amount of aggregated Wellington capacity available from an insurer will be considerably less than the aggregate capacity available in a less hazardous region. The difficulty is determining which regions are ‘less hazardous’ because the location of an extreme weather event is becoming less predictable, as well as more frequent and costly.

Capacity shortages can be resolved by using a different insurer or additional insurers through a practice called co-insurance. Co-insurance is not an unusual solution although, until now, it has mostly been necessary for Wellington properties, high value sites or hazardous occupations.

A shortage of capacity can be likened to there being more demand than supply, bringing about yet another upward pressure on the cost of insurance for commercial buyers.

In respect of commercial insurance, we anticipate insurers will increase their use of technology to identify high risk locations and conservatively underwrite each risk. This means that their location data will become more accurate and their risk selection more cautious. Terms quoted by insurers may include higher flood deductibles or excesses, the insured perils might be reduced, site specific terms might be imposed and premiums will continue to rise.

Businesses and organisations can mitigate some of the consequences of the insurance market conditions by exercising sound loss prevention or reduction measures and working with an experienced broker who will convey those positive elements of the risk profile to senior decision makers at financially secure insurers.

 
Rural Property Insurance

Farming assets such as shearing, dairy, storage sheds and barns, wind and sun shelter structures are all subject to similar premium pressure as other commercial buildings.

However economic pressures increase the difficulty for farmers to absorb higher premiums. For example sheep farmers have experienced a 30% reduction in export prices over the last two years and other exporting farmers are similarly affected.

These circumstances will motivate any business to review their insurance costs, maybe even to cancel some of their insurance cover. However, the premium saving may be dwarfed by the financial consequences of inadequate cover

Insurance brokers play an important role in recommending suitable cover, whilst also recognising the farmer’s circumstances, such as their financial situation, needs, goals, and willingness to retain some risk.


Construction Risk Policies

Inflation poses a significant challenge for both commercial and residential Construction Risk policies. The aftermath of the Covid pandemic has led to heightened project costs, initially driven by labour and material shortages alongside shipping delays. These challenges have morphed into a deep-rooted ‘cost of risk’ factor, which is a common consideration when owners or developers negotiate with contractors.

Contractors are increasingly factoring in costs for potential delays, overruns, and unforeseen shortages, anticipating a higher likelihood of disputes as contracts conclude.

Similarly, insurers approach new Construction Risk policies with caution. They must grapple with higher sums insured, which may surpass their capacity to provide the required amount of cover.

Our outlook aligns with other forecasts suggesting that premiums for Construction Risk insurance will likely continue to escalate, mirroring the trajectory of annual construction inflation rates.

The positive news is that the rate of inflationary increase is diminishing. In April 2024 CoreLogic (a reputable provider of construction data) measured the annual rate of construction inflation has reduced from 10.4% to 2.3%. However, an adequate sum insured could also be inflated by the ‘cost of risk’ factor described earlier and therefore construction inflation may not be the only pressure on insurance premiums.

Personal Property Insurance Policies

The 2023 Auckland storm and Cyclone Gabrielle continue to influence the market for home and contents insurance policies in New Zealand. These weather events rank as the second and third largest insurance events in the nation's history. The latest statistics, published on 1 March 2024 by the Insurance Council of New Zealand, are:

Auckland storm:        59,067 (57,205 in September 2023) claims totalling $1.958 billion ($1.84b in September 2023)

Cyclone Gabrielle:     58,347 (55,607 in September 2023) claims totalling $1.790 billion ($1.66b in September 2023)

The attention of insurers is now moving beyond changes to their reinsurance arrangements and pricing. Insurers are using comprehensive land data to identify individual properties that are exposed to natural disaster events. This means, for example, a house at the flood prone end of the street could be difficult to insure and attract a much higher premium than a similar house at the elevated end of the street.

The frequency and costliness of natural disaster events in New Zealand have been on the rise. To put the scale of the Auckland storm and Cyclone Gabrielle into perspective, the average large storm or flood event typically costs insurers less than a tenth of the costs associated with each of the February 2023 events.

The magnitude of these events, occurring within weeks of each other, has drawn the attention of global reinsurers. Consequently, premiums across the country have increased to offset the paid claims and higher reinsurance costs. For instance, as mentioned earlier in this commentary, one insurer's 2024 reinsurance premium exceeds $2 billion annually.

New Zealand isn't the only country facing such challenges. Other countries are experiencing catastrophic weather and fire events, resulting in premium trends that are similar to what we are experiencing:

Australia

Research in Australia reveals house and contents premiums increased between 28% and 50% in flood-prone areas where insurance is available; in some areas insurance is not available. About 12% of Australian households pay the equivalent of one month’s gross income for house insurance.

United Kingdom

A Financial Times article in April 2024 reported that the median cost of home insurance rose by 36% in 2023. The report explained that higher building costs and extreme weather events are largely the cause of these increases.

United States of America

The home insurance market in parts of the USA is “crumbling” with insurers withdrawing from states where the weather and wild fire risk is high. Consequently, premiums are escalating. One example cited in the linked article describes a year-on-year premium increase of 208% for a modest home in New Orleans - the new annual premium was approximately NZD8,000.

What is unique to New Zealand is that our premium pool is small on a global scale but, as a country, we have posted three catastrophic events that are noticeable on a global scale. Additionally, the Auckland storm and Cyclone Gabrielle revealed poor modelling of potential losses, suggesting the cost of these types of events are much higher than anticipated by insurers and reinsurers. This may mean that house and contents premiums could continue to increase over a longer period than elsewhere in the world.

Besides the hike in premiums, insurers have adopted a more cautious stance towards properties situated in coastal areas, areas prone to flooding or susceptible to landslides. The classification of land by local authorities has introduced an additional unfavourable aspect, particularly when these determinations are delayed, casting uncertainty on the insurability of certain properties (it may be determined that some Category 2 and Category 3 land is inhabitable due to anticipated landslip or flooding risk).

Insurance brokers are well aware of the challenges in such environments. Firstly, they advise and regularly review the sum insured to ensure adequacy in the face of inflationary pressures, secondly they highlight mitigation measures to the insurer and third, they monitor claims closely to ensure timely settlements based on fair and accurate assessments.

Insurance brokers are deeply concerned about the affordability of insurance. Negotiating premiums is one strategy to address this concern. However, when necessary, adjustments to coverage, such as reducing insured perils, introducing higher excess amounts, or switching to instalment-based premium payments, may be considered.

These options are considered more prudent than reducing the sum insured or cancelling the cover.