The gloom surrounding the New Zealand economy shows little sign of abating mid-way through 2024, with GDP figures for the three months to March revealing GDP growth of just 0.2% in the March 2024 quarter. The patchy, prolonged recession — and stubbornly high inflation — have impacted every sector, resulting in challenging conversations between brokers and clients on risk and insurance coverage.
Brokers across New Zealand have seen clients change their attitude and approach to risk and insurance amid this perfect storm of rising business costs, hard insurance premiums and slow economic activity. Insurance advisers are helping clients weather the economic conditions, maintain the right level of risk protection, and position businesses for brighter times.
IBANZ chief executive officer Mel Gorham says brokers across the sector have noted the squeeze on clients as insurance costs rise.
"Our members have expressed concerns about the effect of the economic slowdown on clients, and the knock-on impact on clients' approach to insurance, which for some sees them facing the unenviable choices of reducing cover they need or not renewing at all,” she says.
“Consumers seem to be particularly hard-hit with significant year-on-year rises in premiums, which are expected to last until the end of this year.”
Budget strain
SHARE NZ broker Sam Kerr has seen businesses and individual clients feel the effects of New Zealand’s post-pandemic economic slowdown and high inflation. He says those in the consumer sector, such as retail and hospitality, are at the sharp end of the economic slowdown.
“I think all clients, from businesses to households, are feeling the effects. Certainly, clients such as the hospitality clients are seeing the impact more.
"With reduced earnings and profits and restrained household budgets, companies and consumers have been forced to make sacrifices with their insurance coverage," Kerr says, a worrying trend that may leave some exposed to greater risk.
“The concerning trend is arbitrary cuts to insurance as an expense,” he adds. “Some clients are being forced to make tough decisions between insuring the risk and accepting the risk without insurance. It’s a hard balance as the cost of insurance (both premium and levies), continues to trend upwards, while businesses struggle with both profitability and cashflow.”
Mark Jones, chief broking officer at Gallagher, says the challenging economic conditions have led clients to reassess their insurance priorities, with a greater emphasis on higher priority risks.
“Unfortunately, the economic slowdown coincided with a harder insurance market. So for many commercial clients, they were [already] experiencing increasing costs across many aspects of their business, such as interest rates, labour costs and supply chain pressure. Then added to this, they got a higher insurance bill. The result has been that clients have needed to be more strategic in their attitude to risk, and focus on how to ensure that their insurance spend addressed the higher priority risks to the business.”
Greater client risk
Yet the financial downturn has inevitably forced clients to take on greater levels of risk through policy adjustments.
“We have seen clients taking a higher level of self-retained risk, such as increasing policy excesses to mitigate premium increases, and also clients selecting to not insure assets that are not essential to replace in the event of a loss,” Jones says.
Kerr has been advising clients on navigating the economic downturn while retaining the right level of downside protection and risk coverage.
“We’ve been advising clients on a case-by-case basis. Every industry and situation is different and the advice we give matters. We’ve helped clients reduce covers, premiums, talked through limitations, and we’ve equally helped clients understand their credit risk, supply chain risk management and other emerging exposures.”
Jones warns companies about the “false economy of under insurance” and paring back insurance policies to cut costs.
“We have been experiencing a period of high inflation that impacts things like rebuilding costs and the cost of replacement plant and stock. Some clients have elected not to increase their sums insured in order to keep insurance premiums down. Unfortunately, for those who then suffer a significant loss, they often find that they do not have sufficient insurance proceeds from the claim payout to return to the same position that they were in before the loss.”
According to Jones, brokers must provide clients with a complete understanding of the consequences of underinsurance and acknowledge the potential effects of decreasing future coverage.
“Our brokers work with each of our clients on an individual basis to firstly understand their risk exposures and then design a solution that best suits their needs,” he says. “Where a client has financial constraints around insurance costs it is important that they understand fully the potential consequences of decisions that are made in insurance programme design. There is nothing wrong with buying less insurance cover or even no insurance cover, as long as the decision is made with an eye on the outcome of a potential future loss.”
Signs of a recovery
The latest inflation figures offer a glimmer of hope that New Zealand’s economy may be moving in the right direction, and the marginal economic growth of the March quarter may indicate that the worst of New Zealand’s economic downturn is behind us.
Yet the 0.2% growth in the first three months of the year still resulted in the slowest annual growth since March 2021, when New Zealand was emerging from pandemic restrictions, including lockdowns.
Recent inflation data from Stats NZ showing annual CPI inflation at 3.3% for the June quarter has seen the Reserve Bank take a slightly more optimistic tone on the economy, and the central bank made a long awaited 25 basis point rate cut in August. Interest rate cuts could relieve pressure for many businesses and consumers, but the economic recovery is expected to be a slow process.
Gorham adds, “My hope is that the recent change in mood from the Reserve Bank and slowing of inflation will inject some much-needed confidence back into the economy and help provide some meaningful respite from the financial challenges of recent years.”
Market impact
Jones says the tentative global economic recovery, reduced inflation and lower interest rates will affect the insurance market and insurance buyers in different ways, both good and bad.
“The impact of reduced inflation and lower interest rates have less of a direct impact on the insurance market,” he explains. “They actually have the potential to work to the detriment of the insurance market as lower inflation often means less premium is collected, and reduced interest rates result in insurance companies making less interest income on the premiums they collect. However, globally reducing interest rates usually drives more capacity into the reinsurance market, which then filters down to reduced costs at insurance company level and drives the market into a softer phase, meaning that there is more competition between insurance companies and a lower premium cost to clients.”
He adds, “However, this is a fragile balance that can be disrupted by insurance losses from catastrophic events. We are currently at the start of the North Atlantic hurricane season. With the unpredictability of weather caused by climate change, the insurance world is holding its breath and watching with interest. A softening insurance market could yet be turned around by events over the next few months,”
Jones adds.
Insurance advisers caution that high premiums are here to stay in the New Zealand market.
“I think they [inflation statistics] are moving in the right direction, but we’re unlikely to see a change to premium rates in the near future,” Kerr adds.
The difficult client conversations about risk are set to continue as clouds remain on the horizon for New Zealand’s economy.
