News of an increase to the EQC building cap has been met with concern by some within the insurance sector, with warnings it could undermine an already competitive industry and unfairly penalise those who live in low seismic-risk parts of the country.
The Government recently announced it will increase the amount of insurance risk taken on by EQC, increasing the cap from $150,000 (plus GST) to $300,000 (plus GST), to damage caused by earthquakes, tsunamis, volcanic eruptions, hydrothermal activity and natural landslips.
The change will be significant, adding an extra $207 to homeowners’ premiums* when it comes into effect from October 1, 2022.
The Government increased the cap in response to insurers moving to risk-based pricing. It meant policyholders in high-risk areas like Wellington, Hawkes Bay and Canterbury were paying higher premiums. In those areas it was becoming difficult to obtain policy cover at affordable prices.
The Minister Responsible for the Earthquake Commission, Dr David Clark, said the ongoing Covid-19 pandemic had “highlighted the importance of having the right financial and other support when disaster strikes” and it was his government’s wish for “New Zealanders to have access to affordable residential property insurance”.
Clarke said increasing the cap “should lead to reduced premiums for many” as the Crown absorbs some liability and risk from private insurers.
Reactions to the cap increase are not as cut-and-dry.
Mel Gorham, CEO of the Insurance Brokers Association of New Zealand (IBANZ), says she has a “few concerns” about change.
“It would seem doubtful that competition can be materially improved by extending the cap by which the EQC maintains a monopoly,” she says.
The figures released by the Government in the Treasury papers support her claim, says Gorham, citing government figures that show nearly two thirds of New Zealanders are expected to pay more.
“Perhaps the government sees the higher cap as enabling new entrant insurers into the market, given the significant exposure to natural disaster that our country presents,” she says.
“This does not, however, guarantee better outcomes for consumers and needs to be considered against foreseeable issues that may occur given the volume of reform being driven by the government.”
Gorham has expressed concerns for months. In correspondence sent to Minister Clark late last year, she raised issues about the messaging from EQC and the government, which she said may mislead New Zealanders into expecting the increase in the cap will deliver a reduction in insurance spend as the rate is reducing from 20 cents to 16 cents.
The letter read: “It is recognised that the EQC and Government could point to a reduction in the rate from 20 cents to 16 cents. This would lack transparency and mislead New Zealanders by providing an inaccurate perception of the overall outcome from this. It will not be helpful in setting expectations and could even contribute to a mistrust of insurance and decisions associated with it.
“The community rating approach removes competition from the $150,000 to $300,000 layer by putting it into a government monopoly which is demonstrably worse for the majority of New Zealanders.”
Reactions from member brokers are mixed, says Gorham, and to some extent depend on whether the expected impact on the overall insurance spend is positive or negative.
“There are concerns over the reduction in competition the higher cap brings and the foreseeable challenges this creates for the majority of New Zealanders who are facing increased costs for the same cover,” she says.
“It is unsettling that many will be faced with choosing which necessities they can do without or how they can reduce their spend on essentials. The foreseeable issues these types of choices create often impact the most vulnerable within our community.”
Insurance Council of New Zealand (ICNZ) chief executive Tim Grafton says the change will mean policyholders will now be at the mercy of not only nature but the Act of Parliament when it comes to natural disasters.
“The increase will mean private insurers will cover far less of the loss to a residential property caused by an earthquake, volcano, tsunami, landslip, or geothermal activity, meaning insurers will need to buy less catastrophe cover for New Zealand risk from reinsurers,” says Grafton.
“This means that EQC will need to buy more and insurers will still be managing and settling claims as agents for EQC under commercially agreed terms.
“Customers, though, will need to understand that far more of their loss will be covered by what an Act of Parliament says and not what the insurance policy they bought says in the event of one of these natural disasters.”
The ICNZ’s concerns are not a recent development.
The possibility of a cap increase had been publicly canvassed well before the official announcement, and Grafton says the ICNZ’s warned the government of “market distortion and unintended consequences”.
In summary, the concerns raised by the ICNZ with the government included:
• New Zealand has continued to enjoy extremely high levels of house insurance uptake and consequential EQC cover, indicating that there is no evidence of a significant affordability problem.
• The view that the ability to send risk-based price signals is fundamental to insurance.
• The equity consideration of low-risk areas subsidising those in high-risk ones.
• The potential for a “moral hazard” of incentivising people to favour high-risk locations with cheaper property prices and/or not undertaking risk avoidance work.
• The precedent a large cap increase would set in terms of public expectations about how the Government should manage other risks including climate change impacts to property owners, like flooding and erosion.
Insurance companies will feel the full weight of the change and one major insurer is as unenthusiastic as Grafton is by the increase.
Tower chief executive Blair Turnbull says the increase in the EQC cap has the potential to undermine the already competitive insurance industry and warned it would penalise customers who lived in lower seismic risk areas.
“Tower is all for competition – our model is predicated on offering an attractive alternative to the major Australian insurers – but we believe that ensuring the industry remains sustainable is essential,” Turnbull told Tower’s 2022 annual general meeting.
“From a customer point of view, the changes to the EQC cap will also see insurance costs rise for homeowners in less earthquake-prone areas. While Tower has worked hard to remove the inherent unfairness of cross-subsidisation by implementing transparent, risk-based pricing, the EQC building cap will partly undo that work,
“Homeowners in high-risk areas like Wellington, Hawkes Bay and Gisborne will have their premiums subsided by every other Kiwi.”
A spokesperson for IAG said the company has been “extensively engaged” with the government on the reform of the EQC Act and the current change to the EQC cap.
“Our focus has always been on ensuring there is a healthy and sustainable insurance industry to support New Zealanders,” they said.
“We are still working through the implications of this announcement for our customers, and we will communicate any changes to customers prior to implementation on 1 October 2022.”
A report released by New Zealand actuarial firm Melville Jessup Weaver says by increasing the EQC cap, EQC is choosing to community-rate a greater portion of a policyholder’s earthquake insurance premium.
The report outlined that while in theory this should result in premium reductions for policyholders in high-risk locations, in effect the EQC levy requires policyholders in Northland to subsidise the high cost of earthquake insurance in Wellington.
“Of course, different insurers will see things differently,” the report concluded.
“There are a variety of catastrophe models on the market and numerous choices of vulnerability functions to use. There is no one right way to allocate reinsurance costs between policyholders, nor is there a right way to allocate overheads. Different insurers have different priorities and will make different decisions.
“In short: individual results may vary.”
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