New Zealanders who own properties at risk of floods or earthquakes may be unable to afford insurance coverage, the Reserve Bank warned.

Rising premiums may make home insurance "increasingly unaffordable" for households, and insurers may decide not to cover certain properties at all in response to growing risks.

In its latest Financial Stability Report, the RBNZ said residential insurance premiums "significantly outstripped general inflation over the past decade."

According to the central bank, the higher insurance premiums reflect higher construction costs and reinsurance costs as the markets adjust to NZ’s risk level. 

"We have also seen the insurance industry move towards greater use of risk-based pricing for residential dwelling insurance, meaning that the value of insurance premiums is more tailored to the specific risks a property faces (e.g. seismic or flood)," RBNZ director of financial stability assessment and strategy Kerry Watt said.

"The long-term trend towards risk-based pricing was evident in certain areas and would pose challenges for some property owners," Watt added.

"The RBNZ believes some owners of high-risk properties could see “a withdrawal of insurance availability.

"We're anecdotally already seeing some policyholders struggling with increased costs in insurance and also potentially in the future availability of insurance," Watt said.

However, the Reserve Bank said insurance remained mostly available and complete withdrawals from underwriters were likely to be rare. 

The central bank said the shift to risk-based pricing could encourage homeowners to take mitigation measures to lower their exposure to risks. 

To proactively manage affordability issues, the RBNZ recommended that lenders, insurers, governments, and home buyers enhance their knowledge of natural hazards.

"Banks need to be conscious of the ongoing insurability of the properties they lend against, which will require more scrutiny in their lending decisions than currently," the RBNZ said.

"Banks also need to pay closer attention to insurance coverage, as there is a risk that owners underinsure high-risk properties over time in the face of rising premiums."

June 2024

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