Treasury is reviewing the levy and financial settings under the Natural Hazards Insurance Act (NHI Act), concerned that current levy settings will not meet the projected costs of running the scheme.
It points to the 2022 update to the National Seismic Hazard Model, which saw an average 50% increase in the likelihood of future national earthquake shaking hazards as one of the key reasons why the current levy rate is no longer adequate.
The NHI Act requires the financial settings be reviewed at the same time. Financial settings include the residential building cover cap, which is the maximum the Natural Hazards Commission Toka Tū Ake (NHC) can pay towards rebuilding or repairing a home, currently set at $300,000 (excluding GST).
The NHI Act replaced the Earthquake Commission Act in July 2024. Its purpose is to help manage the financial risk to the Crown of providing natural hazard cover and reducing the impact of natural hazards on people, property, and the community.
The review
Treasury presented options for the five-year period from 1 July 2025 based on NHC modelling. The modelling anticipates that the levy will need to change every five years in future to account for construction sector inflation, changes in exposure, and increased understanding of natural hazard risk.
The current levy rate is 16 cents per $100 of NHC building cap cover, and the building cover cap is $300,000. This rate was reduced from 20 cents in October 2022 when the cap was increased. Feedback was sought on four levy rate options, one option for changing the residential building cover cap and two options to phase in any proposed increases over time.
Hon David Seymour intends to recommend new rates to Cabinet later this year. Any changes would require regulation change, and the implementation time could be between six and 18 months after that.
The technical levy
The options were modelled around the ‘technical levy’ rate. The technical levy rate is where the costs of the scheme are expected to meet levy income on average. The scheme’s potential losses are highly skewed, with a long tail of low probability but high-impact claims events. The technical levy rate used for the review (24 cents per $100 of NHC building cover) was calculated to support scheme self-sufficiency at 66% probability, i.e there is a 66% chance that increasing the levy to this rate from July 2026 will cover the costs incurred over the following five years, and a 34% chance that one or more natural hazard events will mean the scheme hasn’t accumulated sufficient income to cover those costs.
The review sought feedback on four options:
1. Maintain the current levy rate of 16 cents per $100 of NHC building cover
2. Increase the technical levy rate to 24 cents per $100 dollars of NHC building cover
3. Adopt the technical levy rate less 2 cents
4. Adopt the technical levy rate plus 1 cent
In its submission to Treasury, the Insurance Brokers Association of New Zealand (IBANZ) recommended Option 3 as striking the best balance between sufficiency of the fund and the risk of building up an unnecessarily large accumulation.
IBANZ believes Option 3 supports insurance affordability and uptake, which were key criteria for the choice. It also strikes the best balance between sufficiency of the fund and the risk of building an unnecessarily large accumulation. Treasury modelling indicated it is more likely than not to achieve intergenerational equity and efficiency for future generations.
Chief Executive Mel Gorham noted that a lower level of insurance uptake would end up requiring more government support for the uninsured in the event of a significant natural hazard event, so a higher levy would not necessarily lower the fiscal risk for the Crown.
IBANZ also supports the Treasury’s proposal that there be an ability to temporarily increase the levy rate following a major natural hazard event, however, it says any increase should be kept to a year so that it doesn’t incentivise low uptake of private insurance.
Building cover cap
The NHI Act currently has a building cover cap of $300,000 (excluding GST) per dwelling. The cap is the maximum the NHC can pay towards rebuilding or repairing a home.
The setting of the building cover cap is a balance between competing objectives and risks. There needs to be a level of socialisation of natural hazards risk that maintains affordable and accessible insurance and strikes a fair balance between homeowners vs taxpayers and rate payers who bear the residual risk of the scheme. However, this needs to be balanced with the need to support a viable local insurance market. If the building cover cap is too small it introduces too much uncertainty for insurers to operate in our risky country, but if it’s too high it may squeeze the potential value for insurers to make it no longer worth operating in our small market
The building cover cap was increased from $150,000 to $300,000 in October 2022 and Treasury says the results were broadly in line with its anticipated market response. Regions that paid low amounts for natural disaster cover from private insurers saw increases (as their NHC levy increased), and regions that paid high insurance premiums for natural disaster cover from private insurers (e.g. Wellington) saw price decreases.
The submission from IBANZ noted that any increase in the building cover cap increases the subsidy from low-risk regions to high-risk regions. However, because cover above the level of the building cap is met by private catastrophe insurance, an increase in that cap would not be expected to make a material difference to the overall cost of insurance or accelerate rates of under insurance. However, IBANZ warned that this would not be the case if policyholders perceived that the cost of NHI cover is more than they previously paid for that cover from their private insurer.
IBANZ recommended that there should be a suitable marketing campaign to help the public understand the reasons for and effects of the proposed changes. It says the campaign should be clear about both the breadth and limitations of natural hazards cover, including explaining that the levy covers land as well as the dwelling.
