An increase in claims, the effects of climate change, inflation and rising premiums are driving change in the insurance industry as underwriters tweak their models to ensure they are fit for purpose in a changing world.
The appetite for taking on additional risk is therefore limited, with insurers taking stock of conditions in both New Zealand and in overseas markets in a challenging environment in which quality advice to clients has become more important than ever.
Paul Munton, Rothbury Insurance Brokers executive general manager for broking and branches, points towards several factors that have contributed to capacity constraints in the domestic insurance market, noting that the commitment and cost of capital to underwrite risk is “generally determined by assessment of prevailing economic conditions and environmental factors”.
“We know that higher insurance prices attract investment and therefore access to capital. However, insurance markets are also significantly influenced by the claims experience and to reduce volatility, insurers and reinsurers determine their own level of comfort,” says Munton. “They will cap their exposure to protect their balance sheet, investors, and regulators and therefore sustainability. “
The insurance market is also greatly impacted by global events and the response of international insurance and reinsurance markets, he adds.
Megan Warner, commercial team keader at Marsh, says shrinking capacity is due to inflation putting pressure on insurers’ regional accumulations. “There is only so much capacity in the market and inflation has caused insurers to use more capacity than perhaps they anticipated they would need,” she says. “This is presenting itself by insurers not being able to maintain line size, or percentage share, on increased values and co-insurers being needed to fill the gap.”
Tim Grafton, chief executive of the Insurance Council Te Kāhui Inihua o Aotearoa, says costs are impacting all lines of insurance, with capacity issues pronounced in certain sectors.
“Capacity will be more of an issue for more vulnerable structures in higher risk areas and loss frequency — that is commercial property fires and weather losses such as flood and storm damage on residential and commercial property and motor - is increasing,” he says.
“Insurers are now finding that inflation is increasing sums insured significantly (some as high as 30%), due to rebuilding costs like material and labour. Construction time frames are extended, and this increases business interruption costs as well.”
Insurers may be more discerning about their appetite for accepting additional risks in this environment, adds Grafton says. “Insurers are also finding that the cost of purchasing reinsurance, typically in the lower layers to act as buffer for these high frequency weather events, is now increasingly costly.”
The industry is also dealing with rising premiums, despite the recent EQC cap changes. Since the changes were announced, insurers have faced double-digit building inflation and rising reinsurance costs because of overseas extreme weather events like floods and wildfires.
“We are seeing a rise in premiums because of the pressure on accumulations and its impact on competition,” says Warner. “New Zealand is a small market, only becoming smaller due to this. In addition, more frequent loss-incurring weather events are impacting insurers’ ability to deliver consistent financial results, so rates continue to be adjusted.”
Rising premiums should be of little surprise, says Grafton, who says that even Treasury’s own analysis about the EQC cap changes showed that most residential properties would end up paying more in their total premiums.
“This is because most New Zealanders live in relatively lower risk seismic areas and will pay a $552 including GST EQC levy, a $207 increase, which exceeds what private insurers were charging for that risk before the cap change,” says Grafton.
“In addition to this, all areas of New Zealand, including the higher seismic risks areas, will see the impacts of double-digit building inflation, increased costs due to headline inflation, and reinsurance costs.”
Grafton says supply chain issues and a labour shortage had impacted the length it took to fix a home, adding further to insurers’ costs in recent times.
The effect of climate change is also becoming increasingly clear.
Given that 2021 set a record for insurance claims from extreme weather events – the total amount was $324 million – it was to be expected that loss-incurring weather events would continue to have an impact on premiums in 2022 and beyond, says Grafton.
“For the first six months of 2022, these claims totalled $198.5 million and we are yet to have any numbers for the three extreme weather events for which we’ve collected data for in July. All this has an impact in terms of overall claims being met locally by insurers.”
The reinsurance market is also hardening on the back of large climate-related losses globally, adds Grafton. “Closer to home, 2021 was another big year for climate-related claims in Australia. Again, 2022 is shaping up to be a bad one too with flood-related claims in Australia alone having already reached AU$7 billion. So, while some people in high natural hazard zones should expect the EQC component only of their total premium to fall, there are a host of other factors that, combined, might reasonably be expected to overtake that.”
When it came to earthquake cover, lower-risk areas like Auckland may start to see a rise in premiums, says Munton.
“To ensure the affordability and sustainability of earthquake cover in the high seismic areas most exposed to earthquakes, insurers are now looking to redistribute some of these costs to areas where there is lower earthquake risk, like Auckland and other parts of New Zealand, to help share the load,” he says.
Earthquake-prone areas such as Wellington, Canterbury and Hawkes Bay have to date carried a disproportionate share of the Earthquake pricing and this is set to change with a redistribution of cost across all areas, he says.
“Overall, the cap changes have prompted a review by the insurers of their earthquake pricing, and they too will aim to balance out the cost of earthquake insurance across the country. Each insurer will determine their pricing strategy in response to the EQC change and unfortunately, there is no ‘one size fits all” approach.”
Given current market conditions, insurers are seeking to limit the exposure to natural catastrophe due to the reduction in reinsurance capacity, escalating price of property catastrophe reinsurance, and increasing frequency and severity of losses, says Munton.
“Rather than purchase additional reinsurance at a higher premium, many underwriters have set their own cap on their portfolio aggregate exposure. Typically, they are setting a small percentage increase for sum insured increases for existing policies and reducing their appetite to new business. General inflationary pressures and supply chain disruption combined with escalating property valuations can exceed the insurers comfort or risk appetite.
“This is not a new phenomenon; many property reinsurance treaties previously contained a “cession limit” clause restricting the amount of risk an insurer could underwrite. Once exceeded, one approach adopted was a “one-on, one off” approach. One way to overcome the challenge faced with such limitations is to allow another insurer to co-insure the risk to remain within their own internal limits and appetite. “
So, what does shrinking capacity and rising premiums mean for insurance brokers in general?
“We are in a very challenging market and clients now more than ever need personal service and quality advice about their insurance,” says Munton.
“Generally, insurance has been available on demand, and perceived as being “of right”, but the world is changing. Insurance is not a commodity, and for far too long price has been the primary focus rather than the nuances of coverage. Poor choices in terms of markets and coverage will have a more detrimental impact than the price point at claims time.”
"This highlights the importance of insurance brokers to take a closer look at every aspect of the clients’ business and its market to identify the risks and ensure the client has the appropriate coverage,” he says.
“Today, access to appropriate markets and capacity are an escalating need. We all recognise the challenge of affordability; however, no one wants insurance more than someone who needs it and can’t access it at any price. Know your client, know your market, and know your worth.”
