As a small island nation prone to natural disasters, New Zealand is a difficult place for insurance underwriters. Over the past year, insurance premiums have begun to rise across the country following a series of natural catastrophe events, as insurers seek to maintain their profit margins.
The Northland floods last winter, the devastating Lake Ohau bushfire, and Napier floods in November have all caused losses for insurers over the past years, leading to rising premium rates and a reassessment of underwriting books.
Across the globe, insurance commentators have declared the arrival of a long-awaited hard market, with demand still high but supply and appetite dwindling. The conditions have made it challenging for brokers and risk professionals purchasing and renewing policies.
The outlook for the NZ insurance market is for more of the same. According to analysts at Jarden Research, insurance premiums are poised to rise by between 3-5% in the first half of 2021, continuing a trend which has led to higher risk transfer costs for businesses and individuals across NZ.
Insurance premiums are rising due to higher reinsurance costs, with the NZ market covered by relatively few reinsurers compared with most global markets. As the reinsurers pick and choose their exposures in this market, costs are passed through to insurers and ultimately, clients.
The investment landscape has also affected premium costs. With interest rates plummeting to record lows following the Covid-19 pandemic and subsequent financial crisis, insurers are making less money on traditional investments such as bonds. Higher prices are offsetting the shortfall.
The recent financial reporting season indicates that insurers are keeping their profit margins intact. IAG’s premiums increased by 2.8% to $1.47 billion, with increased rates and new business bolstering income. IAG said business premiums had risen by 4%, while consumer rates rose by 2%.
Rival group Suncorp, the owner of Vero and AA Insurance, increased profits by 19% in the six months to December. It said rates had risen by 4% for commercial customers, with individuals paying about 2% more over the period.
The figures back up claims of a hard market, a phenomenon seen across the world. As the pandemic bites and local loss events such as the Black Summer in Australia cause further damage, carriers here are likely to adapt accordingly.
Sam Kerr, an Auckland-based insurance broker at SHARE NZ, says some markets have seen rises of nearly 10%: “Where you are seeing premium increases, almost the whole market is moving, because there is a limitation of capital in that market or significant exposures. Whole markets are rising 5-10%."
Kerr notes that insurance premiums have risen across material damage business interruption policies, body corporate insurance, and home contents policies, with increases “driven by natural disaster components”.
NZ insurance will continue to be volatile for natural disaster risks, he says. “We’re built on a series of fault lines, and that is significant, even with the EQC (Earthquake Commission) being the first line for insurance,” he says.
It’s easy to explain to clients why rates are rising when a large event like the Kaikoura or Christchurch earthquake has happened, whereas now we are explaining that it is aggregate losses, with smaller events,” Kerr says.
According to Kerr, there is a difference in pricing depending on where the client is based. People based in the higher risk centres of Wellington and Christchurch faced a sharper rise in premium than other areas.
Granular factors continue to affect insurance premiums in the capital. The topography of Wellington, and the different soil quality across the city, can affect prices, Kerr says.
He says insurer competition has kept rates flatter in Auckland.
“On the flip side, Auckland has been quite soft,” he says. “Auckland doesn’t necessarily have the same natural disaster risk as those other regions. Insurers are competing for the Auckland business and see it as a safer risk for disasters. So Auckland and Northland aren’t seeing the same increases as other parts of the country.”
Meanwhile, external factors, such as construction costs, continue to dictate premium rates for home insurance, Kerr adds.
“Natural disaster drives the largest increases in New Zealand, but build costs also factor in. You’d almost expect your house insurance to creep by 1-2% every year just to keep up with the replacement provisions.”
Megan Warner, commercial leader at Marsh New Zealand, says premiums have been increasing for several years across the Pacific region and beyond.
Warner said the rate increases were mainly due to “a higher-than-normal frequency and severity of natural catastrophes in our region than ever before”, along with other factors.
“Generally speaking most New Zealand portfolios have performed well over the past few years, while Australia and the Pacific Islands have suffered significant losses from bushfires and cyclone events.”
The natural catastrophe shocks have prompted insurers to take stock and reposition their allocations, Warner says.
“Many insurers are stepping away from underperforming classes of business, and this creates pricing pressures on the available capacity in both the primary and reinsurance world,” she says.
“ Large global reinsurers, as well as paying for the significant natural catastrophe events across the world, are impacted by the uncertainty that Covid-19 brings.”
She agrees that the low interest rate environment has made it tough for insurers to supplement underwriting performance.
“Persistently low interest rates are making it more difficult for Insurance carriers to balance diminished underwriting results. Most in our market now accept rate increases in certain lines are necessary to remain sustainable.”
While rates continue to change, Warner says capacity remains strong in the NZ market. But some regions and commercial sectors are more difficult to cover than others in 2021.
“We understand there is capital out there, however accessing such capacity can be challenging. We have to be wary where such capital is being deployed. High-risk material damage business interruption (MDBI) zones such as Wellington, high-risk occupancies such as food & beverage manufacturing, and use of high-risk construction materials (expanded polystyrene) are under closer scrutiny than ever.
“Indeed, coverage has certainly come under the microscope in recent years with insurers narrowing cyber, infectious disease and some contingent business interruption coverage,” she added.
Broader industry changes are set to impact pricing over the next few years. Leading insurers, such as Tower and IAG have moved to risk-based pricing for property insurance, due to the growing impact of climate change and dangers such as coastal erosion for many NZ homes.
Risk-based pricing is likely to see those on the coast paying more to insure their homes, as the effects of climate change deepen and insurers suffer more losses.
While current market trends aren't the best news for clients, several unpredictable factors, such as interest rates and natural catastrophe events, will shape where premiums go from here.
In the near-term, what will it take for rates to stabilise following a year of unprecedented volatility?
For Warner, premium rates will ultimately be determined by insurers’ bottom lines: “Consistent year-on-year underwriting profitability will be necessary to see insurance costs plateau,”
she adds.
