The Insurance market is changing and its all about risk!
Insurers are moving to “risk-based” pricing, that is customers in areas that are more prone to natural disasters and severe weather events will see premiums rise, while customers in lower risk areas will likely pay less. Historically Home and Contents insurance pricing was predominantly based on the value of the property, the higher the house value the higher the premium with little consideration given to the risk or the likelihood of a claim being made.
Due to the impact of climate change related weather events and the recent earthquakes, New Zealand’s environmental risks have increased, so insurance strategy is changing to take into account these growing risks with insurers looking to limit their exposure.
The extreme weather claims bill in New Zealand for insurers in 2018 was $226m and the past two years have been in the top three most expensive years on record. Christchurch properties are harder and more expensive to insure and IAG has recently announced that they will not issue new insurance contracts for properties in Wellington.
Insurers now have increasing amounts of data available to them about the risks they take on, which allows them to make more specific decisions. In the not too distant future insurers may make property by property risk assessments. They may start to consider factors such as
how close is your property to the beach front or river/creek?
is your property low lying?
is your property prone to flooding due to run off from your neighbour?
Is your property located near the top of the hill or exposed to high wind?
are large trees located close to your house?
is your water supply via mains or tank?
There is also a domino effect - as some insurers become more specific about charging for actual risk, others will have to follow suit. If, as an insurer, you don't risk-rate then you risk being selected against. That is, your competitors, if they do risk rate, will cherry-pick the safest risks and you will end up with only the higher-risk customers. This is why insurers need to do their best to estimate the true risk that each policyholder brings to the pool.
All this will have an impact on the housing market. If it became known that a particular property was very expensive or difficult to insure, it would reduce the properties market value. If you cannot insure a specific house, it will be harder to sell as banks will not lend on a house that is uninsurable.
Changes to EQC cover are also having an effect on the market. As of July, it will cover up to $150,000 for buildings, up from $100,000 now. But will no longer offer any contents cover. This means insurers' exposure to domestic building risk would decrease and contents risk would increase, which may affect insurers' appetites.