EQC cap rise to shake up premiums

Auckland to help take strain as cover in disaster-prone areas gets cheaper

Multi-unit buildings will likely remain unattractive to insurers. Treasury

Aucklanders will soon start doing more to subsidise Wellingtonians’ home insurance premiums. From October 1, the amount of insurance cover the Earthquake Commission (EQC) provides homeowners in the event of an earthquake, tsunami, volcano, hydrothermal activity or natural slip will double from $150,000 to $300,000.

This means EQC will cover the first $300,000 of damage to a residential building, leaving a homeowner’s private insurer to cover damage above this level.

Doubling the EQC cap will transfer risk from private insurers to the EQC. The EQC is mostly funded by levies, collected by private insurers on its behalf. While it has reinsurance cover, it’s ultimately backstopped by the Crown.

Doubling the cap will also reduce (by $150,000) the portion of a homeowner’s cover priced by their private insurer according to the risk they pose.

The change will be a win for homeowners who live in disasterprone areas, as the portions of cover they’ll be pawning off to the EQC will be relatively expensive.

It’ll be a blow for those who live in low-risk areas, as cover provided by the EQC might be more expensive than that provided by their private insurer.

The Treasury explored this dynamic, which socialises the cost of insurance, in advice provided to the Government in May 2021, ahead of it in September announcing the EQC cap would double.

The Treasury referenced modelling done by the EQC’S reinsurance broker, Aon, which estimated doubling the cap could see annual Wellington home insurance premiums fall by $207, at the expense of Auckland premiums increasing by $103.

It estimated Hawke’s Bay home insurance premiums could fall the most, by around $483, followed by premiums in the Wairarapa ($414), the East Coast ($328), Marlborough ($294), Westland ($224), Manawatu ($138), Bay of Plenty ($17) and Southland ($17).

To compensate for these savings, Aon estimated annual premiums could rise in Northland ($86), Canterbury ($86), Otago ($86), Waikato ($69), Nelson ($52) and Taranaki ($17).

The Treasury cautioned premiums could look very different to these estimates depending on how individual private insurers respond to the EQC change, the cost of reinsurance, and commercial factors, which already see low-risk policyholders subsidise high-risk ones to some extent.

Inflation, which is having a big effect on the cost of building materials, has also risen a lot since the modelling was done.

Nonetheless, the estimates provide an idea of how the costs of home insurance cover may be spread once the EQC cap is lifted.

Policyholders will see changes to their premiums after October 1, as their annual policies come up for renewal.

Coming back to the Treasury advice, it advised the Government against lifting the EQC cap to $300,000, preferring a more modest increase to $200,000.

It argued a higher cap would mute price signals from insurers aimed at reducing risk. In other words, someone might be more inclined to build a house in a risky area, that’ll cost them a lot to insure, knowing they’ll get a decent amount of EQC cover.

The Treasury also worried a higher cap would set a “strong precedent” for how the Crown might deal with greater climate change-related losses in the future. If a large amount of state insurance is provided for earthquakes, should it also be provided for damage caused by sea level rise and storms?

Furthermore, the Treasury said there was uncertainty around how the change might affect the way private insurers participate in the market.

It noted most insurers expressed “strong opposition” to increasing the EQC cap, arguing insurance is still generally affordable.

However, the Treasury also recognised, “It is likely that property insurance price pressures will increase over the next few years in high-risk regions across New Zealand.

“Multi-unit buildings will likely remain unattractive to insurers and could see further price increases. For this reason, the status quo will not meet Cabinet’s [insurance] affordability and availability objectives.”