Why your insurance costs more
Quakes played a big role in pushing up the cost of coverage much faster than incomes, reports Tamsyn Parker
The cost of insurance is rising faster than Kiwi pay packets, and industry experts say there are risks it could increase further. Figures from Statistics New Zealand show the cost of insurance has risen by 48 per cent in the past 10 years — far surpassing the 31 per cent rise in wages and the 19 per cent increase in inflation.
It is house and health insurance that have skyrocketed the most over that time.
Since 2007, the cost of dwelling insurance has risen by 259 per cent, with a 154 per cent rise in the wake of the Canterbury earthquakes in February 2011.
Linked to that is contents insurance, which has risen 53 per cent since 2007. Health insurance has risen by 99 per cent.
Tim Grafton, chief executive of the Insurance Council, said that while the Canterbury earthquakes had been a big driver of the cost rise, there had also been increases in government taxes and levies over that time including a GST rise, the EQC levy and the Fire Service levy.
“First of all there has been the Canterbury earthquakes — we have seen something like $20.5 billion paid thus far and it is probably going to be another $1b, and that is just for domestic housing.
“On the commercial side it is almost just as much.”
On top of that came the November 2016 Kaikoura quakes.
“In the space of six years, 2010 to 2016, this country has had significant losses to earthquakes.”
Grafton said the Canterbury quakes had resulted in a recalibration of risk and the way in which reinsurers charged to cover that risk.
That meant that before the quakes consumers were probably paying a lot less for their insurance than they should have been, particularly given that policies were open-ended, allowing people to claim an unlimited
We are a very small economy producing very small premiums but have produced a significant loss. Tim Grafton, Insurance Council CEO
amount for damage, he said. That model had since been scrapped, with insurers moving to a “sum insured” model where they pay out only up to a specified amount.
The Reserve Bank had also increased the solvency margin for insurers after the failure of AMI in 2011.
Now, instead of needing access to enough capital to cover a once-in200-year event, they had to have enough to cover a once-in-1000-year event.
Insurers had had to raise capital and buy more reinsurance to cover it, “which comes at a cost as well”, Grafton said.
Predicting whether the rises in insurances costs would continue was difficult, and would depend heavily on whether there were a raft of big global disasters, or another big local one which could push up the cost of reinsurance.
“One thing we need to bear in mind — the cost of insurance in New Zealand is also a function of what happens globally.”
New Zealand’s insurance cover is based on what reinsurers charge and what happens globally affects insurance here.
Grafton said there was also uncertainty facing the sector with rising bond rates in the United States.
In recent years the insurance sector had benefited from hedge funds and pension funds pouring money into insurance contract investments as investors sought a better return on their money.
But that could change if bond rates rose.
“If they were to rise would we start to see money flow back?”
Riskier countries also faced paying more and New Zealand was now on the riskier nations list.
“We are a very small economy producing very small premiums but have produced a significant loss.
“If we have another big event — if Wellington was hit — the elevated risk would be quite sharp. We really don’t want a big event happening.”
Counterbalancing that, improvements in technology had allowed more people to apply for insurance and make claims online, which helped to keep costs down.
Health insurance has also risen sharply over the past 10 years.
Roger Styles, chief executive of the Health Funds Association of New Zealand, said the past decade had seen a doubling of both claims and premiums, with around $1.2b paid out last year compared with $600 million in 2007.
“There are several reasons for this, although essentially insurers are funding access to both a greater num- ber and a wider range of treatments than they were a decade ago.”
Styles said medical inflation — the cost of hospital stays and surgical procedures — had risen much faster than the consumers price index and New Zealand was not alone in that. “It is a global trend.” That accounted for about onethird of the cost rise while new procedures were another third and the final third was more people choosing elective surgery because of delays in the public system.
Styles said most health insurers in New Zealand were not-for-profit, which meant the premiums went straight out into payouts.
Medical inflation was expected to continue rising, as it had done historically, Styles said.
But there could better news on elective surgery, with the new Government expected to pour more resources into healthcare.