Insurers must price risk properly
risk for the Wellington region freely available online.
So, what is the problem? Why are insurers throwing away free money in ways that encourage too many people to live in the riskiest places, and too few people to live in the safest places?
Failing to price risk properly also makes councils want to restrict development in riskier places – even for people willing to pay high insurance premiums. The whispered answer I usually get is that insurers worry they will be stomped on by central government if they allow home insurance premiums to reflect risk.
Insurance prices in places like Petone would skyrocket. People would complain to the government.
Government would respond – and probably poorly. Insurance would look unaffordable to too many people – and especially if people started betting that higher rates of uninsurance would mean the government would bail them out come the quake. Both of those concerns would have the government stepping in to regulate insurance charges.
Finance Minister Grant Robertson warned insurers last week they should not allow risk-based premiums to result in insurance unaffordability in risky places. And we are back to the Stooges and their plumbing.
If insurers price risk properly, they will be in trouble with Robertson.
If they don’t, councils will increasingly look to zoning to undo the mess.
And that causes cascading sequences of additional problems.
We should be careful when asking government to turn regulatory wrenches. Government plumbers too often fail to notice the other pipes they break along the way.
Dr Eric Crampton is chief economist with The New Zealand Initiative