Quake-risk pricing shakes up insurers

A move by Tower Insurance to start pricing its premiums based on earthquake risk is expected to be a catalyst for an industry-wide change.

Tower, the country’s thirdlargest general insurer, has announced that thousands of its customers who live in earthquakeprone areas would face a premium hike, while those further away from active faults would be charged less.

Chief executive Richard Harding said the company would stop ‘‘subsidising’’ higher-risk properties from this week in order to send a clearer message to homeowners about the risks in their backyards, and to more fairly distribute costs.

Harding said the majority of the company’s 350,000 customers would not see any significant change in their premiums. Fewer than 2.5 per cent would face an increase of more than $250, and 1 per cent would see a hike greater than $2000.

‘‘Customers receiving these increases will usually have highspec homes in high-risk locations like Wellington, Napier and Gisborne,’’ he said.

The cost to cover a $1 million home in Auckland for earthquakerelated damage was about $40 but

"Customers receiving these increases will usually have high-spec homes in high-risk locations like Wellington, Napier and Gisborne."

Tower chief executive Richard Harding

the equivalent property in Wellington would cost $5400 to insure.

The pricing of flood coverage would soon change according to risk as well, Harding said.

Jeremy Holmes, principal of actuarial firm Melville Jessup Weaver, predicted Tower would be the ‘‘first of many’’ insurers to implement risk-based pricing.

‘‘They’ll sort of be obligated to because you don’t want to be left as the one insurer who doesn’t riskweight, or you end up with the most expensive risks.

‘‘The history of New Zealand is that we haven’t really riskweighted earthquake risk very finely, but that looks like that’s set to change.’’

Holmes was an author of research published in November that found there was no difference in the price of insurance for highrisk locations compared to lowrisk areas in the Hawke’s Bay.

‘‘It just wasn’t a clear picture of ‘this place is high risk so insurers are charging higher premiums’. I would expect to see a different picture five years from now.’’

Tower is one of a few New Zealand insurers using RMS, a California-based global catastrophe modelling firm, that looks at pricing for individual properties based on earthquake risk.

RMS’ New Zealand hazard model was updated in 2016 for the first time in 20 years to include learnings from the Canterbury earthquakes.

Holmes said the model was ‘‘very granular’’ and took into account factors such as distance from fault lines and liquefaction risk.

Insurer IAG also uses RMS’ model to look at the risk and price of underwriting individual properties, but it is understood it does not use that information when setting premiums.

Insurance Council chief executive Tim Grafton said Tower’s move could result in people making better decisions.

‘‘We know that about $20 billion worth of assets and about 47,000 houses are within 1.5 metres of the high tide level today, so in the decades to come there is a significant challenge there around managing how those assets are protected in the future.’’

At the moment, insurance pricing provided ‘‘no clear indications’’ of whether or not development should be occurring in a particular area, he said.

‘‘Increasingly we want to see communities around New Zealand are not undertaking developments that are just going to end up in social and economic disaster for people.’’

Hastings said one of Tower’s roles was to help change and influence community and government behaviour.

‘‘The pricing of insurance for risk is one of these signals.’’