Insurance makes an important contribution to New Zealanders' financial and economic wellbeing, by spreading the cost of adverse events across time and policyholders, Reserve Bank Director of Financial Stability Assessment & Strategy Kerry Watt says.
Residential dwellings and land account for a majority of New Zealand households' net worth. At around 96%, uptake of residential insurance is high by international standards.
Premiums for residential insurance have significantly outstripped general inflation over the past decade, reflecting both elevated construction cost inflation, and also higher reinsurance costs, as global reinsurers reassess New Zealand's risk profile.
"We have also seen the insurance industry move towards greater use of risk-based pricing for residential dwelling insurance, meaning that the value of insurance premiums is more tailored to the specific risks a property faces (e.g. seismic or flood). The use of risk-based pricing has become evident in certain areas, and for specific risks, such as for seismic risk in Wellington."
A long-term trend towards risk-based pricing will pose challenges for some property owners. We expect that owners of higher-risk properties may find insurance increasingly unaffordable and for some properties we may see a withdrawal of insurance availability, Mr Watt says.
The evidence to date suggests that insurance continues to be available. Full insurance retreat is rare, even for properties exposed to high seismic and flood risks.
"Insurers' adoption of greater risk-based pricing is a rational response to a changing operating environment, including climate change. Over time, risk-based pricing can provide a strong signal to encourage the proactive mitigation and lowering of exposure to risks, which can be beneficial for society's overall risk management."
However, it is important for all affected stakeholders (insurers, central and local governments, home buyers and lenders) to take actions now to improve their understanding of natural hazards so that future affordability challenges can be proactively managed, including risks to policy holders.
Banks need to be conscious of the ongoing insurability of the properties they lend against, which will require more scrutiny in their lending decisions than currently. Banks also need to pay closer attention to insurance coverage, as there is a risk that owners underinsure high-risk properties over time in the face of rising premiums.
We explore this further in an excerpt from our May 2024 Financial Stability Report that we are pre-releasing today. Our full Financial Stability Report will be published on Wednesday 1 May.
More information
May 2024 Financial Stability Report Special Topic: Insurance availability and risk-based pricing
