Government Launches Six-Month Review of Home Insurance Premiums

The Government of New Zealand has initiated a six-month review of escalating home insurance premiums amid growing concerns over affordability and limited coverage in high-risk areas. The review follows a Cabinet paper presented by Finance Minister Nicola Willis, which highlights the potential for New Zealand insurers to be achieving higher profit margins than their Australian counterparts, thus raising questions about competition in the insurance sector.

The inquiry was prompted by the recent decision of AA Insurance to temporarily suspend new home insurance policies in Westport due to the area’s flood risk. This raised alarms about access to insurance in vulnerable regions. Treasury analysis indicates that home insurance premiums have surged by 40 percent over the past two years, increasing at a rate three times that of general inflation since 2011.

“We are not only worried about that affordability, but we don’t want to see people dropping their insurance policies,” Willis stated. She, along with Commerce and Consumer Affairs Minister Scott Simpson, has tasked the Council of Financial Regulators—which includes the Reserve Bank, the Commerce Commission, and the Financial Markets Authority—with investigating the factors influencing residential insurance pricing and its affordability.

The review aims to assess the underlying causes of rising premiums, their effects on households, and potential policy measures to alleviate the financial burden on consumers. “We know that the insurance industry has really good data about who’s insured, how much it’s costing, and we want to know what they are seeing in terms of trends,” Willis added.

While most homeowners can still secure insurance, it is becoming increasingly difficult in regions prone to both earthquake and flood risks, such as Wellington, Marlborough, and Canterbury. The Cabinet paper notes evidence of higher profit margins for insurers in New Zealand compared to Australia, although the reasons for this disparity remain unclear. “New Zealand’s higher risk profile is likely a contributing factor, with investors demanding higher returns for the higher risk,” the paper states.

The concentrated nature of the residential insurance market further complicates matters, with three insurers dominating the sector. Preliminary findings from the Treasury suggest potential competition issues within the insurance market. Willis emphasized the importance of distinguishing between cost increases driven by unavoidable risks, such as climate change and earthquakes, and those associated with regulatory and compliance costs.

“I think most New Zealanders will understand this isn’t going to be a quick-fix issue. This isn’t a simple Band-Aid solution,” she remarked, acknowledging the complexities involved. The review will explore factors such as competition, construction costs, reinsurance pricing, and the trend towards risk-based pricing for hazards like flooding.

Consumer NZ CEO Jon Duffy welcomed the inquiry, emphasizing the need for a clearer understanding of market dynamics. “We need to understand the market dynamics better so that we can work out what fixes we have because the insurance sector is critically important for our economy,” he stated. Duffy insisted that the review must be fully independent and free from industry influence, cautioning that if insurance becomes unaffordable, the repercussions for communities and the economy could be severe.

Similarly, Kris Faafoi, CEO of the Insurance Council, expressed support for the Government’s review, stating that insurers are committed to collaborating with the Government to ensure long-term accessibility and affordability. He pointed out that a significant portion of home insurance premiums—around 40 percent—is composed of taxes and levies, which are beyond the control of insurers. Faafoi noted that inflation, higher repair costs, and regulatory expenses have also contributed to rising premiums.

In response to AA Insurance’s decision in Westport, Faafoi clarified that this was a singular business decision and does not represent the industry as a whole. He reiterated that without addressing climate risks, pressures on premiums are likely to persist. “We have long warned that climate risk, including the increased likelihood of flooding events, will affect premiums unless actions are taken to mitigate that risk,” he said.

Willis assured that the review is not intended as a punitive measure but rather as a constructive effort to understand and resolve the challenges facing the insurance market. Additionally, a separate review of the Natural Hazards Insurance Act levy settings has been paused until the affordability review concludes. Treasury had previously proposed raising the Natural Hazards Commission levy from 16 cents to 24 cents per $100 of building cover, resulting in an increase of the maximum annual levy per home from $554 to $828.

As the review unfolds, the Government aims to address the critical issues surrounding home insurance affordability and accessibility, particularly in regions at risk from natural disasters. The findings of this inquiry will be pivotal in shaping the future landscape of home insurance in New Zealand.