A Wellington Mayoral Forum was held on 10 June to discuss insurance issues for the city. One of the key questions discussed at the forum is the degree to which the EQC should be used to cross-subsidise insurance across areas of New Zealand. At a high level this is a straight forward concept, however we have noted five key issues that deserve more consideration.
Risk based pricing
Now that one major insurer has moved significantly to risk based pricing for earthquakes, all other insurers will be under pressure to do so. Those without risk based pricing are likely to see their portfolios grow in high risk areas which reinsurers will 'penalise' through increased reinsurance premiums. In the absence of some form or regulatory intervention, all insurers will ultimately need to move to risk based pricing - it's too late to close the stable door.
Increasing the EQC cap from $150,000 to $400,000, as was mooted at the forum, will do nothing for commercial insurance and will likely increase expected EQC claims in the event of an earthquake by perhaps another 50%. Notably:
- The vast majority of domestic earthquake insurance cost would then reside with EQC and be fully cross-subsidised across the country.
- This ensures availability but completely eliminates any insurance signal with the risk essentially transferred to the public sector.
- A common approach overseas is to "support" affected policyholders with a long term view to move towards risk based pricing, which is the best view we have of the long term cost of protecting property.
Arguably insurance for small businesses is a more pressing issue than domestic insurance:
- Commercial entities have to purchase their entire earthquake insurance through the private market while domestic insurance is already cross-subsidised through the EQC.
- Most commercial entities are small local businesses, more akin to domestic entities, and will not have much or any negotiating power.
- Therefore if there is a drive to increase cross-subsidies, arguably introducing cross-subsidies for small business is more pressing than increasing existing cross-subsidies for domestic.
Earthquake building standards
The focus of earthquake building standards has long been on the preservation of life. The Kaikoura earthquake substantially damaged confidence in the ability of modern commercial buildings to survive earthquakes and be fit for use afterwards. Ultimately higher earthquake costs due to building standards translates into higher long-term insurance premiums. As a nation, to reduce the cost of earthquake insurance we need to include a focus on property preservation in addition to preservation of life.
What about coastal flood an erosion?
The attention to earthquake risk has overshadowed the other looming issue of coastal flood and erosion.
- Properties in earthquake zones are generally insurable, albeit at a price higher than some are willing or able to pay.
- Properties at risk of coastal flood an erosion will rapidly become uninsurable or priced to an extent most will not be able to afford.
- Coastal properties are higher risk while large earthquakes causing total losses are rare, coastal flooding events are relatively frequent for some properties and are expected to become more frequent in the future.
- Coastal risk need to be managed similarly to earthquakes; a focus on increasing resilience and careful consideration on where it is suitable to build and maintain infrastructure.
How Finity can help
We are delighted to provide our insights on relevant market issues for our clients. Finity may be able to assist insurers with a tailored review in response to this report. We have deep knowledge of the markets, the products, the claims environment as well as direct experience with risk management advice and reviews including reporting to Boards.
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