The departing Chief Executive of the Insurance Council of New Zealand says if Wellington is hit with an earthquake on a similar scale to the Canterbury quakes, it would “raise some questions” on whether NZ insurers would be able to continue to purchase reinsurance at an affordable cost.
“I think reinsurers would still be there. But the ability to purchase reinsurance at a good rate and the degree of capacity that would be available, particularly for property in Wellington, could be really challenging,” he says in a new episode of interest.co.nz’s Of Interest podcast.
“Ensuring how we manage that risk is really critical because we're very dependent on offshore capital and reinsurance to help support our insurance programs in New Zealand.”
The Insurance Council says to date, private insurers have incurred over $21 billion in expenses due to the Canterbury Earthquakes.
Toka Tū Ake EQC has contributed an additional $10 billion, resulting in a total insured cost surpassing $31 billion for the event.
The Insurance Council estimates the overall economic losses for the entire sequence are estimated to exceed $40 billion.
This week marks the conclusion of Grafton's nearly 12-year tenure as CEO of the Insurance Council and he reflected on his time in the role on the podcast.
He says lessons were learnt from the 2010 and 2011 Canterbury Earthquakes, which were then applied to responses to the Kaikōura earthquake in 2016 and the Auckland floods and Cyclone Gabrielle last year as well.
“When that [Kaikōura] earthquake struck, which was just a little bit after midnight, I think, on the 14th November, a lot of people were thrown out of bed almost by the earthquake in Wellington. And after the shaking stopped, I rang my counterpart at EQC Ian Simpson [EQC’s Chief Executive at the time] and said, ‘we’ve got to do better than Canterbury and can we meet in a few hours and work out where we go from here’,” he says.
“So, within four weeks, we had the foundations of an agreement which enabled insurers to manage and settle claims on behalf of EQC. And that meant that for the customer, there was one point of accountability and responsibility for their claims, their insurer. And so it didn't matter whether it was an EQC claim or an insurer claim, they didn't get bounced around between the two.”
“So from that, we then developed a more formal and longer lasting agreement with EQC to be their agents. And I think also the experience of those events from Canterbury through to Kaikōura, meant that when the Auckland anniversary floods and Cyclone Gabrielle came along, we were well seasoned in dealing with these kinds of situations.”
Kris Faafoi will be the Insurance Council’s new Chief Executive from next week. Faafoi held a number of portfolios during the Sixth Labour Government before he quit politics in 2022, including Commerce and Consumer Affairs, Broadcasting and Media, Immigration and Civil Defence.
You can find all episodes of the Of Interest podcast here.
40 Comments
Still loads of fat in the insurance industry.
From my broker.
They have just decided to add adviser and admin fees on top of this.
El Torso. Many larger accounts are broked on a 'net' basis, ie the broker receives no commission in exchange for lower rates than would be the case if placed with the insurer on a 'gross' basis. The broker then charges the client a set fee for service. This will vary according to complexity of account, claims volume etc. But background volume/profit share arrangements with the insurer may still be in operation.
It's common for adviser fees to be charged on top of commission. Rate of commission will depend on the mix of your portfolio; eg motor vehicle policies attract lower rates than do material damage. Overall 22% commission would be reasonable. Adviser fees are the icing negotiated between client and broker. Brokers also usually have background volume and profit share deals with insurers. A combined 30% plus is often captured. Broking businesses are very profitable in NZ. Obscenely so IMO.
Yep. Onerous and largely box ticking compliance processes are a significant contributor to the market concentration being achieved by a few large firms. Smaller brokerages are becoming rare beasts as it becomes too hard to meet compliance regulations and as a result competition is being steadily reduced. Further compounded by the big brokers operating co-insurance 'binders' where a ppn of every policy is allocated to each insurer instead of the whole policy being placed with just one. This means an insurer participating in the binder will not provide rates and terms on that policy to an 'attacking' broker, with the result that they can only get terms from a non participating insurer or convince the client to appoint them for non price reasons. Brokers put forward plausible sounding defences of binders, a few are sound such as reduced admin costs, but IMO mostly slick justifications for borderline cartel practices.
Now that is interesting and confirms mounting suspicions we have had over the premium outcomes from our broker. In fact we have been discussing going back to as previously and dealing our policies direct with one insurance company. Adding to that a couple of vehicle claims where we were not at fault have been handled laxly by our broker. Thoughts?
FG. My observations apply mainly to commercial insurance. Domestic policies are also often placed through such 'binder' arrangements and this is where the genuine admin cost savings arguments that brokers advance do have merit given multiple alternative avenues to place domestic policies are readily available. How much of those savings is passed on to clients is another discussion. You'll likely be paying a decent fee for your broker services and savings can be made by DIY. I recently helped an associate ditch their broker and move to a 'direct' insurer for their domestic covers at a significant saving. But they are well resourced and robust business people. It's not for everyone. As a Cantab EQ victim you've experienced what it's like to have Beelzebub attempting to strangle you; it's a lonely place and having a broker in your corner can be very useful notwithstanding your less than stellar personal experience. The alternative of having to use a lawyer is eye wateringly expensive. On the other hand you present as an astute articulate person well able to stand up for yourself. Suggest at least make some enquiries and see what spins out.
Insurers can't just keep passing on increasing liabilities in the form premium increases. 30% is absurd and unsustainable. The big issue is how increasing weather events are going to be covered and who needs to be involved. Thinking homeowners are always going to foot the bill is not an adequate strategy.
If you want to buy a poorly designed house, constructed by cowboys, using inferior materials, on a river, below a cliff holding a foresty block, on a known faultline, with ocean views - then you have accepted the risk and therefore the insurance pricing.
If the homeowner doesn't like it, then maybe some more Due Diligence is order before purchasing.
People will work it out eventually. Insurance is no longer viable (and hasn't been since it became widely adopted) - short term it can generate positive cashflows, but long term it is a definitive loss.
The payout on the 2011 Chch earthquake was the equivalent of ~30 years worth of current premiums - for all policies nationwide.
As more of the world is insured, insurers are realising that they are the gamblers...not the house.
While NZ is too small on its own to be a 'recovery market' in that reinsurers cannot recover what they've spent on large disasters, they tend ( except for EQC) to treat AUS/NZ as one risk block, with the combined RI program for both countries being one of the larger in existence world wide.
That's my point. When my insurance climbed 30% just recently I was told it was due to Auckland's floods and Hawkes Bay's cyclone. I don't live in either of those areas but I'm sharing the load. If these events are to become more frequent, expecting everyone ( including those unaffected) to keep coughing up is unsustainable. It's like adding more lanes as traffic volumes increase. At some point you have to ask if that's the only answer.
Agreed. I'm in Napier and the floods we had a few years ago and then Cyclone Gabrielle last year didn't affect my property at all - nor any property in the suburb I live in. This suburb, as a number of suburbs, was totally untouched. Insurance companies like to say that risk is specific to each property and different houses in the same street can have vastly different premiums. I wish that were true. Like I say, this area has been untouched and despite that my premiums have almost doubled over the last two years.
Flood risk is increasingly being modelled down to specific address level. If not yet it'll be coming to your place at some stage. But flood peril is only one component of your premium, other factors will be in play eg age/construction type of your property and geotechnical data such as liquefaction/shaking effect potential of your specific property.
Nothing is fair in life.
My first job out of university was as a pricing analyst with a consulting firm. Most newsletters spoke of advanced tech was completely revolutionising insurance pricing in favour of a proper user-pay model. There was the promise of data science, then blockchain, then data science/ML, now AI.
Yet the only things your health insurer cares about are your age and whether you smoke. All those that live off ultra-processed crap and alcohol get their premiums subsidised by those that exercise, eat well and look after themselves.
And how much of that $31b was money accured from delaying claims and reaping money by investing while the insured waited. Two commenters below note a seven year wait, enough time to double an investment not to mention the premiums being paid on a property that is now at no insurance risk cause it's already munted.
The inevitable surge in disaster claim costs from delay almost always well outstrips any investment income achieved on the cash set aside to meet that claim. This calculation can change for large 'long tail' claims where the outcome is uncertain eg liability claims and also where there is a fixed sum insured that is the insurers maximum liability. But this did not apply in ChCh where most residential policies were 'open ended' ie there was no sum insured meaning the total cost of damage was payable. In that EQ there was powerful incentive to settle claims as quickly as possible, with the possible exception of AMI/Southern response where much of the payment was coming out of the taxpayers pocket.
At the coal face, yes. A glib and patronising advocate for the insurers during the Canterbury EQ claim processes, in my opinion, certainly. Would question though how his conscience would fare, compared to that glowing advocacy, if he had sat in our living room and witnessed our insurer’s attempt to foist a ridiculously assessed settlement on our family for the repair of our home. And then witness the seven years subsequent hostile and bitter fight that ultimately ended four days before court when the insurer capitulated and paid out in full for a rebuild that was blindingly obvious from day one. And of course, our treatment was hardly unique. If one is to be acclaimed as being at the coal face, then it would be much more convincing, to have actually gone down a few of the mine shafts to have a look at the actual activity going on there.
Yes, @Foxglove. seven years here to get our claim honoured when our house was destroyed in the Chch earthquake. Seven years of lies, deception, confusion, legal and consultant fees paid by me. My life on hold, the stress of it all,emotional and financial, during which our child took their life. The triumphant public Facebook post by our loss adjuster when the case was closed, of champagne glasses and how she was looking forward to her bonus.
FG. Your far too common story of cold blooded desk jockeys playing cruel games with peoples lives is a scandal. Dame Cartwright made a good fist of calling out some of the terrible behaviour but IMO the insurer brinksmanship tactics on larger claims such as yours is yet to receive proper examination. I have however had exposure to large natural disaster insurance responses elsewhere, none of which had comparable dynamics to ChCh eg mixed EQC/insurer insurer model, lengthy EQ decay period, govt mandated area retreat etc, yet still struggled to respond. The complexities in ChCh were mind bogglingly difficult compared with anything else I've experienced or studied. I'm no fan of platitudinous cheshire cat Grafton but at the macro level agree with him that hard lessons from ChCh resulted in the Kaikoura event being more successfully handled by the insurers and EQC.
Throughout it all recall we agreed much more than we disagreed& same again. Regarding the Cartwright report and other documentation it seems to me that the directive(s) issued by the Treasury to EQC created an unfortunate pathway, precedent that the insurers were quite content to align with. Witnessed here EQC desperate to keep our job under the cap & our insurer engaging & utterly complicit. The great irony being that motive to suppress the real authentic cost(s) turned out a monumental own goal when attempted repairs by Fletchers/EQC were revealed as balls ups but thus allowing the insurer to renounce any liability. The government should have just forked out the cap payments where obvious and allowed the insurer & insured to get on with it from there. I would wager that would have cost a great deal less than what subsequently the last government saw fit to fork out over the pandemic etc.
Not all insurers blindly followed EQC's cap determinations, with some more proactive on this than others. I have no doubt that your last sentence is correct. The insurers who most quickly got into cash settlements at replacement value rather than the policy mandated indemnity value, ended up settling for significantly less cost than those who held out longer until the repairs and rebuilds could be physically done. I remember one insurer executive publicly declaring that insurers had a duty to actually carry out all repairs due to a social obligation, piously implying that competitors who were cashing out claims were moral degenerates. Needless to say as months later when delays set in and repair costs escalated, they too began cash settling.
I used the Official Information Act to get documents and correspondence between insurer, EQC, geotech inspectors, and builder going back over several years. I still have them, huge piles that are tragic and deceptively banal testimony to the wrecking of not just a house, but my life.
It turned out that the insurer's costings were based on a basic home on a flat section, whereas my home was a period house on a steep section.Also learnt that their tame geotech engineers 'missed' a substantial 3m x 6m retaining wall that even the EQC folk had noted. At one point the insurer talks about dealing with me, that they were worried about 'brand damage'. That kind of mentality when there were more profound issues at stake.
The builder's docs were almost entirely redacted, which speaks for itself.
I was talking to someone a few months ago who owned an apartment in a building with three others (large villa subsequently divided up). She was insisting that her insurer was charging her according to the total value of the land (i.e. not a portion). I found it hard to believe but honestly wouldn't be too surprised if it were true.
Time for NZ Insurers to immediately start pricing premiums based on risk. If that means coastal, low lying, flood prone, earthquake and other geological risk areas face massive increases in premium (think 10x or more) or no premium at all because the property / asset is deemed uninsurable then so be it.
It seems that our insurance market is characterised by some of the highest levels of moral hazard and premium cross subsidisation in the World. If we continue to reward those who unwittingly or knowingly buy high risk property it won't just be those with at risk properties who cannot insure - it will be all of us save the ultra wealthy.
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