IAG's chief risk officer believes Wellingtonians will soon stop being subsidised by insurance policyholders in other parts of the country for living in a quake hotspot

By Jenée Tibshraeny

Insurance as we know it isn’t here to stay.

The 2010/11 Canterbury earthquakes saw insurers move full replacement home insurance policies, to sum insured, giving them more certainty about the risk they were taking on and transferring risk to policyholders.

Six years on, they’re tackling a new disaster, bruised and battered and still dealing with a raft of complex claims from Christchurch.

Tower’s chairman, Michael Stiassny, on Tuesday said the system was “broken”.

Something has to change. The chief risk officer and disaster recovery lead of the country’s largest general, IAG, explains what.

An end to ‘cross-subsidisation’ on the horizon

Speaking to interest.co.nz in a Double Shot Interview, Karl Armstrong says insurance premiums had been “hardening” since before the Kaikoura quakes.

“Now you’re going to see an exacerbation of that.”

A time will also come when those of us in parts of the country less prone to earthquakes will stop subsidising policyholders in more risky parts of the country.

In other words, Aucklanders may stop picking up the tab for Wellingtonians, sitting on vulnerable fault lines.

“What we must consider at some stage in the future is a user-based pay system,” Armstrong says.

Those in risk-prone places like Wellington will pay for it.

“At the moment there is still an element of cross-subsidisation going on in the industry. We see that across the Earthquake Commission (EQC) as well. It’s a community rate from North Cape to Bluff,” Armstrong says.

He notes commercial policyholders are already paying premiums according to where their properties are located, how they’re constructed and the type of soil they’re built on.

While high-risk residential policyholders in Christchurch for example have already had their premiums bumped up, this risk-based division may become more pronounced.

Armstrong says insurers will “return to more disciplined underwriting”.

Asked whether he believes people in Wellington will struggle to get insurance, he says “not at the moment”.

IAG has no intention of withdrawing from Wellington and reinsurers are still committed to the New Zealand market. Reinsurers have recovered from Christchurch and are benefiting from a world currently awash with capital.

IAG not directing customers to EQC  

The other change the Kaikoura quakes have brought about is around the way claims are handled by EQC and private insurers.

Armstrong says the Insurance Council of New Zealand (ICNZ) is working on a memorandum of understanding with EQC, to enable private insurers to deal with their clients’ claims on the first instance.

Up until now, those who have suffered damage to their homes, contents and in some instances land, due to a natural disaster, have had to submit claims with EQC first.

The government agency has assessed these claims, passing those over its $100,000 cap on to private insurers.

This system has seen a substantial number of new claims continue to drip through to private insurers nearly six years after the quakes, causing insurers to buy additional reinsurance and increase their provisions for the quakes.

“Scopes were wrong, clients, as they’ve been paid to go and do their own repair work, have discovered further losses,” Armstrong says.

“We’re frustrated that we haven’t had clear sight of this. However there’s a working party currently with EQC and the rest of the industry to highlight some of the gaps in the data.”

The escalation of costs in the wake of the Canterbury quakes saw IAG buy another $900 million of costly emergency reinsurance, known as Adverse Development Cover, in the 2016 financial year. This is a significant amount, relative to the $4.4 billion of regular reinsurance cover IAG Group Limited has exhausted for the February 2011 quake.

Should we brace ourselves for a similar scenario with the Kaikoura quakes?

Armstrong says IAG is adamant to avoid “claim fatigue”.

“Most of our [Christchurch] clients were subjected to multiple agencies - EQC, ourselves, external loss adjustors, external claims advocates - all of those people creating confusion. Confusion because they expected one party to talk to them.

“We’re now working, trying to get a collaborative agreement with EQC so that we can actually approach this as one party - a seamless approach from the customer’s perspective.”

Armstrong says this requires real time data being made available to both EQC and private insurers.  

While the ICNZ is still working through the details of the arrangement with EQC, Armstrong says in the meantime: “If the customer comes to us, we’re not directing them to EQC necessarily. We’re dealing with the claim ourselves.”

Insurance industry taking matters into their own hands

The pinch is that the EQC Act 1993 review, which was meant to be completed in 2013, but has now been pushed back to next year, deals with this issue around whether EQC or private insurers deal with claims in the first instance.

Insurers have been vocal in urging the government to get on with the review; Swiss Re a month ago saying the New Zealand economy is vulnerable to the risk of reinsurers charging insurers a premium for the uncertainty caused by the delayed review.

While it now appears the industry is taking matters into its own hands, Armstrong denies it is working “separately” from the government.

“There’s a reality here that we have to deal with the customer that’s got a challenged situation.

“Working with EQC and ourselves, how do we come to one solution? We don’t know if this is quite the right solution. We don’t know if this is where the review will end up, but what we are saying is, we have to have a seamless approach so that the customer is protected.”

Armstrong also acknowledges being involved in a claim from the get-go, should give IAG “comfort” that costs won’t keep escalating as they did with Christchurch.

Yet the bulk of IAG customers affected by the Kaikoura quakes have still lodged claims with EQC first. Armstrong says 7500 IAG customers have made claims with EQC so far, while 1500 have lodged their claims direct with the insurer.

He says it’s too early to tell what the total cost of the quakes will be for IAG.

He says the US$3.5 billion figure AIR Worldwide has said the insured cost could reach is “just a figure that a modelling agency rightfully does at the time. Most modelling agencies do this. Everyone’s under pressure to give figures as quickly as they possibly can.”

People waking up to the fact they’re under insured

IAG is reviewing the insurance freezes it has on quake affected parts of the country, from the Waimakariri River to the lower part of the North Island including Wellington, every 24 to 48 hours.

Armstrong says it has lifted restrictions in Christchurch, the West Coast and Buller. Nelson and possibly Marlborough may not be far off.

Freezes usually last for 30 days after a shake of a certain size but could be longer.

Armstrong assures property buyers, who need insurance to secure mortgages, will be able to take over the insurance cover the vendor had on the property.

Asked whether mortgage applicants have run into problems if the vendor of the property they want to purchase is under-insured, he says, “there is underinsurance regardless of this issue” due to sum insured.

While Armstrong is seeing some under insurance, he says, “What we are seeing is the knock-on effect outside the zone of freeze… People are immediately reviewing their covers and immediately waking up to the fact that they don’t have enough.

“We’re seeing a tremendous amount of activity in reviews going on at the moment… As the zones open up, we’ll see the same activity.”

Asked whether insurers are secure enough to deal with a catastrophic quake in Wellington, in the wake of 2010/11, Armstrong says:  “An organisation like IAG has got incredible backing from a parent in Australia.

“It is a market lead in terms of the size of the organisation, it has a high S&P rating, it has a superb reinsurance programme.”

He says insurers’ reinsurance programmes have improved immensely since before the Canterbury quakes, with the Reserve Bank now requiring them to have enough capital to get through a one in 1000-year event. 

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39 Comments

If we had a truly competitive insurance market IAG wouldn't get away with socializing the risk as a competitor would come along and take the less risky business by offering lower premiums just leaving IAG with the risky business.

Auckland - volcano- oh dear

Rubbish. The risk has NOT changed. They merely see this as am opportunity to increase premiums

Too true! What were once vices are now habits. This corporate besotted government has let all the insurance companies, and to boot, provided EQC as the pathfinder, away with blue murder over the Canterbury EQ claims. What sort of country are we that has a government that flouts the laws enacted in to protect its citizens and use them instead to persecuted them . This government runs our country like a corporate. Corporates do not give a toss about minority shareholders, except in our case we are known as tax payers. Good grief, the insurance companies have been given open slather, they are corporates too, predators in the dark? Not at all why bother to hide.

Who's saying the risk has changed? Do you not agree that higher risk property owners should have to pay a premium? I'd be expecting a reduction to my house insurance cost in a low risk area.

Wellington already pays much more they can't increase them further due to recent earthquake. That has already been priced into higher premiums wellingtonians have been paying for decades. My premiums more than doubled after chch as did a lot in Wellington it wasn't until recently they came back down some. Any excuse to ramp them up and get away with it as people fears are heightened.

Absolute scum move

So we need to shift to an elevated part of Northland?
Joking aside, very sensible and I would expect that location differentials will in future be applied to other risks. Low lying properties near the coast?

You are right Chris-M. I spoke to the Commissioner for the Environment in July and she said we should be prepared for insurers to start making it harder for property owners to get cover for damage caused by the sea.

Jan Wright noted the Australian parents of the insurers that operate in New Zealand have exclusions for sea damage in their policies across the ditch, so it could only be a matter of time before they make similar moves here.

Tim Grafton of the Insurance Council responded saying, “If you get frequent enough events and the risk level goes up, then clearly insurers will have to look to respond to that.”

Here's a link to the story I wrote at the time... 

Already happening. Armstrong's statement that 'Insurers will "return" to more disciplined underwriting' (as though it'll be sometime in the future!) is likely to be code that the application of increasingly sophisticated GIS based risk selection that's been underway for some time now, is about to be accelerated .
Insurers are paranoid about brand backlash so you won't see blanket announcements about specific areas or types of property but industry players will see a quiet tightening in risk section criteria and progressive withdrawal of cover for properties with increased exposure, by various means. There are lots of ways to kill a cat without it realising what is happening.

Trouble is no part of NZ is risk free. A big EQ and an elevated part of Nortland might find itself not so elevated. For our size we have pro rata one of the longest coastlines of any country. All of that is obviously at high risk of a tsunami, and not just from one of our own EQs. Apart from Hamilton our largest cities are on the coast. So if they want to, and no doubt they do, insurance companies could justify premiums for risk on premiums at any location they choose. There is no competition, they all act in unison.

Hi Foxglove. Some parts of NZ are more EQ prone than others; see
http://www.teara.govt.nz/en/map/4416/new-zealand-regions-at-greatest-ris...
Not much volcano risk there either.

Chris-M, well yes thanks for that but do the EQ's themselves know that? Appreciate the boffins are doing their best & techno information is improving all the time but for example there has been a whole lot of fault lines only recently exposed. No fault or criticism intended but it is fair to say all the experts can only be an expert about a big EQ after it has happened. The entire Sth Island is prone & a large earthquake could hit at any location. So Collingwood is just as much at risk as Fiordland. Just look at the Sthn Alps. What gigantic power forced them up to that height and not all that long ago, NZ geologically is but an infant. I am a Sth Islander. I am nervous.

Don't they do this already with motor vehicles.?
I recall the last time i insured a car being told that location and the theft rate from that area can alter the premium,so it follows that the same should be for property.
I can possibly see a time when, should you live in an earthquake prone area coverage will not be possible.

I can see the logic. But who can picture how Christchurch would have emerged without insurance assisting? Ghostchurch? And then the entire burden falls on the tax payer? It seems that commercial companies are very happy to rake in the profits, and pass on the risks to customers and society as a whole. Something is not working here.

I California I don't know anyone with earthquake insurance. Perhaps we will have to get by without it.
https://www.bloomberg.com/news/articles/2014-08-25/88-percent-of-califor...

no cover from Tower if you live near a penguin colony then?

Tower will provide cover for penguin colonies but will only meet claims for those that are in the Artic

Apologies to Tower they may well cover Penguins in the Artic wherever that may be, but my earlier note should have read Arctic.

"user-based pay system" ?

Well, Christchurch was not a earthquake hot spot before 2010, and look how hard it got hit.

So those living on a hill ridge pay less because flooding is not possible? Plus the tsunami discount.

So we will do geological assessments whether a house is on crumbly or solid bedrock or reclaimed land?

And the North gets the volcano surcharge.

What about trees? They increase the risk of windfall, but decrease the risk of landslides.

Where will it end to assess all these risks?

No wonder our GDP per hour worked is decreasing.

Wasn't the whole purpose of state run insurance and EQC originally , so that the risk of earthquake prone areas is spread across the entire country? If people in these areas are going to have to pay more, then something is broken, and we will need the government to create another state owned insurance company.

"While high-risk residential policyholders in Christchurch for example have already had their premiums bumped up, this risk-based division may become more pronounced."

Perhaps I'm being naive, but I thought that the basis of insurance was that the risk was aggregated/averages across all policyholders.

The further we step away from that, The closer we come to the situation where only those who can prove there is no risk will be insured.

Exactly, that surely is the end game. Funny part is the buggers will still be there trying to convince you that you need to buy the policy for something that will 100% never happen and be doing it with a straight face. What's more some will buy it.

Tax payer ends up being the insurer.

If the insurance companies are going to opt out of earthquake cover over and above our EQC cover, which I think they should, their premiums would be a lot cheaper. The difference could then be added to our EQC earthquake cover. Then we would not have to deal with the insurance companies, the nightmare that they are.

There is merit in that but also complications. Perhaps if State Insce & Govt Life had nor been sold off that ability might exist now. The EQ's have cost far more than what EQC had salted away for a long period of time. So the insurance companies have been liable for the balance. How long would it take to build EQC funding up to cover all of that for future events. And then of course EQC's record for claims is hardly a shining example of integrity & efficiency, no better than the Insurance companies, probably worse considering how EQC have flouted the very leglislation that they are bound by. Finally how could such a body be trusted with all that public money. Perhaps they could buy shares in an insurance company, just like it appears ACC & NZ Super are doing to prop up Tower..

no good looking for an answer from insurance companies that are farming us like ants or sadly our govt,maybe some chinese insurance companies will come with their new developments.

Far from being 'farmed like ants' by the insurance industry, premiums in NZ are suppressed through the buying power of large Aussie insurers behind whose reinsurance programs NZ slipstreams.
That we also have one of the worlds most efficient primary layer risk transfer vehicles in EQC, is another reason we have access to such high levels of cover at reasonable prices.
Some commentators on this site complaining about gouging should investigate what comparable disaster cover costs in other similarly earthquake prone countries and provinces. It's an eye opener.
Also - the world is awash with surplus capital just now and with low interest rates, reinsurance has been a trendy place to park it. If capital supply and interest rates revert closer to historic norms, we will likely get a sharp reality check.
Wellington is a still developing story and is becoming more expensive for reinsurers every day. We are in no position to be bleating about reinsurers ripping us off, given our recent history. Short memories.

I will stick with my own reality based evidence,namely experience.there are plenty of reviews of big insurance companies on productreview.com.au that dont give the same fulsome praise,they all say they are rippy,possibly they are wrong?

You'd think then that new insurers would be falling over themselves to set up in this country, eh, if there is that much cream being made? But lets see ...........ahh, no.
Dots not joining between your 'reality based evidence' and the inconvenient truth that margins being earned on capital invested in general insurance industry in this country are not excessive by comparison with other sectors.

Here is a fair and just solution: Banks must share the cost of premiums since they are part owners of the house.
You buy a house and put down 20% so you pay 20% of the insurance premium - the bank pays 80%. This gets adjusted as the CAPITAL gets reduced.

Dollar swap exercise. Mortgagor would end up paying anyway.

Let's see from memory, we had way back. State , Govt Life, CML, T & G, Sth British, Phoenix, Norwhich, Royal Globe, Royal Sovereign, Victoria, Albion, National, New Zealand, Prudential, and quite a few more beyond my memory. There was then competition and a spread of risk. Nowadays there is the AIG & Suncorp groups and minions , Tower, FMG, Medical and a few others like AMP. So the two biggies have dominance over the consumer and from the History of the EQ process EQC & the government as well. Not much room or opportunity for new entrants really.

Most of the ones you list were hoovered up because they could not make enough return to justify their existence. NZ is too small for most new insurers to achieve scale but has a massive natural disaster exposure that is challenging to manage. Youi is having a crack and will put some heat on the biggies but they have their work cut out to make a dollar here. Digital underwriting/transaction models backed by international players have a chance of disrupting the Aussie duopoly but only in some classes of business.

Oh yes agree that is the reality both past & present. Idle speculation but how would it have gone if the 2010 EQ's had struck in the mid sixties. Those house policies were all sum assured & so both insured and insurers had to at least annually think about their exposure. Before you could get house insurance you required to pass an inspection to identify any defects or risk factors. A lot more experts around as assessors as each company staffed accordingly. Would suggest house by house there would have been a much more prompt and efficient response by the insurance companies, but have to be fair and remember CHCH has grown and sprawled. Of course in those days the only thing that changed the exchange rate was a devaluation and life meandered on as in any good British colony. Things have to change but the set up back then may have provided better results, residentially at least. Of course in those Days as well, the governments were much more concerned about their people than this one at present

Remember that insurance is about spreading the cost of what is essentially random risk. Earthquakes on active faults and flooding on the coast are not random. Hence, insurers do not cover known issues except if you pay an elevated premium. As insurers gain more information about events and customers, they reflect that information in the premiums.

Considering the money flowing out of Auckland to prop up other cities which are now known disaster zones, the country owes us.

I read an article in BusinessWeek some years ago, they discussed how in the US all policy-holders (as a result of statute) paid into a pool which was available for all in the case of disaster. The trouble was, it meant that people in a safe location in Ohio were subsidising those building on the coast in Florida. Thus there was a perverse incentive to build in risky locations. Moral hazard.

Plus those on the coast are usually the wealthy, so the poor were subsidising the rich. We see this in NZ when the owners of red zoned places on cliff tops or by the sea squeal like stuck pigs, and they get redesignated by Councils.

So largely I agree with the concepts behind the article. Sorry.