HOT TOPICS:   Election 2014  |    Regional development   |  OCR                                   RESOURCES:    Economic calendar   |  Fix or float calculator

Find your KiwiSaver fund

The comment stream

Reader poll

When do you think the Reserve Bank will resume increasing the Official Cash Rate?

Choices

Andrew Hooker says the way insurers are acting makes a case for new regulation to ensure they play 'fair' with their market dominance

Posted in Personal Finance
If quake risk is no higher where you live, why should premiums rise, asks Andrew Hooker

By Andrew Hooker*

Insurance is all about risk.

When someone applies to insure their house, the insurance company assesses the risk of a claim happening and the cost of such a claim and then allocates a premium.

It might sound complicated but it’s actually rather simple.

That is why recent statements by the insurance industry about premium increases are difficult to understand.

Whilst it may be that the risk of damage by earthquake in Christchurch (and even maybe now Wellington) has increased over the last few years, there does not appear to be evidence that the risk of earthquake in other parts of New Zealand is any more now than before the first Christchurch Earthquake.

But there is talk of premiums doubling and massive increases around the country.

Rather than genuine premium increases to cover increased risk, what the insurance industry appears to be doing is to recover now what it should have charged years ago but didn’t. 

The insurance industry blames its reinsurers, but that is just a red herring.

The reinsurers rely on the insurers to collect the premium, and the relationship between the reinsurers and the insurers should be no concern of the insurance company’s customers. 

Why is it that the insurance industry seems to be able to justify price increases based on historical losses?

Would it be strange if Noel Leemings doubled the price of televisions because it needed to recoup losses made in previous years on the sale of those televisions? The public wouldn’t stand for it.

But the insurance industry seems to believe it can justify enormous and potentially unaffordable increases in domestic insurance rates on the back of events that happened over two years ago. 

Surely when insuring a house, the customer should be charged a premium based on what the risk is to the insurance company on the date the insurance is taken out, not based on the fact that the insurance industry has lost its shirt in an event more than two years ago.

Which leads to another issue.

Some insurance companies have now in Wellington taken the hard line position that they will not insure new risks for the meantime.

This is causing a crisis in which people may not be able to settle recent houses purchases if they cannot obtain insurance.

In New Zealand, there is no government insurance company, and the private sector companies cannot be forced to insure anything if they do not want to. 

But insurance is not a luxury, it is a necessity of everyday life.

The insurance industry needs to understand that it has social obligations to its customers and potential customers that go much further than its need to make quick profits.

In years gone by, the government may have regulated to require the insurance industry to act more responsibility, and this has certainly happened in overseas jurisdictions such as Australia and the United States of America.

But in New Zealand, the insurance industry is left to entirely self-regulate in this area, and the result is that the consumers are left powerless largely because of knee-jerk reactions by insurance companies.

And when they can attain insurance, they are paying rates that are through the roof so the insurance companies can recoup losses from events that have nothing to do with the risk they are presently insuring.

No one wants a market that is over-regulated or dictated by the government.

But perhaps it is time that the government considered stepping in with some form of controls over this industry.

-------------------------------------------------------------

*Andrew Hooker practices as a specialist insurance lawyer in Albany on Auckland's North Shore. He is also director of Claims Information Specialists Ltd, an insurance information website.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

21 Comments

Good article. You would think

Good article. You would think that after our second biggest city was hammered and the EQC/insurance companies relationship was really tested there would be some meaningful lessons and reforms to the system.

Why is it that the insurance

Why is it that the insurance industry seems to be able to justify price increases based on historical losses?
Would it be strange if Noel Leemings doubled the price of televisions because it needed to recoup losses made in previous years on the sale of those televisions? The public wouldn’t stand for it.
But the insurance industry seems to believe it can justify enormous and potentially unaffordable increases in domestic insurance rates on the back of events that happened over two years ago.
 
Orion, the power lines company owned by Christchurch and Selwyn councils believes it has similar, but indefensible rights.
 
To summarise, the people of Christchurch are faced with increases in the lines charge part of their power bills if the Commerce Commission approves Orion's request.
 
On average, it appears that lines charges would rise by 18.5 per cent in 2015, followed by further increases of 4.2 per cent each year from 2016 to 2019.
 
Orion wants the ComCom's permission for the price rise because its prices are restricted under a "default price-quality path" (DPP) set by the regulator. Under the rules it can ask for a "customised price-quality path" in certain circumstances, such as if its activities are hit by a catastrophic event.
 
In a December 2010 policy paper, the commission confirmed its role "if a catastrophic event occurs is to provide certainty to a supplier that it can recover the prudent costs of supplying regulated services".
 
Orion says its costs have increased because of the earthquakes and argues that "our regulatory DPP means that we have been unable to adjust our prices to match our revenue with our costs".
 
The price rise would enable it to make a commercial return on the additional investment required by the earthquake damage. As Orion explains: "Cost recovery therefore includes recovery of our fair but not excessive cost of capital over time."

And yet the impression the

And yet the impression the industry has given to customers here is that premium rises are the result of reinsurance costs sky-rocketing since the Christchurch earthquakes.
 
When asked about the statements, one prominent fund manager with investments in insurance companies told the Sunday Star-Times: "The best time to own a general insurer is after a catastrophe."
 
The share prices of Suncorp and IAG appear to confirm that. IAG shares have risen from A$3.75 in late 2010 to around A$5.80, while Suncorp's have gone from trading between A$7 and A$8 in 2010 to over A$12.
 
With so much bad news about, policyholders are amenable to premium increases, the fund manager said. The reinsurance story provides good cover for a one-off opportunity for a step change in the profitability of general insurance.
 
"They put their rates up.
 
Households are accepting because there is a lot of bad news and a lot of red ink," he said. Read more

Would it be possible for a

Would it be possible for a broker to act as a go-between with an off shore insurer? I seem to recall some businesses have done this and so unfairly bypass paying the Fire Service Levy?
I heard someone on the radio mention in the last couple of days that they have done just this because of the premium hike presented to them here. The overseas company accepted the risk for a lower premium  because the risk was spread much wider.

CREDIT CARD INTEREST RATES

CREDIT CARD INTEREST RATES !
INSURANCE PREMIUM INCREASES !
 
IS THERE A SUBJECT THAT YOU'RE NOT AN EXPERT ON HOOOKAH ?
IF I LENT YOU MONEY 2 YEARS AGO AND YOU DEFAULTED, SHOULD I NOT TAKE THAT INTO ACCOUNT WHEN LENDING YOU MONEY IN THE FUTURE HOOKAH ? DO I WANT TO INSURE MY HOUSE WITH AN INSURANCE COMPANY THAT CONTINUES TO MAKE LOSS AND PLANS TO DO NOTHING ABOUT IT ? NICE BUSINESS PRACTICE THAT'D BE !
FEAR MONGER FEAR MONGER FEAR MONGER

YOU'RE NOT WRONG , COBBER ,

YOU'RE NOT WRONG , COBBER , HOOKAH IS ALL HOT AIR AND SMOKE !!!

Lower case not working in

Lower case not working in space?
As it happens I agree with the writer's main premise. The business model of the insurance industry as I understood it, was that they effectively had 100% gross profit margins in good times, but they would keep a reasonable portion of those premiums for the years when a catastrophe occurred, and then they would make a significant loss. After the catastrophe life would return to normal.
It does seem to a large extent that presumption was wrong; they kept all the money in the good years; had the year or two of losses, and now want the losses made good while keeping all the earlier profits. In Wellington's case they are getting their retaliation in first, sort of like the Lions rugby team years ago in South Africa.
I can accept that may be an oversimplification, although the fact Wellington has some earthquake risk is hardly new news. And the insurance companies have a product that for anyone with a mortgage is compulsory. Some regulation would seem in order; although it could be difficult to manage through, I accept.
 

In space, no-one can hear you

In space, no-one can hear you shout...
 
Perhaps with the insurance companies, it's a variation on the theme of privatisation of profits, socialisation of losses.
 
As I understand it, a lot of the NZ insurance companies are underwritten by overseas funding providers, so other disasters outside of NZ will also have had an effect on the cost of supplying payout money.

Yes, but by the same token

Yes, but by the same token the premiums will be coming in world wide.  Whats hurting is AGW and more so in the future than EQs.
regards

Premiums going through the

Premiums going through the roof and when it comes to the crunch backsliding by the insurance companies when it comes to paying out.  It undermines the proposition of taking out insurance.  With a lot of people under significant financial stress (upcoming morage interest rises), I wonder how many people will give up on it.  How many more natural disasters have to occur before it becomes so expensive that a significant number of people will dispense with it.

Indeed...right now I have to

Indeed...right now I have to have insurance, but when Im 70+ and freehold do I still need it?  no, not when I have to eat.  At the rate premiums are rising OAPs for instance wouldnt be able to afford such "luxuries". So worst case WINZ would have to house me for my last few years, that way I eat now on the $50 saved per month or not....quite an easy choice really (sorry kids).
I dont know that it will be dispensed with, I suspect first it will come down to our insurance companies wont be able to get re-insurance so will either do policies excluding EQ or wont do policies, bye bye housing market overnight.
regards
 

We are building a house right

We are building a house right now and this is one of our considerations.  I am trying to make the house strong enough to withstand a decent earthquake.  It is on flat non flood prone ground that is well above the water table.  Single story, Tin roof, Extra high wind loading zone bracing design.  All cost little or no extra at this stage.  Even if the brick facard fell off, that may not be such a problem.  We could fit fire sprinklers.  If insurance went to say $4,000 a year, you would seriously consider dropping it.  The way the insurance companies are behaving in Christchurch is only going to get worse if we have any more disasters, so we may be wasting our premiums anyway.
If they were smart the insurance companies would get far more precise about the risk weightings in their premiums for every house.  It is inevitable that this will happen at some stage.  Somebody will work out that they can safely undercut the market by reducing the premiums for low risk house designs in low risk locations and leave the rest of the higher risks to the other companies.  The rest will all be forced to follow suite, so we will all end up paying insurance more targeted our the risk.

Error, Sorry

Error, Sorry

I think Stephen L

I think Stephen L encapsulates it nicely. I am a GA pilot and insurance for aircraft follows the same model. A high profile aircraft accident in the US has led to significant insurance increases all over the world for aircraft owners. The risk is easily measurable, but insurance agencies are milking a market that has little or no way to challenge them on their business practices. Insurance companies seem to be acting like banks, (many of them are) and use big words and obfuscating language to confuse and confound non-experts and influence Governments. this is about getting richer not providing a service.

One comment that came out of

One comment that came out of the Japanese Tsunami was that only 10% of the properties were insured. Wheras in Christchurch it was something like 90%. That is why Christchurch was such a big disaster for the insurance industry.
 
But this does raise the question of how does the Japanese property market work, how do you get a mortgage if you are not insured? Some investigative journalism on this issue wuld be great.
 
I know the building/architecture community is putting a lot of thought into buildings that not only the occupants survive the disaster (the focus of the building code) but the whole building survives. And there being back up services like rain water collection that in normal use would water the garden but in an emergency could be used for other things. This change in thinking is because insurance has not being as effective as people hoped. People whose houses survived the earthquake have been able to move on with their lives, wheras people whose houses were damaged but had insurance are in limbo for years. 
 
I wonder if you had a well designed house, took precautions like fire alarms and had back up systems if insurance is really worth the money.

In New Zealand we have the

In New Zealand we have the culture that being insured is the safe, sensible thing to do. But if insurance premiums keep rising at some point the sensible thing to do is self insure. To use the money you would have used for insurance to instead take more precautions to minimise risks and to use the remainder of the money to increase savings.

Mr Hooker for a past "

Mr Hooker for a past "  insurance salesman" you seem to have forgotten quite a few things. Insurance is essentially the spreading of risk across a large number of parties. In addition all insurance companies in NZ buy reinsurance from overseas markets or reinsurers so the cost they pass onto the end customer here is directly driven by the cost of reinsurance they buy. 
Insurance is essentially renting someone's else's capital for a fixed period of time. And like every other market is subject to supply and demand.  When there is plenty of reinsurance capital and capacity retail  insurance prices are low and the opposite applies. 
Look worldwide at the number of natural disaster and man made disasters over the last 5 years and you will get an appreciation as to why reinsurance costs are high.  Reinsurers and insurance companies are not benevolent societies. They like any other company are there to make a profit and return money to its shareholders. 
 
In New Zealand we have been "lucky" for a number of years and benefited from relatively low insurance costs. Coupled with this we have been able to buy "full protection"  from almost all perils.  This is not the case in many countries where natural disaster is either excluded or sublimited as the case is in California, Many states in Tornado alley in the USA and Japan.
If you want low insurance costs be prepared to accept lower forms of cover.
Interestingly everyone is having a go at Insurers where it seems to be forgotten that the EQC increased its levy by 300% on all homeowners. This makes up quite a large proportion of your insurance costs. Once again this increase is directly driven by the international reinsurance market and reflects the costs that EQC incur in purchasing the Naural disaster insurance for NZ.  
Moving to a sum insured value rather than a open ended SQM basis is not the end of the world and simply puts NZ on equal footing with other countries. You choose the value , you choose the cover you want so you still have control. Additionally your policy still covers you for all the same perils it did previously. parts of Australia have flood exclusions, Japan has EQ exclusions, USA has Hurricane, Tornado, and EQ depending on where you are. 
New Zealand you don't know how lucky we are! 
Insurance is a privilage not a right. 
 
 
 

       

 
 
 
 

Some interesting comments   A

Some interesting comments
 
A couple of points ..
With 1.6 million residential houses in new zealand at (say) an average annual premium of (say) $1000 the total industry is worth $1.6 billion. That is not particularly large compared to say Fonterra with a $15 billion annual turnover. Australia with 9 million residences is a $9 billion industry.
 
Andrew Hooker's point about restrospective recovery of past losses does have some validity. The Insurance companies were caught asleep at the wheel and do appear to be over-reacting. The point he is making is akin to the "Lloyds Names" insurance business of old where only wealthy "names" were invited to participate. They made a lot of money every year. Year after year. Occasionaly they took big hits. Often some "names" were wiped out. But the point is, a name who survived for another day, to go again, didn't charge double the next year to recover past losses. They either crossed their fingers and participated again the following year, or they didnt. But then, Lloyds is no longer a "private club", it was corporatised, floated off as a public company, failed, bailed out and is now in the arms of RBS or one of those other Merchant Banks

The FMA and the RBNZ do have

The FMA and the RBNZ do have some regulatory power over insurance companies. It is suggested that every insurance company active in the new zealand market should be required to publish annual audited accounts so the public can see for themselves just how profitable the industry is, and how much is being made and salted away (or siphoned off) in the good times. Sunlight is always the best disinfectant.

Good grief. People listen.

Good grief. People listen. New Zealand will NEVER pay back the insured losses from the Canterbury Earthquakes in most people's lifetime! With current claims at $35billion and rising the earthquake premium collected in nz prior to the quake was a dust mite in comparison. If you think Insurance is ripping you off. Don't buy it!