Insurance affordability and the financial settings are a 'downstream symptom' of increasing risk, Natural Hazards Commission chief executive says, as Southern Response continues to expect new claims

About 60,000 homes in New Zealand are not insured, according to Natural Hazards Commission Toka Tū Ake chairman Chris Black.

The commission’s chief executive Tina Mitchell says while there has not been a massive decrease to its levy income, suggesting people are still buying insurance, whether they’re insured to the full sum amount is another question.

Mitchell, Black and the NHC’s chief strategy officer Michala Beacham spoke at Parliament's Finance and Expenditure Committee meeting on Wednesday about the NHC’s annual review for 2024/2025.

“Our levy income hasn’t reduced so we know the national portfolio is well insured - whether it’s fully insured is not something we would have sight over,” Mitchell says, as the NHC only covers the first $300,000.

“We know what the number of houses are in New Zealand … For each one of those houses we would expect to get a levy income … We are not seeing a massive dip in our levy income which suggests everyone is still buying insurance, at least to $300,000.”

Black says there were three important components: access to insurance, affordability of insurance and adequacy of the insurance.

“You can have access to something that’s affordable but it’s not adequate.”

As part of their insurance premium, homeowners pay a Natural Hazards Insurance Levy.

This money goes into the Natural Hazard Fund and is used to cover claims after a natural hazard event. The fund is also used to buy reinsurance from international financial markets, meet the costs of administering the Natural Hazards Commission Toka Tū Ake (NHC) Scheme and goes towards research and education.

For each natural hazard event, the NHC currently pays $300,000 towards rebuilding or repairing a residential home. This is called a building cover cap and currently, the Natural Hazards Insurance Levy is 16 cents per $100 of the insurance cover amount.

NHC Levy 'does need to go up at some stage'

In November, interest.co.nz reported the Government was pushing out its decision on whether to increase the Natural Hazards Insurance Levy with Finance Minister Nicola Willis saying at the time insurance was a major cost-of-living pressure for New Zealanders.

The Treasury had been consulting with industry professionals, experts and community representatives to look into the financial settings and levy settings under the Natural Hazards Insurance Act 2023. Options were put forward to maintain the levy at its current rate or to bump it up.

The options put forward for consultation were to maintain the levy at its current rate of 16 cents per $100 of cover, or increase the rate to either 22 cents, 24 cents or 25 cents per $100 of cover. In the consultation document, 24 cents per $100 of cover is considered the technical levy rate.

If kept at 16 cents per $100 of cover, this would be $480 per year. If it went up to 22 cents, it would be $660 per year and $720 if it went up to 24 cents per $100 of cover. For 25 cents per $100 of cover, it would be $750 per year.

The $300,000 building cover cap, the maximum amount the NHC can pay for a building claim, was also looked at, with options to keep it the same or increase it to $400,000.

Asked about the delay, Black says: “That’s a decision for the Government of the day and at the moment, I think the priority seems to be on the review of private sector insurance so I imagine it will come back onto the table after that but it does need to go up at some stage.”

Last week, the Government announced it was launching a six-month review into home insurance affordability and costs.

Black says the NHC could handle the costs that come with current weather events but they needed to be set up for “the big event.”

“Ultimately, there’s a Crown guarantee if a big event happens and we haven’t got enough money for that," Black says.

Using a model event for a magnitude 7.8 earthquake in Wellington, Black says if this costs $15 billion, the way it would be funded is the NHC has $10 billion of reinsurance and an excess starting at $2.5 billion.

“So that goes up to $12.5 billion. So the Crown would be on the hook for above that and they’re also on the hook for the balance from $2.5 billion back down to our current balance … which is currently about $600 million.”

Second riskiest country in the world

Mitchell says last year the commission secured $10.3 billion worth of reinsurance.

“So we went up by a billion but for the same price that we paid the year before."

The scheme was 80 years old and had a longstanding relationship with the capital markets, Mitchell says.

“When we are the second riskiest country in the world and when we’ve got the financial pressures that the country is experiencing at the moment.”

Talking about the rising risks of climate change, Mitchell says: “If I can start on an optimistic note, the global commentators say ‘look if anyone can do it, New Zealand can actually’ because we’ve got some really good foundations in place, a fantastic public-private scheme … [they also say] ‘no one has all the answers but you’re only five million people so if you guys can join yourselves up together and get going, anyone can.’”

Insurance affordability

Mitchell says affordability is a live issue and a fair issue for everyone to think about.

“Insurance affordability and the financial settings are a downstream symptom of the real problem. I think the big problem, the core problem, is that the risk is increasing.”

Mitchell says what was driving the weather-related events in New Zealand were changes in weather patterns and the amount of tropical storms coming from the north.

“Now New Zealand has a double whammy, we’ve got catastrophic risks of earthquake, volcano, tsunami - the things we’ve always lived with, and now we’ve got this new layer of climate-related risk that we’re all adjusting to as well.”

An important place to start is with data and information to understand risk and then, to look at ways of reducing the risk, Mitchell says.

“Until you shrink the risk, then you look at the financial settings and the solutions and the things that you can do for where you can’t eliminate the risk at all.”

With the Government's National Adaptation Framework, which includes creating a national flood map and introducing legislation clarifying the responsibility of local government by requiring adaptation plans in the highest priority areas, Mitchell says the NHC were helping with ensuring there’s a national view of the science and the risk.

Southern Response and new claims

Asked about on-sold and reopened claims in Canterbury, Mitchell says the original wave of claims have been settled.

“What it is, is people come in to revisit that claim for the property. The most common catalyst is people going to sell the house and doing an inspection and finding damage they hadn’t noticed before.

“Or doing renovations, or in other situations there are certain companies that proactively go street by street, offering to do free inspections … over 50% of those incoming queries are from those companies.”

Mitchell says sometimes it was earthquake damage and other times it was a normal end of life.

Southern Response were also anticipating these types of claims.

The Government-owned company also had its annual review before the Finance and Expenditure Committee on Wednesday.

When asked how long things were expected to continue, its chief executive Casey Hurren says there will be new claims that are yet to come through the door.

Two thirds of their policy holders are the original homeowners and the average age of Southern Response’s policy holders was 65.

“What you’d expect in the next 10 to 20 years is that group would look to sell their house and then may discover that there are some issues with the original appearance. So it still could go on for quite a long time as people move on and buy, and sell, houses in Canterbury.”

Hurren says the buying and selling of property is often the catalyst for discovering there’s a problem.

What Southern Response planned to do was track down people and potentially go to their properties to check if things were done properly the first time, Hurren says.

“We want to do it in a sensitive way.”

“We don’t want to spook people or scare people unnecessarily so we’re looking at smarter ways of doing it like around land conditions - so if it was poor land at the time, or if there was certain characteristics of the property … was it a heavier property, heavier cladding - that might mean there was more damage as well," Hurren says.

“So we’re doing a lot of that desktop work at the moment to try and assess that."

With some of these claims yet to come through, Hurren says: “If we sat on our hands and did nothing, it would be another 20 or 30 years we could potentially be getting claims, just as that demographic ages and moves on into downsizing or retirement homes."

“If we can do the work that we’re doing at the moment, well then we’re hoping we can bring that forward.”

“That’s why for us, there isn’t the opportunity for us to just say ‘sorry, we’re packing up and closing down now’ because for some of these people, they’re going to discover this problem as they’re dealing with their largest asset thinking they’ve worked hard all their lives and then all of a sudden discover that there might be a problem," Hurren says.

"So that’s the difficulty in all this.”