Although New Zealand has one of the world’s highest levels of residential property insurance coverage, the Reserve Bank (RBNZ) says rising rebuild costs, climate change and improved modelling of seismic hazards are leading to rising premiums and increasingly impacting insurance affordability and availability.
Releasing its latest Financial Stability Report on Tuesday, the RBNZ said insurance played a critical role in supporting financial stability in New Zealand because of the economy’s high exposure to natural hazards and the importance of residential property as a household asset and “a core component of bank collateral.”
While these emerging pressures are unlikely to be a risk to New Zealand’s financial stability in the short term, the report said “aggregate data may hide pockets of risk.”
The RBNZ estimated the total sum insured of New Zealand residential dwellings in 2024/2025 was around $1.5 trillion.
Alongside this, the Natural Hazards Commission Toka Tū Ake (NHC) estimated about 60,000 New Zealand homes aren’t insured.
"While insurance coverage of residential property in New Zealand currently remains high, emerging pressures from insurance affordability, underinsurance and insurance retreat from areas exposed to elevated flooding risk indicate financial stability risks may increase."
“Concerns over affordability, climate change, and dependence on global reinsurance mean the situation could change quickly and warrants monitoring," the report said.
Affordability
With rising house insurance premiums, insurance affordability has been in the spotlight.
The report said at the moment, the national average annual premium or domestic buildings cover is about $2900. This could rise after a review is done of the Natural Hazards Insurance Levy.
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 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.
The options put forward for consultation are 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.
But in November, the Government announced it had pushed out its decision on whether to increase this levy.
In February, NHC chairman Chris Black told the Finance and Expenditure Select Committee that the levy would have to go up at some stage.
The Financial Stability Report said while for many New Zealanders, these costs remained manageable, “pockets of vulnerability likely exist, particularly in higher risk areas or for those with lower incomes, such as retirees”.
Underinsurance
The report said the scale of potential underinsurance doesn’t currently appear large enough to pose a systemic threat.
But the size and location of underinsured properties remain uncertain, the report said.
“Underinsurance could amplify losses following a major event, particularly if rebuild costs continue to rise or if inflation exceeds adjustments to sum-insured values.”
The report said consumer survey evidence shows people with insurance can struggle to figure out what’s an appropriate amount to insure themselves for.
“Underinsurance may also be a rational choice for policyholders trying to manage the overall cost.”
Insurance retreat
Only a small percentage of homes are exposed to near-term risk of losing insurance, the report said, and if insurance retreat did happen, “national insurance penetration would remain robust by international standards”.
“However, the distribution of retreat risk is uneven, with coastal communities exposed to sea level risk and erosion being the most affected, with inland properties facing high flood or landslide risks also at risk of increasing exclusions or non-renewal.”
Potential impacts on the banking sector
The report said previous large-claims events have had limited impacts beyond the insurance industry.
But should affordability pressures, retreat or underinsurance broaden materially, the report said several areas could end up impacting the banking sector.
This includes:
- Credit risk through collateral impairment: Properties that aren’t insured face depressed market values and may be unsellable which could limit banks’ recovery options
- Borrower disposable income: Rising premiums increase household outgoings, potentially affecting debt servicing capacity especially in hazard exposed areas, the report said
- Reduced mortgage ability: The report said banks could choose to “red line” areas with high insurance uncertainty, creating pockets of financial exclusion and potential price declines
- Operational and legal exposures: Mortgage contracts require borrowers to have insurance but banks lack the tools to systematically monitor this
- Market functioning and confidence: High-profile cases of uninsured losses could erode public trust in insurers and lenders, even where aggregate risks are low
“Banks have begun to explore responses to these risks,” the report said.
“Some banks get information from individual insurers to identify under-insurance of properties in their mortgage portfolios. Some are assessing physical risks, such as flood risk, at loan origination rather than relying solely on whether a property is insured.
“For properties identified as underinsured or in high-risk areas, responses are being considered such as restricting top-ups or limiting loan-to-value ratios for new lending.”
While insurance uptake remains high, immediate financial stability risks appear limited and this offers an opportunity to strengthen monitoring and data collection, the report said.
“Better data will support more accurate identification of regional vulnerabilities, the scale of affordability challenges, and the likely pace of insurance retreat.
“We will continue to monitor developments in insurance affordability and availability, and maintain regular dialogue with banks, insurers, industry associations and other regulators.”
3 Comments
It's not just sea-level and it's not just weather events.
We are on a global de-growth path now - whether that is understood or not.
Which means we will increasingly be unable to insure ourselves.
Re; ditto
Like all central banks, the RBNZ is completely ignoring that these skyrocketing costs for timber, concrete, and construction labor are the direct consequence of its own past monetary expansion and artificially low interest rates, which diluted the purchasing power of the currency and overstimulated the property sector.
At the same time, the state’s historical socialization of geographic risk—through subsidized disaster insurance and lax zoning approvals—created a massive moral hazard that encouraged unsustainable development in high-risk zones. Now that private insurers are finally using raw data to price risk accurately, the central bank laments the resulting "affordability crisis" and "insurance retreat," masking the reality that the market is simply attempting to correct decades of state-induced monetary and regulatory distortion.
Agree with the first sentence completely - and the rest is a different way of stating what I did upthread.
But the thing to note is that this isn't a correction; it's a trend.
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