Reserve Bank says it wants banks to have a much broader sense of insurance coverage across their loan portfolio as emerging insurance pressures ‘indicate financial stability risks may increase’

The Reserve Bank wants banks to have a much broader sense of insurance coverage across their loan portfolio, its acting Assistant Governor of Financial Stability Angus McGregor says.

Banks are very engaged on these issues at the time that lending is first established because ensuring that a property is insured is often a requirement, McGregor told reporters at an online press conference on Wednesday.

McGregor says: “We are working closely, both with insurers and increasingly with banks to highlight this issue and to really encourage banks, in particular, to be more focused on insurance coverage over the duration of the term of a loan rather than just at the beginning.”

This comes as the Reserve Bank (RBNZ) released its latest Financial Stability Report. The report says insurance plays 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 says “aggregate data may hide pockets of risk”.

"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 says.

Data sharing between insurers and banks

McGregor says they're looking forward to seeing what banks could do at an industry level to improve their understanding of the risks posed in this area, he says.

When pressed further on what he would like the banks to do more of, McGregor said: “What we’d really like … is to have banks have a much broader sense of insurance coverage across their loan portfolio.” 

“There are some insurers and some banks, who are increasingly working closely together to ensure that data is more free flowing. We would really like to see that, ideally at a system level, so that lenders and insurers are sharing information more effectively.” 

Insurance affordability review

McGregor says the RBNZ is working closely with other agencies and industry members on the insurance affordability review. 

This review, which will take six months, was first announced by the Government in February. 

“One of the things that we’re looking to get out of that review is to get much better data, much better insights on affordability issues and to some extent, availability issues as well, and then [we’ll be] using that data to inform us at a system level," McGregor says.

This was not just a RBNZ issue, he says.

“This is a broader financial system issue to help us understand what some of those pressures, issues and concerns are, and then what any policy responses might be.”

The RBNZ estimates 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) estimates about 60,000 New Zealand homes aren’t insured.