Commerce and Consumer Affairs Minister Kris Faafoi tells insurers to communicate price and policy changes more clearly, but won't force them to ensure insurance remains accessible 

Commerce and Consumer Affairs Minister Kris Faafoi tells insurers to communicate price and policy changes more clearly, but won't force them to ensure insurance remains accessible 

The Government is warning general insurers not to spring price and policy changes on their customers.

The message from Commerce and Consumer Affairs Minister Kris Faafoi follows the country’s largest general insurer, IAG, on March 4 adopting a new approach to pull back from writing new contents insurance policies in Wellington.

IAG’s move signifies another step towards it reducing its exposure to Wellington. In July last year it announced it was following Tower in using a risk-based pricing model, which would see it more aggressively hike premiums for homeowners in flood and earthquake-prone parts of the country.

Speaking to interest.co.nz, Faafoi said the issue of accessibility to insurance cover wasn’t bad enough for him to justify stepping in.

“We’re a long way away from intervention, but we’re obviously watching it very carefully, because risks [around climate change and more severe weather events] are increasing,” he said.

“Insurance cover for kiwis is extremely important to the government.”

Asked if he was concerned that taking a more heavy-handed approach would spark a backlash from reinsurers, possibly prompting them to exit the New Zealand market, Faafoi said: “It’s a delicate market.

“We’re going to be very careful about what we’re saying, which is why I think the insurance sector needs to take a lot more responsibility.”

Faafoi said he hadn’t seen signs of the general insurance market being uncompetitive, despite IAG and Vero (which part-owns AA Insurance) accounting for about 70% of the market.

Nonetheless, he said: “When you do get a decision like this around coverage, you watch things pretty closely.”

IAG's change of approach towards contents insurance will affect all its brands, including AMI, State, NZI, Lumley and Lantern Insurance, as well as the products it underwrites for the likes of ASB, Westpac, BNZ and The Co-operative Bank.

It's also significant because as of July, the government-run Earthquake Commission will no longer provide up to $20,000 of cover for contents damaged in a natural disaster. 

'You can’t just go from zero to a hundred'

Faafoi said following the Canterbury and Kaikoura earthquakes it was well-known that insurers were applying risk-based pricing models to home insurance. Yet IAG’s move was the first he’d seen of contents cover being affected too.

“From my perspective, they [insurers] need to do a much better job of informing their customers as to why this is happening,” he said.

“They also have to be mindful of what price increases, what coverage changes, mean to the average consumer.

“Because you can’t just go from zero to a hundred in a short amount of seconds without someone being shocked.”

IAG has been vague about its new approach towards contents cover in Wellington.

It said on Monday it was continually reviewing its approach to risk in Wellington, and was giving "priority to existing customers with regard to contents insurance”.

The company said it was still writing new contents business in Wellington, but wouldn’t specify whether this meant it would insure say 5% or 80% of people who applied for cover.

IAG also refused interest.co.nz’s interview requests.

It isn’t the only company that's been cagey about changes to its risk appetite.

Tower last year misrepresented the changes it made to its pricing, to the point its CEO during a Radio NZ interview wrongly lead the public to believe that 97% of Tower customers would receive home insurance premium decreases.

While changes at Tower and presumably IAG largely relate to earthquake risk, Faafoi said the Government was working with insurers to figure out how to protect communities at risk of climate change-induced flooding.

Climate Change Minister James Shaw last month told interest.co.nz insurers were “acting very responsibly”.

He assured insurers and banks wouldn't end up being the ones to essentially decide who would pay for climate change.

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?

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22 Comments

Kris Faafoi is a busy man , his work ethic is very good, he is across many details and onto many current issues, and one has to be impressed .

But I am left wondering if he does not have too much on his plate , or too many balls up in the air , for his effort to be sustainable

... he's so busy 'cos there's sweet bugger all talented individuals in Taxcinda's party ... witness how long it took her to boot our the bumbling Claire Curran ...

Let's all pray that Faafoi doesn't get the measles or something ...

Not a single talented person in an entire party?

Oh, "Taxcinda's party" never mind I can't take anything seriously from anyone that calls her "Taxcinda" or similar. Same with anyone that calls Bridges "Soimon". If all someone can come up with is personal insults and exaggerated statements about either side, their opinion isn't worth considering.

Massive hit coming up to property prices if it’s hard to insure 100k contents what about the house in WGTN

EQC takes a big hit for property before the Insurer coughs up. Agree with the sentiment though, I wouldn't touch Wellington property. Every year is Russian Roulette.

Empty Sabre rattling from Faafoi. Insurers have been steadily withdrawing capacity from older masonry buildings and houses in natural disaster prone areas for some time now, with zero reaction from the government. Onto the scene comes household contents and thus an opportunity to virtue signal to voters so suddenly they are issuing empty threats.

The underlying message in this and similar articles is the degree of rort that the insurance industry has become. Buffet bought into IAG because it is essentially easy money. But for consumers it is little more than a rip off.

A lesson; insurance is about off setting risk. Consumers pay someone else to take on the risk that something bad will happen to whatever is insured. Anyone can figure out that statistically there is a chance that something will happen in any one year. From nothing to a totally devastating calamity is possible. Insurance companies factor these odds into a calculation that determines the level of risk and premium that should be paid. And this is where the problems begin. The chance of a minor event might be comparatively high, but significant events low, indeed 1 in 10 or 100 years or so, but they are still paid for int he premium. But what the insurance companies do is take any of their funds not paid out in a year as profits. They do not put them aside as a pool to cover them off for the bigger more expensive events. It is common knowledge that statistically the longer it is between major events it is more likely for them to occur. But due to their practices, insurance companies can no longer claim to be covered for them. This goes against the implied principle of their business, while covering for major events, their ability to genuinely cover them is limited to non-existent at best. Instead they rely in re-insurance to do this. This is at least in part why insurance companies became problematic after the Christchurch earthquakes and are running scared from Wellington.

What do we expect.. Insurance companies have been considering these matters for some yrs now. Government local and central how been dragging feet. Banks caught in the middle as to coving high risk areas for mortgages
Both insurance and banks have not been shy in these areas for several yrs now.
Comsumers have persisted in building and buying. In spite of commercial sector warnings, in building and buying.
Comsumers ignoring warnings, well a where of climate change issues for several decades are expecting government to fix anything and cover anything that happens blindly.. And those tax payers who have taken notice of these warnings are shaking there heads and when the time comes will be a huge political force in not contubuting to... Idiots stupidity.
Insurance is based and spreading the cost of loss where there is risk.
They cannot survive where there is not risk just 100% or near 100% certany loss will happen

Smart property buyers would investigate the cost of insurance for any building they would consider buying and factor this in to their assessment of the value of the entire property. Dumb ones will buy and first and find later that the "house" they bought was more of a liability than an asset.

Imagine the conversation you would have with a vendor of a property with an at risk building laying out the options for them to remove the building and sell the bare land at reduced cost or be offered that same reduced cost less the cost of removal. Some folk are in cloud cuckoo land thinking that those lovely old buildings are still worth something. Newsflash, they are no longer fit for purpose for a range of reasons and will cost to remove.

As to comments about rorts etc.. Not thought thru at all
Regardless if insurance companies are rorting or 100% squeeky clean, given the now long term inaction of local and central government.. Banks insurance companies would have no alternative to gently slide limited cover and eventually refuse cover on very high to 100% risk areas.
Will have to Co ordinate with banks and current mortgages on these areas.
We will see in the not to distant future banks refusing mortgages because of lack of insurance and risk to many areas.
It's not rocket science

What you are talking about is another level of risk management. Any risk can be covered, the quetion is how much premium are you prepared to pay? There will be situations where the premium must be at or close to the value of the asset because the likelyhood of a severe event is too high. And this is about what you are talking about. Insurance companies do have a part to play in this area. People seeking insurance need to understand the risks they face and what they will present when attempting to offset them to an Insurance company. Deciding what property to buy should take into account its geopgraphical location and risks of things such as floods, rising sea levels, land slides, storms, burglary, fires, including forest fires and so on. No insurance company can afford to accept risk today without careful consideration, why should the ordinary public be able to expect others to bail them out of the consequences of stupid choices?

This in no way takes away from the rort of insurance companies failing to put funding aside to cover themselves for the severe events rather than raking them off as profits.

Read what is written. Rort is not the issue.. Even if rort existed or not it doesn't change if a location Is going to be a right off.. Uninsurable.

We may be arguing two different points. But from a risk management perspective I think you are missing the point. "Uninsurable" doesn't exist. Nothing is "Uninsurable". The question is whether an insurance company would take up the risk and at what cost? It may be semantics, but still relevant. Insurance companies refusing to accept a risk is a valid tool within a market. And I suspect many property owners in Wellington are soon to get a rude shock as insurance companies catch up with the science that identifes the risk of earthquakes in the region.

Maybe you should go back to an article some time ago here covering risk and insurance company sides of it.. Insurance company's assets the risk and decide upon that risk as to insure and costs.
They stated they do not and would be fool Hardy to cover something where extreme or so high that the event is inevitable. And doing so is covering means 100% loss and payout.
It is a total facicy insurance companies will cover anything if you are prepared to pay the premiums.. That bottom line a negative profit line.
The best place this is found is say a fishing comp if a catch meets a given size.. The under fighters the do so knowing the odds it will happen.. The bigger the 'fish' the less the 'premuim' the fish club pays.. And the better the publicity/ advertising to cover that premium
The real world

We are arguing for the same point. But you are missing something. You cite in part; "to cover something where extreme or so high that the event is inevitable. And doing so is covering means 100% loss and payout." Any insurance company asked to carry such cover, if they agreed to carry it, should charge more than 100% of the assets value, because the coverage will bear a cost to them as well. Any business must make a profit, or at least break even. For an insurance company to make a loss then there has been a failure in either or both valuing the asset at it's restoration or replacement cost (and this must be reviewed regularly) or understanding the costs of all aspects of their business.

I agree that no insurance company will likely carry such a policy legitimately, however it would be a way to launder money?

Reminds me of a bach out Ngawi way that some of my surfing mates used to ponder collectively buying. Might have been $15k but uninsurable because it was going to end up in the drink one day. But the conversation was how much use could we and friends/family get out of it before it finally did, and whether we'd feel like we'd get enough value out of it.

That is going in eyes wide open.. As more places become uninsurable. Which include high end realestate built on coastal bars.. Like JK s Bach.. A new market will appear. Short term convience disposable short term cheap realestate.

Added to the extreme weather events, fingers crossed that we won't get any more shaking. The whole country would end up in financial administration.

A proment Auckland major purchased a Clift top home to retire to a decade or so back. The backyard fell into to the sea.. Think from memory house also at risk..
Having lived in Auckland all my life. These clifts have been crumbling going back to at least the 60s...widely reported off and on for decades.. Yet he brought there then when section dropped away.. Shock horror on his part.
Compensation insurance issues, rate payer got to meet the loss etc.
And this is the head I the sand stupidity that has existed for decades..
And rate payers, tax payers and thosevwhonpaybinsurane premuims have to /expected to foot the bill
A tuis yeah right

I remembered the old Manukau Mayor and that crumbling saga. I believe ECQ paid over 1.5 mil for it.

This is classic neo-liberal economics of privatise profits and socialise losses. Insurance is a form of gambling that is only tolerated by society because it assists in the pooling of risks and the reduction of losses that could wipe out individuals.

It is no accident of history that the first insurers were mutuals that shared their profits amongst those that pooled their risks. That way all were incentivised to remain - both the bad risk and the good risk and everyone benefited.

However,. since the model has changed to a shareholder model, driven purely by returns being paid back to shareholders, who generally dont share in the risk pool, insurers of all ilks have been removing higher probability risks from the pool and leaving lower or almost zero probability risks in the pool.

This leaves a probability outcome no different to a casino, and allows super-normal profits to be taken, as the probability of a payout is minimal, and if a major one does come along - bankruptcy is an option.
What is left is that the worst risk pool is left out of the insurance classes and therefore government has to pick up the mess. Classic privatization of the profits from the pool, and socialization of the losses.

Remember - the house always wins.

Insurance should again be seen as pure gambling, unless the persons in the pool, are actually the owners. No other model will effectively work.

Yes, nothing is theoretically 'uninsurable' there is a price for everything. But often the competitive market informed or uniformed will make it too difficult for an individual insurer to obtain the price they believe they need. Therefore they may decide to allocate their capital to risks or to territories where they believe the returns they may get may be greater. They must be allowed to do this without criticism. The removal by the legislators of contents from EQC cover has compounded the difficulties in the allocation of insurance capacity to best advantage. The nominal EQC amount of previous cover was based on providing at least beds and beddings, chairs a fridge and so on. Now 30+ years later the fears that the EQC cover will be valuable if private insurers can not or will not provide cover to everyone seem to becoming real; but the EQC backstop has nearly gone..