The Government is hesitant to intervene in the market – either by directly influencing the price of insurance, or by expanding the role of the state insurer, the Natural Hazards Commission (NHC) – in a bid to make insurance more affordable and accessible.
The reality is the insurance market is doing what is politically unpalatable by pricing homeowners out of areas prone to severe flooding, slips and sea surges.
If the Government tried to soften the blow by subsidising insurance on high-risk properties, it would be delaying the inevitable and spreading the cost among existing and future taxpayers.
This would also create a moral hazard – encourage people to live in risky areas based on the belief they will be bailed out if there is a problem.
Willis respectful of ‘pricing decisions of the private insurance market’
In September 2024, Finance Minister Nicola Willis explicitly told the Herald she didn’t want to intervene in the insurance market.
She got Treasury to stop policy work it was doing on how the Government could potentially respond to insurers doing more risk-based pricing – using increasingly sophisticated modelling to price individual properties according to risk.
Willis said she wanted Treasury to focus on climate adaptation instead, by looking at how the Crown could better engage with local government to mitigate climate change risks, and ensure there was more informed land-use planning, infrastructure delivery and building codes.
“These are the issues where there is the most pressing need for Government leadership, rather than intervention in the pricing decisions of the private insurance market,” she said.
Willis wary of the cost of overloading the NHC
Willis said Treasury did not propose expanding the NHC’s remit. Nor did it suggest creating a new scheme to insure homes damaged by floods.
A left-leaning government might be open to broadening what the NHC covers. In 2022, the Labour Government doubled the cap on its buildings damage cover to $300,000 – transferring a lot of risk from private insurers to what was then called the Earthquake Commission (ECQ).
However, a right-leaning government would be hesitant to expand the NHC’s footprint.
Willis recently went so far as to delay hiking the levy homeowners pay via their private insurers to fund the NHC, fearing a higher levy would put cash-strapped households under too much pressure, and possibly prompt some to reduce their private insurance cover.
As the Herald reported in November, Willis decided to leave the levy as it was until at least mid-2027.
This was despite Treasury warning there was only a 37% chance the Government-backed scheme’s levy income would meet its costs over the next five years.
This week, we learned Willis also wanted to see the outcome of the Council of Regulators review before reassessing the NHC levy.
An area where there could be some movement
If recent inquiries into competition in the banking sector are anything to go by, there might be appetite, among those in government at least, to get the Reserve Bank to regulate insurers more loosely by allowing them to hold less capital.
While this would make insurers more vulnerable to collapsing in the event of a major disaster, it would reduce their costs.
Like with the banks, there is a question mark over whether insurers would pass this saving on to customers or simply pocket it.
Less onerous capital requirements might also make it easier for new companies to enter a market that is dominated by two Australian giants – IAG and Suncorp – which underwrite insurance offered by various banks and brands, like AMI, State and Vero.
The Reserve Bank’s preference is for any review of its insurance solvency standards to only start next year.
Is insurance the problem or the symptom?
The insurance industry is ripe for scrutiny. While premiums have been falling in recent quarters, it’s worth investigating whether spikes following the Canterbury earthquakes and Cyclone Gabrielle were entirely justified.
It’s difficult for homeowners to know if they’re being ripped off, as so many elements go into pricing insurance. The quality of cover also needs to be assessed alongside the price.
While Finity Consulting provides Treasury with annual reports on the cost and availability of insurance, it makes sense for the Government to plug any data gaps.
The insurance industry wants it to focus on reducing the incidence of homes being damaged by severe weather in the first place.
“The problem is the actual risk, and then the insurance is a risk indicator, which is why we’ve been saying for some time, ‘reduce the risk’,” Insurance Council of New Zealand chief executive Kris Faafoi told the Herald.
Parties from across the political spectrum get it.
The trouble is, risk reduction (which needs to be proportionate) will hurt some people – require them to pay towards making their homes and communities more resilient, lower their property values, and maybe even force them to move.
It also requires long-term planning, consensus and investment – things governments find much harder than commissioning reviews.
Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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