The Government is hesitant to intervene in the market \u2013 either by directly influencing the price of insurance, or by expanding the role of the state insurer, the Natural Hazards Commission (NHC) \u2013 in a bid to make insurance more affordable and accessible.<\/p>\n
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.<\/p>\n
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. <\/p>\n
This would also create a moral hazard \u2013 encourage people to live in risky areas based on the belief they will be bailed out if there is a problem.<\/p>\n
Willis respectful of \u2018pricing decisions of the private insurance market\u2019<\/p>\n
In September 2024, Finance Minister Nicola Willis explicitly told the Herald she didn\u2019t want to intervene in the insurance market. <\/p>\n
She got Treasury to stop policy work it was doing on how the Government could potentially respond to insurers doing more risk-based pricing \u2013 using increasingly sophisticated modelling to price individual properties according to risk. <\/p>\n
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. <\/p>\n
\u201cThese 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,\u201d she said.<\/p>\n
Willis wary of the cost of overloading the NHC<\/p>\n
Willis said Treasury did not propose expanding the NHC\u2019s remit. Nor did it suggest creating a new scheme to insure homes damaged by floods. <\/p>\n
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 \u2013 transferring a lot of risk from private insurers to what was then called the Earthquake Commission (ECQ). <\/p>\n
However, a right-leaning government would be hesitant to expand the NHC\u2019s footprint. <\/p>\n
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.<\/p>\n
As the Herald reported in November<\/a>, Willis decided to leave the levy as it was until at least mid-2027.<\/p>\n This was despite Treasury warning there was only a 37% chance the Government-backed scheme\u2019s levy income would meet its costs over the next five years. <\/p>\n This week, we learned Willis also wanted to see the outcome of the Council of Regulators review before reassessing the NHC levy.<\/p>\n An area where there could be some movement <\/p>\n 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. <\/p>\n While this would make insurers more vulnerable to collapsing in the event of a major disaster, it would reduce their costs.<\/p>\n Like with the banks<\/a>, there is a question mark over whether insurers would pass this saving on to customers or simply pocket it. <\/p>\n Less onerous capital requirements might also make it easier for new companies to enter a market that is dominated by two Australian giants \u2013 IAG and Suncorp \u2013 which underwrite insurance offered by various banks and brands, like AMI, State and Vero.<\/p>\n The Reserve Bank\u2019s preference is for any review of its insurance solvency standards to only start next year.<\/p>\n Is insurance the problem or the symptom?<\/p>\n The insurance industry is ripe for scrutiny. While premiums have been falling in recent quarters, it\u2019s worth investigating whether spikes following the Canterbury earthquakes and Cyclone Gabrielle were entirely justified. <\/p>\n It\u2019s difficult for homeowners to know if they\u2019re being ripped off, as so many elements go into pricing insurance. The quality of cover also needs to be assessed alongside the price.<\/p>\n 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. <\/p>\n The insurance industry wants it to focus on reducing the incidence of homes being damaged by severe weather in the first place. <\/p>\n \u201cThe problem is the actual risk, and then the insurance is a risk indicator, which is why we\u2019ve been saying for some time, \u2018reduce the risk\u2019,\u201d Insurance Council of New Zealand chief executive Kris Faafoi told the Herald.<\/p>\n