Written by Charles Lilly, an RBNZ financial systems analysis adviser, the report says a lack of granular, property-level data on hazards is the main constraint to insurance affordability.

Lilly says it is important for insurers, central and local governments, buyers and lenders to take action to improve their understanding of natural hazards so affordability challenges can be managed proactively.

This has included pricing for seismic risks at regional and local levels becoming more prevalent over the past decade and higher premiums for properties with elevated flood risks being introduced by some insurers as data and modelling improve.

He says it is difficult to pinpoint if and when insurers will completely withdraw the availability of insurance for certain properties and/or areas or risks, although it could occur relatively quickly given that contracts are typically annual.

“The withdrawal of insurance will depend on the severity and frequency of flood events in a location, improvements over time in the understanding of flood and seismic risks, the competitive dynamics between insurers, and how risks evolve (for example, due to climate change and mitigation actions). Withdrawal will tend to first occur in communities where these physical risks are already well known.”

Owners of properties where natural hazard risks have already occurred through claims – and particularly repeated claims – such as those properties badly affected by last year’s Auckland Anniversary weekend floods and Cyclone Gabrielle, are unlikely to be able to obtain comparable cover in the future, unless there has been a substantial mitigation of the now known risks, Lilly says. 

“Even if the complete withdrawal of insurance availability in certain areas is some time away, owners of high-risk properties may find insurance increasingly unaffordable.”

Similar to overseas markets, a potential outcome of the trend towards more risk-based pricing is that insurers begin to unbundle different risks, particularly if one type of peril is a dominant factor in the unaffordability of premiums for an all perils policy, he says. 

For example, unbundling could take the form of removal of flood cover for a flood-prone property in an area with low seismic risk.

This may help to maintain insurance accessibility for other risks such as fire and EQC cover, which typically requires a policyholder to have private insurance, but it comes at the expense of leaving property owners uninsured for flood risks.

“With optional cover for some risks such as flood, property owners who need that cover the most may not be able to afford it, as the risk pool for flood risk could shrink as owners not exposed to flood risk choose to opt out of cover,” Lilly says. 

Homeowners may also respond to declining insurance affordability by reducing their coverage through higher excesses and reducing their sums insured, although this will leave them more exposed to a total loss event.

Lilly says insurance retreat presents a long-term challenge for the financial system.

“It is important for all stakeholders (insurers, central and local governments, buyers and lenders) to take action now to improve their understanding of natural hazards, so that future insurance affordability challenges can be better managed.

“Central and local governments have an important role in collecting and sharing natural hazard data, setting policies for land use and coordinating adaptation plans. Improvements in data will help support insurers’ risk modelling, and thereby enhance the price signals sent by premiums for different natural hazards.”

He says banks need to be conscious of the ongoing insurability of the properties against which they lend, which will require greater scrutiny in their lending decisions than currently.

“Banks also need to pay close attention to insurance coverage given the increasing risks of underinsurance of high-risk properties over time.”

Lilly says banks need to work with insurers to obtain better and more regular information on mortgaged properties’ insurance status.

While insurance affordability is under the microscope, the latest set of results indicate the majority of insurers continue to offer insurance online for properties with both high seismic and flood risks.

• For suburbs with high seismic risks, on average three quarters of the insurers surveyed make insurance widely available online. However, insurer participation varies geographically, with some insurers having withdrawn online quoting in recent years from some parts of the Wellington, Marlborough and Canterbury regions, for example.
• About 6% of properties (around 120,000) are assessed being at high flood risk, defined in the analysis as properties where a riverine or surface water flood event is expected to occur more frequently than once every 100 years. For these properties, an average of around 20% of the insurers’ quotes were assessed as including additional flood risk premiums averaging $250 or more annually (flood pricing), relative to properties in the same suburb assessed as not being subject to flood risk. This result varies by suburb, with no insurers applying flood pricing in some suburbs, and many insurers applying flood pricing in others.
• About 0.6% of residential properties are subject to both high flood and seismic risks. On average, more than half of the insurers offered policies with no additional flood risk premium in these areas. However, in a small proportion of sampled suburbs availability was lower, meaning that there were fewer participating insurers to choose from. Even without flood risk premiums, owners of these properties may find insurance unaffordable if a high earthquake risk premium is also charged.