Here at AIB each customer situation is treated separately as each client has its own driver of insurance need, appetite and cost points. Much of what is mentioned below is a generalised view of the market so we do encourage further conversations with our team about your circumstances. We are here to serve and help you find the right mix of cover and the advice to go with it.

General Insurance Market

Market conditions remain difficult, tight and narrow, as detailed previously. This is particularly the case for property insurance and those related policies. Premiums for most policy types will increase over the next year although the rate of increase for non-property insurance (liability policies) will continue to remain flat and reflect activity and revenue of each client.

Individuals and businesses in New Zealand paid just over $8 billion of premium in 2022. This was predominantly to protect personal and commercial property, motor vehicles and liabilities (excluding Life and Health insurance premiums).

Approximately 53% of the $8 billion is paid to protect physical assets like commercial property, houses and household contents. As a consequence, when natural disasters occur and premiums increase, almost all of us are directly affected.

The reality of New Zealand’s risk profile as a country exposed to earthquakes and severe storms is beginning to have a significant impact on the insurance markets across all commercial and residential property related policies. 

Auckland Storms - Cyclone Gabrielle

We reported in April 2023 that the likely costs attached to these two large weather events was estimated to be around $2.54 billion (combined)

With our further update, the figures are now more likely to be closer to 3.5 billion

 Prior to these events, the largest insurance event was the Canterbury earthquakes where 168,855 claims worth $22.46 billion were handled by New Zealand insurers. 

Natural disaster events in New Zealand are becoming more costly and occurring more frequently. However to give some perspective to the size of the Auckland storm and Cyclone Gabrielle, on average a large storm or flood event would normally cost insurers $0.12 billion.

The Auckland storm and Cyclone Gabrielle events and their timing, within weeks of each other, has drawn the attention of global reinsurers. The consequence has been increased premiums across the country to pay for the higher reinsurance costs. 

Looking Forward

Large-scale weather events

Given the scale of the Auckland storm and Cyclone Gabrielle and their timing, within weeks of each other, these losses drew the attention of global reinsurers. The consequence has been increased premium rates across the country to pay for the higher reinsurance costs. 

The cost of reinsurance, to cover catastrophic events, is one of the largest expenses for an insurance company. For example, Suncorp (trading as Vero Insurance in New Zealand) has reported their annual reinsurance costs (approximately $2.1 billion) will increase by 12% or $250 million for the coming year. In their 4 July 2023 statement, Suncorp said “this reflects the hardening global reinsurance market and the impact of adverse weather events through the La Nina cycle in recent years across Australia and New Zealand”.

Other insurers will be experiencing similar outcomes for their reinsurance negotiations.

Reinsurance/Natural Disaster Costs and Capacity

Apart from the increased cost of insurance for clients, a shortage of capacity (or less stock on the shelf in a trading context) has historically been an issue within Wellington EQ Market alongside other high-risk seismic zones.

A lack of capacity and the cost of that capacity continues to challenge us and our clients. It is also becoming evident that the capacity constraints experienced in Wellington is now broadening out to other regions as we grapple with the increasing occurrence of large scale weather events. The difficulty is determining which regions are ‘less hazardous’ because the location of a severe weather event is becoming less predictable, as well as more frequent and costly.

In respect of commercial insurance, we anticipate insurers will increase their use of technology to identify high risk locations and conservatively underwrite each risk. This means that their location data will become more accurate and their risk selection more cautious. Terms quoted by insurers may include higher flood deductibles or excesses, the insured perils might be reduced, site specific terms might be imposed and premiums will continue to rise.

Businesses and organisations can mitigate some of the consequences of the insurance market conditions by exercising sound loss prevention or reduction measures and working with AIB who will convey those positive elements of the risk profile to senior decision makers at financially secure insurers.

Inflation

We are still seeing premium increases caused by our inflationary environment. 

• The increasing cost of materials to repair or replace property and cars. 

• Legal fees and settlements paid for liability claims and any other fees that need to be paid to assess an insurance claim are also increasing.

• Additional resources and expenses to achieve compliance with regulations, particularly the new regulations affecting the insurance sector; and

• Additional staffing costs required to respond to larger than expected events; and
• Wage and salary increases in response to inflationary pressure on employee households.

Inflation undoubtedly increases the cost to repair and reconstruct damaged properties, however indecision about the future suitability of land adds delays and higher recovery and reconstruction costs.

We believe the difficult property insurance market will persist and may deteriorate further over the next two years. AIB is in the best position to help you determine how to prioritise the risks that you should be insuring.

Summary

New Zealand is not alone. Australian households face a similar situation because of their exposure to cyclones, floods and bush fires. Recent research in Australia revealed house and contents premiums increased between 28% and 50% in flood-prone areas that are insurable. Some Australian households, about 12%, pay the equivalent of one month’s gross income for house insurance. 

New Zealand insurers were already experiencing an upward trend for claims since 2019, as evident from this graph.

The upward trend has been similar for domestic and commercial claims although the latter contributes larger claim costs because of the higher value of commercial properties.

Another contributing factor has been the higher repair and construction costs attributable to inflation. These result in higher sums insured and higher claim settlements when an insured event occurs.

Apart from increasing premiums, insurers have also adopted a more conservative approach when considering houses that are coastal, on a known flood plain or on or close to land that is subject to landslips. Categorisation of land by local authorities has added another unfavourable dimension, especially when those decisions are delayed, making it uncertain whether a particular house is uninsurable (some of Category 2 and all of Category 3 land may be unsafe to live on because of unacceptable future landslip or flooding risk). 

AIB is very mindful of our current market. Our first priority is monitoring claims to ensure settlements are not delayed and they are based on fair and proper amounts. The second point is to encourage clients to review their sums insured regularly; making sure the sum insured remains adequate in the inflationary environment. 

Here to Help - Tips 

• Start early and have a general understanding of our current insurance market conditions. Ask questions and work with your broker (and bank) to understand the different risk points and costs. 

• Provide accurate information. 

• This allows us to focus on further options and potential solutions to address the challenges. In some circumstances, it may be difficult to predict what terms can be negotiated until all the information is collected.

We are all concerned about the affordability of insurance. Sometimes it becomes necessary to adjust the cover, introduce higher excesses or just pay the premiums via an instalment plan. Communication is key.