In a recent statement, Kerry Watt, the Reserve Bank’s Director of Financial Stability Assessment & Strategy, emphasized the evolving landscape of residential dwelling insurance in New Zealand, highlighting a shift towards risk-based pricing.
Watt underscored the significance of insurance in safeguarding the financial and economic welfare of New Zealanders, noting its role in spreading the financial burden of adverse events over time and among policyholders.
Residential dwellings and land constitute a substantial portion of New Zealand households’ net worth, with a robust uptake of residential insurance standing at around 96%, a figure considered high by international standards.
Over the past decade, residential insurance premiums have surged well beyond general inflation rates. This escalation, according to Watt, is attributed to increased construction cost inflation and amplified reinsurance expenses as global reinsurers reassess New Zealand’s risk landscape.
Watt elucidated that the insurance industry is increasingly adopting risk-based pricing for residential dwelling insurance, tailoring premiums to specific property risks such as seismic or flood exposure. Notably, this approach has become more prevalent in certain areas, particularly in relation to seismic risk in Wellington.
Looking ahead, Watt acknowledged that a prolonged shift towards risk-based pricing could present challenges for property owners, particularly those with higher-risk properties who may face increasingly unaffordable insurance options. There is a possibility of insurance availability diminishing for certain properties.
Despite these trends, Watt emphasized that insurance remains accessible overall. He noted that full insurance retreat is uncommon even for properties exposed to significant seismic and flood risks.
The move towards risk-based pricing by insurers is characterized as a logical response to a shifting landscape, including the impact of climate change. Watt highlighted the potential benefits of risk-based pricing, suggesting that it could incentivize proactive risk mitigation, ultimately enhancing overall risk management for society.
Watt emphasized the importance of collaborative efforts among stakeholders including insurers, central and local governments, home buyers, and lenders to enhance understanding of natural hazards. This proactive approach aims to manage future affordability challenges and risks for policyholders.
In anticipation of the upcoming Financial Stability Report scheduled for release on May 1, the Reserve Bank is previewing insights from the report, exploring the evolving dynamics of insurance and its implications for financial stability. Among the key considerations highlighted is the need for banks to closely assess the insurability of properties they lend against, particularly in the context of rising premiums and evolving risk profiles.
The full Financial Stability Report is slated for publication on Wednesday, providing a comprehensive analysis of the financial stability landscape in New Zealand amidst evolving insurance dynamics.
