Kiwi broking network Insurance Advisernet New Zealand (IANZ) wants to make it clear that there’s a lot more to general insurance pricing than a policyholder’s own claims history or an insurer’s profitability.
“Premiums do not simply increase to make insurers more money; they increase because they reflect the cost of providing insurance protection in the current economic and political environment,” IANZ said in its Insurance Landscape Report 2023.
IANZ believes it can be helpful for clients to gain an understanding of the factors that affect premiums, which in New Zealand include the steady increase in the average cost per claim and the Australian influence.
Globally, IANZ pointed to the fourth quarter of last year as being the 21st consecutive quarter in which general insurance pricing rose. This represents the longest run of increases since 2012, according to the network.
“Insurers remain concerned about non-modelled secondary perils, such as wildfire, hail, convective storm, tornado, and flood due to their accumulation exposure and loss trend uncertainty,” IANZ said in its report.
“Amid persistent inflation, insurers continue to focus on accurate property and business interruption valuations. They are focussed on managing greater claims costs as inflation drives increases in the cost of materials, labour and supply chain challenges, staffing shortages, rebuild delays, and other factors which continue to impact loss ratios and profitability.”
Global reinsurers, for instance, are said to be “unwilling” to deploy the same amount of capital as they previously did.
Locally, it’s easy to see why the prospect of a softening insurance market isn’t in the offing yet.
“Severe weather events hit the North Island hard with the Auckland Anniversary storms and Cyclone Gabrielle causing significant damage, which are likely to cost insurers well in excess of $1.5 billion for each event,” IANZ said. “These weather events have accelerated what was already predicted to be tough market conditions for insurance buyers in New Zealand in 2023.
“Reinsurance, which is insurance purchased by insurance companies to protect themselves from claims, is also impacted by these events. The global reinsurance market is experiencing significant volatility due to factors such as high inflation, interest rate hikes, and weather-related losses, including Hurricane Ian and the tragic earthquake in Turkey and Syria.
“This has led to increased costs and higher retention for insurance companies, which will result in premium increases for insurance buyers in what we are now deeming a ‘hard market’, as insurers price their increased capital costs. In addition, insurers will be more proactive in modelling storm and flood risks, which will influence their underwriting capacity in certain parts of New Zealand.”
According to IANZ, the “extremely” high frequency of catastrophe events in Australia will also have an impact, in addition to New Zealand’s “too high and persistent” inflation and the steady increase in the average cost per insurance claim over the past decade. Three years of supply chain issues also didn’t help.
“Significant delays in the supply of materials, white goods, and vehicles are impacting both rebuilding efforts and the settlement of claims,” the broking network said. “Labour shortages and the availability of tradespeople have also affected the timeframes to rectify insurable losses.
“One consequence of the COVID-19 pandemic has been a sharp lift in global demand for goods, as consumers substituted away from in-person services. The global supply chain has struggled to keep up with this additional demand, given the long lags involved in expanding shipping capacity, causing freight prices to rise dramatically. High freight costs meant that importers are paying significantly more to have goods shipped to New Zealand.”
Economic growth, meanwhile, is expected to decelerate through 2023.
“After an evaluation of these factors, we believe the pricing of insurance premiums will continue to rise,” IANZ said. “Cost cycles can be an excellent tool in evaluating where insurance rates are and what direction they are likely to take in the future.
“We believe the industry is currently sitting at 10 o’clock (rates rise strongly) on the insurance industry clock … How long it remains there largely depends on the frequency and severity of future catastrophic weather events and the lowering of inflation that is currently impacting claims repair costs.
“With the continuing hard market, we anticipate a continued period of higher premiums; getting insurance coverage could become more difficult, and more difficult to negotiate terms; insurers may reduce capacity for some risks or industry groups with poor loss histories or those in earthquake and flood areas; higher excesses being applied; a focus on risk management and mitigation processes; [and] more time and additional information required to place insurance.”
Highlighting how valuable insurance is amid the current hard market, IANZ said it is critical for sums insured to be reviewed annually to ensure they adequately reflect the risk and are suitable for clients’ circumstances.
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