Rising reinsurance costs behind soaring home and contents premiums in NZ

Despite a favourable claims experience in 2019, premiums for home and contents insurance have continued to rise as part of a five-year trend. According to a report by analytics and actuarial consultancy Taylor Fry, this is due to a sustained rise in reinsurance costs.

The report showed that annual inflation for home insurance for the year ended June 30 was 0.4%, following three consecutive years of increases over 5%. Meanwhile, premiums for contents insurance continued to increase sharply.

The data also showed that gross premiums increased by an average of 4.8% per year for the past five years. However, net premiums rose by only 9% over the same period.

Pandemic brings uncertainty to insurance sector
The COVID-19 pandemic has had a huge impact on the New Zealand economy. In particular, the insurance industry had to quickly transition to remote working following the lockdowns in April and May. The lockdown also caused the number of motor insurance claims to go down, leading several insurers to partially refund premiums.

According to the report, the longer-term economic impacts of the pandemic are still uncertain. The resurgence of COVID-19 cases in Auckland has demonstrated the need for strict border controls. With tourism being a large part of the New Zealand economy, extended restrictions are likely to be very detrimental financially.

General insurers are also likely to feel the impact in the future. From a claims perspective, the impact will vary between classes of business. The report listed the following examples:

• Traffic volumes tend to reduce during economic downturns.
• An increase in the number of people working from home may result in lower numbers of contents claims due to theft.
• Economic downturns can often result in an increase in fraudulent claims, which may result in an increase in claim frequency for personal contents and commercial property claims.
• Claims under credit insurance policies will also increase as unemployment starts to increase, although this is a relatively small class of business in the New Zealand market.

The greatest impact, it said, will be on claims volumes. A large majority of insurers have introduced hardship measures to support their customers. An economic recession will translate to a reduction in premium, as financially struggling customers may cut back on their insurance payments. This is expected to have the largest impact on the personal lines and commercial SME classes.

Another aspect the report warned insurers to be conscious of is how the economic crisis affects asset values and investment returns. A decrease in interest rates will cut into investment returns, but this can be offset by increasing values for fixed-interest assets, the report said, adding that most New Zealand insurers have quite short-tailed liabilities making them less vulnerable to investment returns. Despite that, Taylor Fry stressed the importance of monitoring assets and liabilities and taking consideration of various possible economic scenarios.