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Cases of massive premium hikes for homeowners have thrust risk-based pricing into the spotlight this year, and insurers are now thinking hard about the model and how it might fit into their future strategy.
While it has been accepted that some measure of risk-based pricing is inevitable for a country with such massive geographical disaster risks, insurers are still debating as to how far the model needs to be taken, and how to walk the line between affordability and sustainable pricing.
“Managing earthquake capacity in areas like Wellington has been a challenge, and we’ve been open about the fact that we are committing to our Wellington customers, as well as our national customers with risks in that area,” Taylor told Insurance Business.
“We are continuing to provide capacity, but there’s no doubt that that has been a real challenge. Wellington has been a ‘closed market’ when it comes to purchasing earthquake insurance, and we have remained in that market while some of our competitors have already been reducing their capacity there.”
“When I think about the last 12 months, the key focus for us has been around remediation,” he continued. “And that means setting the foundations to ensure that we are focused on sustainable returns off the back of a really challenging market. The strategy is to continue to be the national insurer and to be in all portfolios and products – but with the increasing challenge of climate change, this for us has meant a transition to risk-based pricing.”
Taylor says the switch has come off the back of some pretty expensive insurance years associated with claims costs around climate change. With other insurers very much feeling the same pressure, he says interacting with customers every step of the way will become key to how the adjustment is managed.
“There has been more of a shift towards the idea that if you’re living in a high-risk location, you’re going to be paying higher premiums than someone living in a lower-risk location,” he stated.
“Customers in areas such as Christchurch, Kaikoura, Wellington and Hawkes Bay will experience that transition towards a more technical price system, and that’ll continue to be a key challenge for insurers when it comes to educating those customers across the entire industry.”
According to Eftim Stojanov, chief underwriting officer at Allianz Partners, the challenge of pricing insurance sustainably is not one that insurers can face on their own. He says the industry will have to work closely with the government in the coming years to ensure that necessary coverage can be kept in place, and that New Zealanders are not left to fend for themselves in an increasingly turbulent climate.
“It’s certainly a challenge for New Zealand, especially when you talk about events such as earthquakes,” Stojanov said.
“Things like travel and travel insurance are a luxury, but living is not a luxury – everybody needs a home. Household, property and contents insurers in New Zealand will have to look at ways to devise a proper earthquake strategy, and they will have to work together with the government in order to make this sustainable.”
“The issue is that a lot of these things just haven’t been properly assessed in a way that can ensure necessary comfort and coverage for customers. The government, together with the insurance companies, need to come up with a proper way to implement risk-based pricing.”
Stojanov says that moving to 100% risk-based pricing and eliminating cross-subsidisation may be an increasingly attractive option to many insurers, but it’s certainly not an easy fix – and this is true for insurance across the board. This is because risk landscapes are constantly changing, but insurers do not currently have the technology in place to be as dynamic as they need to be to account for these fluctuations in their premium prices.
“To use one example – this year, new flights from Auckland to Chicago were launched, which means we’ll have more people from New Zealand travelling to the United States,” he explained. “But what if an event were to happen in the States which meant that fewer people wanted to travel there? This would necessitate us constantly changing our risk-based pricing model, and this is where it gets tricky, as there are no dynamic pricing engines out there at the moment.
“Insurtech companies rely on big data and algorithms that can be easily updated in light of these events to make the pricing more precise, and artificial intelligence is also the big buzzword in this space,” he concluded.
“Insurers are assessing this landscape, and it’s true that they might understand the impact of these things a little better now than they did a few years ago. But due to the fact that the technology hasn’t matured to the level they need, there is a lot of uncertainty.”
