Insurance premiums for residential properties in New Zealand are increasingly reflecting detailed risk assessments, particularly in terms of flood and earthquake threats, according to the Reserve Bank of New Zealand (RBNZ).
The bank said this shift toward risk-based pricing signals to property owners the importance of managing these risks effectively, highlighting insurance’s crucial role in the financial stability of New Zealanders.
Kerry Watt, director of financial stability assessment and strategy at RBNZ, said insurance contributes significantly to New Zealand’s financial wellbeing by spreading the costs of adverse events over time and across policyholders.
Despite high insurance uptake, premiums for residential insurance have outstripped general inflation over the past decade, primarily due to rising construction costs and higher reinsurance expenses. Global reinsurers are reassessing New Zealand’s risk profile, leading to higher costs passed on to policyholders.
The industry’s shift towards risk-based pricing means premiums are increasingly tailored to the specific risks properties face.
“We have seen the insurance industry move towards greater use of risk-based pricing for residential dwelling insurance, meaning that the value of insurance premiums is more tailored to the specific risks a property faces (e.g. seismic or flood). The use of risk-based pricing has become evident in certain areas, and for specific risks, such as for seismic risk in Wellington,” he said.
While this trend challenges property owners in higher-risk areas, Watt said that complete insurance retreat is rare, even for properties exposed to significant risks. However, banks must consider the insurability of properties when lending, as rising premiums may lead to underinsurance.
“Insurers’ adoption of greater risk-based pricing is a rational response to a changing operating environment, including climate change. Over time, risk-based pricing can provide a strong signal to encourage the proactive mitigation and lowering of exposure to risks, which can be beneficial for society’s overall risk management,” he said.
The RBNZ has been calling for enhanced risk management following recent climate stress tests.
