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PHIL REID/Fairfax NZ
CHANGING LANDSCAPE: Household insurance cover in New Zealand has changed forever.
MARTIN HUNTER/Fairfax NZ
CONFIDENCE SHATTERED: The Insurance Council's Chris Ryan speaks at a news conference.
The way your house is insured is changing. "Evolving" is how the insurance industry terms it.
The sequence of earthquakes in Christchurch in the past 15 months has resulted in a vastly altered perception of New Zealand in the eyes of the giant offshore reinsurers, companies that insure our insurers against natural disaster losses they cannot handle alone.
Once seen as country with a low reinsurance risk, and a place to diversify risk outside the Americas, Europe and Asia, New Zealand and the flood, fire and hailstorm beset neighbour Australia are now viewed very differently.
And the shakes in Wellington in the past couple of weeks are doing nothing to settle reinsurers' nerves.
Much of the commentary on the reinsurers' altered perceptions of these islands has focused on price, but premium rises are not the only policy changes Kiwi households will face. Already, some of the changes are emerging.
Insurers are wrestling with the tough task of rebuilding their profitability, while at the same time paying higher costs for reinsurance, and keeping their products affordable for homeowners.
That means that though premiums are rising - some Vero house insurance policyholders have seen an average 12 per cent rises already this year - the extent of cover for Kiwi households will reduce, and they will have to shoulder more risk themselves.
The annual premiums Kiwi households paid for house and contents insurance totalled $933.5 million in the year to the end of September 2010. In the year to the end of September 2011 (the numbers are not all in yet as insurers have been too busy dealing with earthquake claims), Chris Ryan from the Insurance Council expects the premium could well top $1 billion for the first time.
Ryan says New Zealand house insurance is relatively unusual in that replacement cover has typically been open-ended.
Whatever it costs to replace a house, the insurer will do it, even in situations where there is "demand surge inflation" forcing up the price of rebuilds.
Ryan does not believe that can continue, and indications are emerging that he is right.
Vero, which reinsures earlier in the year than other insurers - meaning it is always likely to be the "first cab off the rank" when it comes to making policy changes - moved at the start of November to limit its replacement cover on its house insurance policies to $2000sqm.
Others acknowledge their policies are likely to change, too, but have not yet said how.
Big Vero rival, IAG, acknowledged that policies were beginning to evolve, but would not be drawn on the track those changes would follow. In a statement, it said: "There stands to be a lot of lessons from the Canterbury earthquakes, and we would want to ensure any decisions that are made in response, including any changes to how our policies might be structured, are carefully thought through, justifiable and necessary."
Peter Bloy from Vero says that is more than enough for most houses, and those with architecturally sophisticated homes can ask for a higher excess, but they will have to pay extra premiums for it.
Reinsurers, shocked by the rising cost of claims, want more certainty over liabilities, and the pressure looks likely to see New Zealand adopt policy limits more in line with other countries.
Bloy said if New Zealand insurers did not allow reinsurers to get that certainty, we would pay excessively for it.
"If there is a significant uncertainty, they will be thinking in terms of a risk premium for that uncertainty," Bloy said.
It could be that policies emerge which allow families to nominate the maximum level of payout by the insurer.
Some in the industry speculate that future policies may reduce coverage for certain natural disasters.
Bloy said in some parts of the world, like areas of the US and Japan, homeowners have full cover for events such as fires, but reduced cover for earthquakes, though New Zealand is unique in that it has the Earthquake Commission Fund, which reduces the pressure on insurers to put in place limitations.
"There is the potential for limited protection for some perils like earthquakes and flooding, if the insurers and reinsurers decide they want to put limits on it," Ryan said.
Moves to shift some earthquake risk back on to households are beginning to emerge at the fringes.
In Christchurch, giant insurer Vero, hit with more than $3b of claims, has lifted excesses on swimming pools, spa pools, drains and pipes, garden walls, paths and driveways and tennis courts.
Some of that is understandable. To limit premium rises, it is likely insurers and policyholders will opt to insure less of what is on their property. The swimming pool, for instance, and that stone wall that keeps down traffic noise may have to go uninsured, or at least insured with a far higher excess.
After all, putting a roof back over a family's head matters rather more than replacing the irreparably-damaged pool.
Annual caps on the claims that a house insurance policyholder can make are also likely to become common.
The shocking liquifaction under some parts of Christchurch has also resulted in insurers paying much more attention to what is underneath homes.
And the beginning of the end is already here for the commoditised house insurance policy, where the owners of very different houses in very different places pay fairly similar premiums.
Like many of the insurance evolution trends sparked by the Christchurch earthquake, the trend is in its infancy, but it will gather pace, industry sources predict. Insurers are investing big money in the area.
Longer term, some predict that as the memory of Christchurch fades, reinsurance costs may dip again. Others are not so sanguine.
But policyholders do have some control over premiums themselves, by opting for higher excesses.
Unusually, most Kiwi household insurance policies have excesses of just a couple of hundred dollars. Anyone opting to lift that into the low thousands would never be able to claim for a broken window again, but they'd cut their premiums dramatically.
Bloy said the trend towards people choosing higher excesses is not yet very pronounced, but he expects it to accelerate as other insurers put their next tranches of reinsurance in place (contrary to some reports reinsurers are not turning their backs on New Zealand). It could provide a mechanism by which insurers retain customers and New Zealand does not see underinsurance rise.
It would not be surprising, some say, for insurers to unilaterally lift their excesses as a means of capping premium rises.
But it does mean that Kiwi households are going to have to shoulder more of the risk of natural disasters themselves.
Unwitting homeowners need to be wary.
It could be that the next time a big shake hits, they find more of the rebuild costs fall on them, and their rebuilding may have to be on a far smaller scale than Christchurch residents'.
- Sunday Star Times
Source: http://www.stuff.co.nz/business/6157973/New-Zealands-insurance-landscape-rocked
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