When house insurance becomes too pricey

Insurance market failure

Premiums in these two cities have jumped as much as 67% since our 2017 survey. If this trend continues, premiums could soon be out of reach of many homeowners – so what happens then?

Insurance consultant David Middleton, former Earthquake Commission (EQC) chief executive, says one way or another, it will become the government’s problem – and that’s why it needs to step in.

In the wake of the Christchurch quakes, legislation has been introduced to increase the EQCover cap on residential damage from $100,000 to $150,000.

A public inquiry into the Earthquake Commission, led by Dame Silvia Cartwright, is also under way. Its focus is on the way EQC operates, though it’s also looking at how the Canterbury earthquakes and subsequent events were handled. The public will have a chance to contribute to this inquiry, but when and how is still being mapped out.

However, none of these moves appear to address the big issue – the risk of insurance market failure.

“Insurance is meant to balance risk across populations,” Mr Middleton said. “It really makes me smile when I hear the head of Tower saying we’re not going to subsidise people in Wellington and Christchurch. That’s what insurance is – it’s a subsidy from the many policyholders to the few claimants.

“The market is failing because it’s not balancing the risk. It’s forcing people to take their own risk if they can’t afford the insurance premiums. It’s isolating the risk.”

The role of EQC

Mr Middleton said EQC’s role is taking on some of that risk by covering the damage from natural disasters. This means private insurers don’t have to, therefore they don’t pass the cost of that risk on to consumers.

“EQC is more than an insurance company that’s owned by the government. It’s EQC that’s balancing that risk function by having a flat rate across the whole country and requiring everyone who takes out insurance to get cover.”

A Treasury spokesperson said it’s hoped premium pressure would ease in earthquake-prone areas with the EQCover payout cap shifting from $100,000 to $150,000 from July 2019.

But Mr Middleton said an increase of the EQCover cap was too little, too late. He believes EQC should be covering the full replacement cost of home and contents damaged in an earthquake.

This was the original intention of the cover. However, the current $100,000 level was set in 1993, when the estimated cost of a house build was $774 per m². It’s now estimated to be between $2000 and $3000 per m².

A 100m² home would cost between $200,000 and $300,000 to rebuild. Demolition and clearing costs, surveying, architect and resource consent fees, and GST would need to be factored in as well.

Mr Middleton estimates $400,000 plus GST would be about right for a 100m² home. That would cost a consumer about $800 a year in EQCover premiums.

He also wants to see the cost of alternative accommodation after an event covered and contingency plans to ensure EQC can handle its own claims instead of asking insurance companies to do it.

After the major natural disasters of the past seven years, each resulting in thousands of claims, EQC has looked to private insurance companies to handle the claims process.

After the November 2016 Kaikoura quake, it signed an agreement with insurers allowing them to act as the commission’s agents in settling claims.

“To be a bit crass – why would you hand another party your chequebook? Insurance companies are settling claims for their clients on EQC’s money. There’s a blatant conflict of interest. There’s a resourcing problem that EQC is far better equipped to [manage] with adequate planning,” Mr Middleton said.

We say

• It’s time to take a critical look at whether EQC is capable of doing what it was designed to do – protecting New Zealanders from the economic impact of a natural disaster.
• The government needs to look at how we provide natural disaster cover. That has to be done before private insurance premiums become so expensive people are priced out of the market.