New Zealand’s insurance brokers could be staring down the barrel of a residential and commercial property insurance crisis, as climate change and natural disasters push premiums sky-high and leave thousands of clients struggling to find cover. The sector is now at a crossroads with some policymakers and industry leaders considering whether to stick with a market-driven approach or pivot to a more collective, solidaristic model that could reshape the entire insurance landscape. Brokers will play an important role in this debate as affordability and availability pressures likely increase on their clients across property insurance lines from strata to landlords.
In New Zealand and globally, according to numerous industry reports, insurance industry losses from natural disasters over the last three decades have increased at a rate that has reached as much as double global GDP growth. The result is a widening property protection gap.
“Insurance losses are absolutely out running the growth in GDP, and of course, if that continues at some point this is going to have profound implications for the insurance industry and for the amount of property that's insured,” said Jonathan Boston (main picture), ONZM, Emeritus Professor of Public Policy at Te Herenga Waka.
The public policy expert was explaining what’s at stake and future options for property insurance stakeholders at an event hosted by Wellington based community group Critical Signals. Boston said the main driver of these challenges isn’t just climate change but also the sheer number of people now living in high-risk areas.
"We're obviously faced with a situation in which [property] insurance costs are becoming increasingly unaffordable for many,” said Boston.
For brokers, this means more clients are being hit with unaffordable premiums – or worse, being left without any cover at all.
He said the policy options on the table to combat this include extending the Natural Hazards Commission’s remit to cover all climate-related perils, overhauling the first-loss insurance structure and expanding means-tested subsidies. Each option, he cautioned, comes with its pros and cons.
Boston said these can be considered as two “broad strategic options.”
“We can adopt the market model, which is very much what is happening at the moment, led by Tower, which is to move increasingly to risk rated insurance premiums, in which people with higher risk properties pay more and people with lower risk properties pay less,” he said.
The option is based on actuarial fairness, he said, where you link the premium to the risk and “essentially” individuals take responsibility for the risks their property faces and where there is no significant risk pooling.
“The alternative is to adopt a more solidaristic model, or a community pooling, or mutual responsibility, collective risk pooling model,” said Boston.
He said this could be similar to the approach to earthquakes and would mean a degree of. smoothing of the of the premiums across the community with people in higher risk areas, in effect being cross subsidized by people in lower risk areas.
He said there is already some degree of risk sharing through the natural hazards Commission, which takes the first loss of up to $300,000 on a property damaged by an earthquake or other seismic event.
“But obviously, we also have private insurance bearing some of the risk, and as a result of that, there is risk rated differentiation across the country, with areas like Wellington with higher earthquake risk than Someone like Auckland paying incurring a more significant premium,” said Boston.
Boston said his preferred answer to all these property insurance challenges is the solidaristic model.
"I argue the case that insurance is both a merit good and a public good.”
He argued that insurance is essential for securing a mortgage and, by extension, access to shelter – making a strong case for means-tested subsidies to keep cover within reach for all New Zealanders.
For brokers, a solidaristic model could mean a more stable and inclusive market, with fewer clients priced out and less volatility in coverage. But it would also require significant policy reform and a shift in how risk is distributed.
Boston also pointed to insurance schemes in other countries that could point a way forward for New Zealand to cover protection gaps. For example, public insurance companies in Spain and France that provide cover for nearly all major natural perils.
"France and Spain, using slightly different approaches, have decided essentially that they will cover either fully the cost of natural disasters for insured properties, up to the insured value, or a very substantial part,” said Boston.
He said in France, three principles guide the scheme: solidarity, prevention and partnership. The main concept involves collective risk pooling and legal requirements and incentives for adaptation at the local government level.
As local policymakers and industry leaders debate between a market-based approach and a solidaristic, community-oriented model, brokers are uniquely positioned to help clients navigate these developments and contribute to discussions about sustainable solutions for the property insurance market.
What do you see as options for increasing the affordability and availability of property insurance? Please tell us below.
