The Sustainability of Insurance –
IAG’s New Zealand Chief Executive Jacki Johnson
The Canterbury earthquakes, various storm and flood events including in the Hawkes Bay, and even the recent tornado which ripped a path through Albany on Auckland’s North Shore have significantly challenged various communities and individuals within those communities.
The insurance industry too has been challenged and is working hard with impacted communities and their customers. If there has been any time to reflect, these events reinforce the importance to everyone of making prudent decisions to cover risk. That includes giving careful consideration to insurance cover – how much, and with whom.
At its heart, insurance is about spreading the cost of an event that could be devastating to an individual, a family, a particular business or a community across many so that there is an opportunity to quickly recover from the hardship of unexpected loss.
IAG is New Zealand’s largest insurance group, providing financial cover for hundreds of thousands of customers across the country under various brands. We believe in providing our customers with the best possible quality of cover, so they can always be assured that their assets such as workplaces and family homes, and their livelihoods, are protected.
To provide our customers with the level of financial cover they expect, and to be there when needed, we need to ensure that insurance premiums appropriately reflect the risk being insured against. This includes matching prices to the real costs of repairing damage and replacing possessions, as well as to a full understanding of risk factors. In both regards we have entered a different world.
Firstly, the cost of repairing damage is rising as a consequence of the magnitude of events such as the two major Canterbury earthquakes. When large events occur there is demand pressure for building materials, building and construction services and even whitegoods to replace those damaged. With such concentrated requests for services and supplies, costs can increase dramatically.
Secondly, our awareness of risk factors and our understanding of costs associated with risk is constantly developing. Lessons from Christchurch, when applied across the country, can lead to a new assessment of our own models. An example of that is the cost of remediating the impact of liquefaction.
Thirdly, the cost of reinsurance is also escalating.
To explain, insurers themselves take out cover against catastrophic events, called reinsurance, primarily to help manage extreme demands on cash flow. Reinsurance is spread to companies around the world so that when significant natural disasters occur, cash reserves can be drawn on to cover for the very high cost of these catastrophes. Insurers pay a premium each year to reinsurers for this protection. In the last 18 months global reinsurers have faced big costs associated with New Zealand earthquakes as well as from events such as the Japanese earthquake and tsunami and the Chilean earthquake at the beginning of 2010.
When such events occur, reinsurers reassess risks and costs to ensure they are calculating the correct reinsurance premium. They, in turn, pass this on to insurance companies. In the current environment, insurers face upward pressure on reinsurance rates in the short-medium term.
To support the sustainability of our New Zealand business it is imperative to have a strong financial position, with access to capital and reinsurance at rates advantageous to our customers. Being part of the Insurance Australia Group gives IAG in New Zealand access to a larger pool of capital and to global reinsurance markets that it might not be able to access on its own. This provides added security to IAG’s already strong financial position in New Zealand.
Following the Christchurch earthquake in February we have seen increased interest from new customers which we believe is due to a “flight to quality”, acknowledging the financial strength of our business and the sustainability of our business model.
As the market leader, we are committed to continuing to provide our customers with cover and providing insurance capacity in this changed environment. An unavoidable consequence, for the reasons given above, is that many people will face a rise in insurance premiums in coming months. The quantum of any increase will depend on individuals’ particular insurances and circumstances.
Soon after the 22 February quake, there was speculation of premium rises in the vicinity of 20%. This week, 50% was mentioned. For the majority of our personal insurance customers I believe the quantum of increase will be less than the amounts speculated.
It is still early days, however. Further price impacts, led by changing costs and risk factors, are likely to be felt over years, rather than months.
Decisions still need to be made by others in relation to the Fire Service Levy and the EQC levy which provides natural disaster insurance administered by the Earthquake Commission. This adds to home insurance costs. Because of the compounding impacts of these levies, perhaps it is time to reassess how they are applied and whether it is fair for the insured to, in effect, subsidise the un – or under-insured. Should this instead be a community function, where the cost is more fairly spread via rates or other taxes?
Another consideration is that if the amount of regulatory capital or reinsurance an insurer is required to hold is increased in response to the Reserve Bank of New Zealand’s Solvency Standard for Insurance companies, increased costs for insurance companies will result. This will also ultimately impact on the price of premiums made available to customers.
IAG is conscious of financial pressures being faced by households. We are also conscious of the need for us to be there, on the ground, financially strong and working within communities, with businesses and with individuals when they need us. That is the balance we are determined to achieve.
The measure of success will be our service and our ability to be there when our customers need us, sustainably and over the long term. That is our focus. After all that is what people purchase insurance for.