By Gareth Vaughan
New Zealanders should be grateful insurance companies remain committed to New Zealand given the country's risk exposure, John Lyon of Ando Insurance says.
In the latest episode of the Of Interest podcast I asked Lyon how well general insurers are serving New Zealanders, how competitive the market is, and how the public should judge strong financial results from their insurers. As well as being CEO of Ando, an underwriting agency, he's also the former CEO of Lumley Insurance.
Statistics NZ's Consumers Price Index shows insurance costs rose 14% in the June year, making them a key contributor to households' cost of living pressures and the stubbornly high non-tradable inflation that meant the Reserve Bank held the Official Cash Rate at 5.50% for as long as it did.
"I think we should be grateful that there are insurance companies who are still committed to the New Zealand market, because what we need is a healthy, strong insurance market because the risks are so great in New Zealand," Lyon says.
"When you think about the risks we're exposed to from volcanoes that are overdue, to the well known earthquake exposures, the evolving cyclone and climate change issues, [and] we don't really fully understand tsunami risk. There's lots of evidence that there have been major tsunamis along the coast of New Zealand. At what frequency would we expect something like that to happen? We don't know. That's not been particularly well modelled. That's a major risk to the country."
"There's a whole bunch of factors in there that we can talk about in terms of what New Zealand Inc needs to do to protect itself from the environment we live in. And climate change is a big part of that. But it's also all of the other generic risks that are there in front of us. So we have to think about how we manage them as well," says Lyon.
With the likes of IAG, Suncorp and Tower having recently reported strong financial results, how should we judge how well they're doing financially?
"One of the things that the reinsurers did [last year], as well as putting prices up, was they went to the insurance companies and they said, 'you now need to hold more of the risk to your own account'."
"The Suncorps and IAGs, and indeed our business, was faced with a situation where if we had been holding, say, $100 million of the risk to our own account before reinsurance comes in, the reinsurers might have put that up to $500 million. So if you think about that, then if you've got an exposure of $500 million for any one event, you're not going to get $500 million every year."
"So typically what insurance companies will do is they say, 'well, maybe over five years, we'd expect to have $100 million on average. So it'll be one big event every five years. That's $500 million. We'd spread that cost over five years.' So in every year you'd put a cat allowance [catastrophic event allowance] in of $100 million. If you don't have a cat event, you've got $100 million profit and then the next year you might have no event and you got another $100 million profit. But in year five you've got a $500 million event and you lose $500 million."
"That's the market that we have moved to. The insurance companies need to be very profitable in the good years because the cost of managing the bad years is a lot higher. So it's not just reinsurers that suffer when there is a big event. The insurance companies hold more to their bottom line and that's a challenge for all the businesses in that respect," Lyon says.
"So it's hard to judge insurance on a year on year basis."
Lyon suggests the most significant barrier to enter the general insurance market is New Zealand's risk profile, noting a number of international insurers look at NZ and see the economy is relatively small.
"It'll never be a major strategic value add to a global company in terms of incremental growth. So all you're going to have is a problem when a big thing happens like an earthquake."
In the podcast audio Lyon also talks about what he believes should be done that would be more beneficial to customers' insurance costs than a market study, how the insurance industry is lagging from a transparency perspective, the perception of choice created by the big companies being behind numerous brands, how competitive the market is, the level of market power the big players have, climate adaptation, managed retreat and uninsurable areas, whether the general insurance market is a duopoly, insurance policies being used as a taxation device, risk-based pricing, parametric insurance, what the insurance equivalent of open banking could mean, and more.
*You can find all episodes of the Of Interest podcast here.
13 Comments
'So it's hard to judge insurance on a year on year basis.'
Always true - that's why people buy insurance.
But what seems missed here is that society as a whole, can no longer afford itself.
Health, LG, education - more and more are in trouble. There comes a point where 'income' insurance - hedging in a way - cannot be 'funded'. This happened in '08, and the can was kicked down the road. Next time?
I think we should be grateful that there are insurance companies who are still committed to the New Zealand market
I'm not. To me all they have enabled is for us to live and leverage our lives well beyond our means so that any mishap isn't recoverable from. We'd have been better off if they'd never existed and bank loan books reflected the fact it's unlikely the average Aucklander couldn't afford to repay the average house price if it burnt down or was washed away in a flood.
Insurance has enabled us (society as a whole) to avoid the reality that we cannot afford ourselves in its current state.
There are insurers who have been pulling back from places such as California and Florida - https://smartfinancial.com/insurance-companies-drop-california-florida
The Australian market is one of the worlds largest reinsurance buyers. The major reinsurers actively compete to be part of AUS insurer's programs, to achieve the geographic diversification they must have. Given NZs insurers are largely subsidiary to AUS insurers, they enjoy the advantage of their parents considerable RI buying power. Certainly reinsurers will pull back the extent of cover, with the higher program deductibles Lyon discusses one such example, but his cringe inducing suggestion we should be grateful for their participation is overblown. EQC/Natural Hazards Commission appears to have had little difficulty in filling its RI program. Perhaps Lyon's perspective is influenced by his company not having a muscular Aussie bruiser for a parent.
The USA and other large countries have a very large pool to spread risk over as well.
Insurance is not a right - someone has to be prepared to take a risk that they will have more left than they pay out. If they don't like the odds they don't have to accept the bet just as you don't have to place the bet if you think the odds are wrong.
Its all about understanding risk - which it appears many in NZ are not very good at doing.
I expect within 5-10 years homes on beachfronts will be uninsurable. The result will be a crash in house prices in those areas as banks will not lend if the property is uninsurable. When buying a house the insurance risks of tsunami, cliff erosion and flood plains should be at the top of the buyers lists to avoid.
Noodles. Happening already in some places and as you predict it'll become more common over time. A family connection has owned a bach in a once desirable waterfront location for decades. Previously worth close to $3m, a recent council hazard redesignation has seen insurance suddenly hard to get and the value plummet to under a third of that.
Some already are: 10 years ago I spent a month in Ruby Bay near Nelson doing some contract work. A number of large sections had been developed as 'ultimate beach-front property' and the developers were after an astronomical sum - like 7 figures.
Several years later I was back and the sections were still unsold as people who could afford a million dollar section were more than smart enough to check out the natural hazards and their insurability when wanting to put a McMansion a small step up from the high tide line. Apparently it wasn't that the insurance premiums were high, but more that no-one could find a willing insurer.
Yep, parts of Ruby bay a sitter for changing weather patterns. A gorgeous bit of NZ but during your month there you possibly witnessed the sea crashing over the coastal access road, as it intermittently has done for years. Interesting to note the impact on AUK CC's budget of its flood buyout scheme. It's already significant for just a comparatively modest number of properties. Other cities such as Dunedin have massive such exposures. Socialising the housing retreat costs driven by climate change through rates is clearly not viable long term.
Sitting above South D, I'm watching it turn in to a lake - the local high school's sports fields are one sheet of water, as are the local park's, and there is a lot of surface flooding visible on the streets.
That said, it was mostly swamp and it's mostly reclaimed land.
South D is mostly a low decile area and the council is openly saying the low-lying parts will have to be gradually abandoned. However: no-one has said a word about where all the people who are the least able to pay are going to go - particularly since the large green belt is regarded as sacrosanct by the preservationists, but there are heavy controls on the development that restricts the amount of building land to try and densify the city - while still and mandating low density development on any edge developments.
The land our hugely expensive hospital is being built on is also reclaim and not far above the high tide line - when there was a good spot in Wakari, on the Leslie Groves Hospital site, which is stable, elevated and reasonably flat - but apparently not the politically preferred solution.
We just will not get out of our own way, and it may be that Dunedin's lack of insurability and unintended-consequence development rules are going to accelerate our slide even further in to provincial city status.
A gloomy view but sadly I think as things stand, a correct one. I lived in St Clair for a while as a kid and remember the regular S Dunedin flooding way back then. Only Mosgiel and non flood exposed areas of the Tairei plain offer feasible lower cost land options for retreating south Dunedinites but as you observe, entrenched positions of the ruling clans will probably frustrate this. In ChCh insurers are through risk based underwriting incrementally facilitating a revaluing of eastern flood exposed suburbs and that is also S Dunedins slowly materialising fate. A difference in ChCh though is the ready availability of land to the west and south of the city that was opened up after the EQs.
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