Reserve Bank’s latest financial stability report says risk-based insurance pricing is a continuing trend and high-risk properties may see further increases

The Reserve Bank (RBNZ) is warning that while insurance premium growth for residential dwellings is likely to soften, high-risk properties may see further insurance premium increases.

In its latest Financial Stability Report (FSR) on Tuesday, the RBNZ says the recent lack of large natural catastrophe claims has helped property insurers achieve stronger profitability.

Conditions in reinsurance markets have improved and global reinsurers have also benefited from fewer major insurance events, the FSR says.

“This will help to ease cost pressures faced by local insurers. For vulnerable properties, flood risk premiums are becoming more common as the trend towards risk-based pricing continues,” the RBNZ says.

“Growth in premiums for residential dwelling insurance is likely to ease overall, although high-risk properties may see further increases.”

The FSR also says excess levels on reinsurance remain high for insurers, requiring them to hold higher levels of capital to cover potential claim costs. 

“Premium growth has been strong as property insurers pass on additional reinsurance costs and improve their pricing of natural hazards,” the RBNZ says.

The RBNZ publishes its FSR twice a year and the report provides the RBNZ’s analysis of the strength and effectiveness of New Zealand’s financial system.

Earlier this year, the central bank’s May FSR explored the impact of dwelling insurance becoming more expensive or unavailable in some locations around the country.

The RBNZ found premiums for residential dwelling insurance had “significantly outstripped” the general rate of inflation over the last decade. In the central bank’s view, this could lead to people being unable to afford home insurance in the future.

The RBNZ said in May it expects insurance for high-risk properties to gradually become less available and says some owners may find insurance “increasingly unaffordable”.

The November FSR released Tuesday notes insurance premiums have continued increasing.

“Since May, the trend towards greater risk based pricing appears to have continued. For example, slightly more properties in flood prone areas have had premiums added to their insurance costs,” the report says.

However, the RBNZ says there hasn’t been “any material change” in online quotes availability for dwelling insurance and owners of houses in almost every suburb can get online quotes from more than one insurer. 

“This means dwelling insurance cover is widely available,” the FSR says.

While general insurers’ profitability had benefited from low claims from large catastrophes, the FSR says life and health insurers had experienced weak premium growth due to cost-of-living pressures reducing insurance demand.

“Cost-of-living pressures have led to more people cancelling or not renewing policies and fewer new customers. Health claims expenses have experienced double-digit inflation rates, while premium increases have lagged,” the RBNZ says.

The central bank expects financial performance in the health market to stabilise as inflation pressures ease.