The increased frequency of extreme weather events, rising sea levels and shifts in temperature patterns, are just some of the climate-related issues directly affecting the risks Tower Insurance underwrites, as well as the insurance claims it manages.
Tower Insurance released a climate report alongside its full-year financial results on Thursday where the insurer reported $595 million in annual insurance premiums and $83.5 million in underlying net profit after tax (NPAT).
In the report, Tower Chairman Michael Stiassny and Audit Committee Chairman Graham Stuart said insurance, more than any other industry, is particularly exposed to the direct financial and operational consequences of climate change.
“This increasingly necessitates that climate-related issues are not peripheral concerns, but integral to
our day-to-day business operations,” they said.
Tower was the first general insurer in New Zealand to introduce risk-based pricing back in 2021 and NZ’s other general insurers have followed suit.
Risk-based pricing boils down to insurers charging a person or policyholder a higher premium if the insurer thinks their insurance policy has more risk than average.
This means someone who lives in a flood-affected area would pay more for their house insurance because of the flood risks attached to that house.
Risk-based pricing has helped insurers buffer themselves during a period where climate-related events have increased. But it has also raised questions about insurance becoming unaffordable for some people in the future.
The Reserve Bank warned in its latest Financial Stability Report in early November that while insurance premium growth for residential dwellings is likely to soften in the future, high-risk properties may see further insurance premium increases.
'Deceptive calm'
Stiassny and Stuart said Tower’s reinsurance programme has been designed to shield the insurer from the volatility of large events, with the company describing the reinsurance programme as “robust” in its results presentation to analysts on Thursday.
Tower has catastrophe reinsurance of up to $800 million for two events in the 2025-year, up from $750 million in the 2024-year.
The insurer also has additional prepaid third event catastrophe cover for up to $85 million with $20 million retention.
Tower’s Chief Financial Officer Johnston told interest.co.nz on Thursday that it was an “interesting time” for the reinsurance market.
“There was a lot of rate increases going through, particularly in 2022, 2023 and 2024. Since then, we are starting to see prices flatten or even come down a little bit. And so we saw that reflected in our renewal for next year,” he said.
The insurer has “prudently” set out a large events allowance of $50 million – $5 million higher than its large events allowance in the September 2024 year, which will be rolled into Tower’s underlying NPAT for the September 2025 year if unused.
More than half of Tower’s NPAT in the 2024-year came from its large events allowance of $45 million, which went unused due to the lack of natural disasters. The unused allowance increased underlying NPAT by $32 million after tax.
Stiassny and Stuart describe Tower’s 2024-year as “unusual” because Tower hadn’t faced large weather events during the September year.
“[...] we understand that a future shaped by climate change will bring a range of extremes, including periods of deceptive calm. Tower remains steadfast in our conservative approach to managing these risks,” they said.
Tower's full year guidance for the 2025 year is for underlying NPAT to be between $50 million and $60 million, assuming full utilisation of its $50 million large events allowance.
1 Comments
Its going to get very expensive for those even remotely in a flood prone area or pretty much anything coastal or perched on a cliff edge. People are going to have to start taking a pass on insurance due to cost and just be prepared to walk away if it turns to custard. I certainly would be selling the place if it doesn't have a decent elevation above sea level.
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