IAG ups the ante on risk-based pricing

Insurance

State and AMI home insurance policyholders in parts of the country deemed risky to receive premium increases of around $91 a year under IAG's new pricing model

23rd Jul 18, 3:01pm by Jenée Tibshraeny

State and AMI home insurance policyholders who live in earthquake or flood-prone parts of the country can expect their annual premiums to increase by an average of $91.

Meanwhile policyholders in parts of the country deemed less risky can expect their premiums to decrease by an average of $54.

IAG - the company behind the State and AMI brands - has announced these changes having adopted a more risk-based pricing approach.

It says those in Whakatāne, Hawke’s Bay, Wairarapa, Wellington, Marlborough, the West Coast, Kaikōura, Waimakariri and Dunedin should be prepared to pay more for home insurance, while those in the upper North Island, Taranaki, Selwyn District, North and Central Otago and Southland, will pay less.

IAG’s consumer general manager Kevin Hughes says three quarters of affected customers will see their premiums increase, while a quarter will see them decrease.

“We know New Zealand has many natural hazards, including earthquakes and floods, with different risks in different regions," he says.

"In the past, the price people pay for home insurance hasn’t fully reflected these differences in risk. This is now changing.

“Over the past few years, we’ve seen how New Zealand’s environmental risks have evolved, and we’re taking these risks more into account. While we can’t ignore these changes, we can continue to be there for our customers when misfortune strikes. This means our prices must change.

“Generally, a home in a location which is a high-risk area for earthquakes or floods will cost more to insure than a like-for-like home in a lower risk location.”

IAG has been flagging a move to more risk-based pricing for some time.

Its chief risk officer, Karl Armstrong, in December 2016 told interest.co.nz a time would soon come when those in lower risk parts of the country would essentially stop subsidising those in higher risk places.

Tower formally adopted a similar risk-based approach in April.

IAG says State and AMI policyholders will be contacted from July 23 with details of premium changes, “which include changes relating to differences in risk along with changes reflecting IAG's normal approach to reflecting changes in inflation and costs”.

While pricing is changing, policy wording isn't.

The changes also don't apply to IAG customers who have policies with other brands, including NZI.

“We know that, for some of our customers, this will be a challenge and we’re committed to working with them through this," Hughes says.

“We will continue to provide solutions and work to make insurance as affordable as possible for them.”

Here is the interview interest.co.nz did with Armstrong in December 2016. Risk-based pricing is discussed from around 13.35min.

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19 Comments

by bilbo | 23rd Jul 18, 3:42pm 1532317351

Some of this comes down to the weak ComCom allowing the insurance industry to opolise. A lot of this comes down to our construction industry. We build expensive houses because we have no alternatives. Over engineered "acceptable solutions", exorbitant council fees, ripoff "certified" materials from the carters cartel, covenants requiring minimum $this and $that.

With all these construction expenses one is forced to have a mortgage, and thereby forced to have insurance. Then all these mortgaged up people are terrified of other people building a cheaper house than them.

In my opinion we could be building a little smaller, with materials that are a little bit better value for money and without a lot of the red tape in place.

by JimboJones | 23rd Jul 18, 4:36pm 1532320592

How about any building under 80 square metres does not need building consent (consent is optional). The risk of a building this size being dangerous is pretty low, and the consent process obviously makes up a bigger percentage of the costs for smaller buildings (e.g. for a carport the cost of consent is more than the cost of the carport). The buildings should still be built to building code standards - for a house: insulation, double glazing, etc.
I bet we would instantly see a lot of affordable houses built!!

by bilbo | 24th Jul 18, 10:14am 1532384067

The standards for building performance really need to be outcome based. The clowns at MBIE don't understand basic physics like thermal bridging. Build it how you like but there should be some tests when all the insulation is installed using scientific instruments measuring the air tightness and the conditions inside/outside the house.

Every home could be sold with an energy rating (e.g. yearly kw/h to maintain 21 deg C) similar to buying a fridge freezer. If the market wants to buy cold damp houses then let them do that but at least the buyer or renter is fully informed.

There should be personal liability for any "professional" who creates a house with major defects home even if the signs show up 15 years later.

It all comes down to the kiwi culture of "she'll be right, we'll sell it in a few years anyway", "houses are an investment", "not in my back yard - muh property values!" - instead of treating housing as shelter that people actually live and breathe in.

by RDee | 23rd Jul 18, 7:49pm 1532332171

With all the money the're saving by sending their call centre to India, the price of insurance should drop! I phoned the other night to ask for a copy of my invoice, said it would take 3-5 days for someone to email that to me, even though they were looking at the document!

by Foxglove. | 24th Jul 18, 8:11am 1532376709

Yeah RDee all the technology, all the electronic wizardry to save time and effort. In the old days you would have phoned up the local office & someone would have taken a photocopy and posted it out that night. Alternatively you may have strolled down to the office in your lunch hour and got the same thing. The financial service industry, banks, insurance used to be big on customer service for supposedly competitive edge, if you want to sound old fashioned. Now it is just words, just worthless noise.

by middleman1 | 24th Jul 18, 10:45am 1532385918

'the financial service industry, banks, insurance used to be big on customer service for supposedly competitive edge'

Reality is no-one is prepared to pay for it. 'I've shopped around and can get my insurance etc 20% cheaper than you from a call centre based insurer, match it or I'll move'. Lowest pricing wins the order therefore lower your customer interface costs. Simple really. Your nostalgic world has gone forever.

by Foxglove. | 24th Jul 18, 11:33am 1532388832

MM at my age much is gone forever but when all the advertising says a service is guaranteed to be delivered then you are entitled to expect it, not just out of nostalgia I might add. I was simply being sympathetic in response to the previous comment about poor service. Sure you can do your insurance bartering through a broker effectively enough as we do but the point I was making is that one on one, just a simple enquiry can be painstakingly frustrating yet there have been huge advancements in speed of communication, and storing and accessing records and information. The trouble is if the solution, or even the question, doesn’t appear on the computer screen of the representative on the other end of the phone you are more or less stuffed. So yes, nostalgically, and ruefully too, I am saying the level of service, despite all the technology is too often a poor comparison to when it was more manual and you could go face to face.

by murray86 | 24th Jul 18, 8:47am 1532378861

This is just about profiteering. The calculations used by insurance companies factor in the risk of any one event occurring, but the insurance companies profiteering means they are not putting aside the portion of premium that covers the 1:100 - 1000 year events. Instead what is not paid out in any one year is taken as profit. This led to the situation that occurred in Christchurch where insurance companies literally ran out of money.

But going back to basics on the principle of insurance means they should be banking the premiums taken for those events. Thus for actual 1:100 year events, between the events they would have 100 years to build up the capital reserves to pay for the payouts. Naturally this money is invested to provide returns so some inflation compensation is provided, plus premiums grow with inflation. If this were done, premiums should be quite low and highly predictable.

The higher risk areas should also pay for those higher risks, but then the question becomes what is considered to be the risk. If a Tsunami occurs 1:1000, should it be covered? when did the last one occur? And so on.

by nymad | 24th Jul 18, 8:54am 1532379248

You may need to read up on how (re)insurance works.

by murray86 | 24th Jul 18, 9:52am 1532382764

Yes I know they have corrupted the principle behind insurance. But that is in the name of profiteering. it doesn't change what the principle is.

I deal with risk management every day in my job, and the farce that insurance has become rankles me big time.

by steven | 24th Jul 18, 1:08pm 1532394502

I am sorry but no they dont have 100 years to save up for the 1 in 100 year event. On top of that CC makes a 1 in 100 year event a joke when they start to occur more in 1 in 5 at that point there will be no insurance.

by Carlos67 | 24th Jul 18, 2:16pm 1532398588

Insurance events are not "Predictable" as far as the weather or earthquakes are concerned. In case nobody has noticed the worldwide weather is getting more and more unpredictable by the year. We are starting to see some pretty extreme events. Certain properties will become uninsurable or simply have their premiums priced off the planet.

by middleman1 | 24th Jul 18, 11:01am 1532386862

Towers move to risk base pricing will probably have triggered IAGs change. Otherwise they faced being 'selected against' through an influx of ex-Tower higher risk customers. Each of these cases requires individual (and expensive) bespoke underwriting review. Suncorp will be forced to follow for its 'direct' non broker business.

The vice slowly closes on coastal erosion/inundation exposed, flood prone, and older houses on liquifiable soil in EQ zones. Bank lending risk models will likely also gradually reflect insurance modelling.

by steven | 24th Jul 18, 1:05pm 1532394339

Indeed, from what I have been reading overseas "not insurable" is a distinct possibility. Now that will be a wailing to behold. The Q then is who will be expected to bear the loss? the owner stuck with an un-sell-able property? or will said owner sue the council for not putting a warning on the property? ie moral hazard, or socialise the losses.

by Kate | 24th Jul 18, 1:44pm 1532396681

Silly thing is - to my mind there is not a property anywhere in NZ that is not subject to one or more natural hazards. And no council is ever going to 'flag' every property within its jurisdiction as at risk.

I was involved in a district plan change in Kapiti recently. A study by Isthmus found the (very near) entire district was within the definition of the "coastal environment" as per the NZCPS. Based on the criteria set down in the legislation as well as in the governing regional policy statement - the study authors methodology was completely correct/robust. But that didn't suit the 'big end' of their town (i.e., the commercial/property owners) as they didn't want to have to assess all of their development proposals against the NZCPS.

So, they ended up with one of the biggest regulatory slight-of-hands I've ever seen - a laughable 'hybrid' giving rise to a new regulatory concept called a 'coastal dominance line' ... as a means to avoid having to actually define where their coastal environment is (i.e., what land is influenced by coastal processes).

by Foxglove. | 24th Jul 18, 6:05pm 1532412330

Oh dear, Kate, why does none of that surprise me? It has become worrying to the point of absurdity. Every one everywhere ever increasingly, just want the authority but not the responsibility. What is this country of ours growing into.

by RickStrauss | 24th Jul 18, 9:40pm 1532425222

slight-of-hands

I am shocked to see our Kate make such a mistake, let alone a two-fer in one compound term.

Reassuring, indeed. Nobody's perfect ;-p

by Kate | 24th Jul 18, 10:11pm 1532427072

lol - fingers going faster than mind - shows just how annoyed I was about the farce.

by pankers | 24th Jul 18, 9:30pm 1532424643

Even though Tower hiked their prices and I live in Christchurch , they have a better policy than IAG group, and 800 bucks less on 1.6 mil house , contents is far better as well