Andrew Hooker says the way insurers are acting makes a case for new regulation to ensure they play 'fair' with their market dominance

Good article. You would think that after our second biggest city was hammered and the EQC/insurance companies relationship was really tested there would be some meaningful lessons and reforms to the system.

Why is it that the insurance industry seems to be able to justify price increases based on historical losses?

Would it be strange if Noel Leemings doubled the price of televisions because it needed to recoup losses made in previous years on the sale of those televisions? The public wouldn’t stand for it.

But the insurance industry seems to believe it can justify enormous and potentially unaffordable increases in domestic insurance rates on the back of events that happened over two years ago.

Orion, the power lines company owned by Christchurch and Selwyn councils believes it has similar, but indefensible rights.

To summarise, the people of Christchurch are faced with increases in the lines charge part of their power bills if the Commerce Commission approves Orion's request.

On average, it appears that lines charges would rise by 18.5 per cent in 2015, followed by further increases of 4.2 per cent each year from 2016 to 2019.

Orion wants the ComCom's permission for the price rise because its prices are restricted under a "default price-quality path" (DPP) set by the regulator. Under the rules it can ask for a "customised price-quality path" in certain circumstances, such as if its activities are hit by a catastrophic event.

In a December 2010 policy paper, the commission confirmed its role "if a catastrophic event occurs is to provide certainty to a supplier that it can recover the prudent costs of supplying regulated services".

Orion says its costs have increased because of the earthquakes and argues that "our regulatory DPP means that we have been unable to adjust our prices to match our revenue with our costs".

The price rise would enable it to make a commercial return on the additional investment required by the earthquake damage. As Orion explains: "Cost recovery therefore includes recovery of our fair but not excessive cost of capital over time."

Would it be possible for a broker to act as a go-between with an off shore insurer? I seem to recall some businesses have done this and so unfairly bypass paying the Fire Service Levy?

I heard someone on the radio mention in the last couple of days that they have done just this because of the premium hike presented to them here. The overseas company accepted the risk for a lower premium  because the risk was spread much wider.

CREDIT CARD INTEREST RATES !

INSURANCE PREMIUM INCREASES !

IS THERE A SUBJECT THAT YOU'RE NOT AN EXPERT ON HOOOKAH ?

IF I LENT YOU MONEY 2 YEARS AGO AND YOU DEFAULTED, SHOULD I NOT TAKE THAT INTO ACCOUNT WHEN LENDING YOU MONEY IN THE FUTURE HOOKAH ? DO I WANT TO INSURE MY HOUSE WITH AN INSURANCE COMPANY THAT CONTINUES TO MAKE LOSS AND PLANS TO DO NOTHING ABOUT IT ? NICE BUSINESS PRACTICE THAT'D BE !

FEAR MONGER FEAR MONGER FEAR MONGER

Premiums going through the roof and when it comes to the crunch backsliding by the insurance companies when it comes to paying out.  It undermines the proposition of taking out insurance.  With a lot of people under significant financial stress (upcoming morage interest rises), I wonder how many people will give up on it.  How many more natural disasters have to occur before it becomes so expensive that a significant number of people will dispense with it.

Error, Sorry

I think Stephen L encapsulates it nicely. I am a GA pilot and insurance for aircraft follows the same model. A high profile aircraft accident in the US has led to significant insurance increases all over the world for aircraft owners. The risk is easily measurable, but insurance agencies are milking a market that has little or no way to challenge them on their business practices. Insurance companies seem to be acting like banks, (many of them are) and use big words and obfuscating language to confuse and confound non-experts and influence Governments. this is about getting richer not providing a service.

One comment that came out of the Japanese Tsunami was that only 10% of the properties were insured. Wheras in Christchurch it was something like 90%. That is why Christchurch was such a big disaster for the insurance industry.

But this does raise the question of how does the Japanese property market work, how do you get a mortgage if you are not insured? Some investigative journalism on this issue wuld be great.

I know the building/architecture community is putting a lot of thought into buildings that not only the occupants survive the disaster (the focus of the building code) but the whole building survives. And there being back up services like rain water collection that in normal use would water the garden but in an emergency could be used for other things. This change in thinking is because insurance has not being as effective as people hoped. People whose houses survived the earthquake have been able to move on with their lives, wheras people whose houses were damaged but had insurance are in limbo for years. 

I wonder if you had a well designed house, took precautions like fire alarms and had back up systems if insurance is really worth the money.

In New Zealand we have the culture that being insured is the safe, sensible thing to do. But if insurance premiums keep rising at some point the sensible thing to do is self insure. To use the money you would have used for insurance to instead take more precautions to minimise risks and to use the remainder of the money to increase savings.

Mr Hooker for a past "  insurance salesman" you seem to have forgotten quite a few things. Insurance is essentially the spreading of risk across a large number of parties. In addition all insurance companies in NZ buy reinsurance from overseas markets or reinsurers so the cost they pass onto the end customer here is directly driven by the cost of reinsurance they buy. 

Insurance is essentially renting someone's else's capital for a fixed period of time. And like every other market is subject to supply and demand.  When there is plenty of reinsurance capital and capacity retail  insurance prices are low and the opposite applies. 

Look worldwide at the number of natural disaster and man made disasters over the last 5 years and you will get an appreciation as to why reinsurance costs are high.  Reinsurers and insurance companies are not benevolent societies. They like any other company are there to make a profit and return money to its shareholders. 

In New Zealand we have been "lucky" for a number of years and benefited from relatively low insurance costs. Coupled with this we have been able to buy "full protection"  from almost all perils.  This is not the case in many countries where natural disaster is either excluded or sublimited as the case is in California, Many states in Tornado alley in the USA and Japan.

If you want low insurance costs be prepared to accept lower forms of cover.

Interestingly everyone is having a go at Insurers where it seems to be forgotten that the EQC increased its levy by 300% on all homeowners. This makes up quite a large proportion of your insurance costs. Once again this increase is directly driven by the international reinsurance market and reflects the costs that EQC incur in purchasing the Naural disaster insurance for NZ.  

Moving to a sum insured value rather than a open ended SQM basis is not the end of the world and simply puts NZ on equal footing with other countries. You choose the value , you choose the cover you want so you still have control. Additionally your policy still covers you for all the same perils it did previously. parts of Australia have flood exclusions, Japan has EQ exclusions, USA has Hurricane, Tornado, and EQ depending on where you are. 

New Zealand you don't know how lucky we are! 

Insurance is a privilage not a right. 

Some interesting comments

A couple of points ..

With 1.6 million residential houses in new zealand at (say) an average annual premium of (say) $1000 the total industry is worth $1.6 billion. That is not particularly large compared to say Fonterra with a $15 billion annual turnover. Australia with 9 million residences is a $9 billion industry.

Andrew Hooker's point about restrospective recovery of past losses does have some validity. The Insurance companies were caught asleep at the wheel and do appear to be over-reacting. The point he is making is akin to the "Lloyds Names" insurance business of old where only wealthy "names" were invited to participate. They made a lot of money every year. Year after year. Occasionaly they took big hits. Often some "names" were wiped out. But the point is, a name who survived for another day, to go again, didn't charge double the next year to recover past losses. They either crossed their fingers and participated again the following year, or they didnt. But then, Lloyds is no longer a "private club", it was corporatised, floated off as a public company, failed, bailed out and is now in the arms of RBS or one of those other Merchant Banks

The FMA and the RBNZ do have some regulatory power over insurance companies. It is suggested that every insurance company active in the new zealand market should be required to publish annual audited accounts so the public can see for themselves just how profitable the industry is, and how much is being made and salted away (or siphoned off) in the good times. Sunlight is always the best disinfectant.

Good grief. People listen. New Zealand will NEVER pay back the insured losses from the Canterbury Earthquakes in most people's lifetime! With current claims at $35billion and rising the earthquake premium collected in nz prior to the quake was a dust mite in comparison. If you think Insurance is ripping you off. Don't buy it!