By Tim Grafton*
Recent commentary from lawyer Andrew Hooker is a lesson in the merits of why he should stick to dispensing legal advice and not proposing how insurance should be priced.
Just as one would not seek legal advice from a surgeon, no-one should accept Hooker’s simplistic rendering of risk-based insurance premiums as akin to selling televisions off the shelf at Noel Leemings.
To whip up interest in his piece Hooker glibly spices it with ‘talk of premiums doubling and massive increases around the country’.
Let’s keep to facts.
Yes, there has been a sharp increase in premiums over the past two years, but there has been no suggestion of premiums doubling over the next two years.
So, the case to answer is why has there been a sharp premium increase?
Firstly, 2011 with the Tohuku tsunami, the Canterbury earthquakes and severe flooding in South East Asia and Queensland contributed to the largest claims made in any year in insurance history. Canterbury incidentally was the fourth largest claim ever, covering both private and public insurers.
Hooker claims that the losses incurred are being recouped through premium increases.
What he neglects to say is that these huge losses brought about a shortage of capital in the global insurance market.
Insurers lay-off risk to international reinsurers, so as in any market when there is a shortage of supply, in this case of reinsurance capital, the price of capital increases.
Reinsurer costs to New Zealand insurers have increased by around 97% since the Canterbury earthquake events. The Government-owned insurer, which also has to obtain reinsurance cover, has trebled the EQC levy to 15 cents per $100 of insurance cover.
Hooker claims that the insurance industry’s premium increases are not genuine, that the industry is now trying to recover what it should have charged years ago and that blaming reinsurers is a red herring.
Insurers are not blaming reinsurers – how a market behaves is what it is.
Secondly, risk assessment of the impact of future catastrophes is complex.
It draws on what is known as well as models that estimate the intensity and potential cost of a catastrophe. Models are refined on the basis of actual experience and as more data comes to hand.
Some models for the Canterbury earthquake significantly understated the actual cost. Canterbury’s 11,000 earthquakes and aftershocks, including 56 above magnitude 5.0, also gave rise to numerous unanticipated complexities that have prolonged the recovery and as a result increased costs.
As a result of this and more recently the timely reminder of the risks faced by Wellington, the risk New Zealand faces has been recalibrated.
On this basis, New Zealand has enjoyed historically low premiums for the actual risk that exists.
For New Zealand businesses, homes and individuals to continue to be protected with adequate insurance in place, commensurate with risk, we will require ongoing capital from both insurance shareholders and reinsurers. The expectation is that there will be a reasonable return on that capital. Yet over the last 10 years New Zealand underwriters have only produced 2 years where returns could be viewed as satisfactory.
Even so New Zealand, with one of the highest probabilities of loss per GDP, remains one of the most highly insured countries in the world.
The response to the Canterbury earthquakes is an example of the benefit that brings, with private and public insurance meeting about $30 billion of the recovery costs.
The Insurance industry operates in a competitive environment with extensive prudential supervision and oversight through the Reserve Bank of New Zealand, the Financial Markets Authority and the Commerce Commission. As a former senior counsel within the insurance industry Hooker, better than most, should be aware of this.
For the future, it is essential that the regulatory regimes ensure that New Zealand continues to have an insurance industry that is efficient and well-capitalised because of the important role it plays in the economy, absorbing risks and reducing liabilities for tax payers.
Hooker’s description of the withdrawal of new insurance in Wellington for a few days following the recent shakes as a ‘crisis’ is scare mongering nonsense.
The suspension was only by a few insurers and in many instances only for a few days.
In any case, as any lawyer would know, settlement clauses could easily address the insurance issue and there were examples of the vendor’s insurer willing to extend cover to the purchaser.
Hooker though leaps to the conclusion that additional regulation is required. This will only drive up costs in an industry that is already heavily regulated and risk the protection we enjoy from high insurance penetration.
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Tim Grafton is the chief executive of the Insurance Council of New Zealand. You can contact him here »
6 Comments
This response dances around some of the fundamentals in the original article. Insurance companies sell a service of taking on risk for individuals. This risk is rated and a premium paid based on the chances of something occuring. No single premium is capable of funding the entire risk, so a part of the principle is that the accumulated premiums will be sufficient to carry the cost of any realisation of the risk. These accumulated premiums are not just across the markets, but across time as well. Insurance companies re-insure their risk for the same reasons.
After taking large profits for many years, and then crying poor due to some big hits, which their own stats should have told them would happen sooner or later, and saying it is "how the market works" is pure BS money grabbing profit focus. The commonly understood principle of their business was that they were covering their own bases to account for this.
The insurance campanies need to understand that societies are getting sick of large organisations fleecing them in the name of profit and not delivering on what they claim to sell. They are well along to pricing themselves off teh market, beyond what is affordable or justifiable.
I'm always weary of people who claim they are sticking to the facts and don't offer any useful facts to the conversation as-well.
The recovery acording to the article will cost $30 Billion. I couldn't find the number of business premesis in Christchurch (or NZ), so can only work out through residential dwellings how to recover this expence.
In Christchurch there are (2006 cencus) 135,261 dwellings so it would cost each dwelling $221,793 to ofset this cost of $30,000,000,000.
The disaster was perhaps a once in a hundred year New Zealand wide event.
In New Zealand there are (Stats NZ) 1,675,700 Dwellings so it would cost each one $17,902 to offset the full cost cost and just $179 per year over a hundred years.
You've got all our businesses who dilligently pay insurance which are not factored into the above equation.
How can any insurance business complain about a perhaps $179 per year cost of doing business per household when they charge revenue of perhaps $800 per household to provide the service?
I know there's some big asumptions in the above but come on show me the numbers.
From the movie Outlaw Jossie Wales which Client Eastwood directed, "don't p$ss down my back and tell me it's raining'.
Straight after the Christchurch earthquakes New Zealand sent its top representative -a wood work teacher called Brownlee to discuss insurance matters with the big re-insurers.
After that meeting I think those clever guys realised New Zealand was ripe for extracting greater profits.
Look what Brownlee since the earthquakes has and hasn't done.
- He punishes people who weren't insured by offering less money when government 'negotiates' to redzone and buy their land and/or buildings.
- He does not set up a disputes resolution process that can quickly arbitrate disputes between EQC, claimants and insurance companies.
- He does not set up statutory requirements for how long insurance companies can delay the honouring of their contracts regarding rebuild or paying out claims.
- Insurance companies face no penalty for delays, unlike say the United States.
- There has been no major reforms of disaster insurance since the Christchurch unlike the Napier earthquake when the government of the day set up EQC and State insurance. Then when the private sector refused to offer insurance the government stepped up, now when the private sector refuses to offer full replacement insurance what does the government do?
- The government is doing nothing about the well known problem post earthquake of demand inflation.
Most of the above clearly benefits the big insurance companies over the smaller property owner. But the last point you could argue the government is beggaring both the insurance company and the claimants.
The government has done nothing about making the construction industry more competitive and thereby reducing construction costs and it has done little to increase the supply of residential land in Christchurch and so the land component of the rebuild has inflated massively.
This actually benefits the governments fiscal position because they will receive more taxes from a higher insurance pay out. But does this really benefit the country?
I am sure (Not) that Tim Graftons previous experience in market research & political advice fully qualifies him in the matter of insurance technicalities wheras Andrew Hooke has only 20 years experience as an insurance litigation lawyer.So far Tim Grafton exhibits the same lack of understanding of the real world as the spin doctor he is.
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