Should insurance brokers brace themselves for aggressive premium hikes?

Hard market set to tighten further following early weather events

Should insurance brokers brace themselves for aggressive premium hikes?

Catastrophe & Flood

By Terry Gangcuangco

Higher insurance premiums in the current hard market are a given, but Kiwi insurance broker Crombie Lockwood, following the Auckland Anniversary flood and Cyclone Gabrielle, is expecting insurers to be less subtle when it comes to future increases.

In Crombie Lockwood’s latest insurance market update, chief broking officer Mark Jones said: “We understand that the two events in January and February have caused several New Zealand insurers to exhaust the reinsurance protection they had in place, requiring them to go back to the reinsurance market and purchase reinstatement cover.”

Australia-headquartered IAG, for instance, just based on claims from the Auckland Anniversary flooding, knew that the natural perils cost impact, net of reinsurance, would be at the retention level. The trans-Tasman insurer previously indicated that an additional premium would be payable on a pro-rata basis for a second drop-down cover under its reinsurance programme.

In Crombie Lockwood’s update, Jones highlighted the case of IAG. 

“The likelihood of New Zealand insurance buyers facing tougher conditions in 2023 is something that we have been signalling for some time,” he said. “However, the Auckland Anniversary flood and Cyclone Gabrielle events have accelerated the market change.

“After the Auckland Anniversary flood but before Cyclone Gabrielle hit, IAG – whose New Zealand brands include NZI, AMI, and State – announced it would blow past its group-wide internal budgets for natural disasters for the year. As a consequence of this announcement, its shares dropped by 3%, wiping out approximately A$330 million of share market value.”

Jones also pointed out that, as the recent extreme weather events took place in the upper North Island, most insurance companies writing business in the country are impacted. Assurances have been offered, however, that insurers are financially stable and that their claims obligations will be met.

‘Perfect storm’ driving premium hikes

As mentioned by Insurance Council of New Zealand Te Kāhui Inihua o Aotearoa chief executive Tim Grafton in his newest Insurance Business column, either the Auckland Anniversary flood or Cyclone Gabrielle in isolation would have been the largest extreme weather event recorded in New Zealand.

Combined, given the impact of reinsurance costs and other drivers like inflation, they create what Crombie Lockwood described as a “perfect storm” pushing insurance prices up.

“The additional cost of the reinstatements (especially so early in the year) will have significant impact in increasing the costs that insurance companies need to recover from policyholders,” Jones said.

“The cost of weather-related claims, the effect of high inflation, and disrupted supply chains had been impacting the results of New Zealand insurers for the past couple of years, but the Auckland Anniversary flood and Cyclone Gabrielle lead us to anticipate that insurers will move from an environment of gradual premium increases to demanding more drastic pricing uplift.”

The Kiwi insurance industry, according to the brokerage, is entering the hardest market conditions in more than a decade. Flood risk, meanwhile, has been put under the spotlight. 

“There is the potential for coverage changes to come into the market around flood exposure. Flood has been a peril largely ignored by insurers in the past, but an expected bill in excess of $2 billion from recent events has focused their thinking,” Jones said. “While insurers are not yet saying that flood damage cannot be covered, we expect to see far more focus on ‘risk-based pricing’. This is where insurers take a much closer look at an insured’s exposure to flood than they may have in the past.

“It is worth noting that in both Australia and the United Kingdom, governments have worked with their local insurance market to try to find alternative solutions to this growing exposure. We anticipate that the New Zealand government and local authorities will need to do the same and work with New Zealand insurers to ensure that affordable cover remains viable and available over the longer term.”

How do you think the Auckland Anniversary flood and Cyclone Gabrielle will impact the insurance market in New Zealand? Discuss in the comments below.

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