Govt must take action before some Kiwis priced out of insurance completely

Dear Grant (that would be you Mr. Robertson, Minister of Finance).

I wanted to have a quiet word after your recent speech on rising insurance costs for homeowners, but temptation got the better of me.

There was the option of a reply by postage stamp, but nothing is more effective than the weekend edition for a less-quiet yarn.

So, you're the MP for Central Wellington, an area with apartments galore. You personally live in the suburb of Northland. That's a pretty steep bit of town.

It means both your neighbours and constituents are going to be feeling the insurance problem. People in higher-risk areas are finding huge hikes to their premiums due to earthquake risk. We flagged the issue back in April when Tower began a letterbox-by-letterbox war on homeowners. It was very clear other insurers would follow suit and now they are.

In the past there was a merging of properties with different risks to make insurance affordable for all. Recent developments in geotechnical models now allow a risk assessment at each driveway, with homeowners stung for massive and prohibitive costs. It amounts to a commercial dumping of high-risk homes by insurers wishing to tidy up their book and get more market share of the less-risky addresses.

What I'm delighted about is you've noticed. So many politicians let the markets dictate and stay silent. A huge thank you for making it clear you don't like it.

While the issue doesn't just involve earthquake risk (coastal inundation and flooding are in there, too), it's earthquakes that pose the biggest moral hazard in the New Zealand insurance industry. When they strike, they rip through people's lives and community infrastructure for decades.

Flooding is devastating, but ad hoc government help is often an affordable solution given it occurs in small pockets. Retreat from these areas is inevitable.

Quakes are not the same. We have fault lines all over major cities and full insurability is crucial. Retreat isn't an option. So we live with it.

Yet responsible people will be unable to afford protection and insurers with no social boundaries are incapable of being anything other than commercial.

Grant, what do you do next? You've made your first move and flagged the issue. Then it's best to fudge-it a bit to give some time for thinking. So I wasn't surprised by your comment "the government would be keeping a close eye on the situation".

You suggested there was room in the market for an insurer to disrupt pricing with a product of better value.

Risk is a zero-sum game. If a disruptor prices below the true commercial risk, the money comes from somewhere. They can only do so by charging lower-risk customers more.

We already have market disruptors. They are the insurers who have not switched to a letterbox-by-letterbox model. Slowly but surely they'll lose their low-risk customers if they don't copy their competitors. It's like watching a slow-motion commercial landslide.

Can a regulator change the situation and say it's unfair? Nope. There's no law against pricing risk correctly. So who can change things? I'm afraid all eyes are on you. It's a tough position to be in, but unless you interfere, the moral hazard will spread and take hold.

Only new regulation can force earthquake risk to be spread across a region or a city. Insurers who want to participate in the New Zealand market must be prepared to quote on all properties and agree to mathematical boundaries for their pricing models.

Fair enough that Wellingtonians pay more than Aucklanders. But no one should be paying 300 per cent more for a like-for-like property. It's fair that a 100sq m multi-storey apartment in central Wellington has a larger premium than 100 sq m bungalow in Johnsonville, but the premiums need affordability parameters.

You may have to get inventive. EQC currently meet the first $115,000 of a claim. Should that double or triple so Kiwis can cross subsidise each other via the levy? Alternatively, the industry could have cross-subsidised pricing regulation up to the value of $1 million per property. That way the wealthy can accept partial cover, or pay the rest at market rates.

Even more radical, perhaps the government should buy earthquake insurance from offshore reinsurers and sell it on to each New Zealand insurer at a flat price, making the whole country fully cross-subsidised.

Look-through contracts would still need to exist so the reinsurers maintained commercial access to audit claims, but the government would source and dictate the costs passed onto consumers.

Take a leaf out of the book of Mark Carney, Governor of the Bank of England. He often talks about "the three truths of finance" (which are all untrue). One of these lies is "markets are moral". They are not. In his view "markets need to retain the consent of society – a social license – to be allowed to operate, innovate and grow".

New Zealand's geology is unusual and the longer you leave it, the more progressed the commercial landslide will become.

Good luck with your next move. Don't feel guilty for interfering.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.