How the global insurance pool impacts local insurance pricing
As a homeowner in New Zealand, you may have noticed fluctuations in your house insurance premiums over the years. While factors such as the rebuild cost of your home and the frequency of local weather events play significant roles, there’s another crucial element influencing your home insurance pricing: the global pool of insurance funds.
To put this into context, consider your personal insurance excess, which might be $650 for your house. In comparison, IAG has a $500 million excess for covering multiple homes in New Zealand in the event of a disaster. Similarly, while your house might be insured up to $1 million, IAG’s reinsurance limit is $10 billion. Although this is a simplification, it helps explain how reinsurance works.
The key takeaway here is that initio and IAG ensure you are well-covered. For more details, you can read the official article from IAG here.
New Zealand: A high-risk country with a small pool
New Zealand is one of the highest earthquake-risk countries in the world, situated within the volatile “Ring of Fire.” This inherent risk, combined with our relatively small population, means we draw from a comparatively smaller pool of insurance funds than larger nations. Consequently, our home insurance market heavily relies on global reinsurance companies to provide additional coverage and spread the risk.
New Zealand’s high exposure to natural disasters like earthquakes, floods, and cyclones makes it one of the riskiest countries for insurers. This, coupled with our small population and insurance market, underscores the importance of attracting global reinsurers to provide essential coverage.
For reinsurers to support the New Zealand market, it must be a worthwhile proposition. They carefully assess the risk-reward balance, considering factors such as the frequency and severity of past events, the potential for future catastrophes, and the insurance penetration rates in the country. If the risks outweigh the potential returns, reinsurers may limit their exposure or demand higher premiums, ultimately impacting the cost of home and contents insurance for New Zealanders.
What is a reinsurer?
A reinsurer is essentially an insurance company for insurance providers. When an insurance provider issues policies to customers, it takes on the financial risk associated with potential claims. To manage and mitigate this risk, the insurance provider may seek additional coverage from a reinsurer.
Here’s how it works:
- Risk transfer: The insurance provider transfers part of its risk to the reinsurer. This process is known as “reinsurance.” By doing this, the insurer reduces its exposure to large or unexpected claims.
- Premium payment: In exchange for taking on this risk, the reinsurer charges the insurance provider a premium. This premium is typically lower than the total premiums collected from policyholders, allowing the insurer to maintain profitability while securing additional risk protection.
- Financial stability: Reinsurers help insurance providers maintain financial stability, especially in the face of large-scale disasters. For example, if a major earthquake occurs, the financial burden of the claims is shared between the insurer and the reinsurer, ensuring that the insurer can meet its obligations to policyholders.
- Global risk distribution: Reinsurers operate globally, spreading risk across different regions and types of insurance. This global reach allows them to balance their portfolios and better manage the financial impact of claims from catastrophic events.
The importance of reinsurers
Reinsurers play a crucial role in the insurance industry by providing a safety net for insurance providers. This enables insurers to offer coverage to high-risk areas, such as New Zealand, which is prone to natural disasters like earthquakes, floods, and cyclones. Without reinsurance, insurers might be unable to cover such risks or would need to charge prohibitively high premiums.
Reinsurers enhance the capacity and resilience of the insurance market, ensuring that policyholders receive the protection they need, even in the event of significant and unexpected claims.
Global events and local insurance impacts
While major weather events or natural disasters overseas may not directly impact New Zealand, they can still influence home and contents insurance pricing locally. For example, when hurricanes, earthquakes, or wildfires strike other regions, reinsurers must divert funds to cover those losses. This depletion of the global insurance pool can lead to higher reinsurance rates, which local insurers must then pass on to their customers through increased home insurance premiums.
During hurricane seasons in the United States, insurance companies often raise their premiums due to the increased risk. This increase is subsequently passed on to reinsurers, making the US market more attractive to them compared to New Zealand. Reinsurers get a better return on their investment in the US market due to higher premiums and a larger risk pool. It’s also important to note that the IAG program covers both Australia and New Zealand, which makes it relatively smaller compared to the US market.
It’s not just the overseas events that can impact your house insurance pricing. Local factors can also have significant consequences. The devastating floods and cyclones of 2023 led to substantial claims and higher reinsurance costs for local home insurance providers.
The impact of regulation on pricing
New Zealand’s prudential regulation, particularly since the 2020 review by the Reserve Bank, has significantly impacted the cost of house insurance for homeowners. Most insurers globally have to hold sufficient reinsurance or capital reserves to cover the risk of a 1-in-200 year catastrophe event. However, New Zealand insurers must hold sufficient reinsurance or capital reserves for a 1-in-1000 year catastrophe event. This stringent requirement drives up the cost of reinsurance, which, in turn, increases the cost of insurance for homeowners.
Balancing risk and affordability
Insurers and reinsurers are constantly reassessing their risk appetites, pricing, and capacity in response to global and local events. While this process aims to ensure the sustainability of the home insurance industry, it can result in higher premiums for homeowners. However, it’s a necessary measure to maintain the availability of home insurance coverage and spread the risk equitably across the global pool.
Enhancing New Zealand’s reinsurance market
To make our market attractive to global reinsurers, it’s essential to maintain a robust and well-regulated insurance industry with adequate pricing and risk management practices. Initiatives like the new disaster response model between insurers and the Earthquake Commission (EQC) aim to improve efficiency and customer experience, potentially enhancing New Zealand’s reputation in the global reinsurance market.
By demonstrating our commitment to responsible risk management and ensuring a fair return for reinsurers, we can continue to secure the necessary backing to protect New Zealand homeowners against the risks we face in our hazard-prone environment.
Making informed decisions
As a homeowner in New Zealand, understanding the interconnected nature of the global insurance market can provide valuable insights into the factors influencing your home and contents insurance costs. By staying informed and working closely with your home insurance provider, you can make well-informed decisions to ensure you have adequate protection against the risks we face in our beautiful but hazard-prone country.
When choosing house insurance in New Zealand, it’s essential to know that initio is backed by industry giant IAG. This partnership ensures our financial stability and capability to pay claims, providing you with peace of mind. We understand that the most important aspect for our customers is knowing that we have the financial strength to support them in times of need.
By partnering with a financially robust provider like initio, you can rest assured that your most valuable asset is protected, even in the face of unexpected events.
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