How are house insurance premiums calculated?

As you pay for your insurance you might wonder where your premium is going? And how is it calculated? This guide explains what makes up the cost of house insurance and how it’s calculated.  

Insurer Premium

This is the insurers cut of the pie and is what the insurer receives in compensation for taking on the risk that you don’t want to carry yourself.  This is the variable component of the overall premium which will be higher for riskier properties and lower for a less risky property.

For example, a premium comparison between a landlord insurance policy for a rental property located in Auckland and one located in Christchurch will show a significant difference in premium.  This difference in premium is due to the risk exposure to earthquakes. However, there are many factors that determine the premium of your property – such as the relative exposure to weather events, flood zones, vulnerability to theft and the historical record of claims in the area.  

In short, insurers use the following factors to calculate what premium they want for the risk.

a) Location of your property

As described the calculation of the insurance premium is heavily dependant on its likelihood of suffering an earthquake or storm. Based on previous claims some areas are more vulnerable than others. Many insurers have now moved to risk-based pricing which means that no longer do low risk regions like Hamilton subsidise higher-risk regions like Napier.

b) Water supply or distance to fire station

The closer a house is to a fire station and the better the access a property has to water, the less likely it is to burn to the ground. For example, a rental property immediately next to a fire station will have a lower premium than a rental property that’s 30 minutes out of town and has rainwater tanks for its only form of water.  

c) Age of the property

Houses built prior to the 1940’s are more likely to have older building materials and methods. A common cause of damage are electrical fires caused by old and corroding wiring. Water damage from by old pipes failing under increased town water pressure is also common. Learn more about insuring older homes here.

There are also certain decades where the New Zealand construction industry (and the Government) allowed the use of certain plumbing products and cladding systems that continue to be a source of significant property damage. Houses built in the 1980’s are most likely to be constructed with Dux Quest piping and fittings. Quest was taken off the market in the late 1980s but there are still a number of houses suffering water damage from poor performance of water pipes and fittings.  

d) Use of the property

This one goes to human nature. It’s a fact that people take better care of things they own. This means that houses occupied by their owners have few losses than those occupied by tenants or short staying guests. A rental property attracts landlord risk (such as malicious damage and loss of rents) so a landlord insurance policy will cost you more than the insurance cost for your own home.  

Holiday homes remain empty for longer periods of time which can mean water damage claims end up being much more costly, and we also see a higher incidence of break-ins and burglary.  

e) Replacement value of the property

The more a house is insured for the more the premium is going to be. This is not to say that $1,500,000 rebuild house costs twice as much to insure as a $750,000 rebuild. At a certain point the cost of insurance increases at a decreasing rate, and this is because over 95% of insurers claims are for smaller losses (e.g. gradually leaking pipe) rather than total loss house fires.    

f) Excess and extras

An excess is the amount the property owner is willing to absorb at claim time. The more the owner is willing to take on the less the exposure to the insurer – especially for those high incidence lower value claims.  

Other things that increase the premium are the additional covers the property owner adds, for example increasing the loss of rents cover.

Government Earthquake Levies:

A government earthquake levy makes up the cost of each and every residential dwelling. These go towards the New Zealand Natural Disaster Fund (NDF).

The cover is for natural disasters losses to dwellings and land for up to $150,000.

Following recent changes to the EQC on 1st July 2019, the earthquake levy has increased to $300 + GST per residential unit covered under your insurance policy. This means a minimum $300 earthquake levy (for a single unit dwelling) is due annually. This equates to a multi-unit property with three residential units having a $900 + GST annual government earthquake levy. 

In the event of an earthquake (where EQC cover applies) the first $150,000 of the loss is funded by the EQC, and anything over $150,000 is paid for by the insurance company.

We collect the EQC money as part of your total insurance cost and pass the funds onto the Earthquake Commission. 

Government Fire Service Levies:

The second type of levy included in your total insurance cost is the government’s fire and emergency service levy, and is another fixed component of your insurance cost. This contributes toward the costs to the government of emergency services (fire brigade and ambulances etc.) that residents of New Zealand collectively share the benefit of.

Like the government earthquake levy the FSL levy is charged on each residential unit covered by your insurance policy. The levy is $106 + GST per living unit with an additional $21.20 + GST if cover for contents is included in your policy.

Like with the EQC levy we collect the FSL levy money as part of your total insurance cost and pass the funds onto the Government. But unlike the EQC, if you choose not to have residential property insurance you will still benefit from the fire and emergency services, even though you have not paid for it.  

Goods & Services Tax:

Like all domestic goods and services in New Zealand, a 15% GST tax is then applied to the total insurance cost (insurer premium, EQC levy, and FSL levy). The total of all four of these makes up the total premium payable by you, the insurance customer.  

As a practical example, a single unit landlord insurance policy with a total annual insurance cost of $1,000 including GST consists of 55% government levies and GST.

This guide has been produced to provide more transparency on how insurance premiums are calculated.  Much of the way the insurance industry operates is a ‘black box’ of jargon – but when it comes to something so important as the cost of house insurance it shouldn’t be complicated.