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.
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
The cost of your insurance is mostly based on how likely it is that your area will have an earthquake or storm. Some places are more at risk than others because of past claims. Nowadays, many insurance providers use “risk-based pricing.” This means areas with less risk, like Hamilton, no longer help cover the cost for higher-risk areas 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 are often empty for longer periods of time. This can make water damage more expensive to fix. There’s also a higher chance of break-ins and burglary.
e) Replacement value of the property
The more your house is worth, the more you’ll pay for insurance. But it’s not as simple as saying a $1,500,000 house costs twice as much to insure as a $750,000 one. After a certain point, the cost of insurance goes up more slowly. This is because most insurance claims are for small things, like a leaking pipe, rather than big things like a house fire.
f) Excess and extras
An excess is the amount you’re willing to pay when you make a claim. The more you agree to pay, the less risk for the insurance provider, especially for small, frequent claims.
Adding extra types of cover can also make your premium go up. For example, if you decide to increase your ‘loss of rents’ cover, you’ll pay more.
Government Earthquake Levies
Your insurance cost includes a government earthquake levy. This money goes to the New Zealand Natural Disaster Fund. It covers natural disasters, like earthquakes, up to $345,000 including GST. Since October 1, 2022, this levy has gone up to $552 including GST for each home covered by your insurance each year.
If an earthquake happens, the first $345,000 of damage is paid for by the Earthquake Commission. Any amount over that is covered by your insurance provider. We collect this levy as part of your total insurance cost and give it to the Earthquake Commission.
Government Fire Service Levies
Your insurance also includes a fire and emergency service levy. This helps pay for emergency services like fire brigades and ambulances that benefit everyone in New Zealand.
This levy is $106 + GST for each living unit, and an extra $21.20 + GST if you also have cover for contents. Like the earthquake levy, we collect this money as part of your total insurance cost and give it to the Government. Even if you choose not to have home insurance, you’ll still benefit from these services.
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.