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How are house insurance premiums calculated?

As you pay for your insurance you might wonder; where is my premium 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 more risky 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, in reality, based on the big data we have on claims, 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.  We know from previous claims which areas perform better than others. Many insurers moved to risk-based pricing in 2019 which meant that no longer would low risk regions like Hamilton subsidize higher-risk regions such as Napier.

B.  Its water supply or proximity to a 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 is 30 minutes out of town and has rainwater tanks as its only form of water.  

C.  Age of the property 

The claims data doesn’t lie.  Houses built prior to 1935 are more likely to have claims than those built after 1935.  Some of the claims we see here are electrical fires caused by old and corroding wiring, water damage caused by old pipes not being able to handle increased town water pressure, and storm damage to older homes with original roofing.  Learn more about insuring older homes here

There are also certain decades where the New Zealand construction industry (and the Government) dropped the ball by allowing the use of certain plumbing products and cladding systems that continue to be a source of significant property damage.  To this end houses built in the 1980’s are most likely to be constructed with Dux qest piping and fittings. Qest 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. Its a fact that people take better care of things they own.  So 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 always cost at least 25% more than the insurance cost for your own home.  

It is also a fact that holiday homes sit for longer periods of unoccupancy which means that 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

This one is pretty straight forward.  The great the insured value of a home and great the exposure, the more the premium.  This is not to say that $1,500,000 rebuild cost is costs twice as much to insure as a $750,000 rebuild.  Basically, after a certain point (about $200,000) the cost of insurance increases at a decreasing rate, and this is because over 95% of insurers claims are for smaller losses (eg gradually leaking pipe) not total loss house fires.    

D.  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 low value claims.  

Other things that increase the premium are the additional covers the property owner adds, for example increasing the loss of rents cover from $20,000 to $80,000, and changing the amount of landlords contents 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).  Learn more about EQC cover 

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. Meanwhile a multi-unit property with three residential units has a $900 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 initio insurance policy. The levy is $106 + gst per living unit, and an additional $21.20 + gst if cover for contents is included in your policy (initio includes $20,000 of contents cover for free as part of a rental property or holiday home insurance 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, EQV 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 inc 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. 

 

Learn more about the different types of house insurance:
Landlord insurance – all in one house and landlord insurance, including loss of rents, malicious damage & more.
Multi unit insurance – for serious landlords with multiple units under the same roof.
Holiday home insurance – for the bach and for holiday homes that are also rented out (eg Bookabach, AirBnB)
Home insurance – for your own home, and contents.