The Reserve Bank of New Zealand
The Reserve Bank of New Zealand has cautioned that New Zealanders who own properties in flood-prone or earthquake-prone areas may encounter challenges in affording insurance or might not be offered coverage for specific risks. According to a report released by the RBNZ in Wellington on Monday, rising premiums or the inability to obtain insurance signal to homeowners the necessity of reducing exposure to risks, which may entail relocating from the area. The central bank emphasized that the phenomenon of “insurance retreat” poses a long-term challenge for the financial system.
The RBNZ highlighted that property owners in areas where natural hazard risks have already resulted in claims may struggle to secure comparable coverage in the future unless significant risk mitigation measures are implemented. Even if the complete withdrawal of insurance availability in certain areas is not imminent, owners of high-risk properties may find insurance increasingly unaffordable.
In New Zealand, insurers have transitioned to risk-based pricing, leading to higher costs in earthquake-prone regions such as Wellington. Moreover, more frequent climate change-related weather events are impacting prices and prompting discussions about whether certain houses should be rebuilt in risky areas.
The RBNZ stated that it is challenging to determine if and when insurers might entirely withdraw insurance availability for specific properties, areas, or risks, although such a scenario could unfold relatively swiftly considering the annual nature of insurance contracts. Withdrawal is likely to occur first in communities where the physical risks are well recognized.
One potential consequence of risk-based pricing, the Reserve Bank of New Zealand noted, is insurers starting to unbundle different risks, especially if one type of peril significantly drives the unaffordability of premiums. For instance, unbundling could involve the removal of flood cover for a property prone to flooding in an area with low seismic risk.
The Reserve Bank of New Zealand stressed the need for further efforts to enhance the collection of natural hazard data, which would assist insurers in risk modeling and improve price signals. Additionally, banks need to be mindful of the ongoing insurability of the properties they lend against, necessitating greater scrutiny in their lending decisions. It also emphasized the importance of banks collaborating with insurers to obtain better and more regular information on the insurance status of mortgaged properties.
