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Hopes many homeowners would pay less for insurance when the EQC cap rises from $150,000 to $300,000 could be dashed as insurers warn runaway building costs must be priced into premiums.
The increase in the cap on October 1 will result in a greater share of natural disaster risk shift from private insurers.
In July last year, a Treasury paper suggested homeowners in high-risk areas such as Wellington and Hawke’s Bay would see the total cost of their house insurance fall as private insurers dropped their premiums to reflect the shift in natural disaster risk to EQC.
Some might see their total house insurance costs drop by several hundred dollars, the paper indicated.
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By contrast, people with homes in areas of low earthquake risk such as Auckland, would see their overall insurance costs rise because the increase in their EQC levies would be larger than the reduction the premiums private insurers charged them.
But insurers are privately warning insurance brokers that the July paper’s forecasts are now hopelessly out of date.
Tim Grafton, chief executive of the Insurance Council Te Kāhui Inihua o Aotearoa said that since the cap changes were announced, insurers had faced double-digit building inflation and rising reinsurance costs because of overseas floods and wildfires.
BARBARA MACKAY/SUPPLIED
Water flows across the access road to Lake Ōhau on Wednesday morning, a day after floodwaters cut access to the alpine village when the approaches to a bridge were washed out. Video published July 20, 2022.
Building costs had risen about 18% in the past 12 months, and 2022 was shaping up to be another big year for weather-related insurance claims, Grafton said.
High general inflation also meant insurers were facing rising wage costs, and disruptions to supply chains could delay claims, pushing up costs.
“If you’re waiting for Gib for six months, and you used to wait for two months, then fixing the burnt-out kitchen will take six months,” Grafton said.
House insurance cover is made up of two components, EQC cover, and cover provided by private insurers.
In the event of a simple house fire, private insurers cover the cost of repairs.
But in the case of a natural disaster, the taxpayer-backed EQC, which is to be renamed the Natural Hazards Commission Toka Tū Ake, covers the first $150,000 of damage, rising to $300,000 in October.
The maximum EQC levy is $345, but will rise to $552 in October.
That move was designed to help keep insurance affordable is higher-risk areas by getting Auckland’s large population to shoulder a greater share of the cost of insuring the country’s natural disaster risk.
If EQC levies were calculated according to individual risk, they would be about $173 for Auckland homeowners, while people in Hawke’s Bay would pay $2105, the Treasury’s paper indicated.
Already insurance premiums risen sharply.
Justin Lim, chief executive of online insurance management company Quashed, said more than 70% of people using its services to keep tabs on their insurance policies, and shop around for better deals, had experienced an increase in their house insurance premiums this year.
On average, that increase was 14.5%, or $250.
Based on the data, the average household with house, contents and two car insurance policies, would have received an increase of about $473.
Insurers are preparing their communications campaigns to explain to people in lower-risk areas why their bills are about to go up.
Tower chief executive Blair Turnbull said it would soon write to all its home insurance customers to explain the change.
People should only pay for their own risks, Turnbull said.
“The biggest driver of pricing is inflation, which is currently at record levels, and this flows through to claims costs.”
EQC Minister David Clark said the cap change balanced the desire to improve insurance availability and affordability, while leaving room for a robust private insurance market.
He said the Government was aware of all pressures on insurance premiums, including building cost inflation.
“While this could mean that households in regions with high seismic risk do not see steep premium decreases, the cap will still put downward pressure on prices, meaning those households will be paying less than they would have been if the cap remained at $150,000,” he said.
But the Government would be monitoring insurers did not take advantage of the change, he said.
“If sufficient evidence of concerns arose, the Government has tools at its disposal including market studies, which can provide a better understanding of how well competition in the market is working,” Clark said.
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