The Government has ordered a six-month review into rapidly rising home insurance premiums as concerns grow over affordability and shrinking coverage in high-risk areas.

According to a report by 1News, A Cabinet paper presented by Finance Minister Nicola Willis indicates insurers in New Zealand may be recording higher profit margins than their Australian counterparts, raising questions about competition in the sector.

The move follows a decision by AA Insurance to temporarily stop offering new home insurance policies in Westport due to flood risk, adding to fears about access to cover in vulnerable regions.

Treasury analysis shows home insurance premiums have jumped 40 percent over the past two years and have increased at three times the rate of general inflation since 2011.

“We are not only worried about that affordability, but we don’t want to see people dropping their insurance policies,” Willis said, 1News has quoted.

Willis and Commerce and Consumer Affairs Minister Scott Simpson have tasked the Council of Financial Regulators, including the Reserve Bank, Commerce Commission and Financial Markets Authority, with examining what is driving residential insurance pricing and affordability.

“We as a Cabinet have directed the Council of Financial Regulators, which is the Reserve Bank, the Commerce Commission, the Financial Markets Authority, along with government agencies, to work with the insurance sector to deep dive into those questions over the next six months,” Willis said, as quoted by 1News.

The review will assess the causes of rising premiums, their impact on households, and the policy tools available to ease pressure on consumers.

“We know that the insurance industry has really good data about who’s insured, how much it’s costing, and we want to know what are they seeing in the trends of whether people are lessening their cover, how they’re responding to those price increases, and what can we expect for the future,” Willis said, 1News has quoted.

While most homeowners can still obtain insurance, coverage is becoming harder to secure in regions exposed to both earthquake and flood risks, including Wellington, Marlborough and Canterbury.

Market pressures

The Cabinet paper states there is “some evidence of higher profit margins for insurers in New Zealand compared with Australia”, although it adds that “the reasons for this are unclear,” as quoted by 1News.

“New Zealand’s higher risk profile is likely a contributing factor, with investors demanding higher returns for the higher risk,” the paper said. “However, it could also indicate weaker competitive pressures in New Zealand,” 1News has quoted.

It also highlights the highly concentrated nature of the residential insurance market, with three insurers holding a dominant share.

“While the data is limited, preliminary work by the Treasury suggests there may be competition issues in the insurance sector,” 1News has reported.

Willis said the Government wanted to distinguish between cost increases caused by unavoidable risks such as climate change and earthquakes, and those linked to regulation and compliance costs.

“I think most New Zealanders will understand this isn’t going to be a quick fix issue. This isn’t a simple Band-Aid solution,” she said, as reported by 1News.

“But if there are small things we can do at the margin which will reduce the pressure on your insurance bill, we want to do it.”

The review will look at competition, construction costs, reinsurance pricing and the shift toward risk-based pricing for hazards like flooding.

Consumer NZ chief executive Jon Duffy welcomed the inquiry, saying it was essential to better understand how the market operates.

“We need to understand the market dynamics better so that we can work out what fixes we have because the insurance sector is critically important for our economy, which is heavily underpinned by house investment,” Duffy said, as reported by 1News.

He said the review must be “fully independent” and not influenced by the insurance industry. Consumer NZ has previously warned: “If insurance becomes a luxury only available to a privileged few, the impacts on communities, our economy and society will be severe.”

Industry response

Insurance Council chief executive Kris Faafoi said insurers supported the Government’s review.

“We’ll work with the Government to make sure that they can get the answers, because we want to make sure that insurance in the long term is accessible and affordable for all New Zealanders,” Faafoi said, 1News has quoted.

“People sitting at home might not realise that 40% of their home premium is taxes and levies. It’s things like that that are out of the control of the insurance sector that I think this review should look at,” as quoted by 1News.

He said inflation, higher repair costs and regulatory expenses were also pushing premiums up.

Responding to AA Insurance’s decision in Westport, Faafoi said it was “one business decision from one insurer” and not reflective of the entire industry. He warned that without action on climate risk, pressures would continue.

“We’ve said for a long time the likes of climate risk, increased risk of flooding events, is going to have an impact on premiums if nothing is done to reduce that risk,” he said, 1News has quoted.

Faafoi added that Willis had assured him the review was not “a big stick exercise”.

Levy review on hold

Willis has also paused a separate review of Natural Hazards Insurance Act levy settings until the affordability review is complete.

Treasury had proposed lifting the Natural Hazards Commission levy from 16 cents to 24 cents per $100 of building cover, increasing the maximum annual levy per home from $554 to $828.

The Government has ordered a six-month review into rapidly rising home insurance premiums as concerns grow over affordability and shrinking coverage in high-risk areas.

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