New Zealand’s general insurance industry is likely to see increased government involvement as more and more households struggle with premium affordability, AM Best says in a report on the country’s non-life sector. 

Premium rates have already risen substantially as insurers respond to rising reinsurance costs after recent major catastrophes including the Auckland floods in January and they are expected to press on with further price hikes. 

“In light of the ongoing pressures of claims inflation, weather-related losses, and reinsurance pricing, non-life insurers are expected to implement significant premium rate increases to offset the impact,” the rating agency said in the report. 

“To alleviate the pressure on the private sector and maintain affordability of insurance cover for consumers, government participation is expected to grow.” 

State agency Toka Tu Ake EQC currently provides support for earthquake risk in the form of insurance cover for the first $NZ300,000 ($277,473) of losses on residential properties for each event, up from $NZ150,000 ($138,736) last year. 

The agency says the EQCover is a specific insurance for damage caused by volcanic eruptions, earthquakes, tsunamis, land slips, and hydrothermal activity, as well as some limited cover for damage to residential land from storms and floods. 

AM Best says discussions about a similar national scheme for other natural perils such as flood are ongoing. 

The possibility of further government involvement comes as the industry’s profitability faces challenges from increasingly volatile weather conditions. 

In recent years, storms, floods and cyclones have strained insurers’ profitability, says AM Best, citing Insurance Council of New Zealand (ICNZ) data. 

ICNZ figures show extreme, climate-related weather claims hit a record $NZ351.2 million ($324.82 million) last year and this year alone insured losses have already ballooned to $NZ3.6 billion ($3.33 billion) in the nine months to September. 

“Non-life insurers’ technical performance is highly correlated with the occurrence of large weather events,” AM Best says. 

“The increased likelihood of extreme weather events could expose the non-life insurers’ earnings to elevated volatility.” 

Despite the weather and reinsurance challenges, AM Best has a stable outlook for the sector, citing expectations of strong premium growth, good capital buffer and the industry’s record of resilience in dealing with catastrophes. 

The rating agency says gross written premium grew moderately in recent years, rising 6% in 2021 and 10% last year. 

“The positive trend is expected to continue into 2024, due to record-high inflation and ongoing strong rate adjustments, particularly in the property and motor segments,” AM Best said. 

“A further boost to premium volume has come from the re-opening of New Zealand’s borders, following the lifting of pandemic-related travel restrictions, which should help revive the tourism sector and boost the travel insurance market.” 

Earnings this year are expected to be materially impacted by significant weather-related claims from January’s Auckland floods and Cyclone Gabrielle in February. 

Combined insured losses are estimated at between $NZ3 billion ($2.77 billion) and $NZ4.2 billion ($3.88 billion), comprising both personal and commercial lines losses, AM Best said, citing Reserve Bank of New Zealand estimates.