Chris Boys, Director of Assure Legal, discusses the performance of the domestic insurance market since September 2010, in light of news that insurers are now using “risk-based pricing”, which means that “high risk areas” won’t be offered certain classes of business. Future premium pricing is being used to compensate for failure to properly price past risks which eventuated, he writes. This is the conclusion to his two-part series on the topic. Read Part 1 here.
Now, the OECD annual insurance reports show that premiums have risen steadily worldwide, but the increases have been disproportionate in New Zealand. Why?
Our domestic insurance market is dominated by two Australian Giants similar to the NZ banking industry. The New Zealand divisions of these 2 insurers are their most profitable. This duopoly is growing and in my view distorts the market. It seems that if you are a shareholder in either Suncorp or IAG you are protected from risk, but if you are a premium payer you bear the risk in the form of higher premiums.
The fact that IAG through its various acquisitions has over 50% of the market in Wellington, and is pricing itself out of risks as a result demonstrates a market failure. In 2011 when IAG was allowed to purchase the “good book” AMI (the brand, ongoing policies and non-CES claims) many in the industry questioned why this was being allowed. However, the Commerce Commission rubber stamped the deal.
In 2014 IAG was allowed by the Commerce Commission to purchase Lumley, despite greater levels of concern. The purchased increased IAG’s market share in the consumer/home insurance market insurance to over 50%. In comparison, Vero’s attempt to buy Tower in 2017, which would have put Vero’s market share over 30% was turned down. Between them Vero and IAG have around 70% of the market.
What seems certain is that the lack of real competition which is currently affecting Wellington, Marlborough, and Christchurch is going to continue and probably spread unless the market is regulated to break up the duopoly.
Underwriting is (or should be), about pricing the risk of future events. Sometimes that is not an exact science; nobody in Insurance or building regulation expected the CES events, although the fact that the spire of Christchurch Cathedral has been brought down 4 times by earthquakes in 140 odd years should have been something of a clue.
But it seems that the market isn’t working in New Zealand, to the point where future premium pricing is being used to compensate for failure to properly price past risks which eventuated. But the “increased risk” of earthquake in Wellington is being used to justify a price hike. In other words “we charged you too little before the quakes so now we’ll charge you more to make up for the failure to underwrite accurately, but we can’t let the shareholders miss out on their dividends now, can we?”.
I don’t believe the profit incentive leads to good structural outcomes in the New Zealand market, and it seems to me that the market really isn’t working. When you consider the probable effect of data driven granular underwriting (which I’ve written about before) and the effect it will have on the healthy function of a risk pool, these issues are going to make insurance unaffordable or unobtainable for a significant number of people.
What is the answer? Firstly, a bit more assertiveness from the Commerce Commission when the big two try to acquire more market share (although I suspect that boat has sailed). Legislation change to favour mutual (customer owned) insurers, these used to be very common and well run (Farmers Mutual Group and Medical Assurance Society remain as good examples, as was AMI but for an over-exposure to Christchurch risks coupled with inadequate reinsurance) The other option (which will trigger the economic libs) is a state insurer.
The Christchurch earthquakes should have taught us the value of a well-insured community, let us hope those lessons stay learnt.
Chris Boys, Director of Assure Legal, specialises in Insurance Law and Litigation. He is a co-author of the LexisNexis title Insurance Claims in New Zealand. Prior to entering the legal profession, Chris worked extensively in the Insurance Industry in New Zealand and England, handling claims, handling complaints and as a Lloyds Broker. Contact Chris at admin@assurelegal.co.nz or connect via LinkedIn