17 Mar 2014

Insurance premiums 'may not increase'

9:50 pm on 17 March 2014

The Insurance Council says the way insurers calculate their premiums will change as a result of the Canterbury earthquakes, but they won't necessarily increase.

The Insurance Council says premiums are too low.

The Insurance Council says premiums are too low. Photo: PHOTO NZ

In its annual review, the council says New Zealand's premiums have been significantly undervalued. It warns that fallout from the damaging Canterbury earthquakes, new policies by the Reserve Bank and the collection of the Fire Service levy will continue to push them up.

The council's chief executive, Tim Grafton, said on Monday models used to assess the risk of a major disaster are being revised after what happened in Canterbury.

"The models will likely produce higher levels of loss in the event of a catastrophe, for which insurers will have to have sufficient capital or reinsurance cover under the new Reserve Bank supervisory regime."

Mr Grafton said that doesn't necessarily mean premiums will rise. He said a competitive market and the high price of reinsurance has seen new capital enter the market, potentially forcing premium prices down.

Mr Grafton said most of the country's insurance policies are backed by capital from shareholders. In the past decade, underwriters have experienced only two years where returns were seen as adequate, which puts New Zealand's insurance cover at risk.

"If you want to maintain a capital investment in insurance companies then investors will look across the portfolio where the returns are. So if you are getting a low return then the risk is that you may get capital go elsewhere."

Mr Grafton said the council believes the Fire Service levy that is paid when people take out house contents and car insurance is unfair.

"It means that people who don't take out insurance freeload on receiving a public good. The Fire Service will come and put out your fire or rescue you from a vehicle regardless of whether you've got insurance or not, because they just do the good thing."

Mr Grafton said the levy should come out of the general tax take instead.