As we all know, the cost of our house, contents and even our car insurance has increased exponentially over the last few years. New Zealand has seen a series of very expensive insurance events that have resulted in millions of dollars of claims and as a result, insurance premiums have increased.
How does asset insurance work?
Insurance companies charge a premium to take on an insurance risk. Most companies assess the risk based on factors such as the age and construction materials of a building, the security features of the building and the purpose that the building is used for. For a car, the premiums are based on how likely the car is to be stolen, and the ages of the main drivers.
The insurance companies retain part of the premium that they have received from you and use the balance to purchase reinsurance. Reinsurance is taking out another policy with another larger company who will cover part of the risk for your policy. Reinsurers are massive global businesses who specialise in insurance. Many reinsurance policies kick in when there are widespread catastrophic events like earthquakes, floods, storms and fires. These events would cause massive numbers of claims that a local insurance kick in when there are widespread catastrophic events like earthquakes, floods, storms and fires. These events would cause massive numbers of claims that a local insurance company may struggle to cover by themselves.
What we need to be aware of
The recent California wildfires highlighted some issues with insurance affordability. In California, the local state Government implemented rules that put a price cap on fire and general insurance premiums. This saw several insurance companies like State Farm and All State withdraw from offering insurance in wild fire prone areas of California, because the premiums that they could charge were not worth the risk of taking on the assets. People then had the option of moving to the state run FAIR programme, which offers less extensive cover. After the recent California wildfires, the state government of California has asked the US congress for $40 billion to help to rebuild Los Angeles. $9.9 billion of that was to rebuild houses and business premises. The state government doesn’t have enough money to pay to rebuild its assets.
As an aside, the most expensive place to insure a house in the USA is Florida and the average annual house insurance premium is around $6,500 USD, which converts to $11,300 a year in New Zealand dollars!!!!!
Global reinsurers are struggling to make profits as we see the world deal with a surge in the number of catastrophic weather events. That means that the cost of reinsurance is increasing, which is passed on to us as consumers. Reinsurers are also refusing to offer reinsurance to certain countries and to cover certain events. For example, there are parts of Brisbane in which you cannot get flood insurance cover, and parts of the state of Victoria where you cannot get cover for wildfires. In these cases, the state or the Government will offer a limited cover, as we have with the Earthquake commission here in New Zealand.
It is quite possible that we will start to see places in New Zealand where certain events are not going to be able to be covered by insurance. At present, insurance covers are applying much higher excesses to risk prone areas. Edgecumbe has a standard $2,500 excess for flood insurance, and along with Westport, their insurance premiums are much higher than many other places in New Zealand. Insurance companies also have the right to not offer insurance to a client and this is also becoming more common.
Things that you may wish to consider
Insurance is taken out to help you to recover from a loss which you could not otherwise financially recover from. Insurance is basically a large group of people who pay a premium to belong to a pool of money, with the hope that you are not the one who ends up with the big payout!
There are options to increase excesses, which means that you carry a larger portion of the loss. This reduces your premium. With car insurance, you can reduce your cover from comprehensive to Third party, fire and theft, or even to third party only if your car has a low resale value and you can afford to replace it out of savings, or do without it.
Otherwise, it may be a plan to set aside more money to cover your insurance costs going forward.
In the past, we have taken it for granted that we would be able to get insurance if we wanted to pay for it, but it is quite possible that this will not be the case going forward.
Cancelling your insurance should be a last resort. You may struggle to replace cover if you decide to re-insure, especially if you are in a place where you are more likely to suffer a catastrophic event. If you are moving house, it is also worth factoring in the likelihood of a catastrophic event in the area as part of your decision making. There is a current list of flagged areas.
https://www.moneyhub.co.nz/difficult-to-insure-areas.html
Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.
DISCLAIMER: The information contained in this article represents the views of the author. It is based on information believed but not warranted to be correct. Any views or information, whilst given in good faith, are given with an express disclaimer of responsibility and no right shall rise against any of the authors or Smart Money Advice or their employees either directly or indirectly out of any views, advice or information.