Difficult market predicted in coming year

Difficult market predicted in coming year

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2023 October 18

In our last market update we talked about the challenges that severe weather events were starting to have on the insurance market.  It was estimated at the time that claims would reach over $1.5 billion. Roll forward a few more months and that number is growing to over $3.5 billion.

It should be no surprise therefore that as we head into the last few months of this calendar year, that further difficult insurance market conditions are anticipated.

New Zealand’s risk profile changing

As a country our risk profile is beginning to have a significant impact on the insurance markets across all commercial and residential property related products.

Historically, our risk profile was related to the likelihood of earthquakes. However, the recent weather events, the Auckland storm and Cyclone Gabrielle, introduced the chance that frequent and costly catastrophic events might occur anywhere in New Zealand. It is no longer possible to say there are specific ‘hot spots’ in the country such as there are for seismic events.

Reinsurance premiums, paid by our local insurers to protect themselves from catastrophic events, have been increasing for several years. The cost of reinsurance, to cover catastrophic events, is one of the largest expenses for an insurance company. More unpredictable weather events mean a rise in reinsurance costs, which then of course get passed on by insurers to the consumer.

Premiums will rise

Premiums for most policy types are therefore expected to increase over the next year, although the rate of increase for non-property insurance will continue to reduce - as they have done for the last six months.

In addition to reinsurance costs, another reason for the premium increases is the inflationary environment. This is caused by the increasing cost of materials to repair or replace property and cars. Legal fees and settlements paid for liability claims and any other fees that need to be paid to assess an insurance claim are also increasing.

Other inflationary influences can be attributed to the typical operating expenses incurred by many businesses across New Zealand:

  • Additional resources and expenses to achieve compliance with regulations, particularly the new regulations affecting the insurance sector.
  • Additional staffing costs required to respond to larger than expected events.
  • Wage and salary increases in response to inflationary pressure on employee households.

Changes in capacity

Along with the increased cost of insurance for clients, a shortage of capacity (or less stock on the shelf in a trading context) is also rapidly becoming a problem for commercial clients. Less than a year ago those shortages were apparent for high hazard businesses and those in the Wellington region with Canterbury to a lesser extent. More recently the capacity shortages are apparent throughout New Zealand.

Reducing the amount of cover an insurer is willing to provide for a particular client is usually a mechanism to reduce the insurer’s region-wide exposure. For example, the amount of aggregated Wellington capacity available from an insurer will be considerably less than the aggregate capacity available in a less hazardous region. The difficulty is determining which regions are ‘less hazardous’ because the location of a severe weather event is becoming less predictable, as well as more frequent and costly.

A shortage of capacity can be likened to there being more demand than supply, bringing about yet another upward pressure on the cost of insurance.

It's a hard market - literally

In the insurance world we are either in a hard market or a soft market.

Currently we are in a hard market. This means that there is not only reduced availability and scope of cover, but that you can expect increased premiums and excesses.

Insurance brokers are used to managing these cycles so you can feel assured that we are here to support you through it.

It needn’t all be doom and gloom. If you have policies coming up for renewal, we will focus on positive alternatives and potential solutions to address the challenges the current market is providing, including how we can further mitigate any of your current risks.

We are here to help so if you have any concerns about what is happening in the current market or the impact on your business, please let us know.