Your insurance premiums are not only influenced by your own claims, but national and international events and trends. Premiums do not simply increase to make your insurer more money, but because they reflect the cost of providing cover in the current economic and political environment. As a client it can be helpful to understand the factors affecting your premiums, and the predicted trends for the future.
A Worldwide View
The worldwide insurance market is currently in a period of hardening (i.e. premiums increasing), after an extended period of high claim events. 2017 was the most expensive year yet for insurance loss in history, with three category 4+ hurricanes, wild fires in California and earthquakes globally. This period of high losses has resulted in reinsurers (who provide capital to insurers) being forced to tighten their belts. With unsustainable loss ratios, reinsurers are also being much more cautious about what risks they insure, with higher risk industries having a more difficult time finding an insurer than in previous years. During 2018, premium prices worldwide have trended upwards.
In the second quarter of 2018 premium prices in Australia increased by 13% more than any other region, due to an especially challenging claims environment. This directly affects our New Zealand pricing as our three largest insurers are Australian owned, which explains why premium trends in Australia are often directly reflected in the New Zealand insurance market.
Natural disasters such as the Christchurch and Kaikoura earthquakes and the weather events in the North Island affect the cost of premiums across the country. These events then drive up the cost of reinsurance which directly affects your premium.
Your premium incorporates levies and taxes such as The EQC Levy, Fire and Emergency Levy and GST which are paid to the government – it is now not uncommon that the percentage of the premium which ends up remaining with the Insurer for paying claims is lower than the statutory charges and taxes. As a result, insurers are reviewing how they charge for risk within higher risk areas. If you live in Auckland, you now pay more for petrol. Moving forward, if you live in an area affected by natural disasters, your premiums may reflect that increased risk.
All premiums are directly affected by the events in the country we live, the region we are part of and the greater global environment. Essentially, the premiums of the many pay for the claims of the few.
Insurance is truly a global economy with premiums both directly and indirectly affected by more than just the risk being insured.
Average Cost per Claim Increases
The average cost per claim has been steadily increasing over the past 10 years. For example, with the technological advances in motor vehicles, where the addition of features such as sensors and increasingly intelligent systems has led to increased repair and replacement costs. In house insurance, higher building costs impact the costs per claim. This in turn affects insurers loss ratios, resulting in an overall increase in premiums.
The NZ$ has fallen substantially from US74cents-US$1 in February 2018 to US66cents (September 2018). The low New Zealand Dollar contributes to the rising cost per claim by driving up the cost of repairs that rely on imported materials, particularly in motor vehicles and marine. The NZ$ is predicted to be stable and to continue to stay relatively low in comparison to the US$ for the next 12 months.
Low Interest Rates
A sustained period of low interest rates has had a signifcant impact on insurers’ results for two reasons:
1. Insurers reserves become lower than anticipated.
When interest rates are falling these reserves need to be ‘topped up’ as predicted investment returns have been impacted by lower than expected investment returns.
2. Historically, investment returns used to make up to 66% of insurers’ annual profits. This percentage has decreased to approximately 33% over the last few years.
Looking to the Future
After an evaluation of these factors, we believe the price of premiums will continue to rise at a similar rate to the previous 12 months. Cost cycles can be an excellent tool in evaluating where insurance rates are, and what direction they are likely to take in the future. We believe the industry is currently sitting at between 9 and 10 on the insurance industry clock, pictured below, anticipating rates will continue to rise for a period before they begin to drop off again. Given the present climate of the insurance industry, it is important to keep in mind just how valuable insurance is, especially when a loss occurs. We hope this increased understanding will be helpful when it comes to prioritising protecting what matters most to you.
Structural change and cost cycles are part of every industry and insurance is no different. The Insurance Clock, below, is a useful tool to represent where the insurance rates are right now – and where they’re likely to be heading in the future