Govt launches high-powered review into soaring insurance premiums

The Government has launched a six-month deep dive review into soaring home insurance costs as some insurers begin withdrawing cover from high-risk areas.

A paper brought by Finance Minister Nicola Willis to Cabinet suggested insurers have higher profit margins than their Australian counterparts.

The review comes as AA Insurance temporarily paused new home insurance offers in Westport due to flood risk, highlighting growing concerns about insurance availability.

Home insurance premiums have risen 40% in the last two years and grown at three times the rate of general inflation since 2011, according to Treasury analysis.

Govt assembles team to tackle soaring insurance premiums - Watch on TVNZ+

"We are not only worried about that affordability, but we don't want to see people dropping their insurance policies," Willis said.

Willis and Commerce and Consumer Affairs Minister Scott Simpson have invited the Council of Financial Regulators to look into the drivers of residential insurance pricing and affordability.

"We as a Cabinet have directed the Council of Financial Regulators, which is the Reserve Bank, the Commerce Commission, the Financial Markets Authority, along with government agencies, to work with the insurance sector to deep dive into those questions over the next six months," Willis said.

The review will examine what has driven price increases, what impact they are having on consumers, and what policy levers the Government can use to reduce cost pressures.

"We know that the insurance industry has really good data about who's insured, how much it's costing, and we want to know what are they seeing in the trends of whether people are lessening their cover, how they're responding to those price increases, and what can we expect for the future," Willis said.

Insurance remains largely available, but access is becoming more difficult in areas facing both earthquake and flood risk, including Wellington, Marlborough and Canterbury.

The Cabinet paper notes there is "some evidence of higher profit margins for insurers in New Zealand compared with Australia" but says "the reasons for this are unclear".

"New Zealand’s higher risk profile is likely a contributing factor, with investors demanding higher returns for the higher risk," the paper read.

"However, it could also indicate weaker competitive pressures in New Zealand."

New Zealand's residential insurance market was highly concentrated, with three insurers controlling significant market share.

"While the data is limited, preliminary work by the Treasury suggests there may be competition issues in the insurance sector."

Willis said she wanted to understand how much of the price increases were driven by factors outside the Government's control, such as climate and earthquake risk, and how much related to "regulatory burden" and "red tape that we put on insurance companies".

"I think most New Zealanders will understand this isn't going to be a quick fix issue. This isn't a simple Band-Aid solution," she said.

"But if there are small things we can do at the margin which will reduce the pressure on your insurance bill, we want to do it."

The review will examine competition issues, construction costs, reinsurance pricing and the industry's shift toward risk-based pricing for hazards like flooding.

Consumer NZ chief executive Jon Duffy welcomed the deep dive.

"We need to understand the market dynamics better so that we can work out what fixes we have because the insurance sector is critically important for our economy, which is heavily underpinned by house investment," Duffy said.

He called for any inquiry to be "fully independent" and free from industry influence.

The organisation said last year: “If insurance becomes a luxury only available to a privileged few, the impacts on communities, our economy and society will be severe."

Insurance Council chief executive Kris Faafoi said the industry welcomed the review.

"We'll work with the Government to make sure that they can get the answers, because we want to make sure that insurance in the long term is accessible and affordable for all New Zealanders," Faafoi said.

"People sitting at home might not realise that 40% of their home premium is taxes and levies. It's things like that that are out of the control of the insurance sector that I think this review should look at. There are other things like inflation that hurts us too."

Faafoi said inflation, which increases repair costs, and the cost of regulation also contributed to rising premiums.

On the AA Insurance decision to pause cover in Westport, Faafoi said it was "one business decision from one insurer" and not an industry-wide issue. He warned that without action to reduce climate risk, insurance challenges would continue.

"We've said for a long time the likes of climate risk, increased risk of flooding events, is going to have an impact on premiums if nothing is done to reduce that risk," Faafoi said.

He said the minister had assured him the review was not "a big stick exercise".

Willis has paused a separate review of Natural Hazards Insurance Act levy settings until the affordability review is completed.

Treasury had recommended increasing the Natural Hazards Commission levy from 16 cents to 24 cents per $100 of building cover, which would lift the maximum annual levy per dwelling from $554 to $828.