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Fortunately for you this article is not about Engelbert Humperdinck (but the name did catch your attention, admit it..)
Unfortunately(and as you may have guessed from the title) the cost of things are going up, and one of those costs is your Insurance premiums.
This year we are seeing increases in insurance premiums across the board that are reflective of the volatility in the market, as well as the level of claims insurers have had, due to weather and economic events locally and overseas.
The first step is looking at the marketplace. You may be wondering why the price of insurance premiums are affected by events in other countries, or even other regions of New Zealand.
Insurance premiums are greatly affected by events in other regions domestically, and even internationally, due to the way costs are spread. For example, the heightened risk of natural disaster in places like Christchurch or Wellington do affect premiums in other regions. The reason is that insurers look to scale the risk of one prone area, by sharing the load across their portfolio, thus increasing the cost overall for all areas. This is simply how insurers can offer cover to riskier areas, without it being astronomically expensive for people living there.
In October new EQC rules will come into place. Your EQC cover will jump from $150,000 plus GST per unit to $300,000 plus GST. But the levy that covers this will only go up 65%.
This means that more of your insurance will get made up by this cover, as you will pay the first $300,000 of your properties sum insured at that flat EQC rate, instead of the insurers’ natural disaster rate. This will benefit everyone, but especially those in areas where natural disaster premiums are high, like Wellington & Christchurch.
Here's an example of what it will look like after October. If your house’s sum insured is currently$500,000 excluding GST (remember this the cost to rebuild the house, so it doesn’t include land and it has no relationship with the market value) you will be paying $300 for the first 150,000 worth of cover which is the current EQC scheme. The other $350,000 will be made up by your insurer who will charge a company premium and a natural disaster premium. In October you will now pay$462, but that will cover the first $300,000. So now your insurer will only be charging company premium and natural disaster premium on that final $200,000 of your sum insured.
We will have to wait till October to see how strongly this pulls down on Insurers’ pricing, but this does give us hope that the increases we are seeing currently won’t be permanent.
Now we are going to talk gib and tiling… the fun stuff!
A major contributing factor to increased premiums is rising building costs. When there’s a lack of materials, increased cost in getting them into the country (thanks Covid,) or even delays in sourcing them locally, building costs go up. If Bunnings wasn’t a luxury store before, it is now. CoreLogic, who are a property sum insured database, have tracked rising building costs. They report that during 2021, the cost to build a 200 square metre brick and tile house rose 6.1%.
When you’re looking at house insurance, the main detail we ask you is for the number you would like to insure the house for (i.e., the sum insured).This is what it would cost to rebuild your home, in the event of a full loss. Once the insurer has this figure, they automatically increase it each year at renewal time, by the increase in building costs, to ensure you could still build the same house. (I’m sure you can see where this is going…)
As that sum insured goes up, you are charged the corresponding premium. So, when building costs rise, you need more cover to be able to build the same house today, than you did two years ago, and thus you pay a higher insurance premium as a result. Nota very fun game of cat and mouse!
Insurance is there to cover you, so you the last thing you want is for it to come in short.
Your sum insured rising is a necessary evil unfortunately.
But just like how the sum insured changes your premium, so does your excess. Raising your excess might seem like a no-brainer to some as insurance goes up, but it is also situational. Increasing it from $500 to $750, or $750 to $1000, will take around $80-100 off your policy per year. A tempting offer, everyone likes saving money. But it's an offer you’ve got to weigh up. It’s the cost benefit analysis of how likely you are to make a claim.
For example, let’s say Lucy owns a house and she wants to raise her excess up to$750. As advisers, we weigh up the likelihood that she’ll make a claim in the next few years, in order to not offset the savings. You wouldn’t want to claim on something less than $800, because it’s the excess plus the cost of losing the no claims bonus. This means that if her property is damaged and the repair bill is $800 it would not be worth to claim on and it would take 8-9 years for the savings from the higher excess to pay itself off. There are cases where we recommend it, when it adds very little risk while helping keep costs down. If you’re thinking that it could work for you, give Joshua or myself a call and we’ll tailor it to your situation.
You didn’t think I’d go the whole article without a dedicated section on the elephant in the room, did you?
The Covid pandemic has not only increased the cost of transporting building supplies, delayed houses getting repaired or built, but it’s also increased the amount of claims. Insurers are focused on profitability, so when claims volumes increase, along with the average value of each claim, then prices will rise. It’s a vicious cycle of having insurance, making a claim, then that part you need from Australia costs the insurer more to ship it, so next year they raise their prices for everyone and then it repeats… and then it repeats again...
We are sorry to be this doom and gloom when the world seems a little too unhinged already. As Brendon shares in his blog, the perfect storm has reached our shores. It is my hope that by writing this explainer I can share some insights as to why the insurance market isn’t playing nice at the moment.
Mark October in your Calendars and get in touch if you’d like to talk about your sum insured, excesses or anything insurance… basically just call us for a chat and a look at your options 😊
Ben.
Disclaimer: Before you make any decisions, discuss your situation with an adviser from Velocity Financial, and seek advice from professionals, such as a lawyer and accountant, to find the best solution for your unique situation.