Until recently, domestic property premiums were largely cross-subsidised, with lower-risk locations effectively subsidising higher-risk ones. However, challenges posed by earthquakes and natural disasters in New Zealand have caused a shift away from cross-subsidisation towards a more individualised approach to property pricing.

This can be done via risk-based pricing, where statistical modelling can predict the likelihood and impact of certain events for individual locations, rather than just the wider area. In New Zealand, the most concerning risks come from the natural environment — earthquakes, floods, landslides and erosion. Following the catastrophic Canterbury earthquakes [in 2010 and 2011], insurers now have billions of dollars’ worth of claims data with which to assess their exposure.

The overall industry trend is towards risk-based pricing. Tower Insurance introduced it for domestic property in mid-2018, and others such as AA Insurance have followed suit, citing concerns about natural disasters as impetus for the change. A recent Lloyd’s report notes that New Zealand is the second-riskiest country in the world for natural disasters.

The 2011 Canterbury earthquakes caused damage equal to 15 per cent of its GDP, and extreme weather events look set to increase with climate change. The reinsurance industry is increasingly concerned about the impact of these losses. Figure 1, from Munich Re, highlights this upwards trend.

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