Pain in the pocket: Higher building costs set to hit home insurance

Higher building costs are pushing up the cost of insurance claims prompting insurers to consider or make price hikes in their premiums.

Insurance advisers were told on Thursday by NZI, which is owned by IAG, that a range of rate changes would be coming into force from September 1 across all home and contents products for new policies and renewals.

It put the changes down to a number of factors including “higher claims costs the industry is facing due to high demand in the building industry and pressure in building parts availability”.

Last month Tower Insurance said it was taking steps to proactively manage its claims after seeing an 8 per cent rise in average claim costs due to rising building costs and a spokeswoman confirmed this week that it may need to pass some increased costs on to customers.

In March Carter Holt Harvey cut timber supplies to Mitre 10, Bunnings and ITM citing accelerated house construction.

At the time Mike Craig, chairman of the New Zealand Certified Builders Association, said he saw Carter Holt’s decision as emblematic of a global problem where increased demand was delaying supply shipments.

He said the usual 12-to-14-week wait for windows from Europe had blown out to six months and domestically some builders were waiting up to three times longer for product.

“It’s a very, very big problem,” he said.

As a result, builders had been taking on more work which extended project deadlines, and were forced to use alternative products which heaped more work on local councils processing new resource consents.

The email to insurance brokers said an example of the rise in building costs was the increase in costs for local and imported timber as well as flat glass. It also cited a rising number of claims.

“There has also been an increased home claims frequency since the first Covid-19 lockdown in 2020 which we believe correlates to changes in customer behaviour.”

When it came to contents insurance IAG also noted that repairs and replacement costs to household appliances, computers and mobile phones were also on the rise due to expensive technology in the latest models, as well as costs for personal-use items, such as eyewear and audiology.

The broker note did not specify what the rate changes would be.

A spokeswoman for IAG, which also owns the brands AMI, State Insurance and Lumley, did not answer questions on how much premiums would go up by.

“A number of factors determine how we price our premiums, and these include location, past claims, cost and risk.

“We are closely monitoring the evolution of the external environment and we’re taking all factors and risks into account, including any impacts of rising building costs. Our priority is to price accordingly so we can continue to be there for our customers when misfortune strikes.”

The Tower spokeswoman said it was also experiencing rising claims inflation with building costs being a driver.

“As we communicated at our half-year results our average house claim cost was $4620, up 8 per cent on the prior year.”

She said the company was proactively managing this via a number of initiatives such as working with its supply chain to manage increases, working with data science partners to analyse the underlying risks related to house fires, and automating its claims management process to enhance efficiencies.

“But ultimately some of these increases may also be passed through to customers. We’re continually reviewing our pricing to ensure we are competitive.”

A spokeswoman for AA Insurance said it regularly reviewed premiums including the effects of any external influences like supply chain constraints.

“There are no current plans to increase home insurance premiums, specifically related to any change in building costs, beyond the outcome of these regular reviews.”

Sacha Cowlrick, executive manager consumer insurance at Vero, said although it was anticipating price increases from its suppliers across the board due to global supply chain pressure, at this stage it was looking to address these through business and supplier efficiencies.

“We always monitor the impact of claims costs and regularly review our pricing to ensure that our business is sustainable.”

However Cowlrick said the rising cost of building materials could also impact the total claim cost on a house insurance claim.

After the Christchurch earthquakes insurers moved to a sum insured model rather than paying out the full cost of replacing a house.

Consumers have to specify exactly how much they want to insure their house for based on what it would cost to rebuild it and for most insurers that is the total amount an insurer will pay out if a house is destroyed through fire or a natural disaster.

Maree Hammersley-Myers, a general insurance financial adviser at Thorner General Insurances in Wellington, said increased building costs meant there was a risk that people’s insurance cover could fall short when it came to a total replacement such as when a house burned down or if major structural damage was caused by an earthquake.

But she said the problem would likely not become obvious unless there was another major natural disaster like the Canterbury earthquakes where there were a lot of people that required a total house replacement.

“It is probably fine if it is a one-off house fire but it’s more if it is another Christchurch. I don’t know if we have learned enough lessons from Christchurch, we are just a small country and we can’t cope basically. We have learned some. But also with insurance it only goes so far.”

Cowlrick said it encouraged customers to check and update their sum insured to ensure that they have the right amount of cover to repair or replace their property.

“For house insurance, customers can use the Cordell calculator on Vero’s website for a free rebuild estimate or get a registered valuer or quantity surveyor to assess their rebuild cost.”

Other insurance impacted

Hammersley-Myers said she was seeing a range of impacts on insurance due to flow-on effects from supply chain issues caused by Covid-19.

A recent commercial client of hers was unable to get a replacement rental vehicle after crashing his truck as there were none available with the specifics he needed in New Zealand.

“I told him: ‘Sorry we are charging you all this money but you can’t actually get a rental truck because there is none available’. So it flows on to everything.”

Fortunately the man had another vehicle in his fleet that had been off the road that he was able to get warranted and use instead.

Hammersley-Myers said insurers had warned brokers to make sure people had car insurance cover which included a replacement rental or money towards one due to the length of time it was taking to source parts and fix vehicles.

“The insurers are saying be careful because repairs are taking so long because parts are delayed that you want to give them the rental vehicle benefit.”

She said domestic vehicle users had to ask for this benefit as an add-on to their policy as it was not a standard inclusion and it did cost more.

For commercial vehicle owners it was called loss of use and was vital for those who needed their vehicle to earn money.

“It is right across the board. It is changing how we used to do things because we have now got different risks to deal with.”

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