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Now, Cura Koto. If people talk about insurance, they're usually saying things like gosh, how much has it gone up? Or will it really be worth it? But understanding your risks and how you need to cover them, well, well that's crucial whether you're investing, we're just doing life. I'm Garth Bray and this is Shared Lunch. Today. We're with the Insurance Council's Chief executive, Chris Farfuey, for a lesson in how to cover those risks. But first he has some important information.
Investing involves the risk you might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest. Everything you're about to see and here is current at the time of recording.
Well, Mullowila, Chris, thanks for giving us some time my look to see it. Look, you represent an industry that, by now I reckon must have taken about ten billion dollars worth of premium in the last twelve months from New Zealand. It's that's gross written premium. I'm about right with that figure.
Yeah, roughly give or take a millionaire a billion either.
Side a billionare a billion there, you know, so you're talking about real money. Look five years ago though, that figure was about six point eight billion, so that's like a forty percent increase. And this is just off the figures that I saw on the on the public page at the Insurance Council. And across that period inflation has been about twenty percent, So it's quite a big gap. How do we get there? And when does it stop?
How do we get there?
It's the cost of repairing things and the cost of inputs into insurance have increased over time.
I think most people wouldn't know that.
We also collect on behalf of the government the funding for the foreign emergency, so the fence levy is part of people's premium. Also, we collect the levy for what used to be EQC is now the Natural Hazards Commission, So all of that goes into how premium is constructed. Also, importantly, you know the cost of repairing things has increased building and construction cars becoming more complex, so fixing them has
become more expensive. But the other thing, as well, as as things kick off around the country, the ability to get reinsurance.
Is becoming more challenging.
And if people are watching and wondering what reinsurance is, it really is insurance for insurance that things get big and then that engages their insurance and the ability to get that is challenging.
Over time.
We do that, our members do that every year, and certainly the cost of reinsurance is going up, primarily because as you've probably seen more recently, climate related events like cyclones around the world mean that more people are looking for reinsurance. And when that happens globally, we do serve
CESPI compricing. We're hoping that that levels out in the next three or four years, but certainly the trend has been in the last two or three years and when we've had events here in New Zealand that that cost of insurance has increased.
You've touched on quite a number of issues there. But I suppose I should just clarify that the numbers we're talking about before, they don't include things like life insurance or health or income protection. That's not where the Insurance Council members cover, right, Yeah, so your members are the companies that offer general insurance, you know, people's homes, contents,
business assets, and cars. Gosh, when I took a look Motivacle insurance, that's like a three billion dollar industry in terms of that gross written premium, and so that looks bigger than homes or contents or any other sector and with lower claims growth. So is that business in some sense kind of subsidizing or propping up the rest of the insurance business? And I guess could the prices be a bit sharper there?
I don't think it is, probably it up.
I think when you know our members, they look across all their box in there what we call lines of insurance, whether it be house and contents, or whether it be home, or whether it be murder.
As you say, they are.
All running their own operations and taking their own kind of levels of risk, more so in home insurance than moder that's pretty finite depending on what you're doing with a car as well. So what I would say to your question, Garth, is that they're all pretty competitive. They want to take business off each other, but in a general sense that the cost of ensuring and the cost
of repairing is becoming more challenging for news yalders. We understand that that's because the cost of fixing some of these things like cars and repairing homes is becoming more expensive over time as well.
So you've got the global chip shortage, right, Apparently that's a problem that it's making new cars more expensive, which means it's more likely you want to repair, and all of that is pushing up and insurance premium for motor vehicles. Is that what you're hearing too.
Yeah, cars are becoming more complex. I've got an old Holden Captiva. It's pretty relatively easy to fix. But someone with a more modern car, which is more complex and the componentry and the digital nature of them, it is harder to fix.
I think if we want to talk about homes as well, right, because for most they're still the biggest asset that people either own or would sort of hope to own. I did a little bit of research the Reserve Bank looked at the insurance price cycle and dwelling insurance inflation. It jumped about forty four percent in twenty twelve following the
Canterbury earthquakes. In twenty eighteen after the Kikuta earthquake, it A bouts up about eighteen percent and on their numbers at the Reserve Bank twenty five percent this year after the North Island weather events and previously those two events, that took about two years for the for the premium
growth to track down closer towards inflation. Should households just expect that's the pattern after a big catastrophe look forward to price increases on insurance premiums for a couple of years two to three.
Yeah.
That by the Razent Bank back in through their Financial Stability Report, I think was really useful. Gave context from the regulator about understanding how the rhythm of events works now when we do have an event. As I mentioned before, the reinsurers who look after our insurers when a big event kicks off, take another look at the market and they try and make sure that they reassess it what is the right amount of reinsurance capacity to send to
New Zealand and what that price is. And there's a kind of a settling of the dust that happens after a big event as you mentioned certainly happened after christ Church and some serious discussions had to happen there to make sure that our members could get that reinsurance in order to continue to offer insurance, especially to the christ Church market. That happened again in co coulda Those were two searsmic events and a lot of our risk At
that stage everyone knew that it was searsmic. We saw something similar happen after the Aukland Anniversary floods and cycle and Gabrielle of earlier last year that that obviously was
a climate related event. And when that happened, the Rensherer has had another good look at New Zealand and the risk profile of it, put their their hands to their chins and said, and we have to have a bit of a think about this in terms of the risk that New Zealand poses now, so we've got this double layer of assessment of New Zealand both seismic which has been traditional, but also climate.
Now.
Just to put that in context, Garth, I think kind of for the years prior to twenty twenty three, members traditionally for weather related events would have paid out at about three hundred and fifty million dollars per annum max on kind of weather related events. There were obviously kind of smaller events that event of last year. I think we're close to having paid out about three point eight billion dollars, so that event is ten times bigger than what we
would expect. So, as you can imagine, we've got some attention from the reinsurers and that's why people are finding it a little bit more difficult at the moment in terms of the premiums. But as you probably also saw, and as you've mentioned, that plateau is out over time. Once that kind of new equilibrium.
Is found, did the insurers get to a point where maybe they weren't going to be able to access some of that reinsurance.
Look, I think it's not necessarily challenge to accesses, but it is a it is a more complex discussion for them to have. And at a macro New Zealand ink level, we need to make sure that New Zealanders a country is saying to reinsure as that because of this increased climate risk that is now a reality, what are we doing to mitigate and reduce the risk and therefore the claims to New Zealanders. We're certainly lobbying hard to the government around its climate adaptation work to say that we
should get ahead of this. What are we doing to ensure that we've got infrastructure in the likes of the Hawks Bay Auckland, for example, because of those north Old weather events, to say, if this happens again, how do we ensure there isn't a flooding to the extent that we've got, And what kind of planning decisions are we making to ensure we're not building in places where we shouldn't Because I think there's a history, and some of it is explainable, and some of it is in New
Zealand that we are building communities and places where there's obvious natural hazard risk and we can't continue to do that in the future because the reinsurers will say, well, why is that happening? We're not necessarily we won't necessarily have the appetite to cover that risk in the future.
I think it was how one of your members that told the market earlier this year the unpalatable try truth is not everyone is or will be able to ensure their home the way they do now? Is that pretty common view around the board table there at the insurance Council.
Yeah, Well, each of our members have got their own appetite as to what they'll cover, but it certainly from what we're expecting in terms of increased severity of weather events and increase frequency of weather events and what we know about coastal risk and kind of floodplaining pro prine areas. Insurers and councils and governments are taking a much closer
look at those kinds of things as well. Not only did we pay out three point eight billion dollars as a result of last year's where the events, but the Crown also forked out quite a lot of money as the councils to make sure that people in red zones could be compensated and confines new places to live. So there's awareness from the government, from local government and also the private sector that we actually need to change things in order to make sure we can reduce that risk.
There's going to mean some challenging conversations in the future for some communities, but also the ability to get insurance will become challenging, especially if we do nothing, which is why we're pushing as hard as we can to make sure we are kind of having the conversation about infrastructure built in the right place and to the right standards to protect communities and households.
If we can do that, our story.
To our reinsurers is a much better story to conversation to have so they can keep seeing that reinsurance capacity to New Zealand and also at a price that is affordable to these elders. It's the sustainability of the market in the future and the medium to long term is challenging. But we want to work with anyone who can make sure that that risk profile can be reduced.
You say in the future, but I mean given insurance contracts typically run for about a year completely withdrawing cover to an area like a suburb or town, even that could happen pretty quickly, couldn't it.
Yeah, And we weren't necessarily be the ones who make that decision. You know, we'll have to kind of work with central government and local government to understand what the future of an area is. Certainly, through some pricing signals, some of our members are saying this area is riskier than others. But you know, the conversation about whether or not a community has a future or not shouldn't just
ride on the price of an insurance premium. It has to be a discussion that central government and local government also lead to make sure the right kind of decisions are being made and they go through a process and work with communities to do that. You can't just say you know, upstacks or where are people going to go?
And certainly we've been heartened by the conversations that we've had with Parliament via the Sect Committee that's just done an inquiry into adaptation and the National Adaptation Plan that was undertaken by James Shaw and the previous government kind
of set some good work too. And I think we're probably going to come to a head pretty soon because I think councils, banks, insurers, local government and central government are predicin that we're working with communities so they can get an understanding of what the future holds to them. It's not just insurance, it's the value of their assets as well, and that's something that is well beyond the remit of insurance itself.
Just quickly, I guess, given that ensurability of homes is getting more expensive and trickier, does that change people's views potentially about perceptions of property as an asset class. Is it going to lead people perhaps to think about equities and other kinds of things, maybe saying case it's too risky to one at home.
A lot of people need to own home to live in, and I think, you know, that kind of sense of the key we dream still needs to be there. I just think it'll be really useful now. I think if we're doing everything as we can as a sector to give kiwis the best available information for them to make decisions. You'll go and by home, and a lot of that can be based on an emotion and price. But what we would ask people to do is make sure that you know, you think about insurance as part of that
purchase process as well. It's not just the thing that you have to get to get a mortgage, it's you understand the risk involved in whatever you're buying, where it is, the impact on your insurance premium, and then that they shop around. You know, most places in New Zealanders in New Zealand are still getting insurance, so you do have to shop around a bit to kind of understand what you can get and where you can get it.
I'm sort of mentally having to stop myself calling you minister because the last time and I folk.
That way, people call me a lot of things and they don't call me that anymore.
Well, Chris, I'm having to mentally stop myself from calling you minister, because last time you and I spoke, you were still in Cabinet. I mean you did five and a half years there. You were the Minister for Emergency Management and Civil Defense, I think, and justice and let's not forget broadcasting and immigration during the COVID lockdowns when all we did was watched TV and wonder about where
we couldn't go. So I just wonder you've stepped in as the chief Executive of the Insurance Council after those devastating floods up here in Auckland start of last year, after Cyclone Gabriel. Of course, so much damage, you know, took lives and costs so much to the industry. Are you an insurance insider Now, I.
Wouldn't say I'm an insider, yet I'm an outsider that's come in. I like really complex problems, which is probably why I was given the portfolio as I was given in cabinet, and I really enjoyed both the commerce portfolio and also emergency management. So I've been able to use the context of those and certainly the networks that I've built over time to be able to effect some change here.
We do have the insurance set down in New Zealand does have some complex problems around climate adaptation in front of it. I'm actually confident that there is a pathway to meeting that challenge, and I spent quite forward thinking about that and it's my job to kind of get the insurance sector's voice and opinion into some of that. I'm really lucky I've got a really proactive board who does see the end zet ink challenge in this as well as the sustainability of their industry and the long
term as well. There's some pretty difficult conversations that need to happen and insurance needs to be part of that as well. We'll kind of enter some of those tricky places where we may not have gone to before because we do want to make sure that we're advancing it. I think the worst thing that could happen for New Zealand and to our sectors we just sat on our hands. When we know that the frequency and severity of the
climate change climate related challenges are upon us. We just have to speak to anyone in the Hawks Bay, tider Fitty and Auckland, those areas that were affected that if we don't learn from this and make sure that the ability of New Zealander is to have the peace of mind of insurance is still there and affordable and available, that you know, a lot of that asset value that we talked about becomes difficult, a lot of future of communities becomes difficult, work hard to kind of maintain the
happy medium and equilibrium that we've got.
Now your time in politics and I think as communistments, so that you know, the community ComCom started market studies. I think we've got one in banking right now. We've had them for supermarkets, we've had them for building materials and for the fuel patrons. On what would a market study of insurance show us?
Well, look, I think we've got about just a little over twenty general insurance in New Zealand. We've got two or three kind of large players in the in the in the country as well. I think the benefit of some of that structure is that at least two of
them are kind of Australian only got Australian parents. So when we go shopping for reinsurance, we don't just go as in New Zealand, we go as Australia and New Zealand and we're able to have some kind of economies of scale there and buy and power as good for us there. I think generally there is good competition in the market, so you know, we do see some fierce
competition to make sure pricing and products are there. I think you'll probably see in the product space much more innovation in the future because of what's happening in terms of climate change. But one of my jobs is to do what I did at the beginning of this interview and just let people know how insurance premium is constructed and that we do have to go offshore to buy a rather large component of the input into an insurance policy,
which is a reinsurance It's a global price. We bargain hard, but we do have to kind of go with whatever the wins of the global reinsurance market is. So I think one of our jobs is to make sure that this system understands how insurance works and keep being on
about that. You know, we're taking a minister to London to make sure that they understand how reinsurance works as well, making sure our kind of local government and other central government members a part of understanding as well, so when they're looking at it in terms of policy in the future. They understand how the market works, so as the minister who introduced market studies are there for a purpose. But I would say that the currently the insurance market's working pretty well.
Chris, looking ahead five years, if you try to take a five year view of the insurance industry, same same, all different. I mean, we're still going to have those two big Australian mega brands pretty much covering most of what people do.
Oh, that's not for me to say that. There's a whole lot of other factors that go into that, but I think what they are interested in is making sure that the market is still strong and sustainable. I mean, I think one of the questions you're probably gonna ask is whether they're not insurance is a grud to purchase. I don't think it's a grudge purchase. I think it's a grudge payment. People don't like paying for it, but they do understand that they need it. So having that
availability for New Zealanders is really important. You know, these in this relationship with insurance is pretty They make sure they've got most people, make sure they've got coverage for their car, and that we've still got coverage and the house market of well into the nineties, So we want to make sure that that kind of relationship with insurance
has maintained. Prices are a big factor in that, and making sure people do understand how that price has arrived at is one of the things that we have to do a better job at, not just with consumers, but also with regulators and politicians who have the leavers of policy.
What about I suppose the insure text, the nimble companies that are going to come to market. What's the role for them and are they part of your club?
Well, they're not members, if that's what part of the club has meant. Are they being innovative? Yes, but so
are our members. And I think the way that our members are kind of developing products, developing pricing, certainly using technology to be more efficient in their processes in an effort to try and make the consumer experience better and keep costs slow is really important in that respect, you know, kind of the exposure to AI in the back office processes, but also in terms of what is expected of communication to consumers now when the new contracts of insurance law
Bell becomes an act is really important. So I'm quite excited about what the sector can do with AI in terms of communicating to consumers. But also there's really simple things that AI can do for processes to make life for consumers easier. And for insurance. You know, it's already been done with some of our members. You know, if you've got a relatively simple insurance claim, you can get that done quickly because our members are using AI. Whereas once you might have had to ring three or four
times to get some traction on your claims process. Some of that stuff is happening just like that because all the information is coming through and the process then ensure are much more streamlined, and the technology.
Is there now.
Every other industry is subject to sort of massive innovation as these smaller players come in without all of the legacy costs and try and do something different. How how does the insurance industry respond to that? Does it welcome it? Does it challenge it? How do you? How do your members deal with that?
You loo can think like anyone, if a challenger comes along, then the best thing is to make sure you understand what's happening and responding to it. Each of our members will do that in their own way, but certainly you know, the innovation and the use of AI. It's kind of
the easy thing to say. But product innovation, that kind of innovation, with the way that our websites are offering better services and faster services to consumers, is certainly there, all of those things coming together offering the best possible product our members are thinking about that day and day out.
There's data as well, right, The data is the other part of the the data about you know, flood patterns, whether people trying to use that very granular approach to risk to say this house, this house will ensure it, but not the one in the middle, rather than sort of the traditional model of insurance, which was kind of like socialism for capitalists, like, you know, we'll all put our risk together and cover our assets that way. So is that going to change things?
And it has, and it will and it will continue, not just for insurance. As counsels and governments and insurers and banks get their hands on better data and modeling, then the decisions that we make can be more granular. And at the end of the day, I think that's useful for consumers as they have access to that and
they can make decisions on investments or not. And again, as I kind of said it there earlier in the interview, are consumer's ability to go into those decisions about investment fully and warned about what those insurance implications are, what the borrowing implications are, what the reality of the the location are. Put us in better stead to make better decisions.
Better information is good for everyone, and certainly as we get more as information as insurers and as a sector, we're able to have more precise discussions with people about what the coverages and at what pricing point that is.
Thank you, Chris Farvoy, that's been really interesting. I hope you found it too awesome and thank you for tuning in. You can watch Shared Lunch on YouTube or catch it wherever you find your favorite podcasts. Want it, Rate us there and let us know what you'd like to see in the next episode Quam two. That's us for now.
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