File photo. Photo: RNZ/ Tess Brunton
Households may find home insurance "increasingly unaffordable" due to higher premiums, while rising risks could lead to insurers refusing to cover some properties altogether.
In an excerpt from its upcoming Financial Stability Report, the Reserve Bank (RBNZ) said residential insurance premiums "significantly outstripped general inflation over the past decade".
It said it reflected higher construction cost inflation and higher reinsurance costs, as global reinsurers reassessed New Zealand's risk level.
"We have also seen the insurance industry move towards greater use of risk-based pricing for residential dwelling insurance, meaning that the value of insurance premiums is more tailored to the specific risks a property faces (e.g. seismic or flood)," RBNZ director of financial stability assessment and strategy Kerry Watt said.
Risk-based pricing was evident in certain areas, such as for earthquake risk in Wellington.
"A long-term trend towards risk-based pricing will pose challenges for some property owners," Watt said.
The RBNZ expected owners of higher-risk properties to potentially find insurance "increasingly unaffordable" and some properties "may see a withdrawal of insurance availability".
But it said evidence suggested insurance remained available and insurance companies withdrawing insurance was rare, even for properties facing greater risks.
"We're anecdotally already seeing some policy holders struggling with increased costs in insurance and also potentially in the future availability of insurance," Watt said.
"Over time, risk-based pricing can provide a strong signal to encourage the proactive mitigation and lowering of exposure to risks, which can be beneficial for society's overall risk management," he said.
However, the RBNZ said insurers, governments, home buyers and lenders should take action to improve their understanding of natural hazards to proactively manage affordability challenges.
"Banks need to be conscious of the ongoing insurability of the properties they lend against, which will require more scrutiny in their lending decisions than currently," the RBNZ said.
"Banks also need to pay closer attention to insurance coverage, as there is a risk that owners underinsure high-risk properties over time in the face of rising premiums."