Increases in insurance premiums look set to ease up

Last updated 05:00 23/01/2013

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Households and businesses can look forward to some relief from rocketing insurance premiums in 2013 as the cost of reinsurance levels off.

That's because 2012 was relatively catastrophe-free for the global re-insurance industry, industry players say.

The past 12 months have been a mild one in terms of global risk for reinsurers, with Hurricane Sandy, which slammed into the east coast of the United States in October, the only big catastrophe to hit the already beleaguered industry.

Even then reinsurers got off lightly. An analysis by Insurance Insider shows the sector bore only US$3 billion (NZ$3.5b) of the US$20b to US$25b in damages from the storm, with insurers absorbing the rest.

Risk consultant John Sloan said there had also been resistance from the market against rising insurance costs, especially from small and medium-sized businesses, which have had to wear the spike in reinsurance premiums over the past two years.

"The absence of a major earthquake in 2012 does not mean insurers or re-insurers will suddenly reduce their premiums, but there are early indications of some alleviation in the market," Sloan said.

Those alleviations are likely to see prices stabilise in 2013, but a return to pre-2010 levels is still nowhere in sight.

That is partly because reinsurers do not have any room on their books to cut rates.

The slow pace of global economic growth has depressed investment earnings from bonds, with central banks keeping interest rates near zero.

That level is likely to remain in place for the next two years.

Insurance companies in New Zealand are also facing rising domestic cost pressures. A Vero spokesperson said while it expected premium increases to slow in the year ahead as reinsurance costs came off the boil, it was still dealing with a spike in claims from the Canterbury earth-quakes.

Some of those costs would flow through to customers.

Gary Young, head of the Insurance Brokers Association, said insurers also had to bear the cost of regulatory changes which would force firms to bolster their balance sheets.

For example, under the current rules firms have to have sufficient financial resources to withstand claims equivalent to a 1-in-250 year event.

The Reserve Bank is looking to lift that to a 1-in-1000 year event (equivalent to the February 2010 earthquake) to prevent insurers from collapsing.

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- Fairfax Media


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