Cross subsidies will end

IAG Chief Risk Offcier, Karl Armstrong says an end to ‘cross-subsidisation’ on the horizon.  Speaking to interest.co.nz he said insurance premiums had been “hardening” since before the Kaikoura quakes.

“Now you’re going to see an exacerbation of that.”

A time will also come when those of us in parts of the country less prone to earthquakes will stop subsidising policyholders in more risky parts of the country.

In other words, Aucklanders may stop picking up the tab for Wellingtonians, sitting on vulnerable fault lines.

“What we must consider at some stage in the future is a user-based pay system,” Armstrong says.

Those in risk-prone places like Wellington will pay for it.

“At the moment there is still an element of cross-subsidisation going on in the industry. We see that across the Earthquake Commission (EQC) as well. It’s a community rate from North Cape to Bluff,” Armstrong says.

He notes commercial policyholders are already paying premiums according to where their properties are located, how they’re constructed and the type of soil they’re built on.

While high-risk residential policyholders in Christchurch for example have already had their premiums bumped up, this risk-based division may become more pronounced.

Armstrong says insurers will “return to more disciplined underwriting”.

Asked whether he believes people in Wellington will struggle to get insurance, he says “not at the moment”.

IAG has no intention of withdrawing from Wellington and reinsurers are still committed to the New Zealand market. Reinsurers have recovered from Christchurch and are benefiting from a world currently awash with capital.