Cyclone Gabrielle and Auckland floods to erode profitability of property insurers in New Zealand
Cyclone Gabrielle, which caused extensive damage to property, businesses, and infrastructure, is the most significant weather event to hit New Zealand in this century so far. It prompted the government to declare a national state of emergency for the third time in history on 14 February 2023.
The country also faced devastating floods in Auckland from 27 January to 02 February this year, followed by a massive earthquake.
As a result of the massive damage caused by Cyclone Gabrielle and the Auckland floods, property insurers in New Zealand will see a severe impact on their profitability, says GlobalData.
Chandini Sharma, insurance analyst at GlobalData, commented: “The preliminary estimate of economic loss due to the current catastrophic events is expected to exceed $10 billion; however, it is too soon to estimate the extent of the insured losses.
”Insurance claims from Auckland floods are expected to reach NZ$1 billion ($702.8 million), for which more than 40,000 claims have already been registered as of February 14, according to the Insurance Council of New Zealand (ICNZ).
“The insured losses from the cyclone and floods are expected to cost insurers more than $1 billion. The losses incurred so far in the current year are expected to surpass the total of all weather-related claims in 2022, which was the highest to date.”
Loss ratios set to rise
Property insurance gross written premiums (GWP) stood at NZD5.2 billion ($7.4 billion) in 2021 and accounted for 42% share of New Zealand’s general insurance GWP.
The loss ratio for the property insurance line increased from 59.4% in 2020 to 74.0% in 2021 due to higher natural catastrophic (NatCat) claims and is expected to jump significantly in FY2022-23 to reach 156.5%.
Sharma continued: “As the industry braces for the aftermath of Cyclone Gabrielle, a massive earthquake with a magnitude of 6.1 struck the north-western part of Wellington on 15 February.
”Albeit no damage has been reported from the earthquake so far, it reminds insurance stakeholders that the island nation is prone to earthquakes as it sits on an arc of seismic faults around the Pacific Ocean.”
Earthquakes, floods, and wildfires are major drivers of the New Zealand property insurance sector, the sixth largest market in the Asia-Pacific (APAC) region.
As businesses continue to recover from the effects of the floods, the recent cyclone will have a negative impact on the profitability of property insurers.
Property insurers in New Zealand are expected to incur underwriting losses in FY2022-23, as the expense ratio for general insurance lines averaged around 27%.
Sharma concluded: “Massive losses from wildfires and other catastrophe-linked insurance lines have led to a double-digit growth in premium prices for New Zealand insurers in the last few years.
The current NatCat events are expected to further increase property premiums leading to GWP growth during 2023-26. However, insurers’ profitability is expected to remain severely challenged in the coming years due to increased frequency of weather events and rising inflation that will lead to higher claims pay-out.”
Time for resilience
The latest catastrophes are a reminder of the need to ‘build back better’, according to the Insurance Council of New Zealand.
“Repairing and rebuilding property and infrastructure in high-risk areas to the same specifications as the past will only lead to a repeat of the dreadful consequences we have all seen,” said the Council’s CEO Tim Grafton.
”Indeed, it could be worse with more extreme and frequent weather events as a result of climate change.
“Now is the moment to reset and ask questions about whether to rebuild in some locations and if we do how to rebuild better to better protect ourselves.”
“Most communities have infrastructure built decades ago that may have been fit for the hazards of the time, but are now demonstrably inadequate,” he continued. ”Massive and sustained investment is required to address that.”