Commercial property and construction… what on earth(quake) is going on?

The New Zealand insurance market is dynamic to say the least. We are a small nation that contributes little to the global (re)insurance premium pools, yet we carry more than our share of natural disaster losses. This in part explains our short, sharp insurance cycle (two to five years) between what we deem soft (low cost) and hard (increased cost) insurance market conditions.

We have experienced many hard market cycles, which have traditionally been dictated by increased premium rates, imposed higher excesses for certain perils and changes to insurer appetite (their willingness to allocate capital to certain risk types). The current hard cycle feels different to others and the analogy ‘The Perfect Storm’ comes to mind, when considering the additional factors affecting the cost of asset insurance in this hard market cycle.

In past hard market cycles, the reaction has been knee jerk, in most recent times it was the catastrophic losses presented to the market following the Christchurch (and subsequent) Earthquakes in 2010-2012. The losses sustained to the (re)insurance markets were in excess of $60bn with some long tail reinstatement issues still being dealt with in Christchurch – 10 years later. This hard market, we are of course seeing the rate, excess, insurer appetite applications as would be expected however there are other factors that are having quite a material impact on the cost of insurance for commercial and residential property owners / developers.

Socio economic conditions – ram raids, theft, burglary rates are the highest NZ has seen for over 20 years. Previously not accounted for by insurers but now on the radar and further changes will be made, likely to excesses and premiums.

Interest rates – OCR increase from .25% in October 2021 to 2.5% current at time of writing in 2022, with additional increases expected. Cost of funding premium (monthly payments) have increased in line with high interest rates.

Cost of reinsurance for New Zealand based property risks has increased. Global flood losses have reached US20bn in 2021 alone. Climate change and changing weather patterns dictate that this peril will continue to worsen – driving rate increases and costs of insurance. Australia no longer able to purchase flood insurance in certain areas (flood prone planes). New Zealand is not quite there yet, however in 2022 alone, floods and heavy weather events have cost the NZ industry in excess of NZ0.5BN, with trending data expecting this type of loss to continue to worsen.

Insurance valuations (reinstatement) are increasingly up. Long Burroughs has always pushed hard for our clients to maintain the upkeep of their insurance valuations to remove the risk of under insurance and the application of average to insured losses – at a minimum of every two years. Regardless of this, we are seeing a very large jump (one client 43% increase over last valuation two years previous) in the reinstatement values being presented by valuers on commercial building stock across the country. On average, the increases are between 10-20% which has a material effect on the cost of insurance.

Rate increases are an expected lever, and have been slowly on the rise for the past 24 months. This year however we are seeing sharper increases, especially where there have been re-occurring claims of the same nature i.e. multiple water damage claims on the same building over 12 months. 5-10% increases expected on buildings with minor/no claims and up to 20% premium rate increases for buildings with claims.

The cost of construction is another factor that contributes to the costs of insurance. It is well documented that construction costs in 2021 increased by ~10% with the same expected in 2022. This has an impact on the cost of reinstatement and is driving increased claims costs. Furthermore, the ability to get contractors to site quickly to remediate damage is causing increased business interruption losses. All of this contributes to insurer premium/loss rations and performance indicators, and drives premium rate reviews at a local level. Combined with with global reinsurance cost increases for natural disaster / catastrophe related losses, we are seeing an unusually high increase in premium rates.

Adding to the pressure on commercial building owners and the OPEX presented to tenants, is council rate increases. Combined with valuation increases, premium rate increases, cost of funding premium (interest rates) and the local/global (re)insurance view on New Zealand property risks, we expect that premium rates will not level out just yet and that this hard premium cycle we are currently in will continue for another two to three years, longer if we continue to suffer the effects of adverse weather patterns and the socio economic conditions driving high crime and interest rates in this country.

Lastly, a new and unfamiliar implication being felt across the insurance market is the ‘working from home’ requirement following the lockdowns of 2021/22 in New Zealand. A large number of insurers have maintained the working from home eligibility for their employees or, in some cases, offshore parent companies continue to require it in some form. Turnaround times and general ‘commerciality’ is at an all time low, a sentiment of “take or leave it” is being felt and not helping the overall insurance transaction and renewal results being felt by clients in NZ. In summary – there are a lot of implications that are driving premium costs which are not directly caused by the insurance market. This is the first time for many years that outside factors are adding to the cost of insurance and it is difficult for building owners and thus, tenants, to weather the effect these factors have on OPEX.

Cyber crime and the “she’ll be right” Kiwi attitude

Cyber crime is not a new phenomenon. It can no longer be considered an emerging risk and the focus of these disruptions has shifted from large global corporations like Sony, Citibank or Saudi Armaco, to smaller organisations. It does not discriminate and knows no geographical boundaries. As individuals, business owners or Directors, we are none of us immune – so it begs the question, why is the uptake of cyber insurance in this country so poor?

There has been a distinct move towards targeting smaller businesses for financial gain, using a number of smart tools in order to do so. The smaller the business, the more effective the crime, as often, the business does not have the governance in place to identify and halt an illegal transaction until after it has happened.

The two biggest cyber crimes we have seen this year at Long Burroughs both involved very small businesses paying large invoices, supposedly to well-known third parties. All seemed well, until those third parties contacted the business chasing settlement of the invoices – at which point the businesses realised something was wrong. Weeks had passed by, and the funds were long gone.

“Invoice hacking” or “redirection” is the hardest form of cyber crime to detect and has the highest strike rate of success. The two aforementioned businesses had less than five employees and under $1,000,000 in annual turnover. The owners managed debit control themselves and in the absence of multi-factor sign off, the funds were paid to an alternative account. Unknown to the business owners, their emails had been hacked, real invoices secured, accounts amended, and re-sent to the business owner. Thanks to our partners, you can find online to suit every preference and budget, from budget to top-of-the-range super stylish models.

By the time the business owners realised the issue, time had passed – they had no recourse from their bank, the funds could not be saved or returned, and they still had the issue of the outstanding debts to third parties.

Both businesses had been made aware of cyber exposures and options presented to provide this cover. The premium for doing so was under $1,500 a year per business and would have provided indemnity for both losses – over $200,000 in losses in total, both material figures to these small businesses.

Despite stories like this, in New Zealand, the uptake of this cover is extremely low. Insurers have tried to incentivise uptake by offering low cost/stripped back cyber cover options to assist small businesses by being able to afford the purchase, with limited results. The issue seems to be one of attitude. The underlying New Zealand motto of “she’ll be right” combined with the misconception that small businesses are not the target, is a dangerous combination.

Cyber Liability policies offer much wider protection than just invoice hacking, covering losses arising from first and third party breaches such as, phishing scams, network lockout/interruption, data breaches and malware attacks.

Global surveys of Directors confirms cyber security as a top five concern, right alongside massive global issues such as climate change and inflation. The risk is real, and while difficult to quantify, can have a huge impact on businesses, regardless of size.

Long Burroughs and Auckland Insurance joined forces back in 2017.

A perfect partnership, with the commercial and corporate expertise of Long Burroughs, paired with the experience and established platform of Auckland Insurance.

Now, nearly 20 years since Harvey and Chris Kerr founded Auckland Insurance, and after 5 years of flourishing alongside Long Burroughs, Chris will be stepping back from the day-to-day running of the business, handing over to the Long Burroughs team.

What a journey it’s been.

2003
INCEPTION
Harvey and Chris Kerr start Auckland Insurance.

HAPPY CHAOS
Harvey hustled, Chris stitched it all together and the business grew.

2015
TRAGEDY
Harvey was called up to the big wine tasting in the sky.

GOOD FIT, GOOD TIMING
Chris continued the business, in partnership with Geoff Long and David Burroughs of Long Burroughs Ltd.

LIFT OFF
Auckland Insurance flourished alongside Long Burroughs. The team, the service offering, the Parnel office, expanded.

2022
JOB DONE, WHAT’S NEXT?
Chris is now stepping back from Auckland Insurance, leaving the business and the clients she’s worked with in good hands.

Chris remains a member of the Long Burroughs team and will still be working with us from time to time, as she phases out of a full-time role, moving into an advisory, and assistance capacity.

This is an exciting time for Chris and a wonderful moment to talk to her about the experiences of 20 plus years in the insurance industry.

What are you most looking forward to in your next chapter?

Playing more bridge.

What is your favourite memory of the Auckland Insurance journey?

Gosh, it is hard to choose only one! Maybe being a finalist (twice) in the IANZ broker of the year. And when we finally got big enough to bring on another employee (Geoff) – that was quite a milestone at the time. Then there’s joining forces with LB and moving the office out of home and into Parnell.

What has been the biggest industry change you’ve witnessed in the last 20 + years?

The growth of technology which has helped hugely with the day-to-day business. For instance, we used to do all the scheme renewals by post. Then moved to doing it all by email, and now the whole process is automated.

What is the most interesting or obscure insurance claim you have seen or heard about?

The client had a warehouse and used it to store property from time to time. On the proposal he had noted that he sometimes worked on cars in the yard. The underwriter missed this and when a fire claim was lodged (started in the yard) the insurer initially declined it, but when the proposal was brought to their attention, they had to honour it. That’s why I always insist on having a proposal completed! Visit our partners, – leaders in fashionable footwear!

What is your favourite insurance policy and why?

Professional Indemnity, because I have been dealing with this for many years, and know the most about it.

What advice would you give to someone starting in the industry today?

Embrace technology, work hard and always put the client first. Hopefully by doing this you can enjoy all the dealings you have.

What is your farewell message?

It is with satisfaction and pride that I leave Auckland Insurance. From scrambling to fulfill Harvey’s well-meaning promises in the office at our family home, to seeing the company take root in Parnell and thriving as part of Long Burroughs, I have loved my job.

I have also loved working with my clients, some whom I’ve known for over 20 years. To see you all work so hard to grow your businesses, dealing with the struggles we all face in business from time to time, and finding success, has been an honour.

I thank you all for your support over the years and wish you all the best as I begin the next chapter of my life: working part-time, travelling, playing bridge, and spoiling my grandchildren.

Chris Kerr