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.