What impact do insurance increases have on your commercial property?
Over recent years, New Zealand’s risk factor has increased significantly. The nation’s natural disasters have cost insurance companies billions, and as a result, insurance premiums have been rising and insurers are taking a different approach to areas deemed high-risk.
In fact, Stats NZ has found a 48% increase in insurance costs in New Zealand over the last ten years, which compares to inflation of around 19%.
Rising insurance premiums have been one of the mechanisms insurers have used in an attempt to control the industry’s losses. Commercial property owners in New Zealand’s high-risk areas are now, unfortunately, bearing the load.
As commercial property owners, what could this mean for you?
Whether you’re looking to sell or buy, finding out about the latest insurance changes will help you better look after your investments, and inform your decisions as you look towards the future.
New Zealand’s natural disasters: a large factor for rising insurance premiums
New Zealand’s susceptibility towards natural disasters has become internationally recognised across insurers and the country is now considered ‘high-risk'.
According to the Insurance Council of New Zealand, 2017 and 2018 were two of the three most expensive years on record. Dunedin has suffered three ‘one-in-100-year’ floods in the last four years, and recent earthquake events in Wellington and Kaikoura have cost insurers over $2.1 billion dollars.
What does this mean for insurance companies? Some have begun minimizing their presence in these high-risk areas. The high likelihood of repeated events means insuring properties in this area doesn’t make sense from a business point of view.
What’s been happening across the country?
In the last ten years, we’ve seen commercial insurance premiums rise significantly. Within the last two years there have been more changes that affect New Zealanders nationwide, such as:
- End of cross-subsidisation. Certain areas of the country are at higher risk of natural disasters, so it’s no surprise that insurance companies have taken to placing the price of risk in the areas where the risk is located. This means insurers are moving away from the previous cross-subsidisation scheme where insurance costs were spread throughout the country. Now, property owners in high-risk areas will see a large hike in their costs, or even difficulty getting insurance cover at all.Since Tower announced their end of cross-subsidisation of risk throughout New Zealand, large insurance companies IAG and Vero have already started following their footsteps.
- Banks are becoming aware. While insurance is renewed annually, banks can hold contractual relationships that last years. This means that they’ve started to take a closer look into insurance. If your property is struggling to get insured, you might start to encounter problems lending with banks, due to their hesitation and more thorough checks with insurance.
- Wellington suffering. Insurers have begun pulling back from insuring properties in Wellington due to the high-risk area they’re located in, and IAG has recently implemented a policy to move away from providing content insurance in Wellington (though the specific details remain unclear).
- Levies have increased. Most people aren’t aware that ⅓ of their insurance premiums are comprised from a government tax, which consists of a Fire Service Levy, Earthquake Commission Levy, and GST. As of 2018, the Fire Service Levy increased by 40% (which is uncapped for commercial properties) following the Earthquake Commission’s levy increase of 33% in 2017.
What do commercial property owners need to be aware of?
While there isn’t much we can do about the increase, there are several things that commercial property owners should be aware of for their properties now and in the future.
- Earthquake prone buildings – your commercial insurance will always be high. Insurers are assessing all risks in the surrounding area of your building as well as other factors such as age, construction materials and fire protection. If your building is earthquake prone, this will increase your insurance premiums significantly and may impact your ability to get full cover. The location of your building also plays a large part in assessing your insurance. For example, properties close to hills in Wellington will have a much higher risk and will be paying larger fees to cater for it. Commercial properties in flood-prone areas will also face a similar hike in insurance costs, as will buildings with heritage status.
- Net or gross leases. It’s important to consider the type of lease held on your commercial property, whether that be net or gross. As insurance premiums rise, we recommend reviewing who pays the insurance premiums on the property and what impact this may have on net cash flow if they increase.
- The market. If insurance companies won’t insure your property – which is becoming more likely – it could be very hard to sell. The market has already begun hardening, and with many properties across the country facing the risk of having no insurance at all, their appeal is lessening. Selling may become more difficult with these buildings, and properties with high insurance costs could face the same problems. If New Zealand suffers from more natural disasters within the next few years and insurance becomes harder to obtain, insurance will become one of the key factors of an investment property.
Steps you can take
Although we can’t control the increase of commercial insurance, informing yourself on your property’s situation is the best way to move forward with your investment.
Insurance isn’t the be all end all, but it’s important to consider when it comes to your investment property.
Here are some practical steps you can take:
- Get an insurance valuation. While all these latest changes have begun largely affecting the market and your insurance costs, one valuable step forward is to get an insurance valuation for your commercial property. Our qualified TelferYoung valuers can provide an up-to-date insurance valuation, covering things such as the age of the building, security and fire protection, and location and surroundings.
- Talk to the experts. Informing yourself on your situation can help you make the best decisions surrounding your property investment, or potentially explore new investment opportunities. If you have a broker, talk to them about your options, or speak to your local TelferYoung valuer about the value of your property and what investment opportunities are best for you.