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Understanding your house and contents premiums

Your insurance premium can change from year to year, but it’s not always easy to understand why. To help make this a little clearer, here's some information about what makes up your insurance premium, why we use risk-based insurance pricing, and why the cost of cover in New Zealand is increasing.

What makes up your house insurance premium?

To help you understand where your money goes, let’s look at a breakdown of the costs for an average suburban house located in Hamilton.

Company premium

This is the money we use to pay your claims and other costs. We also need to pay our insurance - it's called reinsurance.

Earthquake Commission (EQC) levy

This contributes to the EQC's earthquake and natural disaster cover.
Learn more about the EQC levy

Fire and Emergency levy

The levy covers most of the work that Fire and Emergency New Zealand does, including putting out fires.
Learn more about the Fire and Emergency levy

Tax (GST)

Your premium includes a 15% Goods and Services Tax on the amount owing.



Insurance premium pie chart for an an average house in Hamilton


We use risk-based pricing for house and contents cover

Because the chance of your home being damaged by a natural disaster, like an earthquake, is different depending on where you live, we consider the risk of this happening at your specific address when we calculate both house and contents insurance premiums. We call this risk-based pricing.

If you live in an area with a greater risk of damage from a natural disaster, you’ll pay more than if you live in a lower-risk area. If you live in a low-risk area, you won’t be subsidising the cost for people in higher-risk areas.

What you pay could go up or down depending on where you live as we continually review the risk at each address.
 

Why we do this

We introduced risk-based pricing because we believe it's the fairest way to distribute the costs we face as an insurer. The cost to insure a property can differ a lot between regions as some are more likely to face natural disasters than others. For example, Wellington is much more likely to experience an earthquake than Whangarei.

Recovery from earthquakes and other natural disasters can cost billions of dollars. If a disaster happens, we need to make sure we can pay out to those customers affected and still have money to pay for day-to-day claims. To do this, we buy our own insurance. This is called reinsurance and it's included in the price of our premiums.

Our new way of pricing more accurately reflects the cost of providing natural disaster cover at each address and means locations that have a higher chance of suffering damage from natural disasters will likely pay more than locations where the chance is lower.
 

How we price insurance

We use various sources of data to assess the level of risk each address faces, looking at factors like soil type and how close it is to an earthquake fault. We combine this with information about the building itself such as its age, number of stories, construction material and its sum insured.

To help us better understand earthquake risk in New Zealand, we’ve partnered with Risk Management Solutions (RMS) – one of the world’s leading catastrophe modelling companies. RMS earthquake models are built using advanced technologies, science, and data, including lessons from historical events, geologic data, ongoing global research and damage statistics.

Assessing properties with this level of detail means earthquake damage risk can vary from one address to another, even for properties on the same street. These differences are reflected in our premiums.

Learn more about RMS and its methodology

Why is the cost of house and contents insurance going up?

As a responsible business we need to make sure we’re in a strong position to be able to help our customers when they need us the most. The price we charge needs to accurately present the costs involved in providing insurance cover.

We continuously review our pricing to fairly reflect this and that means your premium can change. Your insurance premium is based on a number of things specific to you, such as your claims history and the type of asset you own.

It’s also influenced by other components that contribute to the rising cost of providing insurance in New Zealand. We’ve summarised some of them here.

  • More bad weather and natural events

    Ongoing bad weather and natural disaster events around New Zealand, including “weather-bomb” storms, floods and earthquakes, have resulted in an increase in the number of claims. 

    We have absorbed these costs for as long as we can but now need to share these expenses to make sure we collect enough premium to cover the cost of claims.

  • Rising building costs

    Building costs are rising and insurance premiums are changing to keep up with this increase. Data from QV costbuilder shows the average cost of building a home in New Zealand’s four largest cities has increased by 25.5% since 2007. Regulatory changes can also affect the costs of repairing or rebuilding your home. 

    For example, new health and safety regulations introduced with the Health and Safety at Work Act 2015 mean increased compliance costs for building repairs and more on-site safety requirements.

  • The items you own

    The nature of what we own is changing and items tend to be more expensive. For example, things like smartphones and other tech that were previously luxury items are now essentials for our everyday life. They’re expensive to replace and there’s more opportunity for that type of stuff to get lost, stolen or broken.

  • Natural disaster reinsurance costs

    In simple terms, reinsurance is insurance for insurance companies. Reinsurance cover helps pay for the cost of claims if there’s a large disaster like an earthquake or major flood. Following the Christchurch earthquakes and other natural disasters both in New Zealand and around the world, there was a significant increase in the cost of reinsurance. This increased cost is reflected in the premiums insurance companies charge their customers.

  • Location of your house

    The cost of providing insurance can differ depending on where you live. Everywhere in New Zealand is at risk of a natural disaster such as earthquake, flood or storm, but some regions tend to be more prone to these events than others. We regularly review how these events affect each address and then set our premiums to fairly reflect this.

  • Changes to the EQC levy

    The Earthquake Commission (EQC) increased its levy on house insurance on 1 July 2019. This was to cover a rise in the maximum amount of EQCover for houses from $115,000 to $172,500 (including GST). We collect this on behalf of the government through house insurance premiums and pay it directly to the EQC.

    As of 1 July 2019, the EQC no longer covers contents damaged in natural disasters. This means that all contents insurance claims from natural disaster damage are covered entirely by Tower.

    Read more about government levies