The Reserve Bank of New Zealand warns action is needed now to avert insurance affordability and availability issues resulting from the rising uptake of risk-based pricing.

A lack of granular property-level hazards data has previously limited risk-based pricing, but some insurers are moving in that direction, putting pressure on rivals to follow and avoid being left with the riskier properties, for which averaged “community-based” premiums are insufficient.

New Zealand home policies cover all major events such as fires, storms and floods, earthquakes and volcanic activity, but risk-based pricing trends could mean some perils are unbundled, potentially leading to affordability problems for those most exposed to specific threats, the Reserve Bank says.

“Insurance retreat presents a long-term challenge for the financial system,” the central bank says in article in this month’s Financial Stability Report.

“It is important for all stakeholders, insurers, central and local governments, buyers and lenders to take action now to improve their understanding of natural hazards, so that future insurance affordability challenges can be better managed.”

The report says risk-based pricing has been most prominent for seismic threats, affecting regions such as Wellington. Granular pricing for flood risk is at varying stages of being rolled out.

The bank says insurers’ adoption of risk-based pricing is a rational response to a changing operating environment and it sends price signals to encourage mitigating and reducing risk exposures.

Evidence to date suggests insurance continues to be available and “full insurance retreat” is rare, even for properties exposed to high seismic and flood risks.

“It is difficult to pinpoint if and when insurers will completely withdraw the availability of insurance for certain properties and/or areas or risks, although it could occur relatively quickly given that contracts are typically annual,” the report says.

“Even if the complete withdrawal of insurance availability in certain areas is some time away, owners of high-risk properties may find insurance increasingly unaffordable.”

The Insurance Council of New Zealand says decisions on premiums are continuously reviewed to better reflect risks, and it endorses findings that the country needs to act decisively on natural hazard perils.

“By taking proactive steps to improve our understanding of natural hazards and enhance resilience, New Zealand can better protect communities and ensure that insurance is affordable and accessible for all,” CEO Kris Faafoi said.

“We know New Zealand needs to take a long-term view on the risks from flooding and other natural hazards on peoples’ homes as we face the prospect of more frequent and severe events due to climate change.”