Tower's move to charge more for high-risk properties is a backwards step for society

The insurance industry looks set to start a weasel dance, led by Tower, to extract higher premiums from owners of earthquake-prone properties.

On Tuesday afternoon a cluster of earthquakes hit the West Coast and Methven. Simultaneously, news websites were pinging our phones with an announcement from Tower. Their new method of pricing is about to change the face of home insurance in New Zealand in a seismic fashion.

Tower will now charge larger premiums to insure houses built in high-risk earthquake regions. If you live in central New Zealand you should probably be quivering, regardless of who insures you.

It will take 2.5 nano-seconds for the rest of the industry to follow suit and protect their share of the lucrative low-risk Auckland market. They need to match the discounts Tower will be offering. Glasses will be clinking in delight up north.

It's apparently a scientific fact that once a weasel has its prey cornered, it twists, hops and darts about to distract, confuse and hypnotise its victims.

The chief executive of Tower tells us "the cost to cover a $1 million home in Auckland for earthquake-related damages was about $40 but the equivalent property in Wellington cost $5400 to insure". A mere 135 times more expensive.

It wants to stop cross-subsidising, distribute costs more fairly and send a clear financial spanking to those with risks in their backyards.

Now the darting and hopping begins. Apparently only 2.5 per cent of Tower's customers would get a hike of $250 and 1 per cent would see a hike of $2000.

Well that's okay then. Smash a small number of people and don't worry about insurance affordability, or the social costs of these people becoming uninsured and vulnerable in a disaster.

Think of Christchurch's eastern suburbs. New Brighton, Bexley, Aranui and Parklands, all on liquefied land and without the bank balances of Merivale. The vast majority had insurance. That could be quite different under this regime.

I'm now confused. Cross-subsidisation appears to be massive in dollar terms, but don't worry, only a few people will suffer. So why do it then?

Is it actually fair behaviour to financially expose these people and refuse to combine their risk into an overall increase for their city?

Tower's whizzy new risk model is so granular they can shine a torch up every driveway from Lyall Bay to Kapiti.

IAG own the same model. They know where the risks are, but so far have bundled them into the pricing.

When other insurers follow suit, there will be no refuge for those living with liquefaction risk in Petone or slip risk in Khandallah. In fact it's not just about earthquakes. Coastal inundation is another target.

In the boardrooms of insurance companies, do the words "moral hazard" ever get uttered? We know for a fact the Insurance Council uses these words. Only a year ago it was raising the issue of increased EQC and fire levies imposed by the government. Insurers were worried fewer people would buy insurance.

Tim Grafton, head of the Insurance Council was quoted saying if fewer people insure, it would create a moral hazard for the Government.

He also questioned if New Zealand would continue to go down the path of making it difficult for low-income people to protect themselves.

Great words, and it all made sense when forming an argument to lobby the Government on levies.

But now even the Insurance Council is looking prone to weasel-jigging.

They say Tower's stance will help us all make better decisions about where to live. How virtuous of Tower.

No sign of the moral hazard argument this time. Go knock on the door of mum, dad and two kids in Petone and convey how the price hike will help them see the error of their ways.

Facetiousness aside, what they really want to stop is our councils continually developing houses on high-risk land and insurers being forced to blend the cost of protecting people into everyone's premium.

Anything that raises overall premiums means fewer people insure. If you can lobby the Government to lower levies and carve out high-risk properties, prices will drop and levels of cover rise. Low and behold that probably also increases profits across the industry.

Even the Commerce Commission is no help. It is worried the market is controlled by IAG and Vero and refused to let Vero buy Tower.

The commission cited the cross-subsidisation of high and low earthquake risk as being "an indictor of market power".

Vero sold its 20 per cent stake in Tower and Boston-based Bain Capital Credit moved in.

Famously founded by Mitt Romney, the former United States presidential candidate, and even more famously described as "notorious for its failure to plough profits back into its businesses".

I now feel like this entire weasel dance has me fully hypnotised. Insurers are moving away from cross-subsidisation, their industry body is making supportive comments and the Commerce Commission believes it will aid competition.

Yet a whole bunch of people are about to get a financial lashing as none of these corporations or agencies will ever rank moral hazard more highly than commercial factors.

On a commercial level this is the real world. In many other countries there is a granular assessment of individual property risk. Yet we live on three tiny exposed islands where earthquakes result in terrible social consequences. Sometimes a different and coordinated stance is required.

Only the Government can make a call on whether they want to intervene. This is simply not the same as fast cars in bad neighbourhoods paying higher premiums.

Insurers must be allowed granular pricing for normal risks, but earthquakes have widespread consequences.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.