Posted: 09 Feb. 2023 5 min. read

Underinsurance poses a threat to inclusive progress in Aotearoa

Without intervention, we will see groups and communities already facing economic and social hardship further disadvantaged as a result of inadequate risk protection. To create inclusive progress, we need to ensure all New Zealanders are resilient to shock events.

We are seeing more large scale shock events disrupting lives and livelihoods, with far-reaching effects beyond the immediate and obvious impacts. The COVID-19 pandemic, the war in Ukraine, and the flooding in Tairāwhiti Gisborne, Marlborough and Tāmaki Makaurau Auckland are just a few of the recent examples of such events. And now, with the increased frequency of these events, communities are facing higher levels of risk than ever before. It’s the most disadvantaged groups who are most exposed, and typically have the least protection, therefore experiencing the greatest consequences.

Our public and private sectors both have an important role to play in distributing risks to incomes more equitably and exploring how to improve insurance accessibility to underserved communities.


Underinsurance is prevalent in Aotearoa

By default, individuals and families bear the burden of the risk posed by shock events. Through the social support system in Aotearoa some risk is transferred from the individual to the state, but this is not comprehensive. Under consideration are government insurance schemes that would transfer further risk to the state (the Government Flood Insurance Scheme and Income Insurance Scheme), alongside the existing Toka Tū Ake EQC (The Earthquake Commission) which provides insurance to homes for natural disasters – albeit at a cost. The timing of new schemes is unclear with the Income Insurance scheme deprioritised for the current term. Even with the proposed schemes adopted, the ability of our social support system to provide adequate support in the face of emergencies is uncertain and as it stands today, there is a residual burden of risk that sits with individuals and whānau. 

Research shows that Aotearoa is significantly underinsured, meaning many New Zealanders are likely to have inadequate protection. Underinsurance can be understood as the gap between the value of an asset, and how much it is insured for. Globally, Aotearoa ranks 26th out of 56 OECD countries for insurance spend, at 3% of GDP, compared to the OECD average of 9.4%. 

Inadequate protection means that when faced with a shock event, many households and whānau will be unable to recover. A UK study found that a third of households moved into a lower income quintile after a shock event, and 20% fell into poverty. For a portion of New Zealanders, insurance can be the barrier between financial resilience to shocks, and falling (back) into poverty. 


Risk exposure is highest for lower income households and communities

Affordability is consistently cited as a barrier to insurance access, and is worsening. Premiums will continue to rise as risk increases. With the use of risk-based pricing and data-driven models, we may even see some communities become uninsurable. As prices increase and the spending power of lower income households reduces with the current cost of living crisis, it’s likely that risk protection will drop even further. It’s the most disadvantaged groups who are most exposed to the increasing risks we are facing, in particular to the environmental risks as a result of climate change. New Zealand is rated the second highest country globally for natural disaster risk, and flooding has been recognised as one of the most common types of natural disasters.

The Auckland flooding illustrates this issue playing out

The January 2023 Auckland flooding demonstrates how this inequity is playing out. We saw some of our poorest communities disporportionately impacted by an extreme weather event where South Auckland, and parts of West Auckland were the areas most devastated. Anecdotally, we know many of those impacted did not have sufficient insurance or the means to recover. It remains to be seen what the long term impacts on these communities will be, however, we can assume that a devastation of this scale is likely to widen the existing economic divide between poor and wealthy in Auckland.

We recognise for climate related events in particular there are levers beyond insurance that need to be pulled to protect communities and mitigate risk (for example, managed retreat from exposed areas).


There are emerging innovations but they need to go further

Insurers have started to address affordability through product design. Two examples are on-demand insurance and micro-insurance. On-demand insurance provides customers the ability to turn insurance on and off based on usage. For example, paying for car insurance by the kilometre rather than based on a premium with assumptions about usage. Micro-insurance provides cover for specific losses. For example in Kenya and Rwanda, Kilimo Salama offers a low-cost policy covering the cost of a farmer’s crop only in the event of a loss due to extreme drought or excessive rain. These innovations have made in-roads to expanding accessibility, but still leave vulnerable groups more exposed. The ultimate test for any innovation will be how equitably it spreads risks to incomes.

This issue calls for public and private sector collaboration, radical thinking, innovation and leadership with a strong equity mandate. As we look to build inclusive progress, this topic should be high on the Board and Executive agenda. 

Building equitable household resilience in the face of uncertainty and change, including shock events, is explored in depth in our 2017 State of the State.

Get in touch

Frances Arns

Frances Arns

Manager - Consulting

My purpose is to bring about more equitable futures for Aotearoa. With a background in LGBTI+ community leadership, I am a champion for justice and inclusion and I am particularly passionate about uplifting our most marginalised groups. I bring a values and purpose led approach, and support organisations to embed that same authentic commitment to values and purpose. I draw on a unique mix of disciplines including experience in corporate strategy, service design and community development to find the sweet spot of innovation that balances desirability, feasibility and viability. There is an important role for business to address the widening inequities in society and I am excited by the growing appetite for organisations to lean into this. Organisations need to bring everyone on this journey, and take the time to build a common understanding of how their unique values and purpose translate into broader social and environmental issues.

Lee-Ann du Toit

Lee-Ann du Toit

Partner – Actuarial & Insurance Services, National lead - Insurance

I have extensive practical, strategic and operational experience in the Insurance Industry, where I’ve developed a passion for the end-consumer and how the right needs-based insurance solutions can enhance their financial wellness. This is something I’ve gained through working in the insurance sector for almost 25 years across a number of countries. Through my various roles including Chief Actuary, Chief Customer Officer and Chief Digital Officer, I have developed a deep understanding of the challenges insurers face. Since joining Deloitte New Zealand in 2018, I have led various cross-functional engagements for NZ insurers, including supporting pre- and post-merger activities, IFRS17 implementations and customer and conduct deliverables. I also lead the Actuarial and Insurance practice for New Zealand. I have a passion for the consumer and enjoy partnering with insurers to deliver exceptional customer outcomes. I also love working with people and connecting multiple skillsets to create an outcome that would not have been possible without extensive teamwork and collaboration.

Grant Frear

Grant Frear

Leader NZ Financial Services Industry Practice

As one of the senior Consulting partners at Deloitte New Zealand, I lead our Deloitte Digital and banking sector teams. I specialise in technology-enabled business strategies, focusing on financial services clients.  I enjoy helping businesses develop and implement great strategies to help them achieve their business goals. While I admire great strategies, I have a lot more respect for those that can implement them. The world of business and technology is developing at pace, things that were once out of reach for many New Zealand businesses are now a reality. So to really take advantage of this, business needs to have a mind shift. Small is the new big - innovation is critical as the challenge shifts to how you can pull together the options that are now available to you. Well thought out strategies are great, the ability to execute is critical.