Inflation, interest and now insurance hikes of up to 56 percent are tipping local authorities into an unprecedented cashflow crisis
Martin Connelly is questioning whether three public swimming pools are a luxury his small community can't afford. Some libraries could perhaps be outsourced. And the fleet of council cars has got to go, he reckons.
The South Wairarapa mayor goes into a committee meeting this week to consider where they can cut costs to pay a 56 percent increase to the local authority's insurance premiums this year.
"There are a number of things that have to be looked at," he says. "I mean, the jargon term is service levels. And at the moment, our service levels say that everybody should be able to get to a swimming pool – the vast majority can get to a pool in five minutes. But is that affordable into the future?"
In Hastings, councillors have cancelled insurance cover on their public toilets and are looking for more cuts, as they face the prospect of their premiums hitting $3 million when they renew this year – that's three times what they were five years ago.
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And in the north Canterbury district of Hurunui, they've already cancelled natural disaster cover on a number of community assets, such as halls. But now they're anticipating another 30 percent increase in their premiums for the year.
Newsroom has talked with mayors and chief executives the length of New Zealand. They call it "the three 'i's" – high inflation, high interest rates, and high insurance premiums. And with little ability to increase their revenues, they have no choice but to tighten their belts.
For the 16 councils that disclosed to Newsroom final numbers or firm forecasts for their 2023/24 premiums, the unweighted average increase is more than 24 percent. That includes increased valuations as well as higher insurance rates.
Rapid rise in councils' insurance premiums (2021-2024)
In an interview with Newsroom, Christchurch mayor Phil Mauger quotes the three 'i's, and says premiums are going "stratospheric".
"So do you sell something?" he asks. "I look at surplus land and see things we don't need. Do you sell something, or do less?
"Now, as soon as you do less, the ratepayers are going to go berserk because there are some things that they expect to see for their dollar."
"One of the things that got Christchurch through, when Christchurch had the earthquake, we'd been trained for years to always have insurance. And an avalanche of money came in from overseas for fixing things." – Phil Mauger, Christchurch mayor
Mauger says he's been "dead against" cutting insurance cover.
"One of the things that got Christchurch through, when Christchurch had the earthquake, we'd been trained for years to always have insurance. And an avalanche of money came in from overseas for fixing things.
"Now, up in the North Island, I doubt very much that the roads are all insured. The amount of infrastructure that's damaged and not insured, that's going to cost the Government a lot of dough. It really really is."
Built like a brick outhouse
As it happens, he's right that some Hawkes Bay councils have cut back their cover.
Bruce Allan, deputy chief executive of Hastings District Council, says they've been forced to reduce their cover. "Over the last five years our material damage and underground asset catastrophe insurance has increased from just under $1m per annum to over $2.3m last year with expectations that it could be close to $3m when policies are renewed in November," Allan says.
Operating as part of the Hawkes Bay collective, a group of councils that bulk-buys insurance, Hastings is trying to minimise the impacts of increasing premiums – and that means self-insurance on a portion of council assets or through increasing deductibles (what households would call 'excess').
"We also identified some buildings that wouldn’t be replaced if damaged or buildings that were due for demolition in the years ahead." – Bruce Allan, Hastings District Council
"Self-insurance comes in a number of forms; removing assets from the asset schedule, insuring say 90 percent of the asset replacement value and then covering the balance through self-insuring, increasing the deductible or excess so that council covers the lower value claims. We are looking at all of these options, or a combination of them," Allan adds.
"In one example last year we achieved about $50,000 of premium savings by removing assets from the schedule of assets insured ... We removed our public toilets, on the basis that they are geographically spread, are a rather robust structure and that we had a rolling regime of asset renewal and replacements which could be adjusted if required.
"We also identified some buildings that wouldn’t be replaced if damaged or buildings that were due for demolition in the years ahead."
"Earlier this year, council considered reducing its cover for physical assets, but fortunately took no action – and a week later, Cyclone Gabrielle struck." – Gary Borg, Wairoa District Council
Napier City, too, has cut back insurance cover on its underground infrastructure, says a spokesperson.
But not so in Wairoa, in the northern Hawkes Bay. The small council's premiums had jumped 35 percent, causing councillors and managers to consider their options at the start of this year.
"As part of the Council’s risk assessment review, removing insurance coverage on less critical and less vulnerable assets was considered. Other options included higher excesses," says Gary Borg, the acting chief executive.
"We're not very susceptible to earthquakes. But we are somewhat susceptible to inundation from the sky – flooding, stormwater flooding... There will be tough decisions required." – Jules Radich, Dunedin mayor
"Earlier this year, council considered reducing its cover for physical assets, but fortunately took no action – and a week later, Cyclone Gabrielle struck."
The district was devastated by floodwaters – but at least the council's infrastructure was insured.
"Although cost-saving measures are always being considered, certain types of insurance and liability policies would be too risky to do without," Borg says.
'Tough decisions'
Dunedin mayor Jules Radich is watching his council's insurance premiums rise steadily, faster than inflation every year.
"It remains to be seen how much our premiums go up by in terms of disaster coverage," he tells Newsroom. "Because for some things in Dunedin, we are pretty secure. So we're not very susceptible to earthquakes. But we are somewhat susceptible to inundation from the sky – flooding, stormwater flooding.
"All those discussions have to take place. And I think that in our long-term plan, there will be tough decisions required."
There will be a question about whether it's more important to protect public infrastructure, or more important to control rates rises. "That is the balance, of course," he says.
"The community will be able to view the discussion in real time as the councillors debate and discuss this issue, and I can assure you that there are councillors from both sides of the argument, and they all get to express their opinion freely."
"The Council’s insurance premiums are increasing year-on-year for similar levels of cover. This trend has triggered the need for an increased risk appetite for the Council, by choosing to accept more risk in exchange for lower premiums." – Barbara McKerrow, Wellington City Council
It was Wellington City Council that seems to have highlighted the severity of the problem first, in a briefing late last year to the incoming mayor, Tory Whanau, which was reported by Newsroom in January.
The report from council officers, led by chief executive Barbara McKerrow, is gruelling reading. High inflation is causing the city's costs to blow out, at the same time that its insurance premiums are soaring, as insurers better understand the risk of earthquakes and other adverse natural events. It can't maintain the same levels of cover – so the council is going to have to cut its cover and take on greater risk.
"The Council’s non-rates revenue streams are becoming increasingly exposed to risks such as the impacts of earthquakes or other adverse natural events in Wellington," the report says. Council-controlled organisations revenue, central city parking, airport dividends and commercial property ground leases are all exposed to the risks of significant natural disasters in Wellington City.
"Insurance is currently the Council’s major risk transfer vehicle. Due to the risks listed above, the Council’s insurance premiums are increasing year-on-year for similar levels of cover. This trend has triggered the need for an increased risk appetite for the Council, by choosing to accept more risk in exchange for lower premiums."
The unease has spread across the country. Auckland Council's treasurer John Bishop declines to disclose how much the super-council pays in insurance premiums – but buried at the back of the council website is a report to the finance and performance committee in October 2021.
It reveals that the council's long-term plan seriously underestimates the accelerating insurance costs. Even before this year's floods and landslides, it shows the council's premiums rising towards $100m at an exponential rate.
Auckland Council insurance premiums forecast to hit $100m
It offers a crisp assessment of the insurers.
"They exist to make money," the reports says. "Over the long run you can always expect to lose money buying insurance. Note, council has never received claims in excess of premiums paid in any year."
Existing high levels of insurance are uneconomic, it says. But similarly, cutting cover is perilous. "Catastrophic loss could result in $1.49 billion cash loss," it says, an "unacceptable level of risk [that] could threaten credit ratings, reputational damage."
"Therefore: only buy insurance when we need it: To protect balance sheet (credit rating); other reasons (eg travel, motor vehicle)," the reports says. "Council needs to move from a transactional buyer of insurance to a strategic purchaser."
Today, Bishop spells out what that means in the city's strategic approach to insurance.
"Like everyone else we have experienced significant increases over the last few years, particularly as a result of the Auckland weather events earlier this year and the impact they have had on our insurance claims," he tells Newsroom.
To combat the increase in premiums, Auckland Council has implemented several insurance-focused initiatives:
- It has established a self-insurance fund that enables the council to assume more risk itself, and gives it optionality in the insurance markets. That fund is currently capitalised at around $40 million – and given the 2021 report says some of the council's excesses are up to $10m, there will always be call on it;
- It has reviewed its insurance limits and deductibles to ensure they are fit for purpose and aligned to the council's risk appetite;
- It's implemented group insurance buying arrangements across the council group to take advantage of its size and economies of scale;
- The council has diversified its purchasing of insurance so it has placements both domestically and offshore;
- It's also carefully reviewed what insurance policies it's buying to ensure insurance is the best solution to manage a particular risk;
- Finally, it's improved the quality of its asset/financial data and also undertaken loss-modelling to better inform insurers of its risk.
Not all of those solutions will be viable for small councils on their own – but many small-to-mid-sized council (like those in Hawkes Bay) are working in with others to buy their insurance – and that scale may make it easier to adopt solutions like diversifying the insurance buy onshore and offshore.
Shop around
The Insurance Council is warning against cutting cover to important assets.
Spokesman Christian Judge says councils would be better to increase their excesses, instead, and shop around insurance for better deals.
He explains that local insurers hands are tied just like their customers. They have to pass on the increased premiums that they're paying to their reinsurers in the UK, Switzerland and elsewhere.
"When you do have these awful events, it does underline the value of insurance," Judge says. "There's no doubt, premiums do present a challenge. I think people can understand, with inflation and these events, that there is pressure on insurance."
"I'm sure the councils and the communities will put other things ahead of the dollar losses. And that's the safety of their communities. Because that really does come first." – Christian Judge, Insurance Council
But he emphasis that increasing the excess was a better option that doing away with insurance entirely. "You're better off taking more of the loss yourself, but ensuring you are protected when the very worst happens."
Judge says these decisions are about more than insurance. "I'm sure the councils and the communities will put other things ahead of the dollar losses.
"And that's the safety of their communities. Because that really does come first. Tragically, you've seen loss of life as well. And damage to the environment, and what it does to the economy when businesses can't trade and people's lives are disrupted.
"The risks to those things should be seen as intolerable, in the worst cases, just as much or even more so than the risk of financial loss from their assets being damaged."
"I'm sure that's on the minds of councils to protect their communities. And insurance isn't the only thing, but they'll be learning lessons from this year, that insurance is a part of it."
