Commercial property insurance has arguably never been more important and consequently it has never been more expensive. Economic and political upheaval along with increased natural hazards have all fuelled the increase, but relief is in sight.

Landlords and commercial property insurance policyholders have felt the impact of sharp increases to their premiums in recent years as the New Zealand insurance sector grapples with a perfect storm of challenges.

The rise in commercial property premiums since 2022 is a global issue, driven by the challenging combination of a rise in weather-related natural disasters, economic volatility and increased reinsurance costs.

New Zealand’s experience reflects that global pattern, but a unique cluster of factors such as a relatively small commercial insurance market combined with damaging weather events has meant insurance premium increases have been felt more acutely here.

Bayleys senior commercial and industrial valuer Jason Williams notes that on top of natural hazards, surging construction costs have also contributed to higher insurance premiums and occupancy costs. Supply chain disruptions, labour shortages, material, infrastructure and compliance costs have driven building costs upward, creating a domino effect across the market.

The new good news is construction costs have stabilised over the past year, offering potential relief. Future trends remain uncertain due to ongoing global political and economic volatility.

The lay of the land

According to Stats NZ the insurance sector’s inflation rate was 8.6 percent year-on-year as of March 2025, significantly outpacing the general Consumer Price Index (CPI) of 2.5 percent.

The Insurance Council of New Zealand (ICNZ) says the commercial property insurance market has been facing many of the same factors that drive premiums for other groups, including homeowners, such as inflation, construction repair costs, reinsurance and taxes and levies.

“For example, the FENZ levy, which is collected by insurers on behalf of the government, rose 12.8 percent from 1 July 2024,” ICNZ chief executive Kris Faafoi says.

“The data shows that premiums are continuing to head in the right direction. Some of the pressures on insurance have been easing with construction inflation and reinsurance rates stabilising, which in turn is flowing through into premium levels.

“There are signs that generally there is more reinsurance capacity and competitive pricing in New Zealand for commercial property. Nevertheless, the impact of climate-related weather events globally is still likely to have an impact on reinsurance in New Zealand, which insurers buy to help protect themselves against the financial impacts of one-off major events.

“Premiums are also affected by natural hazard risks. In Wellington, premiums will reflect a higher earthquake risk compared to other parts of the country. The experience from the Canterbury and Kaikōura earthquakes, and more information about the Hikurangi Trench and the Alpine Fault, has seen insurers adjust their understanding of the risks faced in regions like Wellington.

“The commercial property insurance market is dynamic and competitive. We urge policyholders and their brokers to contact their insurer, see what’s available and shop around.

“We would also encourage policyholders to explore mitigation and adaptation measures to improve the resilience of their property. For example, by improving flood defences, and maintaining and strengthening fire safety controls,” Faafoi says.

The insurance industry has consistently highlighted the importance of reducing natural hazard risks from the impact of climate change on our communities, he says. “The impacts we are seeing from climate-related weather events require a New Zealand-wide approach, led by Government, to make sure we invest in resilience and send the right signals to global reinsurers that as a country we are reducing risk and ensuring insurance is affordable and accessible.”

New focus on risk

Head of insurance for Vega, Bayleys’ financial advice partner, Roharn Smith says one noticeable shift in the market has been insurance companies taking a more risk-based approach to assessment as one way to tackle the increased costs and challenges of its core business.

A risk-based approach to insurance means premiums are calculated on the risk profiles of individual buildings, rather than being based on broad population averages and building values. It requires detailed data on individual buildings and can result in variations in premiums between buildings that would seem to be of similar value.

“In the last 12 to 18 months we have definitely seen a shift toward risk-based pricing as a response to the increasing frequency and severity of weather events,” Smith says. With more property-specific data available, insurers are able to dig deep into individual structures to establish their risk.

“The data includes everything from elevation modelling to soil type or flood mapping. It means they can rate one building over another, rather than relying on a broad regional pricing plan,” Smith says.

The risk-based approach has caught out some building owners with unexpectedly higher insurance premiums.

“It has been a shock for some, depending on where they’re based, and what effect they’ve had from some of the recent events. I’m thinking of Auckland particularly and the effect of the 2023 flooding in the city.”

The upside is that risk-based pricing can also incentivise property owners to be proactive in addressing potential risks to their properties in the hope of lower premiums, Smith says. “Risk mitigation and proactive asset management is huge. Insurers do reward people who take positive steps to improve their risk. Investing in good flood protection or installing modern fire suppression systems can all help lower insurance premiums.”

Turning the corner

Meanwhile, Gallagher chief broking officer Mark Jones says there are positive signs within the insurance market of a softening of pricing.

“Two years of relatively benign claims activity in New Zealand off the back of several prior years of increased premiums has meant that the major insurance companies have all reported large profits. As a result, there is competitive tension between insurance companies to write new business and retain their market share. This is great news for insurance buyers as it can result in aggressive underwriting that delivers significant premium savings,” Jones says.

While climate change and weather-related losses remain a concern, and risks heavily exposed to flood will be looked at more closely by insurers, Jones says those with properties that are well risk-managed with good claims histories will find there is competition within the market that should be taken advantage of.

“Geopolitical instability and New Zealand’s exposure to natural disasters such as earthquakes, cyclones and floods mean it is impossible to predict for how long the market will remain in this phase. Significant catastrophic events here or overseas could have an impact on the market cycles, but for the foreseeable future the picture is good for insurance buyers.”

Setting up for insurance success

Though it can be common for customers, as well as insurers, to start looking for alternative approaches to insurance when the industry goes through a cost crunch, Smith says the number of commercial property owners looking at different insurance models, such as parametric or captive insurance, is minimal at this stage.

Parametric insurance policies pay out a fixed amount based on the occurrence of a predefined event, rather than covering actual losses. Captive insurance is a form of self-insurance where a company creates its own insurance company (a captive) to insure its own risks, rather than buying coverage from a traditional insurer.

“There is early interest in different models, particularly from larger businesses and infrastructure owners, but people certainly aren’t diving straight into them,” Smith says.

The best move a property owner, whether they’re a landlord or owner-occupier, can make is to make sure they get good advice about how to navigate the challenges in the insurance environment to get the best outcome, he says.

“In the commercial space, you need to have a broker who you trust and who understands your business and your risks.”

Smith says seeking out that comprehensive market knowledge is the best weapon policyholders have in the current changing environment for insurance premiums.

“Though key market drivers are changing we haven’t really seen their effects here yet and reinsurance costs remain high. I think we're going to see continued upward pressure on premiums particularly for high-risk sectors and older buildings. There is motivation there to look very hard at your buildings and to get good advice on what you can do to mitigate risks if you haven’t yet invested in resilience.”