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New Zealand: Insurers increase use of granular data

Source: Asia Insurance Review | Jan 2019

Insurers are increasingly using granular data on risk exposures and historical claims to price more accurately for differences in risk. This allows them to charge higher premiums for higher risks, says the Reserve Bank of New Zealand in its latest six-monthly Financial Stability Report released in November 2018.
The trend is particularly pronounced in the market for home insurance, where the Canterbury earthquakes have provided more data for insurers to use in their risk models. 
However, the central bank warns that while more risk-based pricing may be an efficient response to having more data, if taken to an extreme it could reduce the risk-pooling benefits that insurance provides. In the case of earthquake risk, the prevalence of risk-based pricing partly reflects some insurers having limited capacity to take on additional earthquake risk. 
The report also notes that general insurer profitability has increased over the past year despite continuing high weather-related claims in 2018.
The upturn largely reflects premium increases, particularly for vehicle insurance, as well as cost reductions. It also reflects higher profitability for commercial property insurance because of adjustments to premiums and underwriting terms. These developments have seen an improvement in the non-life insurance sector’s net combined ratio. A 
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