The efforts to combat climate change have begun in many corporate sectors around the world, and here in New Zealand that effort has been led by the insurance industry as it grapples with what to do when coastal properties become too risky to insure.
For the most part, the loss of insurance can be put down to rising sea levels. Sea level rise is the most predictable outcome of climate change, as expanding warmer waters and melting ice push sea levels up and cause flooding. Aside from the environmental impacts, however, rising sea levels are also expected to affect the insurance industry at a significant level.
That’s where people like Belinda Storey come in.
Storey is a climate scientist from Climate Sigma. She believes there is a big question mark over coastal properties and rising sea levels when it comes to insurance in New Zealand.
Storey is undertaking research under the Deep South National Science Challenge, and part of that research is looking at when we are likely to experience insurance retreat from the New Zealand coastline - and how that is likely to impact property values.
Storey says one difficulty is finding out exactly which areas in New Zealand may already be experiencing insurance retreat because it is information that insurance companies are reticent to make public.
“Anecdotally, we know that there are locations that have lost insurance,” said Storey.
“But when it comes to the availability of insurance, effectively no one who is involved wants to talk about it.
“So the insurers who are no longer making insurance available don’t want to provide that information. The homeowners who lose insurance don’t want to communicate, and the local council doesn’t want to communicate that.
“We know anecdotally that there are locations, and we can estimate where we anticipate those to be, but we don’t have information on that from the insurers or from the homeowners or the local council.”
Tower and IAG have both now moved to risk-based pricing, which requires people whose homes are at higher risk from natural disasters and weather events to pay more.
IAG was also reportedly reticent about issuing new contents insurance policies in Wellington earlier this year.
In terms of coastal properties, Storey said locations with a small tidal range and significant rainfall catchments were the most at risk.
“There are places around New Zealand that meet that criteria and the key point is the tidal range," she says. "You can have a location, for example, in Auckland which has a large tidal range, which means the probability of a storm surge coming in at low tide and not overtopping any of the fences. There’s a much better probability of that in Auckland than for example in Wellington, which has a much smaller tidal range.
“So you may have locations that, under sea level rise in Auckland versus Wellington, would both be inundated with 50 centimetres of sea level rise by the end of the century. But the Wellington ones will lose insurance earlier because of their tidal range.”
Jeremy Holmes, a principal at actuarial firm MJW, points to well-known flood risk areas like South Dunedin as being an area often referenced as a “casualty of climate change”.
But a flood risk can also be very localised, he says.
“You can have house number seven on a street that may be in a one-in-20-year flood zone and meanwhile number eight on the same street only floods at a one-in-200-year level,” he says.
“Modelling of climate-related risks needs to be done a very granular level.”
Christchurch may be another city to watch, where post-earthquake the water level table rose relative to the land and there was frequent flooding, resulting in excesses going up for every flood event.
Storms are another concern in a future with rising sea levels.
“The key factor is that even with very small amounts of sea level rise, that allows the existing storms to reach further in,” Storey said.
“So you can have something as little as a 10-centimetre sea level rise in Wellington, for example, that changes a one-in-a-100-year event or an event with a 1% probability to a 5%t probability .
“So that very small amount of sea level rise has a really significant shift on the probability as far as insurance are concerned and if you get to that it is extremely unlikely that you will still have insurance.”
The timeline for insurance retreat or increased premiums is a matter of debate.
Holmes expected to see increasing numbers of uninsurable properties and put it down to a combination of properties being built in high risk locations due to increasing demand for land, better understanding of risk by insurers and other parties and the changing nature of climate-related risk. “It is very likely we will see insurance coverage becoming unavailable or very expensive in certain locations,” he said.
But Tim Grafton, chief executive of the Insurance Council of New Zealand, said insurance retreat would not happen overnight.
“Clearly, though, there are many properties located close to the mean high tide levels which come under increasing risk of damage over the next decades as sea level rises and the climate changes as these conditions mean we will experience more extreme weather conditions,” Grafton said.
“This is why we are urging a strong focus on adaptation or risk reduction to enable insurance to remain affordable and available and many, though not all, territorial local authorities are addressing these issues.”
Rather than full retreat, Grafton said to expect a typical response of a pattern of increased premiums and/or increased excesses reflecting increased frequency of losses unless risks are reduced.
“The Parliamentary Commissioner for the Environment in a report released about three years ago identified properties around many parts of New Zealand that were close to today’s mean high tide levels and this is a good indicator of areas where local councils need to be looking at risk reduction plans,” Grafton said.
So how would house prices respond to insurance retreat? The news was not all bad, Storey said.
“People anticipate that if you would lose insurance that property values will crash, but it’s not necessarily the case.
“What we find is that property values are often quite sticky, and they bounce back quickly.
“So even if you have something that is much more damaging than a loss of insurance, say an actual event, house prices will rebound within a really short period of time, sometimes as short as three years.”
That itself was surprising, said Storey. “What seems to happen is people tend to forget about things that should have changed house prices like a loss of insurance,” she said. “And so house prices don’t crash, and if they do dip they tend to recover.
"However, you do expect to see that house prices will decline over time.
“And if they get closer and closer to the period where you can no longer insure houses or borrow money to purchase houses then you would expect to see house prices fall more sharply.”
That did not, however, happen the moment that insurance was withdrawn, said Storey, because there will always be someone willing to pay cash for homes by the sea.
“For some there will always be a romantic attachment to a home that has a view of the sea or is close to the sea.
“So there will always be someone who is willing to pay for a particular home even if they can’t get insurance on it. They will instead pay for the property in full with cash, even if they can’t get insurance on it.”
In essence, said Storey, there would be fewer buyers, but there would still be buyers.
Grafton predicted property prices would eventually fall as limits on insurance cover started to create issues for banks and other loan providers who looked to insurance cover as underwriting for their loans.
“If insurance cover is harder to obtain or is not obtainable then banks will not provide loans,” he said.
"This, in turn, will limit the number of people who are prepared to purchase properties, thus reducing demand, and as demand declines, so do property prices.”
As New Zealand continues to see – and feel – the increased effects of climate change, attention will turn to the role of local government and the EQC.
Storey said there was already significant discussion being undertaken within local government about its role going forward.
“At the moment EQC has potential liability in terms of storms and floods but only with regard to the land, not the house itself,” she said.
“So there are proposals that have been developed about whether we need to have an EQC-type model to be able to facilitate the movement out of the high-risk areas."
Grafton, however, warned against governments becoming too involved.
“If private insurance gauges the risks of insuring to be too high, it makes no sense for central or local government to underwrite these risks,” he said.
“Indeed, it would be unsustainable to do so and the real answer is to plan now to reduce risk and so avert these outcomes.”
It was important to remember that EQC’s current role was to operate as a first-loss insurer for properties that had secured cover in the private market, said Holmes. “Although it is possible to apply for cover directly with EQC.”
EQC, however, was only able to provide the cover specified under the EQC Act and this included (capped) building damage due to natural landslip and land damage due to a storm or flood.
“Importantly, it does not include building damage due to storm or flood, other than via landslip,” Holmes said, “and EQC therefore has little-to-no ability to operate as an ‘insurer for the uninsurable’ under the EQC Act.
“Local government has responsibility for determining whether or not a parcel of land is suitable for building on, and under what conditions.
“There is probably some scope for better cooperation between insurers and local government in terms of identifying land which is unsafe or uneconomical to build on and insure.”
A more difficult issue was what to do about locations with existing homes which might become uninsurable, Holmes said.
“This is either because there is a better understanding now about the risks present at that location than was the case when the council granted permission to build, or because the nature of the risk has changed over time.
“If a home becomes uninsurable then this will undoubtedly affect market values, and this is another issue various stakeholders will need to address.”
Storey said it was important for the industry to study and learn from overseas case studies regarding severe weather event.
She nominated what happened in Florida as a textbook example.
When Hurricane Andrew barrelled through the region in 1992 it left 26 people dead and destroyed 250,000 homes.
In the aftermath eight insurers went bust and private insurance withdrew from the market.
“Florida, in a way, has been a laboratory of what happens when insurance becomes unavailable because they’ve have taken a number of different approaches,” she said.
The storm was one of the costliest natural disasters in US history with an overall damage bill at the time of $US15.5 billion, leaving an insurance industry simply not able and not prepared to pay that amount in claims.
It was a wake-up call to the industry about how vulnerable insurance companies could be to a major catastrophe and how inadequately insurers were pricing their risks, Storey said, and Hurricane Andrew forced insurers to take a more responsible approach to how they managed their books.
In an effort to boost insurance capacity, insurance companies bought greater amounts of reinsurance from reinsurers less affected by Andrew.
“Additionally, another one of the approaches they did is they created a state-funded insurance to be able to sell the debt when the private insurance withdrew,” Storey said.
Called the Florida Hurricane Catastrophe Fund (FHCF), its purpose was to protect and maintain insurance industry capacity and it still provides reimbursements to insurers for a portion of their hurricane losses.
In New Zealand, insurance retreat is still very much incremental, Storey said.
“It is based very much on each insurer making decisions about their risk appetite but also their public relations.
“What we are seeing is insurers almost experimenting with lines about how they going to respond to increases in risk, for example, AIG’s recent public communications around providing seismic insurance in Wellington.”
Over the next 10 to 20 years expect to see the roles of actuaries expand, she says, and for the thorny issue of reinsurance to play a more critical role.
“We would expect to see availability of insurance based on an actuarial model but there’s also the broader question that you could have a withdrawal of insurance at a reinsurance level,” Storey said.
“This will be because either there’s a flood of capital out of the companies, or there is a growing understanding about, first of all, the frequency and severity of events and also the attribution of those events to climate change.
“As attribution science expands, there’s more confidence that these events are caused by climate change.
“And then you may get reinsurers saying, ‘We are not going to provide cover to these locations for these types of hazards’.”
Storey’s research will be published in September of this year.
