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Home / Business / Economy / Official Cash Rate

Politicians agree Government shouldn’t stop flood-prone property values from falling and insurers from hiking premiums

Jenée Tibshraeny
By Jenée Tibshraeny
Wellington Business Editor·NZ Herald·
1 Oct, 2024 03:40 AM4 mins to read

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Finance and Expenditure Committee members agree new ways of financing climate adaptation need to be explored. Photo / Paul Taylor

Finance and Expenditure Committee members agree new ways of financing climate adaptation need to be explored. Photo / Paul Taylor

Politicians of all stripes say the Government shouldn’t try to stop the values of properties vulnerable to the effects of climate change from plummeting.

In fact, they believe there is room for at-risk property values to fall further to discourage investment in flood-prone parts of the country.

Members of Parliament’s Finance and Expenditure Committee shared this view in a new report that wraps up an inquiry into climate adaptation the Government asked them to undertake.

The aim was for MPs to come up with objectives and principles for how the complex and politically fraught issue should be tackled.

As it stands, insurers are using increasingly granular data to price insurance, making cover unaffordable, if not inaccessible, for some. The pinch is banks require properties with mortgages secured against them to be insured.

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Central government is taking an ad hoc approach to supporting those affected by extreme weather events like Cyclone Gabrielle, and local councils are consenting building on flood-prone land in fear they’ll be taken to court for changing the rules on landowners.

Accordingly, members of the Finance and Expenditure Committee agreed the country needed a plan for how to adapt to climate change.

It didn’t get into the details of exactly how costs associated with this should be split, but assured “adequate” housing should be provided to those forced to relocate.

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It suggested the Government should work with insurers and banks to look at new ways of financing pending expenses.

However, the committee warned it “did not consider that preserving people’s wealth or protecting property owners from the risks of property ownership were legitimate objectives of the funding system”.

It wanted data around climate risk to be more consistent and accessible, even if having this information in the public domain devalued some properties.

The committee specifically expressed support for “allowing asset prices to better reflect long-term natural hazard risk”.

“The more that asset and insurance prices reflect risk, the more efficient outcomes will be,” it said.

It wanted the Government to ensure banks and insurers “have the incentive and ability to reduce risk where they can”.

It believed this would reduce the creation of a moral hazard where people make risky decisions based on the belief they will be bailed out if they run into trouble.

The committee concluded that while it made progress getting cross-party consensus on some issues, some members thought the recommendations to the Government were too vague, open to different interpretations and were at times contradictory.

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Specifically, it said some members worried the committee couldn’t answer the critical question of exactly who pays what.

The insurance industry welcomed the committee’s report, clearly supportive of risk-based pricing, but said it wanted to see more political consensus.

Insurance Council of New Zealand chief executive Kris Faafoi said, “New Zealanders need certainty about the way natural hazard risks are going to be managed, both now and in the future.”

“We support a framework that would create a consistent approach nationally but allow for local flexibility.”

Faafoi - a former Labour Cabinet minister who once held the Commerce and Consumer Affairs portfolio - said insurers supported “improving the quality, consistency and availability of natural hazard and climate risk data to ensure we avoid building in dumb places”.

He also said insurers were committed to working with the Government and other groups to explore the options available for developing financial instruments like resilience, or catastrophe, bonds.

Last year, the National Hazards Commission (formerly called the Earthquake Commission) issued a catastrophe bond for the first time.

This saw 16 offshore investors put $225 million in a fund the state disaster insurer can access (if terms and conditions are met) in the event of a disaster.

Investors will receive interest for the money in the fund, as well as a reinsurance premium of 8.75% a year.

If the commission doesn’t use the funds within four years, investors will get their money back.

Jenée Tibshraeny is the Herald’s Wellington business editor based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.

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