Sustainable Business and Finance: How climate change is reshaping property insurance

‘Insurance retreat’ could leave thousands of homeowners unprotected. Photo / Mike Scott

Climate change is reshaping residential property insurance. If action isn’t taken immediately, homes can expect to see steep rises in premiums. They are the fortunate ones. As insurance companies retreat from the market, thousands of homeowners will no longer be able to insure their properties. They will be left unprotected.

A new report by the Helen Clark Foundation and WSP, an engineering and professional services firm, is titled Premiums Under Pressure – How climate change will reshape residential property insurance, and what to do about it. The report warns that New Zealand must act now to avoid a crisis that will disproportionately impact our most vulnerable people and communities. With a government work programme on climate adaptation and risk assessment well underway, now is the time to address these urgent issues.

By 2050 around 10,000 properties in areas of Auckland, Wellington, Christchurch and Dunedin may be uninsurable thanks to coastal erosion and inundation flooding. Inland properties in flood-prone areas inland also face rising risks.

Low-income households and communities are likely to be the most affected. Unaffordable premiums will leave many without coverage at a time when they are becoming more vulnerable, raising serious social equity issues for the nation’s concerns.

New Zealand has already seen the impact of climate change and more is to come. The world faces unprecedented climate-related challenges in the coming decades.

Our long coastline, many rivers and varied climate mean we won’t be spared. We face increasing risks from severe floods and coastal inundation as sea levels rise. Recent extreme weather events will likely become more frequent and intense.

Residential insurance rates have already increased to reflect these changes. More increases are on the way. Insurers are moving to a risk-based pricing model which pushes up costs for insurance companies and their underwriters.

This will soon mean unaffordable premiums for some properties, which will see homeowners reducing or cancelling their cover.

Beyond that, insurance companies will increasingly withdraw any form of cover for properties in the most vulnerable locations, such as areas prone to flooding and low-lying coastal districts, where increasing levels of damage make it impractical to sell insurance cover. This withdrawal is known as an “insurance retreat”. It is already common overseas in places that have been worst hit by climate change.

It’s not clear when the insurance retreat will happen. Nor is it clear what form it will take. But it is inevitable, and we need to prepare for it now.

In February 2023 Severe Tropical Cyclone Gabrielle devastated parts of the North Island. It was the costliest cyclone since records began. One estimate says damages added up to at least $13.5 billion. More than $2b has been paid out in insurance claims. Gabrielle was a reminder that severe weather events are not just environmental issues, they bring pressing economic and social challenges.

Richard Woods.

We are probably just one more major extreme weather event away from the insurance retreat. To avoid the worst, we need to embark on a collaborative approach to adaptation and retreat. It is better to lead the process where insurance companies can work with democratically appointed decision-makers on adaptation. We need to stay in control of the process and not be reactive.

Central and local government policymakers and strategists face a daunting set of challenges in addressing insurance retreats.

Maintaining high levels of residential insurance coverage is vital if we are going to safeguard the nation’s economic and social resilience as we face the other challenges of climate change. In the past insurance has been there to help people, their communities and the nation as a whole bounce back from shocks. Now we need to prevent people from vulnerable locations from slipping into poverty when disaster strikes.

We have several options that could keep insurance accessible and affordable. It’s up to us as a nation to decide which to adopt.

Kali Mercier.

One of the most promising approaches involves providing subsidies for people who can’t afford insurance. Another would be to standardise insurance policies, so people have a better idea of what is and is not covered. This isn’t always clear at present. It would also help if there were regulations to make pricing criteria more transparent.

Any approach needs to make sure the insurance market remains as competitive as possible.

Meanwhile, other strategies can mitigate the problems caused by climate change. It would help if policymakers introduced rules stopping inappropriate development in vulnerable areas. We must get used to not building in flood-prone areas and in those low-lying coastal areas that will become uninsurable in the coming decades. Likewise in areas that are prone to erosion.

It is time for New Zealand to step up its investments in risk mitigation and in climate adaptation measures, especially those that can keep residential insurance premiums lower for longer.

It’s not enough to stop building new developments in vulnerable places, we also need to start planning now for a process of relocating to safer areas. Countries such as the UK and France are developing public residential flood insurance schemes. Our Government must not wait to begin work on a New Zealand version. It would fill the protection gaps left by insurance retreat. Such a scheme would make sure insurance remains accessible, although it should only be for those properties that are safe to live in and that meet agreed flood risk tolerance thresholds.

Key recommendations

• Recognise the vital role of residential insurance in maintaining societal resilience in the context of increasing climate change-related risks.
• Avoid further developments in flood-risk areas that exceed agreed risk tolerances.
• Invest in climate risk mitigation and adaptation to keep residential insurance premiums accessible and affordable for longer. This must include setting out clear responsibilities and decision-making processes for how adaptation will be planned, funded and implemented at national and local levels.
• Agree a framework and a funding model for planned relocation for homes in risky areas where other types of intervention are not cost-effective or technically viable.
• Develop a public residential insurance scheme or schemes to fill current and future gaps in insurance caused by climate change, especially for flood risk.
• Consider other interventions in the residential insurance and financial markets to maintain high levels of insurance penetration, such as:

- Subsidising premiums for some homeowners.

- Standardising and simplifying insurance contracts.

- Agreeing on the level of transparency that is expected from insurance companies about how they make decisions affecting premium prices.

- Monitoring and promoting competition in the insurance market.

- Further reporting Bill Bennett