Excessive tides and swells are rapidly eroding sandbanks on Port Waikato’s Sunset Beach, destroying the carpark and threatening homes. Video / Mike Scott
Experts have long been warning that mounting climate impacts will put pressure on private insurance: as is now being seen in the wake of recent floods.
Some 441,384 residential buildings are already at risk of flooding, with an estimated replacement value of $218 billion.
While insurers are using risk-based pricing to limit big hikes to the most vulnerable homes, some experts are suggesting New Zealand needs a better and bigger public backstop.
As climate change begins to put pressure on Kiwis’ insurance premiums, a new analysis by the Helen Clark Foundation and WSP suggests we’ll soon need a better public backstop. What does the Government say? Jamie Morton reports.
Jo Poland’s clifftop home gazes out upon a turquoise Tasman Sea that inchescloser by the month.
Soon enough, she worries, it will be inside her garage.
The 72-year-old has lived in Port Waikato’s Ocean View Rd, on the North Island’s wild and beautiful west coast, for three decades.
“The house next to me is being demolished and basically all the others have been shifted back or knocked down, so it does feel pretty threatening.”
There was little mention of the risk when she bought the house.
Everything seemed to change one day in 2015 when, having just had surgery for lung cancer, a council letter arrived detailing a report about concerning erosion trends.
Fast-forward a decade and council officials are still working through adaptation options, while Poland continues to live in limbo.
The Natural Hazards Commission (NHC) might cover damage to land from storms and floods, but not from coastal erosion.
It’s a similar story with private house and contents insurance.
Poland is mortgage-free but now faces the troubling possibility of losing her home and also having to fork out for its demolition.
“Then I’ve got no equity, I’ve got nowhere to live because I can’t sell the property to go to a new place, and I’m too old to start again.”
For policymakers, councils and insurers, cases like Poland’s pose a still-unanswered question: should the rest of us be chipping in to help climate-threatened homeowners?
Rising risk, rising premiums
New Zealand’s exposure to climate impacts like coastal flooding and storm surge is already startlingly high.
Consider the 441,384 residential buildings – with an estimated replacement value of $218b – that recent Niwa and University of Auckland modelling revealed at risk of flooding.
Or Aon-led research that found as many as 137,500 homes are endangered by one-in-100-year floods - with a further 88,000 considered “extremely exposed” and vulnerable to one-in-20-year floods.
International experience suggests companies start pulling out of insuring properties when disasters like floods become one-in-50-year events – as they’re increasingly starting to.
Yet another analysis calculated that some 10,000 (a likely underestimate) coastal properties in Auckland, Wellington, Christchurch, and Dunedin could become uninsurable by 2050.
According to a 2021 Aon report, 250,000 homes – that’s 15% of our housing stock – are vulnerable to some sort of flood risk. Photo / Brett Phibbs
After years of extreme storms and record payouts, premiums have already risen across the board.
Some towns with high flood danger are now less likely to be able to access multiple online quotes.
The Reserve Bank says that, while higher-risk properties may find insurance increasingly unaffordable, to date, full insurance retreat in New Zealand has been rare.
In the meantime, insurers have been turning to risk-based pricing, using detailed new modelling, to spread costs fairly.
First-cab-off-the-rank Tower has been rating customers for flood risk since 2021, meaning about one in 10 customers have received a small hike in that portion of their premiums (a few hundred with high ratings saw increases of more than $500 a year).
The company’s chief executive, Blair Turnbull, told the Herald that nine out of 10 policyholders had benefitted from the system.
“We believe it’s all about helping customers to understand ... the perils that apply to their homes, and how to best manage that through their insurance policy.”
For a country with an extraordinarily high (96%) uptake of residential insurance, it’s perhaps unsurprising our small but competitive industry has adopted a model that places the sharpest price rises on a comparatively small number of policyholders.
“On the one hand, it seems only fair and reasonable for those in high-risk locations to pay more to insure their properties, because they have chosen to live in those places,” says Kali Mercier, the lead author of a major new report released by WSP and the Helen Clark Foundation.
Flooding in Auckland's West Harbour on February 24, 2023. Some 750,000 people and 500,000 buildings in New Zealand are estimated to have some exposure to flooding today. Photo / Dean Purcell
On the other, she says, fairness should require society to share the risks of natural hazards collectively.
“That includes protecting the interests of those who are the least advantaged, those with the greatest needs and those who are exposed to the most serious risks,” she said.
“This approach is similar to the way New Zealand shares the costs of poor health in a collective way through the public health system, for example.”
Over time, she figured many people who live in safer areas may find their premiums go up regardless, as the global impacts of climate change heaped pressure on international reinsurance costs.
A public backstop?
Mercier expected gaps would emerge in private insurance – and her report set out several ways where the state could help bridge them.
A starting point was state subsidies, much like winter energy payments, for vulnerable Kiwis who couldn’t afford their premiums.
“While this will cost us all a bit extra in the short term, a well-designed scheme will be much cheaper than the cost of rebuilding under-insured communities when the next big flood hits,” she said.
“Then as premiums go up more, and as insurance companies start withdrawing coverage entirely for some areas, the country should implement some form of public insurance scheme for flooding, as many other countries have done.”
Kali Mercier is Deputy Director of the Helen Clark Foundation and WSP Fellow.
Mercier said such a scheme could sit within the NHC (its natural hazards cover is currently supported by a levy policyholders pay as part of their premiums) or be formed as a separate entity.
It might insure only those at the highest risk of flooding, as the UK’s Flood Re scheme does, or all homeowners, as France’s Cat Nat does.
Coverage could include losses up to a certain amount – as is the case with NHC’s policy for earthquakes or other hazards – or it might only apply to “total losses” when a house is no longer habitable.
Mercier believed the latter option was particularly promising, as it could help Kiwis who’ve been left homeless while leaving private insurers to cover smaller flood events.
She said another important step was agreeing on a criteria for what exactly constituted “affordability” in insurance.
“In other words, how much is too much for a household to pay for insurance?
“There are different ways to determine this, but I quite like the Australian method: affordability is seen as an issue where a household pays more than four weeks of their gross annual income towards home insurance premiums.”
One of New Zealand’s leading economists in the space, Climate Sigma’s Belinda Storey, said if public insurance was extended in such a way, it’d need to come with strict conditions.
If a home was substantially damaged by flood, for instance, the insurance should come with a “cast-iron” requirement for the owner to move and not rebuild on the property.
“People are going to have to move from these locations sooner or later: move after the first major event, not the second, third, or fourth major event.”
Storey pointed to the US’ uncapped National Flood Insurance Programme, under which some homes had been rebuilt 40 times in the last 50 years.
“That doesn’t help anyone.”
At this point, the Government has no plans for such a public scheme, Climate Change Minister Simon Watts told the Herald.
“The Government wants credible markets to support our climate transition, and we are not considering subsidising premiums for house insurance.”
Climate Minister Simon Watts Photo / RNZ / Samuel Rillstone
Parliament’s Finance and Expenditure Committee recommended the Government consider another objective: ensuring asset prices better reflected long-term natural hazard risk, which Watts said could be avoided “by effective information sharing”.
“I’m considering the Committee recommendations carefully, and continuing to work on building a bipartisan approach to this difficult long-term challenge in ways which will help us to support an effective insurance market.”
‘Sizeable challenge’
With insurers already taking their own steps, Mercier questioned why New Zealand still didn’t have a clear adaptation strategy in place.
The Government has been working toward new legislation, but we still don’t know what that will look like.
In the meantime, councils are having to take an ad-hoc approach to managed retreat and property buy-outs, and development is still going on in risky places.
“In most places, too little is being done to prepare our communities for the increasing impacts of climate change,” she said.
“Disappointingly, the recent cross-party inquiry on adaptation carried out by the Finance and Expenditure select committee once again failed to give any firm guidance on the question of who will pay.
“Yet, deciding who will pay for it is absolutely crucial to getting action on adaptation.”
If we didn’t find a solution, she feared home premiums would rise much faster than they otherwise needed to.
“And the more homes we build on flood plains – where insurance premiums will quickly climb – the greater the number of people who very soon won’t be able to afford insurance.”
Insurance Council of New Zealand (ICNZ) chief executive Kris Faafoi acknowledges flood risk poses a “sizeable challenge” to the sector.
Turnbull felt New Zealand already had a good system in the NHC and the private sector’s risk-based approach and voiced his scepticism at the idea of centralised insurance for flood impacts.
He pointed to the fallout in Florida of last month’s Hurricane Milton.
“Up to two-thirds of all properties that were impacted in Florida had no insurance, and yet, Florida has one of the largest centralised pooling insurance programmes of anywhere in the world.
“Do you think it’s working? Because I really don’t.”
Our government, he said, simply couldn’t afford to cover every single property – especially those built in the wrong places.
“This is a market where [private] insurance does a very, very good job: don’t muck it around,” Turnbull said.
“On the flipside, we do have a portion of New Zealand homes that are in the way of climate change, and flooding in particular – this is the area that I would encourage councils, government and the insurance industry to work together and support a plan about building infrastructure.”
Faafoi ultimately wanted a cross-party political consensus on climate adaptation, and to ensure that regulators and industry were working together to prepare for longer-term challenges.
“The sector has signalled that it will support communities even as risks evolve with climate change, but New Zealand as a whole needs to take action to manage and reduce risk.”
Our largest general insurer, IAG NZ, said the country’s primary focus right now should be on reducing risk in our most hazard-prone communities, “as this is the only way to keep people and property safe and insurance affordable”.
“We are advocates for targeted and practical steps that will reduce risk, including stronger, more consistent planning rules and greater investment in infrastructure,” an IAG spokesperson told the Herald.
Local Government New Zealand similarly wanted more support and direction from central Government, including a new levy that councils could draw from.
“We would like the government to set out a clear formula to calculate the share of costs each actor in the system will be expected to pay for climate adaptation measures,” a spokesperson said.
“This must account for the varied levels of support communities will need and their capacity to pay.”
Mercier said “significant” Government funding would be essential to help under-resourced councils get the work underway urgently.
“If the Government decides not to contribute to local adaptation efforts, then others – ratepayers, for example – will have to pick up the slack,” she said.
Flooding in Westport, July 2021. Photo / George Heard
“This will increase the risk that the costs of climate change will fall disproportionately on those who can least afford it – such as those on low incomes, retirees, tenants, homeowners with low equity, or those with health issues or disabilities.”
Watts insisted adaptation remained a “key priority” to the Government – and would be responding to the Parliament committee’s recommendations within weeks.
“One of the areas the adaptation framework is looking at is how best to address the uncertainty property owners have about what they can and cannot expect as support for adaptation, and what risks their property faces,” Watts said.
“A key question New Zealand has to grapple with is how the costs should be shared, over time. We can’t expect the Crown to foot all the costs.”
Watts added that managed retreat was just one option when it came to adaptation.
“The best adaptation solutions could look different in different places.”
Mercier said much groundwork was laid by the former Labour-led Government, which had planned a dedicated adaptation act before its resource management reforms were torn up after the election.
“It’s up to the coalition government now, and I really hope they’ll start moving a bit faster to lock down a framework and a funding strategy,” she said.
“This is really an issue that can’t wait much longer.”
Jamie Morton is a specialist in science and environmental reporting. He joined the Herald in 2011 and writes about everything from conservation and climate change to natural hazards and new technology.
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