Climate Change and the New Zealand Insurance Industry

A Discussion Paper by Sylvia Gadsden

The 2021 Howden Report – Times are a Changin’ identified that climate change has replaced Covid 19 as the insurance industry’s ‘pre-eminent concern’ (1). The direct impact of climate change on the insurance industry is demonstrable in claim loss statistics but more subtle in industry behavioural change. In New Zealand, the insurance industry must become an agent of governmental change and influence, and an active partner in the education of communities to address climate change risk management. Such influence is necessary if New Zealand is to continue to have a sustainable domestic insurance market.

To appreciate the impact of climate change on the insurance industry, we need to understand how climate change has evolved historically. The 1950’s saw the rise of climate change as a topic of scientific interest with studies by Robert Revelle and Charles Keeling raising concerns about the impact of industrial fuel emissions and rising carbon dioxide levels on the world (2).  From 1988 the science fraternity began to insist that “real action should be taken” (3)  and climate change started to be addressed by the global community with the formation of the Intergovernmental Panel on Climate Change (IPCC) in 1988. (2)

While global temperatures have historically been cyclical and naturally influenced, the industrial revolution saw global warming directly influenced by human endeavor, with rapidly increasing carbon dioxide emissions into the atmosphere. The planet’s average surface temperature has risen by about 1 degree Celsius since the late 19th century, and the current rate of warming is unprecedented (4). This accelerated rate of global warming is resulting in the rise of sea levels, melting glaciers, ice sheets shrinking and a higher frequency and severity of weather events globally in the nature of storms, floods, and severe rainfall. These effects are noticeably evident in New Zealand where the main risks to our island nation are rising sea levels, coastal erosion and storm surge, river flooding, extreme rainfall, and extremes in temperature. (5) 

Insurance claim statistics show that New Zealand is experiencing the effect of changes in weather patterns with alarming frequency. Vero claims data over the period 01 July 2019 – 30 June 2022 shows that their number of claims attributable to extreme weather events has increased from 674 in 2019 to 5,540 in 2022, with the cost of claims increasing from $3,663,829 to $77,284,105 over that period. (6) The Insurance Council of New Zealand (ICNZ) released claims data on 29thJuly 2022 showing that total insurance payments for extreme weather events was closing in on $200 million for the year 2022 to the end of June, with 2021 setting a new annual record for such payments at $324 million. (7) The recent August 2022 weather catastrophe which has most noticeably hit Nelson, Buller, Wellington, and Northland is set to make 2022 another record year.

February 2022 saw Cyclone Dovi wreak havoc from Northland to Buller and claims data from April 2022 estimated that the provisional claims costs for this event was at $40 Million. (8)  20 May 2022 saw Levin hit by a tornado with provisional claims data indicating claims costs for the event would top $8 million. Tornados in this area of the country are uncommon, and as identified by ICNZ Chief Executive Tim Grafton, this “reflects the type of weather that we can expect to see more of as a result of climate change”. (9)

Westport/Buller experienced devastating floods in July 2021, followed by another bout of severe flooding in February 2022 after heavy rainfall flooded the river again, and August 2022 is seeing even more devastation in the area as well as Nelson, Tasman and Northland resulting from another band of extreme rainfall.   The severity and increasing frequency of these events can lead to ‘catastrophe fatigue’ with insurer resources stretched thin.  Consecutive large scale weather events impact the insurance industry’s ability to manage claims to satisfactory levels due to the sheer number and scale of claims.   Shortages of labour and delays in the supply of materials exacerbated by the Covid 19 Global Pandemic, means that claim assessment and repairs are taking longer to start and be finalised.  The Stuff news website reported on the 15th of July 2022, that one year on from the Westport floods in July 2021, less than a fifth of the flooded homes in Westport had been repaired, with 400 homes yet to be repaired. (10)  

All insurance professionals have a duty to manage expectations of their clients with clear explanation of the claims process, expected and experienced delays and consistent regular communication throughout the life of a claim.  The higher incidence and complexity of claims combined with shortages of available labour means that each claim requires a higher touch rate, increasing catastrophe fatigue, claim costs and insurer overheads.  Delay in repairs for residential dwellings and business properties in turn pushes out costs for temporary accommodation, loss of rents and profit - contributing to rising claims costs and the length of claims management.  This directly affect insurer premiums across all lines.

A public misconception exists that premium rates are only affected by the experience of the individual client or locality; however this is a misnomer, and the New Zealand experience cannot be looked at in isolation.   New Zealand largely flew under the radar until the Christchurch earthquakes put us firmly on the world stage.  From this time, reinsurers and international insurers have paid special attention to our risk makeup, and more recently, Lloyds of London identified New Zealand as the second most vulnerable country to natural disasters, only behind Bangladesh. (11) 

There are approximately 89 licenced insurers operating in New Zealand and 55% of these are foreign owned.  Foreign owned insurers account for approximately 85% of the private insurance sector assets. (12)  The large overseas ownership of the New Zealand market means that we cannot escape the impact of global record climate losses.  Australia experienced record-breaking floods in New South Wales in February/March 2022 leading to insured losses of at least $4.3 Billion. (13)  The US has experienced unprecedented wildfires over the past 5 years and Europe has been severely hit by floods resulting from record rainfall. (1)

The 2021 Howden Report identifies that internationally, insurers are reassessing their risk appetites as they realise that their catastrophe modelling may not be efficient - leading to questions around price adequacy.  International markets have withdrawn capacity and required higher pricing in response to climate change losses. (1)   These global responses necessarily flow through to our local market via rate increases driven by overseas parent companies trying to recoup losses and the costs of reinsurance. Locally, insurers have responded to reinsurer concerns in the domestic market by adopting risk-based pricing for home and contents policies, which has seen consumer premium for these covers increase exponentially in areas identified as high risk for Natural Disaster such as Wellington and Christchurch. 

For areas identified as being at risk for flood, both insurer premium and excesses are higher. (eg, Waihi Beach homes identified as having a high risk of inundation flood in a 1 in 100-year flood event where currently we are seeing $2,500 imposed flood excesses.)  Tim Grafton posits that in higher flood areas, this could rise to $10,000, (14) and Tower Insurance has introduced a new pricing model for flood risks, which offers a low, medium or high dwelling flood risk rating, with premiums matched accordingly. (15)  The issue is that eventually the premium charge to provide flood cover in these areas will be prohibitive. If insurers fully priced the increased risk of flood damage into policies, it is estimated that dwelling premiums will end up being around five times what is being charged today. (14)  

In some New Zealand coastal communities, insurance cover has been withdrawn from the market due to the likelihood of damage from sea level rise.   This is seen in locations where coastal erosion is already occurring or where it has been identified as being of very high risk   - for example some locations in Haumoana Bay, Hawkes Bay. (16)  The incidence of insurance withdrawal in New Zealand is forecast to become more widespread as the probability of annual coastal erosion and flood risk increases - becoming a certainty rather than an unexpected occurrence.  Deep South National Science Challenge researcher Belinda Storey posits that insurance withdrawal from coastal markets will be total once the annual probability of flooding reaches 5% based upon anecdotal evidence from the insurance industry. (14)  This could be even more pronounced for dwellings affected by river flooding - which potentially affects more New Zealanders.  From a 1% -2% probability of annual flooding, insurers may continue to provide cover for existing clients with imposed excesses and increasing premium, however, decline to take any new risks in affected areas. (14)  Amanda Whiting of IAG agrees that the withdrawal of flood cover could become evident within 10 years, but at this stage it is not being considered by them (17) and Vero has indicated the same.   The research suggests that New Zealand homes on coastal areas will start losing access to affordable insurance within 15 years.  Unfortunately, neither the potential insurance or damage ramifications seem to be having any effect on public appetite for coastal living, and local councils are continuing to grant consents for developments in exposed coastal and flood risk areas - opening communities to risks that they will likely be unable to financially bear.  

Upcoming changes to the insurance cover provided by the Earthquake Commission (EQC) by way of an increased levy on residential dwellings and higher level of cover is intended to both increase the EQC’s long term sustainability and provide improved insurance affordability.  Unfortunately, the impact of the upcoming EQC changes upon insurance in respect of climate change is negligible.  While it was initially forecast that dwelling insurance premiums would decrease, the impact of international and local weather claims in the past year means that this is not the case, with insurers having to increase premiums to allow for reinsurance costs.  The government intention does not reflect the insurance industry reality. (18)   There is no change to the definition of natural disaster under the Act to include climate change influenced risks.  This would have been a step too far for the government insurer; however, I feel that it is an area that will need to be looked at by successive governments in the future, and I base this on the objectives identified in the Draft National Adaptation Plan (NAP) published in April 2022, which identified that managed retreat from at risk areas and availability of flood insurance as being areas of focus for the committee (19).

Tim Grafton of the Insurance Council and Amanda Whiting of IAG are vocal in correctly identifying that addressing climate change in New Zealand cannot be met by the insurance industry alone, and that there needs to be collaboration with Government at a central and local level, and in communities. The NAP published in August 2022, identifies the insurance industry as having a responsibility to encourage ‘resilience-building’ actions by the provision of advice to clients and sending market signals through insurance policies, (20).  The Plan identifies the following objective: 
EF2 “A resilient financial system underpins economic stability and growth.  Participants can identify, disclose, and manage climate risks”

Central to this is that insurance access and affordability is understood and managed. (20) 

While EQC and treasury have been tasked with creating and updating property risk information for consumers, insurers have also started to develop educational tools aimed at influencing consumer decision making and behaviour.  IAG has launched their Wild Weather Tracker with the aim of clearly demonstrating the impact of climate change on communities and to assist these communities in being able better prepare for these challenges.  The first issue was published in April 2022 and covers 3 case studies (Timaru Hailstorm, Lake Ōhau Fire and Westport Floods) giving clear data on the increasing severity and frequency of weather over the past 10 years and gives advice and tips on what people should do before, during and after an event, along with links to resources and contacts. (21)  IAG has also launched the online Disaster Claims Hub providing an online resource for customers before and after a storm, and has identified the goal of having one million Australian and New Zealand Customers take action to reduce their risk from natural hazards by 2025. (22)  Initiatives such as this demonstrate the changing nature of the insurance industry from being the ambulance at the bottom of the cliff, to providing a fence at the top.     

Education is an important responsibility of all insurance professionals, and intermediaries hold a special duty to assist clients to manage risk and identify the flood and storm risk susceptibility of property and identify underinsurance.  We must change our approach,  to lead discussions on risk management at a governmental, community and client level, and the insurance industry must be visible.  The recent declaration of the state of emergency in Nelson, saw representatives from the Insurance Council being on the ground in Nelson to help with the response for people affected by the flooding, (23) and this is a vital step in the industry becoming more visible and leading community response. 

It is incumbent on the insurance industry to lobby Government for legislative change and physical action to address the effects of climate change and assist communities in protecting themselves.  Information relating to climate impacted effects on insurance cover needs to become common knowledge, and an important consideration when people make their purchasing and investment decisions.  For the New Zealand insurance industry to maintain rate adequacy and longevity it must be adept at data gathering and analysis for predictive claims modelling.  There is a wealth of data available to insurers which when shared, can assist insurance customers to avoid risk.  It is this mapping technology, claims and property data which when utilized effectively, provides a huge opportunity for the insurance industry to ‘empower’ the data held to effect physical change. (24)  Collaboration with society stakeholders, central and local government to prevent construction in risky areas and the influence of construction change to build homes that are resilient to weather change over time, is vital.  These changes can be informed by sharing claims and data analysis.  Combined with advocacy for investment in resilient infrastructure to be able to withstand extreme weather, this will assist in keeping insurance premiums affordable for clients and reduce stress on the industry.

The factors above culminate in the unavoidable reality that the role of the insurance industry is now much wider than it ever was, and that this change is driven largely by the impact of climate change globally and locally.  As insurance professionals, we are called upon to expand our knowledge and application of skills to play a vital part in ensuring the country’s resilience in the face of these ever-changing risks.   It is only through collaboration with other industries and government that the insurance industry can cement its role as an agent of change.   To remain sustainable, the New Zealand Insurance Industry must move its focus from reactive response to educational and pro-active risk management including risk avoidance, of climate change.  Failure to do so, will push domestic insurances in particular, into being prohibitively unaffordable in New Zealand, and in the withdrawal of support from reinsurers. Climate change is irrevocably altering the insurance landscape and grappling to manage its risk will continue to be the most urgent requirement of the insurance industry in New Zealand for the foreseeable future.

References

1. Howden Broking Group Limited . Times Are A-Changin'. London  : howden, 2021.

2. Black, Richard. A Brief History of Climate Change . BBC.com. [Online] BBC New Services , 20 September 2013. [Cited: 04 August 2022.] https://www.bbc.com/news/science-environment-15874560.

3. Pester, Patrick. When did scientists first warn humanity about climate change . livescience.com. [Online] 13 December 2021. [Cited: 6 August 2022.] https://www.livescience.com/humans-first-warned-about-climate-change.

4. Earth Science Communications Team NASA . How do we know Climate Change is Real? Global Climate Change Vital Signs of the Planet. [Online] Earth Science Communications Team at NASA's Jet Propulsion Laboratory , 04 08 2022. [Cited: 04 08 2022.] https://climate.nasa.gov/evidence/#:~:text=Ice%20cores%20drawn%20from%20Greenland,and%20layers%20of%20sedimentary%20rocks..

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8. Insurance News Pty Ltd . NZ Cyclone Dovi claims top $40 million. insurancenews.com.au. [Online] Insurance News Pty Ltd, 11 April 2022. [Cited: 04 August 2022.] https://www.insurancenews.com.au/.

9. Rosser Underwriting . Provisional claims for Levin's May tornado top $8 million. The Rosser Roundup. July , 2022.

10. Meecham, Peter. More than 400 homes still not repaired one year on from Westport floods . Stuff . [Online] Mediaworks , 15 July 2022. [Cited: 05 August 2022.] https://www.stuff.co.nz/the-press/news/west-coast/300636197/more-than-400-homes-still-not-repaired-one-year-on-from-westport-floods.

11. Lloyds . A world at risk Closing the insurance gap. London  : Society of Lloyds, 2018.

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14. Gibson, Eloise. Homes to start losing access to insurance within 15 years - report . Stuff . [Online] Mediaworks, 02 December 2020. [Cited: 10 August 2022.] https://www.stuff.co.nz/environment/climate-news/123560377/homes-to-start-losing-access-to-insurance-within-15-years---report.

15. Turnbull, Blair. New flood risk insurance pricing "just the beginning". Nine to Noon . Radio New Zealand , Auckland  : Susie Ferguson, 11 November 2021.

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18. Stock, Rob. House insurance premiums will riswe despite EQC cap . Stuff. [Online] 24 July 2022. [Cited: 10 August 2022.] https://www.stuff.co.nz/business/129315107/.

19. Ministry for the Environment . Draft national adapation plan . Wellington : Ministry for the Environment , 2022. ISBN: 978-1-99-102525-8.

20. —. Ministry from the Environment. 2022. Aotearoa New Zealand's first national adaptation plan . Wellington : Ministry for the Environment , 2022. ISBN: 978-1-99-102548-7.

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