NZIER says barriers to climate adaptation investment need to be addressed while resilience investment needs to be incentivised

The New Zealand Institute of Economic Research (NZIER) is advocating incentivising resilience to adverse climate change events, even if it involves economic and temporal trade-offs.

In a new report out on Tuesday, NZIER economists Michael Bealing and Roshen Kulwant say climate change is advancing in a way that signifies an increased amount of severe weather events in the future posing a damage risk to the environment, lives and assets.

“Investment in resilience to this damage and expedient recovery could result in savings. However, the cost-effectiveness and efficiency of investing in resilience are not guaranteed, and a trade-off must be considered,” they wrote in the report.

“Economics tells us that we should invest in damage avoidance until the cost of damage avoidance exceeds the cost of the avoided damage. Investing in resilience is similar to this approach.”

Reinsurer Munich Re – one of the world’s largest reinsurers – said in July last year in a half-year report of its national disaster figures that assets destroyed by the Auckland Anniversary floods and Cyclone Gabrielle were worth US$4.3 billion (NZ$7 billion) and around US$2.9 billion (NZ$4.7 billion) of those assets were uninsured.

Insurance 'gap' warning

Bealing and Kulwant say not all assets being insured will widen the “insurance gap” – the gap or difference between total and insured losses.

“With private insurers already retreating from areas with high risk and climate-related disasters predicted to become more frequent and severe, the ability of governments to pay for damages is uncertain. All of this leaves a question mark over the government’s role in providing compensation for economic losses from climate disasters,” they say.

The Insurance Council said in December last year that insurers had paid out 115,353 claims or $2.7 billion worth of the $3.6 billion figure that the Council valued the cost of the Auckland floods and Cyclone Gabrielle at.

That's even though support packages were announced at a local and central government level following the Auckland Anniversary floods and Cyclone Gabrielle – including the billion-dollar flood and cyclone recovery package.

“However, this funding is equivalent to 13% to 20% of the estimated damage to just publicly-owned infrastructure, let alone the wider impacts currently not included in the cost. We need to know how big this gap is and what can be done to narrow the gap and reduce uncompensated losses,” Bealing and Kulwant say.

“In the context of climate-change-related weather events and adaption to climate change, the government has a key role in communicating information about the risk in a transparent and accessible manner,” Bealing and Kulwant say in the NZIER report.

The economic consultancy is recommending adopting a national framework across all forms of government.

Bealing and Kulwant say this would be in order to incentivise investment in resilience, such as the ACTA framework as well as address the barriers to investment.

The ACTA framework stands for the Avoid, Control, Transfer and Accept (ACTA) risk management Framework and is favoured by both the NZIER and the Insurance Council.

The Insurance Council described the ACTA framework as a “tool to determine trigger points for an adaptation pathway” in an INCNZ submission to the previous government’s national adaption plan back in June 2022.

But the previous government’s national adaption plan applied the PARA framework to the plan, which stands for Protect, Avoid, Retreat and Accommodate.

Bealing and Kulwant say the “major weakness” of the PARA framework is that it doesn’t “explicitly address the transfer or sharing of risk, which is what the insurance model does”.

Increased pressure

Also to be taken into consideration is how private insurers are reacting to the increased intensity of climate-related disasters on their books.

New Zealand’s biggest general insurer IAG announced in September 2023 that it would no longer be offering ongoing insurance for properties in Category 3 of the Government's Land Categorisation framework in regions that had suffered from extreme weather events last year.

“Councils have identified Category 3 properties as being at high risk of damage from future weather events and so those residents are being encouraged through this categorisation process to reside elsewhere,” IAG’s Executive General Manager of Events Response Wayne Tippet said in September.

Auckland Council announced in October last year that it had “unanimously voted” to accept a proposed cost-sharing deal alongside the government in order to fund more than $2 billion of flood recovery and resilience works – which includes a 50/50 funding split to buy out Category 3 properties.

An Auckland Council spokesperson told Interest.co.nz last Friday that the current number of Category 3 buy outs is expected to be around 600 – a little under the 700 estimate currently on the Auckland Council website.

Of that estimated 600 buy-out figure, the Council spokesperson said 90 had been confirmed as Category 3, out of 530 confirmed categories.

“We are a good way through our assessment programme and expect to have most of the 2,400 currently in the pipeline completed by March, with only the complex cases remaining to mid-year.”