It’s becoming almost impossible to ignore climate change. Even if you are a wealthy homeowner.
On Wednesday morning the boss of New Zealand’s second-largest insurance outfit laid it out in black and white.
Suncorp chief executive Jimmy Higgins said Auckland’s dramatic weather event, which has seen thousands of homes damaged by widespread flooding and landslips, had caught the attention of the insurers’ insurers, and not in a positive way.
Events like this, Higgins said, would cause reinsurers' risk models to be updated.
When the insurers can't get insurance for at-risk homes and properties, what chance that a homeowner or commercial property owner can?
It’s typical insurance language, but the language from the industry since this latest wild weather event is the loudest climate warning I have heard.
Now it's firmly couched in the language of economics and money, or the language of the rulers, as Korean economist Ha Joon Chang calls it.
There's nothing bleeding heart and green and hippy-dippy about risk and returns for insurers, unless its the colour of cash.
Ando Insurance boss John Lyon says climate change is one of the “mega trends” shaping the insurance sector.
While we could look to pin some blame on the La Nina weather pattern haunting our summer, Lyon says it is pretty clear weather patterns are becoming more volatile.
You know it's getting real when the insurers are baldly saying they don’t think they want to be on the hook for some of Auckland’s most pricy real estate. As academic Michael Naylor archly points out: people who live on cliffs are often rich and connected. But even your connections and cash won't save your mansion from climate change.
So who will? That's the big question.
Lyon says we can take the opportunity from these big weather events to think about how we can manage risk in an environment with so much risk.
“New Zealand is exposed to earthquake, to volcanoes, to storms, and tsunamis, coastal erosion. These are all factors that are inherent in how we operate. Insurance can contribute to protecting consumers from some of those, but ultimately some of that becomes inevitable.”
It will take a massive effort, and the barriers between local government, central government and insurers to be broken down.
Lyon says there are examples where local governments and insurers have worked together on infrastructure projects to ameliorate flooding and other weather-related issues. This is what is needed now, he says.
An OECD report into climate change and insurance said governments must focus on reducing and managing the inevitable risk of further losses and damages from climate change.
Flooding on its own is a major worry. Leading reinsurer Swiss Re churned out some disturbing statistics in 2022 - it said floods caused more than a third of natural catastrophe-related fatalities since 2011.
If money could talk, it would say that from 1991 to 2000 global insured losses from floods was about US$30 billion. In the next decade, global insured losses from floods was US$40 billion, and from 2011 to 2020, global insured losses from floods was $US80 billion.
In 2022 the New Zealand government released its National Adaption Plan, including outlining "the retreat of last resort", or moving entire communities from climate-struck areas.
That report also singled out flooding as a particular concern. About 675,000, or one-in-seven, people across NZ live in areas that are prone to flooding, which amounted to nearly $100 billion worth of residential buildings, that report said.
IAG, New Zealand's largest insurer reckons this flood will cost it more than A$350 million.
Tower is tapping into its reinsurance cover for catastrophe events and Suncorp, our second-largest insurer, says it will be months before it knows how much it will be on the hook for with more than 8000 insurance claims and counting.
Enter the Government?
Home flood insurance could be developed by Treasury and there were expectations when the Government released its adaptation plan that it would agree on the next steps by the end of this year.
In the UK that sort of insurance is already available for homes at the highest risk of flooding, but only those built before January 2009. This insurance is funded through compulsory levies and reinsurance premiums.
Flood-prone houses built after January 2009 instead have to pay whatever the market prices the risk at to discourage building in flood-prone areas. We will need some kind of cut off point here too that incentivises building in the right places, with a firm eye on potential flooding, increased wave movements and shaky cliffs.
The days of insurance companies taking on all the risk are over. We can ignore that at our own risk.
Unfortunately, Naylor says, its human nature to not pay attention to danger until its right on your doorstep.
However, seeing your doorstep slide down a cliff does tend to focus the mind.
If this latest flood, and the terrible damage that has been wrought, focuses the hearts and minds of our politicians and some of our wealthier homeowners, who often own at-risk properties, towards taking a truly community-minded approach to risk that would be a decent result from so much damage.
We will have to mitigate the effects of poor planning and poor infrastructure management together.
It has to be a communal response, Lyon says. I agree.
(*Also see last week's Of Interest podcast on climate adaptation finance with David Hall, and last year's podcast with Tower CEO Blair Turnbull on insurance & climate change).
58 Comments
Yep, typical insurance companies, as soon as it looks like they'll have to shell out they run for cover. The comment about the cost of disasters increasing since 1990 - how about tying that to population growth and it may be revealed that per head the cost of disasters has decreased? At least carry out some further serious analysis. This article just makes it obvious that as soon as the going gets tough insurance companies wimp out.
But it is all inevitable, that is what Insurance have never understood. We are prone to natural disasters. Our Geography and Geology make this absolute.
I don't insure for the 1/1,000,000 chance my house burns down, or a car comes through my lounge window. I insure for the inevitable natural disaster. Earthquake, Flood, volcano, Landslide, tornado, storm...
Insurance companies need to suck it up! Their profit taking over the years has left them exposed and being unable to cover the risks they took on. The industry needs to better regulated. this was evident after the Christchurch earthquake but no one had the vision or the courage to do something about it.
murray86,
Insurance companies need to suck it up! I have no doubt that many would agree with you, but the hard fact is that they won't. These events are happening more frequently and inevitably, this will mean higher premiums and in places no cover at all.
As a country, we have been grossly negligent in allowing major developments on flood plains and there will-sadly- be a high price to pay, individually and jointly-as tax and ratepayers. Our stupidity in allowing some of our best growing land to be turned into housing estates will come back to bite us.
Premiums will rise and consumers will pay because they still need insurance cover. That's just how the world works.
No, not quite. Premiums rise (and other costs rise too) and insurance drops off the radar pretty quickly.
All that happens is the bleating moves from the insurance companies to the individuals.
So the price of weather damage is rising. Maybe those properties simply weren't worth the value placed on them and we're only that valuable because insurance collectively paid by others with less risky property propped the value up.
A good communal response would be unprintable.
This is an area where the market could really sort it out, and where government interference in the free market (e.g. by putting cut-offs for risk premiums) would skew things badly. Market-driven premiums would promote cash purchases of the riskiest (e.g. clifftop and beachfront) properties, with the risk premium reflected in the price.
Yes - surely the only government interference should be
(1) to make sure that insurers can meet their maximum possible exposure to claims. i.e. they can prove they have cash and/or back to back insurance cover for the full value of the insurance they issue and may be claimed for.
(2) - the speed at which they can prioritise assess and pay out for claims in the event of a major issue in our largest regions - as per Auckland now. And they should report on their response and closure speed and be audited. For example someone should never be without their primary needs (house, car, whatever) for an insured item for longer than the timeframe in their policy OR a maximum timeframe dictated by the government.
In the event an insurer is not meeting these required targets set by Govt then then major fines and or withdrawal of their licence to issue insurance should be the consequence. Maybe it already is.
The pricing etc should be up to the insurer, as long as their service meets the needs of the citizens and the NZ economy at large.
I am not in a major city and had a home claim unrelated to the flooding and received very poor service and response times for my claim from a major insurer - with the delays blamed on the floods. Whilst i accepted they were busy due to the floods my claim (a broken window) was my first ever, minor and there surely should have been a rapid process to enable me to secure the property or let me know which providers to use... whilst they moved on. Instead i was fobbed off with their staff acting as passive victims when the fault was a lack of planning by their brand/employer.
Largely agree, but would take issue with part of (1) where you say "or back to back insurance cover for the full value of the insurance they issue and may be claimed for". I accept the need for re-insurance, but the re-insurers must also be able to cover the risk too.
I would suggest that all insurers should focus less on profits and more on building up the fund reserves to cover the major events, and lessen their dependence on re-insurance.
I agree 1000%. Let's regulate electricity, supermarkets and petrol while we're at it. Break up the cartels. Then do something about the Commerce Act (1986) which makes it legal for companies to price-gouge. If we don't the social fabric will come apart. That much is true, if we look to history.
It's not the value that's the issue its the cost.
Unlike cars, which just get written off if even slightly damaged, a house gets repaired at immense cost, time, and effort.
The trend needs to be towards more sustainable and standardised housing to enable cheaper, easier replacement.
The question I ask myself is, are they over valued? By any moral, ethical, or international standard...yes.
But in terms of rebuilding....no. The rebuild cost calculated for my current house (Residence, Garage, Decking, Fencing, Retaining, Driveway) is more than the current market value of the entire property.
Pretty much, the "sum insured" is the max they pay out. If it is over that, it becomes your problem.
Some providers have now reverted back to full replacement (regardless of cost), but it usually only applies to local events (i.e. Your house burns down) rather than for natural disasters. As it is more likely to only impact the residence rather than the ancillary things such as retaining, driveways, etc....
Sort of but, imagine you had a home in Epsom or Ellerslie that had never flooded in recent memory , it in the dip on the street, not by a stream..... It just flooded as stormwater drains failed to cope, something not unreasonable in that last event.... hard to stomach that you are no longer insurable.... perhaps house needs to be raised?
Private Insurance is not a right - someone has to take the risk on. If they see the risk to high they wont cover you.
Insurance is run by actuaries (very very bright people) who are the best at working out risk and the premium required to make a profit - as its a % risk they want to cover the risk of them losing - thats business.
I have dealt with some of the reinsurers in the UK and Switzerland. They work on hard data - not I reckons - and they can see the trend and correlation with climate factors and are withdrawing cover on things that are to hard or to risky to insure.
No insurance - no finance - very simple.
Why should the taxpayer insure things that the brightest minds in the world deem to be to higher risk? A losing bet?
Big hard decisions to be made on where and what we build or remain.
Many roads may never be repaired as we cant afford it.
Many houses, farms etc may have to be abandoned as they wont financially survive the damage caused or roads cant be maintained or insured.
Many houses, farms etc may have to be abandoned as they wont financially survive the damage caused or roads cant be maintained or insured.
This is where we are heading. But for urban environments like Auckland houses damaged by flooding, there is a moral obligation, especially after the Christchurch response which all parts of the country chipped in for, and the various other risks that directly affect some other parts of the country but are spread across the entire nation just to keep things palatable.
The alternative is moving whole cities. That hasn't been on the table until now, if it is suddenly then the contributions people have made on a collective basis can't be forgotten because it's suddenly too hard.
https://www.abc.net.au/news/2023-02-09/new-south-wales-floods-lismore-i…
it’s not only here
Good post Jack, but in it you point to the problem; "Insurance is run by actuaries (very very bright people) who are the best at working out risk and the premium required to make a profit - as its a % risk they want to cover the risk of them losing - that's business." Their profit horizon is too close. They calculate a perceived risk and put a charge on it into the premium. But they take profits too quickly and don't build a fund of reserves to cover the big risks. During another discussion a year or so ago, some one pointed out that insurance companies around the world had accepted risk for which there simply wasn't enough money on the planet to cover! That position points to those who suggest are 'very bright', are actually not so clever. They don't seem to have heard of Murphy's law, where if the worst can happen, it will, at the worst possible moment! Besides major events (tsunami's, earthquakes, bush fires) are guaranteed to occur, no matter how rare, they still happen. Global warming, climate change and its effects have been on scientists radar since the 1970's. so these 'very,very bright' people should have seen these events coming and prepared for them. Or has that preparation been something that their customer base wouldn't appreciate, like gapping it with the 'profits' while their customers lose everything?
They calculate risk of events happening. Based upon data it is/was very unlikely everything gets trashed at once. When you reinsure around the world they then pay out big time somewhere but get premiums from everywhere.
Its a bit like everyone is going to go to the bank and withdraw all their cash today - the banks don’t have enough money but the chance of that is very low or zero, unless we all panic.
What they tell me is the size and frequency of events has blown models out from historical data and forecasts and they are getting more careful.
People may think the profit is to high - well you place bets on events and take the risk. The higher the unknowns and risk the bigger the margins need to be or else you just invest in a quiet electricity utility.
We should be grateful someone is prepared to insure us and take the RISK. It’s business which is about profit.
NZers moan about Governments stifling business and what they spend covering uninsurable things, v high risk, then moan about business making profit.
There are no free lunches and either way you pay. People do not understand risk - we need to stop building, and go away, from high risk areas. Cost does that as people generally understand money.
A 0.01% chance of an event happening only means it is unlikely, not impossible. I'm a risk specialist, and I am sick of people in power treating unlikely events as impossible, and then blaming other people for failing to advise them when those risks get realised.
Yes insurance is a business about profit, but they are too quick and too greedy in taking those profits. And in doing so they increase the RISK to themselves that they get caught out and not be able to stump up when they need to. As I indicated recent events are a case in point.
Risk management is a big part of my job too. I've lost count of the times I've sat in meetings fighting with managers who dismiss a risk because there's "only a 1 in 1000 chance it'll happen," only for those same managers to demand answers as to why that risk became reality in the following 2-3 years.
Most people just take the nominal risk, rather than applying it to the number of events that trigger the risk.
1/10 appears common. Yet if the task is performed once per year, then the probability of an event happening = once every ten years.
1/100,000 appears very uncommon. Yet when 50 people do the task 100 times per day, then the probability of an event happening = once every 20 days.
Well if we don't like them whats the option ? - we aren't seeing a rush from others to insure us - I've just this morning had my new premium in on a commercial property I own - 30% increase - 7 years old, 100% compliant with new code, not near a flood zone, flat land - ie low risk. I have also had a friend tell me their car fleet insurance has just been raised significantly.
In some other assets classes I deal with we are down to 1 reinsurer now - used to be 3 to 5 - all gone as risk to high for them. We are self insuring some now but I am thinking if they wont insure what is the risk I am taking in reality? Probably sell a few of them.
If theres super profits someone else will appear - but they are not.
We cant tell companies in the UK or Switzerland to lower premiums - they will just walk from a couple of small islands - well many have anyway.
Do we want the Government to insure everything? - we all pay in the end and using that rational we end up covering everything when many things should not be there in many places. We need risk priced to get things in the right place - it wont be perfect and seem/will be unfair but thats life Im afraid.
In a lot of cases it needs to be about managing risk, not offsetting it. Buying an insurance policy is NOT managing risk, unless the insurer refuses to issue a policy, forcing the owner to take other measures. An example; some local authorities have declared "climate emergencies", but then don't seem to alter any of their plans to manage the risks that will come from it. Here is sunny Whangavegas we had a significant flood in 2015 that captured a lot of houses alongside Kowhai Park. Subsequent discussions has revealed the obvious; most home owners in the affected zone want the council/community to carry their risk, but most of the community seem to think a roll back out of the flood zone is required.
And those increased premiums, the consequences of those are that a lot of people are already choosing not to carry insurance, or to dial what cover they do have back. Insurance companies are pricing themselves off the market because of their own mismanagement. And no we cannot expect the government, local or national, to pick up the cover. But they do need to put more effort towards managing the risks.
"Based upon data it is/was very unlikely everything gets trashed at once. "
Unlikely? are you sure?
Floods are New Zealand’s number one hazard – Te Ara Encyclopedia of New Zealand and hit large areas generating mass insurance claims across House, Contents, and Vehicle.
Then you have the prominent earthquakes from the last 30-40 years (i.e. from when insurance uptake increased).
So the data very clearly says it is highly likely that everything gets trashed at once.
We should be grateful someone is prepared to insure us and take the RISK. It’s business which is about profit.
Many seem to forget that every business operates differently and is not immune to failing. Banks have failed in the past, as have insurance companies, just because you are insured doesn;t stop your insurance company from failing should the unlikely happen and they need to payout mass sums for numerous natural disasters etc. We all want protection and security should the unfortunate happen, however just because we have a policy doesn;t mean we are all safe and secure as we think.
I see the deputy mayor of Akl was shouting the odds about an enquiry of some description into the Akl flooding disaster. Perhaps if Akl Mayor and Councillors in the future pay attention to maintaining the existing storm water system then it would not have been nearly so bad. Difficult of course to say how bad but this is where a great deal of civil engineering input is required. Hello CEOs and Mayors of the past . What did you do to warn the Councillors of flooding issues and maintaining the existing system properly?
Where I do have sympathy with Akl and probably Wellington and ChCh is central govt opening the immigration taps for the last 25? years and the majority of immigrants ending up in Akl and the expecting Akl to pay for the all the infrastructure needed.
re-posting a you-tube infrastructure clip https://www.youtube.com/watch?v=nXkFzw_atbU
I don't have a problem with insurers either charging an arm and a leg for clifftop homes or homes where the hill or house higher up can slough into your house or not insuring at all.
didn't Confucius say, "he who builds house on a cliff top have danger in falling down cliff." Applies to people and the house
Yes. Sorting water and stormwater infrastructure for more heatwaves and floods should probably be high on someones agenda.
Might be time to think about the cause and if we should dust off our emmissions target plan again.. see if we cant go a tad quicker.
Gotta go get back to building this ark thing.
Insurance companies. The fat lazy squirrel camping at the stash, "helping" the other busy squirrels stack the newly collected acorns into the hollowed out tree trunk. But while they're off fetching more, he's scoffing them down and hiding them around the forest with his other mates. Winter comes bringing a big snow, and a pile of acorn husks.
It's not climate change causing these recent floods it's the eruption of the volcano off the coast of Tonga.
The eruption increased water vapor in the western Pacific by 20% which cooled nearby Antarctica by 1-3o Celsius. This caused a chain of events that resulted in massive rains and flooding
Also:
How The Tongan Eruption Caused Australia's Flooding Situation
Exactly. As soon as some random event happens it’s climate change and it’s man made. The facts about the Tongan volcano and the affect on Australia have been around for a while. Only a complete idiot would start shouting climate change, but there you go, James Shaw did exactly that. This is the old rule, what goes up, must come down. It is, and it fell on Australia and it’s now falling in Auckland. The insurance companies are just lining Auckland up for premium hikes because a) people are scared of climate change and they will pay, and b) because it’s good business to do so.
The media also screamed climate change when the volcano that contributed to all this water Vapor being around ‘disappeared’….it must be climate change again alas the island is gone. Well that’s what tends to happen when it blows apart completely, it disappears, again not climate change but the idiotic media claimed it was of course.
This is so weird - we have a Cat 3 storm on the way - the Meteorologist interviewed on TV1 tonight said in all her time, she'd "never seen a storm like this" (referring to the size of it and the wide area it will affect) BUT there has been no suggestion regarding early evacuation where possible?
Cyclones Tracy and Bola were both Cat 3s.
Wayne Brown said they'd already stood up their evacuation centers in AKL, but personally, I'd rather head south now and stay with friends for the next few days if it were me up there. Coromandel in particular sounds like it's going to be a nightmare. You don't want to call for an evacuation in the 24 hours before the storm - our road network won't handle it.
The least they could tell people is if the storm tracks as they predict and evacuation is to be considered - what day they will call it on? It's Friday tomorrow and this is expected to make landfall on Monday morning.
Are they recommending the boarding up of windows? Where are the sandbags? All I've heard them say is "be prepared" - well that's a bit too vague when you've got a Cat 3 cyclone bearing down on you.
We have a much higher population in Auckland now, than they had in New Orleans at the time of Katrina.
Unfortunately meteorology is not an exact science, and the possible storm paths get wider the further they are from the current position.
My experience with councils has taught me to be proactive rather than wait for official instructions. I clear council drains myself rather than wait for them to do it, as they inevitably only clear them after flooding has already done the damage. Boarding up windows and sandbagging aren't a common occurrence in NZ but likely will become so if/when storms become stronger and/or more frequent in future.
Thoughtful management of the immediate environment around one's home is important, although the whole community needs to pull its own weight to ensure a broader benefit. Too many people think of themselves as a discrete entity rather than a member of a wider society.
Insurers love climate crybabies. "Today’s graph is based on data kept by EM-DAT in Belgium, which is widely viewed as an authoritative source for data on global disasters. The data show that from 2000 to 2021, the number of global weather and climate disasters declined by about 10%, which is very good news and completely contrary to conventional wisdom. The period since 2000 is viewed as the most reliable for data reliability, but it is safe to say that even since 2000, coverage has improved. So the 10% decline is possibly an underestimate. The trends reported here are consistent with independent, peer-reviewed research (e.g., this and this)."
https://rogerpielkejr.substack.com/p/global-weather-and-climate-disaste…
"Using a global, spatially explicit framework that integrates population and economic dynamics with one of the most complete natural disaster loss databases we quantified mortality and loss rates across income levels and analyzed their relationship with wealth. Results show a clear decreasing trend in both human and economic vulnerability, with global average mortality and economic loss rates that have dropped by 6.5 and nearly 5 times, respectively, from 1980–1989 to 2007–2016."
Empirical evidence of declining global vulnerability to climate-related hazards
https://www.sciencedirect.com/science/article/pii/S0959378019300378
Wait until the insurance companies start refusing to insure at risk properties against flood, etc. Could create an issue for the property owner if they have a mortgage - their lender requires the property to be insured. Will be interesting to watch. ** gets popcorn **
The expensive house on the cliff with a great view is typically worth 2-4 times the price of the same house 500 metres back from the cliff. Why should anyone care if these millionaires have to pay the real cost of their insurance or go self insured. The premiums will go down as the value of their house does when it is uninsurable. Homes and business worth much less in flood prone areas should be given "some" (don't know how much) help by government with a high risk scheme that helps with their premiums. Homes and buildings built from now on, are at the owners own risk for insurance.
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