By Michael Naylor*
As New Zealand considers how to better prepare for a future affected by climate change, the insurance sector needs to be part the discussion on where and how we build our homes.
This involvement should include input into future building standards. Insurers should also play a key role in deciding which areas of New Zealand are removed from residential use – aka red-zoned – and when this red-zoning should occur.
If insurers are not involved in the discussions on how the country adapts to climate change, we risk whole sections of the country becoming uninsurable.
Frequent disasters make homes uninsurable
It is clear the risk of damage from climate change has increased in recent years. In late January and early February, large swathes of the North Island were hit by damaging weather systems that left 750 homes red stickered – meaning entry to the property was prohibited. Thousands more need significant repair.
Over the past few years, insurers have responded to the increasing risks by raising premiums in general or suggesting that clients at more risk increase their excesses. Insurers have also begun to charge premiums based on individual property risk.
As the threat of natural disaster increases, insurers will have no choice but to raise some clients’ premiums to unaffordable levels or withdrew the offer of insurance all together.
The general rule of thumb is that any event which occurs once every 30 years will make a property uninsurable. Some areas of New Zealand, like the East Coast or Edgecumbe, are well past that in terms of the frequency of natural disasters. Cover in these areas is only provided as a public relations gesture.
But as the risk of a significant event increases, the companies that guarantee retail insurers for the most extreme events – known in the business as reinsurers – could force the withdrawal of all cover in some areas. These reinsurers could decide that some parts of New Zealand are simply too risky.
A threat to home ownership
This decision to pull out of certain areas will have a negative effect on home ownership. Banks routinely require a house to be insurable before considering a mortgage. Banks also consider whether a house will be insured for the entire length of the home loan.
The difficulty here is that areas which are currently low risk could become high risk in the future thanks to climate change. This rising risk is likely to lead to a situation where insurers will be forced to withdraw cover from clients who still have decades left on their mortgages.
Alternatively, if a property is currently insured but is likely to become uninsurable during the lifetime of a mortgage, banks may become very conservative in issuing home loans to areas they consider risky.
An additional problem is that council consents for housing have been based on statistics of past climate events – set at a one-in-a-hundred or one-in-two-hundred year level. As we have recently seen, climate change makes these statistics dubious.
Instead, consents need to be based on multiple scenarios, given the various potential climate futures. New Zealand needs to determine clearly which areas are likely to be affected and plan ahead.
A role for insurers
The best path forward would be to establish a multi-disciplinary expert group that includes members of the insurance industry and reinsurers, to create a set of criteria and scenarios for housing development.
This group could set the guidelines councils use to determine if a rural area should be opened to new housing development, for example, or if an existing housing area should be red-zoned, with houses removed at a definite future date.
By including insurers, new building standards could be set so that homes better withstand climate change, improving the likelihood of them being insured.
Insurers could then be required to use the mutually agreed criteria to set risk-based premiums. If all insurers use the same criteria, then competition would be based on price and service, and not hidden risk models.
The risk models which insurers create, based on those criteria and the climate scenarios, could be open to public debate. The pricing attached to the risk factors could be flexible as climate change makes some areas higher risk.
A dynamic understanding of risk
In the end, red-zoning needs to be seen as dynamic rather than static. There needs to be the option to withdraw insurance coverage in the future, based on evolving models of climate change risk. And all potential risks need to be clearly communicated to potential buyers though land information memorandum (LIM) reports.
Taking this collaborative and transparent approach would mean insurers could be required to guarantee an offer of insurance renewal for a fixed number of years, allowing buyers to match the length of their insurance to their mortgage term.
The role of EQC or the reinsurers would be to back these fixed-term insurance policies in the case of significant disasters.
Working with the insurance industry would offer a level of certainty as we face an uncertain future – helping New Zealanders protect their homes in the face of changing risks.
*Michael Naylor, Senior Lecturer in Economics, Massey University. This article is republished from The Conversation under a Creative Commons license. Read the original article.
18 Comments
Insurance premiums should be (partly) based upon the type of construction.
If you have a resilienthome that is resilient to floods and quakes, then surely it should be cheaper to insure. A house where there is no gib / batts or timber, and that could be re-occupied a week or so after a flood, should be cheaper than one where linings have to be stripped, dried replaced etc.
Make it on piles for relocation, or higher than flood level would be a wise choice.
Granted that's not the traditional way of doing things, but tradition is only peer pressure from dead people. Maybe it's time to slowly transition away from LWTF 3604 to something more resilient.
This is town planner and civil and environmental engineer work first and foremost, and is already done at different scales from development to Region level depending how much money is thrown at it.
From someone with experience in both the insurance and property sectors, to suggest that this should be done by insurers is... weird. And more expensive duplication than is necessary.
Where the current system fails is where Councils haven't put money into it at sufficient scale.
And example is that Hawkes Bay Regional Council commissioned flood modelling maps, but only completed those for part of the Region. Have a Google and look for yourself.
Unfortunately, much of the recent flooding came through defences onto land where these hazards weren't modelled, there were no defences, situational factors such as woody debris played a part, or the rainfall intensity simply exceeded the design.
The conversation should really be about what level AEP we are willing to accept for what land use type, and whether Council efforts to manage the impacts of stormwater are being funded sufficiently.
For instance, foresters are required to keep debris out of waterways and the 1 in 5 year flood zone, but they are not required to include flood modelling maps on their harvest management plans. How is the harvest crew supposed to know where they can and can't leave sticks if there's no guide?
Yes, agree. And this point;
and whether Council efforts to manage the impacts of stormwater are being funded sufficiently.
is really worth exploring. I suspect I know what the likely findings will be as I've worked as an advocacy planner with many frequently flooded homeowners where inland overflow paths have been poorly mapped (for years) despite green-field development in surrounding areas intensifying at an alarming rate over the same period. One of the citizen groups I was working with managed to get the Council to agree (after much initial resistance) to finally meet with them in a public meeting forum. The Council then notified the public meeting in those little run-on ads at the back of the local rag. The concerned citizens figured there were many more in the local community who likely had similar problems. So they took out a full page ad themselves in the local rag headed:
STORMWATER IS NOT SEXY
Stormwater has never been a sexy topic, but here are the facts....
Well over 100 people turned up to the public meeting, and as the Council had only planned for the 20 or so repeat complainants they already knew - they had booked a totally inadequate size space for the event :-). So, it was a very crowded and very hot meeting (in more than one way).
I wrote a role play for my students based on that meeting. It's an hilarious class exercise on how not to hold a public meeting if you plan to underestimate the knowledge held in your community. More often than not, you can't pull the wool over the eyes of your ratepayers.
Yes, Council's are getting better. But the regulatory system (RMA) has always fallen short by not recognising both regulatory takings (example being when a previously flood/ponding-free home gets 'flagged' as being in an overflow path that was not there previously) and regulatory gains (example being when the previously rural/unbuilt land is newly zoned as residential).
The other big failure of the RMA (in my opinion) was/is the fact that the cumulative effects of a proposal are not considered as part of a consent application/hearing. Hence the reason why loss of storage and its effects on neighbouring land use is not well controlled.
Yes. However if you compare the maps of where there was flooding damage in Hawkes Bay Vs where there was flooding modelling completed and mapped, there is little overlap.
The communities who were hit worst hadn't had the modelling done, so nobody apart from the very old and the avid historians had a good idea of how bad a 1 in X year flood might be.
Surely the real risk in a place like Aotearoa is that the pool of insurable properties will reduce to such an extent that the cost to that small pool will be to high . Edgecumbe is mentioned, well in the eastern bay there's three of the four main towns are built behind stopbanked rivers. Opotiki is built between two highly flood prone rivers that join up in town before flowing to the sea. Whakatane has a series of nice ponds in the town to the south, all former river bends, and the CBD is perched on the tiny bit of flat land between the river and the highly erodable soft cliffs. A whole region where the largest percentage of property is realistically uninsurable.
But then I quite like the idea of property reverting to their actual value rather than actual value plus the value the banks will stump up as the price paid.
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Finance and Insurers will drive the change in the end - they like to make money and don't like losing it. If the risk gets to high they lose more, withdraw or you cant afford the insurance premium - No insurance = No finance.
The number of reinsurers is dwindling as they face major climate challenges/losses all over the world and as a couple of small pacific islands at the end of the world they don't care to much about us.
Insurance is not a right its someone prepared to take the risk on board to cover you. If we price risk properly outcomes will be better - do your homework carefully before you build or buy
How much responsibility should we have for doing our own due diligence?
I'm hunting for a new home in Dunedin, and looking at the Otago Regional Council hazard maps: lots of Mosgiel is on a flood plain between two ranges of hills with one narrow sea outlet for the Taieri River, much of South D is nearly at sea level and so at some time is going to need to beat a retreat to high ground, and much of the CBD (including the new hospital!) if built near sea level and on reclaimed ground.
While it's daunting to look at how much we've built in hazardous areas, it does make working out which areas to live in a bit simpler.
NEW FLASH MBIE decides where you can build via the NZ Building Act. Clause S72 of the NZBA lets you build on high risk land prone to natural disasters, as long as you agree to dissolve Councils/MBIE of liability for the consequences of the inevitable disaster. The physical outcome is that MBIE allegedly is knowingly/negligently putting NZer's in harms-way. Insurance companies and EQC know this and obviously that's why they are getting out of insuring such properties as fast as they can.
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