Environment Commissioner warns getting insurance will become harder as sea levels rise and insurers take cover

By Jenée Tibshraeny

The Parliamentary Commissioner for the Environment warns we should be prepared for insurers to start making it harder for property owners to get cover for damage caused by the sea.

Jan Wright says the Australian parents of the insurers that operate in New Zealand have exclusions for sea damage in their policies across the ditch, so it could only be a matter of time before they make similar moves here.

Insurers already include exclusions for erosion, another common natural hazard associated with coastal properties, in their home insurance policies here.

Wright maintains that sooner or later insurers will also start hiking premiums for properties at risk of being damaged by the sea.

“Insurance is about the unforeseen and the sea level rise is moving into the foreseen space. It’s somewhat different from a normal natural hazard,” she says.

“If you think about a river flooding, you think of it as a one in a hundred year event, but we are going to see those one in a hundreds, become one in fifties and so on.”

Wright, in November last year, released a major report saying that while sea levels in New Zealand have largely been rising in line with the global average of 20cm since around 1900, they’re expected to increase by 30cm between now and 2065.

A “one in 100 year” coastal flooding event is accordingly expected to occur every four years at the port of Auckland, every year at the Wellington and Christchurch ports, and every two years at the port of Dunedin.

Wright’s report also includes maps identifying at least 9000 homes that lie within only a half a metre of spring tide levels. Nearly 2700 of these are in Dunedin, while 1300 are in Napier.

Insurers

She acknowledges that as climate change risks escalate, insurers will adjust their exposures to these risks accordingly.

Insurance Council of New Zealand chief executive Tim Grafton says: “If you get frequent enough events and the risk level goes up, then clearly insurers will have to look to respond to that.”

He says increasing the minimum excess a customer has to pay will typically be an insurer’s first response. From there they could increase premiums or exclude cover as a last resort.

“If and when that occurs [in response to climate change] will be a decision insurers will have to make for themselves.”

An IAG (New Zealand’s largest general insurer) spokeswoman, Melanie Roberts, expands on this:

“We underwrite insurance policies according to the specific risks that apply, so when insuring a home that has an identified coastal hazard, we would determine the most appropriate terms to apply to that policy with this information in mind.

“Terms we might apply to a policy could include restrictions regarding rebuilding costs or a higher premium. It would only be in extreme cases that we would decline cover. 

“Even when we take the significant step of excluding a peril that is otherwise usually covered, this would be based on historical losses at that specific site and anticipated losses in the future.”

An executive general manager for Suncorp New Zealand, Adam Heath, says:

“For customers who live in high risk areas we may impose specific underwriting conditions or a higher excess for flood claims, and in some circumstances we have to consider whether or not to accept the risk. Those would be assessed on a case-by-case basis.”

Grafton confirms some insurers responded to falling land caused by the Canterbury quakes by increasing their minimum excesses for flood damage to $10,000. These would otherwise usually be between $500 and $1000.

He also recognises insurers are hesitant to write new policies for properties in the likes of some coastal parts of the Hawke's Bay and the Wairarapa Coast that are prone to storm surge damage.  

Wright says the Lloyds of London chair has also told her it has sea damage-related exclusions in its policies around the world, while Willis Re senior managers are “thinking about it very actively. I can say that with assurance”.

Local and central government

Yet Wright recognises: “It’s not all about wealthy people who are insured and who can afford to lose things.

“I think it is inevitable people will ask for compensation from both local and central government as this starts to creep up.”

She references the 5000 South Dunedin homeowners who have recently suffered flood damage, largely due to the town’s drainage system not being property maintained.

“When is it your responsibility? Who cops it? Who’s in the front line? People who are now along the coast - if it starts to be a bit of a problem - will happily sell their homes to people who might not know the risks.

“At what stage do we shift from regarding this as a risk, to regarding this as something we have to adapt to over time. How do the financial aspects of it feed into this?”

Grafton points out there are already some backstops available, with EQC providing land cover for loss of land within 8m of a residence and up to 60m in terms of the ground access-way to the property.

Provided the property has fire insurance, EQC cover will kick in for damage to land and land loss, which would be the first sign the property was going to get flooded.

He says the Insurance Council has not suggested expanding ECQ’s brief to cover climate change associated damage, in its submission on the EQC Act review. Rather, the focus should be on adaptation measures to mitigate the risks.

The Council has however urged the government not to pull back on land cover as it has proposed.

Wright says Local Government New Zealand has suggested a government body like EQC be set up to deal with risks associated with rising sea levels.

“Of course it is a form of public insurance, which could be a way of spreading costs that have to be paid,” she says.

She points out that had EQC not have been collecting money over time, we would’ve been in a very different position following the Canterbury quakes.

Both central and local government are discussing these issues and Wright envisages a working group of public and private sector people to be led by Treasury.

Roberts says IAG is keen to get involved in such a group, and is already actively engaged in conversations with politicians and officials about a “possible long-term insurance response” for parts of the country more vulnerable to the impacts of climate change.

“We note the Parliamentary Commissioner for the Environment’s report talks about risks that are still some time away, meaning it may be a while before these risks start to effect the majority of our customers’ insurance costs. However, it is important that we start that conversation now.”

Banks

Wright and Grafton recognise banks are also in the business of risk, so will be considering how rising sea levels will affect their exposures.

“I think it’s quite fascinating - the mismatch between insurance that’s renewed yearly and mortgages that last for thirty years. That’s the sort of thing they need to think about,” Wright says.

In other words, insurers have much more flexibility to adjust their exposures, than banks which provide long-term mortgages.

“Maybe banks have in their mortgage clauses ways out of the situation, but it’s really a question for the buyer of a property to be purchasing with eyes wide open around their mortgage commitments and future insurability,” Grafton says.

Auckland housing pressure

“If you found it impossible to obtain insurance for the property… then you could be looking to settle your purchase without having that security. If that security isn’t in place, the bank might not extend the loan, and you may have signed a contract that requires you to fulfil the payment obligations.”

Grafton would accordingly like to see more of a property’s risks identified on Land Information New Zealand's database, so buyers are more aware of what they’re getting themselves into. He recognises this is something property owners haven’t been keen on.

As the supply of housing ramps up in Auckland, he is aware questions have been raised over the quality of work being completed. Auckland Council’s building control manager, Ian McCormick, has told Interest.co.nz that up to 40% of home inspections are failing.

Asked whether she’s concerned building consents are being granted for homes to be built in flood prone parts of Auckland, Wright says:

“I can’t tell, but given the concern - and it’s an entirely valid concern - considerations like sea level rise could well be secondary because of the pressures on Auckland.”

She supports the Productivity Commission’s call to have a separate Urban Planning Act, as she maintains the Resource Management Act isn’t dealing with urban planning very well. Issues around affordable housing and climate change simply didn’t feature when the RMA was created.

“If we had an Urban Planning Act which had an objective around urban housing, then that would be fine. But I would also like to see an objective around low carbon cities and preparing for impacts like sea level rise. I think we really need to rethink our urban planning around those two factors.”