Parliament’s Finance and Expenditure Committee (FEC) has been warned the increasing frequency of major natural hazard events is causing global reinsurers to reassess New Zealand's risk profile.
The Insurance Council of New Zealand (ICNZ) told the FEC in a public submission on Tuesday the increase in natural hazards is impacting the cost and availability of reinsurance, which in turn is affecting the cost and availability of general insurance across the country.
The FEC was given the responsibility of determining how NZ manages the risks and expenses associated with future extreme weather events back in May.
The Committee's holding an all-day public meeting on Tuesday to hear submissions to the inquiry.
In his submission, ICNZ Chief Executive Kris Faafoi said NZ needed to be sending “strong signals” it was doing everything it could to prepare for and reduce climate risk in order for reinsurance markets to continue to have confidence in NZ.
“Maintaining that reinsurance is vital for our economy,” he said.
As of March this year, insurers have so far paid out over $3 billion from the damage and destruction caused by Auckland Anniversary Floods and Cyclone Gabrielle in 2023. Insurers to-date have received over 117,000 claims from the two events which the ICNZ has described as the largest ever insurance weather events NZ has experienced.
Reinsurance, or insurance for insurers, transfers risk to another company to reduce the likelihood of large payouts for a claim. The ICNZ represents fire and general insurance companies.
Faafoi said if climate risks weren’t addressed and were allowed to become greater over time, it could result in increasing premiums and withdrawal of insurance cover.
“That scenario on a large scale would have serious implications for families, communities, local councils, the Crown and the wider community,” Faafoi said.
Insurance pricing is increasingly becoming more risk-based, with general insurer Tower being the first insurer in NZ to introduce risk-based pricing back in 2018.
NZ’s other general insurer giants like IAG and Suncorp have since followed in Tower’s footsteps.
Managed retreat
Matt Whineray, the ex-Chief Executive of the NZ Super Fund and the current chairman of the independent reference group set up by the Ministry for the Environment (MfE) also made a submission on Tuesday.
The group is assisting MfE in the development of policy recommendations for the climate adaptation framework.
Whineray told the committee one of the challenges around managed retreat was that it requires compulsion.
“It's not something that we as a nation particularly like and has been problematic in the past in the use of things like the Public Works Act. So I think that is a real challenge,” he said.
In discussions with MfE, Whineray said several principles had been considered as important.
This ranged from the requirement that “all actors” possess relevant climate risk information to the principle that parties benefiting from investments in defensive infrastructure should share the costs.
“This also would include local and central governments as property owners, infrastructure owners and potential funders in locations where retreat is inevitable. Sharing of the cost of defensive infrastructure should include recognition of the time limit that climate change is imposing,” Whineray said.
He added later on in his submission that the Government’s climate adaptation framework would have to endure for more than 100 years across numerous political cycles.
A “big education programme” would be needed to ensure widespread understanding of the adaptation approach and decision-making process.
The inquiry plans to provide recommendations and principles on the framework and report back to Climate Change Minister Simon Watts on the 5th September.
Watts said in June that this would ensure the Government would have the fundamental elements to be able to put in place an Adaptation Framework Legislation Bill into the House in early 2025.
50 Comments
You are dreaming.
There is definitely cross subsidy going on, always will be if even if just to cover the admin costs of the insurance company.
Does a house with a brick chimney pay more insurance that one with a steel flue.
Does a L shaped house pay more than a rectangular box
Does a renovated house pay more because it was signed off by a dodgy engineer?
The sooner everyone gets used to self insurance and banks make their loans accordingly, the better
Well i got quote from a few places and they are both cheaper, i don't know how that is far from reality?
admin costs, fine they are the similar.
But does taupo have the same risk of flooding as hawkes bay?
does tauranga has the same risk of earthquakes as wellington?
the risks are different in these area so it only makes sense the insurance cost will be different.
who's gonna hold 300K in case their place floods
Sure having an emergency fund is good, but self insurance... you are dreaming.
If you go to the US, there are areas near san fransico where they cant get fire cover, there are area s in Colorado where they cant get flood cover, and yet people still buy and sell houses in these areas, if that isn't self insurance what is?,
your comment about 300k is an interesting number, not sure where it came from , but if you take a 50 year old house in christchurch on a 600 sq m section you would pay about $750k, if it burns to the ground and you pay $50k demolition and sell the section, you will probably get $500k for the section, and the difference is $300. In other words current premiums are about 1% of the value of your house, or on average 2000 houses are destroyed by fire or flood in christchurch every year. forget about EQ in Christchurch , every house has had a full size proof test. 2000? I dont think so, there's plenty in this business for insurance companies. The only mistake they made in christchurch was allowing the owner to keep the land after making a full payout. Doesn't happen with a car, you get a full payout , insurance company keeps the car
DIY. Insurers cannot retain the land, they don't cover it so have no rights to it. The claim settlement calculations you set out are effectively what 'indemnity' (vs replacement) cover is and is what will be the only cover available in the near future, in disaster prone areas. With a sizeable deductible or excess to eliminate smaller claims.Banks will adjust their lending accordingly, values will drop, it's not the catastrophe some in WGN are portraying. Has already happened in eastern ChCh, is underway in many coastal and riverine communities and the world hasn't ended. Re your assertion that every house in ChCh has been proof tested, err, no. Many older 'repaired' houses will suffer a similar level of damage once again in a repeat event.
I worked in the industry 2016 - 2021 within risk modelling teams.
Understanding earthquake risk was a significant portion of discussion, modelling, and decision making across the whole industry.
There was and still is massive cross-subsidisation of EQ risk specifically:
EQC covering the first portion of Sum Insured at a flat rate (full subsidy),
Market pricing not reflecting true risk due to concerns about affordability and PR,
The models for EQ risk during this time showed the highest risk areas within in Wellington, Napier, etc had Annual Average Loss rates about 10,000 to 20,000 higher than Auckland or Northland for example.
i.e. if insuring against earthquake in Auckland cost $1 the equivalent high risk area in Wellington would be $10-$20k.
It is worth noting that this is only considering EQ risk, and a LOT more risks exist that goes into pricing analysis.
At that point in time EQC levies and the EQ risk portion would make up between 20-40% of the overall premium (excl.GST).
EQC has since taken on a larger portion of risk during changes in both 2018 and 2022, due to market participants moving closer to technical pricing.
My own take? We need some level of cross subsidisation in the short term to ensure peoples home remain insurable until managed retreat and better planning for new developments takes place - hopefully sooner than later. Losing your home in an EQ would be devastating, and affordability plays a big part in people choosing and retaining coverage.
Quite right. Did we not learn anything from the AMI, Christchurch disaster. i.e. "The board of AMI Holdings has requested the Crown's support as it is concerned that the AMI Group's reserves and reinsurances may not be sufficient to cover all claims under AMI Insurance's policies resulting from the Canterbury Earthquakes." Which, of course, Is how Southern Response emerged.
One more like that, and our financial system will be on its knees. And we yet many still think that encouraging New Zealanders to take on more Debt against that very same asset class is the right thing to do? It has to be the opposite.
One thing I’ve noticed is that the excess doesn’t seem to move with inflation. If $300 excess was standard 20 years ago, it should be something like $1000 now. How many less flood claims would that have produced.
By not ramping up excesses, insurance companies are effectively making people buy more insurance each year. Which is great for them, until something bad happens.
An interesting piece on how the Kyiv property market, which was one of Europe's most sort after pre-War, has changed to what it is today .ie: The Unexpected hit it.
People's requirements for housing have
changed.
Buyers prefer housing:
▪ in a safe neighbourhood, away from critical
infrastructure;
▪ with stable power supply;
▪ with bomb shelters or underground car
parking;
▪ with backup power and heat generator;
▪ not on the upper floors of the building.
What will our priorities be after, say, The Alpine Fault goes? Probably something similar.
Why is it just NZ? Both Australia and the USA experience far more extreme weather related disasters on a regular basis (QLD flooding and VIC bushfires, US hurricanes and bushfires). It seems to me this is just an excuse to jack up insurance prices even higher. Nothing to do with climate change, just exploitation of a small uncompetitive market that is held hostage to international companies ripping us off.
That density just means more disaster claims. A US disaster is far more costly than a NZ one.
Besides the death toll, hurricane Katrina left many people homeless as more than 800,000 housing units were destroyed or damaged in the storm. Katrina is the costliest U.S hurricane, with estimated damage over $81 billion and costs over $160 billion (2005 US dollars).
KW. Yes, but reinsurers can more quickly recover their losses in places like the US because of its huge market size. NZ is a 'non recovery' market for them - ie too small to recover losses in fast enough time. NZ insurers are largely a tack on to their Aussie parents reinsurance programs, except for Tower.
Not necessarily so. Iowa USA here - this was traditionally one of the safest climate related markets in north America. Not so anymore. Storm intensity is massively higher than it used to be.
https://www.nytimes.com/interactive/2024/05/13/climate/insurance-homes-…
Most of those 1 in a 100 year events have turned into 1 in 10 year events and it is set to only get worse. Earthquakes are unchanged but all other weather related events are getting worse. We got 85mm of rain the other day in one hit, luckily is was spread out over hours.
Parliament’s Finance and Expenditure Committee (FEC) has been warned the increasing frequency of major natural hazard events is causing global reinsurers to reassess New Zealand's risk profile.
I guess some people still think they're needed and are doing NZ a favour by being here instead of facilitating our unproductive debt problem.
Agree to disagree, you may run an exporting business without insurance - I used to. Same could be said for a farm.
That said, I agree most do use insurance. I'm suggesting they need productive industry more than productive industry need insurance. We've become captured by the FIRE sector and I'm happy to see that change.
Of course insurance premiums have been under scrutiny of late....so this release is not a surprise.
However there is also no doubt that the viability of the model is under pressure, and the largest loss making areas (be it markets or types of risk) will be the first to go.
I guess what they're really saying is the leeches are feeling a bit starved and need better feeding.
You'd think the industry could be done for false advertising. Pay $$$ and all your worries and risks be gone. Instead when the s#$t really hits the fan it's more $$$ or we're be gone.
I've been paying insurances all my life, many many thousands of $$$$. But in the same way banks could not give rates how loyal you've been these guys and girls will walk away real fast.
The FIRE service industry real is the pits.
Risk is going to be priced properly. Those that don’t want to subsidise others will be in favour of this.
The other costs driving insurance up is construction costs. It’s not just climate risks by itself.
These changes will come in over the next few years. Many people will find their premium keep going up or when they simply can’t renew.
HughJ. Having been exposed to the underwriting environment in higher natural hazard risk areas of the world, I'm quietly bemused by the concept in NZ that full insurance is almost a right. There are plenty of places overseas where property owners can't get full cover and who accept that as a reality of living where they do. The Wellington handwringing brigade have themselves worked up into a lather about this entirely reasonable reinsurer warning but it has been long predicted. There will be much talk of grandiose but unaffordable mitigation schemes, while meantime the retreat from high risk areas that is already quietly well underway by insurers will continue in places like eastern Christchurch and will be progressively rolled out elsewhere. Insurers are sensitive to the social licence aspect but in reality have no choice other than to ramp up risk based underwriting.
Those that want us to build MOAR roads are also about to find out what the double whammy of not having enough people to pay for ongoing maintenance costs let alone new infrastructure plus increases in rates to cover climate related damage and insurance premiums.
We're bankrupting ourselves with poor land-use and transport policy
Not from a insurance perspective - probable $ loss from the alpine fault is reasonably predictable and event return periods are known, allowing reinsurers higher levels of certainty than 'aberrant' weather events where incidence and cost predictions are more difficult.
2023 Weather was an aberration
Was it? Because I seem to remember pretty much every climate scientist for the last 40-50 years saying that the consequences of human-induced climate change would be more frequent and severe weather events. This is playing out exactly as they said it would.
Uncomfortable for those who are climate change deniers (not saying you are one by the way), no idea why you think it was an aberration.
I see PE are getting into insurance big time. They can usually smell a profit from a long way off. And some reasonably good anecdotal evidence of big insurers simply not paying up in America. All State & Farm State were the two examples used with Florida & California the two mentioned areas. Fires & floods ay!
Having done some low level work in the insurance industry, this has been coming for a while. The problem is there has been very little traction from local and central government to get on board with things like improving the climate resilience of infrastructure and restricting building in low lying river and coastal zones. If they don’t work with the them the last lever the insurers /reinsurers have is pricing. To a reinsurer NZ is a tiny little market that would be almost insignificant to pull out of. Our entitlement mentality isn’t going to keep them here.
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