Climate change costs are hitting households through insurance premiums

Wednesday, 28 November 2018

In today's dollar terms, New Zealand has had 13 natural disasters that cost insurers more than $60 million in claims.

Man-made climate change has already lifted house insurance premiums, but nobody knows by how much.

Scientist Rob Bell, from national weather service Niwa, told the Insurance Council annual conference last week that the 'shadow' of climate change hung over the rising number of insurance claims from extreme weather events.

Ironically, however, owners of homes on land not prone to flooding, or erosion, could see their insurance premiums actually go down in the near future.

Their good fortune would, however, come at the expense of people with properties more exposed to natural disaster events, who face the very real prospect of significant insurance premium hikes.

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The New Zealand insurance market is moving in the direction of individual pricing of homes for natural disaster risk.

And figures provided in an advertising flyer for conference delegates from actuarial firm Melville Jessup Weaver (MJW) spell out the dollars and cents of how it could happen.

UPS AND DOWNS

Since 2006, dwelling insurance has risen in price by 325 per cent, according to Statistics NZ, compared to a rise in general inflation as measured by the Consumer Price Index of 25.5 per cent.

The devastating Canterbury earthquakes are behind most of that, but weather-related claims, including for the Edgecumbe flood last year, have played their part.

Premium rises have fallen broadly across all homes, but MJW expected market forces to change that.

Any insurer which decided to individually price homes for natural disaster risk could charge less to owners of properties less at risk from events like flood, storm and earthquake, giving it a competitive advantage against other insurers.

At the same time, the higher premiums it charged to people with more disaster-prone homes would probably see them move to its rivals.

Melville Jessup Weaver handed out fliers showing how this was already happening following Tower Insurance's move to individual risk-pricing.

It gave figures for the cost of standard house insurance on a sample of 10 homes with rebuild values of $385,000 in Tauranga.

While the only individually risk-rated insurer (Tower was not named) was charging prices varying from $906 to $1454, the others were charging flat prices.

One was charging $1002, another $1028, and still another $1070.

The risk-rating insurer was charging around $100 less on the least risky houses, and over $400 more on the riskier ones.

IAG (State, AMI, NZI) and Vero, the country's largest insurers, have already said they will follow Tower to individual pricing.

Tower's chief executive Richard Harding told the conference its market research showed the majority of people accepted the idea, and were opposed to 'cross-subsiding' of risk.

PRICE SIGNALS

The upbeat spin that the move is a good thing as it will send pricing signals to the community about where and how to build homes will be little comfort to homeowners hit by rises.

Some homes in low-lying coastal areas could even become uninsurable for flood damage.

That will undermine their value, as no bank will lend on a home that can't be insured.

But the price signals, and uninsurability warnings were not getting through, Bell said.

'We're putting more development in areas that are hazard prone.

'We've had 20 centimetres of sea level rise since the 1930s and 40s, and that's when a lot of our urban areas were developed around that era.'

New Zealand has had few coastal storm-related flooding events to date, but he said: 'We're starting to see the effects in Auckland and other low-lying areas.'

'SUNNY DAY FLOODING'

There had been an increase in 'sunny-day flooding', Bell said, when a king tide filled estuaries and harbours to their highest, non-flood levels.

'There's no margin in a lot of our harbours and estuaries for an added storm to occur at the same time,' Bell said.

There was also rising ground waters in some coastal areas.

'So watch out if you have an intense rainfall.'

With a further 10cm of sea level rise, a storm surge that today occurs one in every 100 years, will instead happen once every 20 years. Events at that frequency cannot be insured against.

In New Zealand, sea level is projected to rise by 30 cm by 2065.

Man-made climate change is increasing the frequency of severe weather events in New Zealand.

This year, there were big weather-related insurance claims events in January, February and March, Bell said.

NIWA scientist Dr Rob Bell warns of the impacts of climate change on coastal areas.

'We need to get used to this increased risk as the new norm.'

REDRAWING THE MAP

Long-term, changes were harder to forecast, Bell said.

For some areas, there was a 100 year window to plan for the future, including retreat from the lowest level areas.

'If we really can achieve a 1.5 degree [rise] world, by 2300, we might be working with one-plus metres of sea level rise. But if we continue emitting as we are now, by 2300 we will have to deal with 5 to 10-plus metres of sea level [rise].'

Such a rise would redraw the maps of Canterbury, the Bay of Plenty, the West Coast, Hawkes Bay and Napier.

Buildings themselves, let alone insurance, would no longer be viable.