OECD says Govt may have to intervene if insurance crisis emerges

Tuesday, 7 May 2024

Scenes from flood-hit Awatoto, south of Napier, during Cyclone Gabrielle in February last year.

About 5% of New Zealand homes are at such a high risk of flooding, their owners should be paying annual premiums of 1% or more of their homes’ value to cover the true risk to their homes, according to the OECD.

The OECD released its major biennial report into New Zealand’s economy on Monday highlighting the action it believes the country should be considering to improve its economic performance.

It identified the threat to New Zealand’s high level of house insurance cover posed by insurers moving to greater risk-based pricing for individual homes away from the current model in which people with homes not threatened by flooding cross-subsidise owners of flood-threatened homes.

This move, initiated by Tower in 2018, could mean people with homes at higher risk of things like flooding end up being charged premiums they cannot afford to pay, the OECD said.

“Given the high house-price-to-income ratio in New Zealand, this [paying 1% of the value of a home in premiums each year] would pose a serious affordability challenge for many of those households,” the report said.

Today, 96 in every 100 homes were still insured, but the OECD said the Government may need to step intervene in the insurance market to keep insurance cover that high.

The country is waking up slowly to the need to stop building in flood zones.

It could be that New Zealand collectively decided to prevent new building in some climate-threatened areas, the OECD said. But even if it did so: “It may be necessary to ensure that existing property owners, who did not always have accurate information about climate-related risks before they invested, have affordable insurance in the meantime.”

The OECD did not say how the Government might decide to address a rising under-insurance crisis, but said it should not take actions that encouraged people to continue building in flood-threatened areas.

It gave the example of Britain’s Flood Re, which was set up to ensure that people owning the 2% of British homes in flood-prone areas continued to be able to get cover after massive flooding saw private insurers pulling out of flood insurance for some areas.

However, the British scheme, which was due end in 2039, did not cover homes built after 2009, when the flood risks were widely known, the OECD said.

Accurate pricing of insurance risk was essential to ensure the country stopped building on land at high risk of flooding, the OECD said.

“Insurance premia should as accurately as possible reflect climate-related hazard risk to help them make better decisions,” it said.

New Zealand has a long history of building in flood zones. This photo shows the Waikato River in floo, at Ngāruawāhia in 1910. The photo is from the Price Collection, Alexander Turnbull Library, Wellington.

The threat of rising flood premiums, and even insurers refusing to provide flood cover in some areas, does not affect the roughly 90% of homes not at risk of flooding, the OECD said.

Overall, flood insurance remained “easily available”, the OECD said, though last week the Reserve Bank Te Pūtea Matua signalled that may not always be so for the roughly 120,000 homes at risk of flooding, and the roughly 12,000 which are at high risk of both flood and earthquake.

To qualify for EQC Toka Tū Ake natural disaster insurance, people have to have house insurance, the OECD said. However both insurer Tower and the Reserve Bank have said some house-owners may be able to get only cut-down forms of house insurance that do not cover flood damage.

The flat levies charged for EQC cover, regardless of whether they lived in seismically active areas like Wellington, or less active areas like Waikato, was an example of the Government acting to keep cover levels high, the OECD said.

“A flat rate was chosen to encourage the take-up of insurance and because of the extremely high unpredictability of where an earthquake may strike,” it said.

The OECD also said New Zealand needed a national strategy to build flood defences, and the OECD pointed to the Netherlands as a leading example of taking an evidence-based, co-ordinated approach to reducing flood risk.

But that would mean the Government needed to invest in better information-gathering and risk-modelling, which would in turn help insurers more accurately price insurance risk, the OECD said.

The Commerce Commission should continue to facilitate co-operation between insurers and EQC to facilitate the creation of a national, regularly updated, confidential database of individual claims database, it said.

“Forewarning is essential to reducing damage, and especially loss of life,” the report said.