How climate change could send your insurance costs soaring

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Climate change is not only set to transform our environment, it's also likely to cause insurance costs to skyrocket. The Insurance Council of New Zealand has warned that our country is one of the most vulnerable to the impact of natural disasters for an economy of our size. Council chief executive Tim Grafton says New Zealand can expect to face, on average, annual costs of $1.6 billion (just under 1 per cent of its GDP) from natural disasters, based on data going back to 1900. Without risk reduction, that cost will increase, he says . READ MORE * Some NZ climate change impacts may already be irreversible: Government report * Government considering experimental climate change visa * Climate change predicted to take big toll on Kiwis' mental health * Emaciated polar bear kicks off discussion about climate change * Tom O'Connor: There is no escaping climate change * As Trump lauds 'good old global warming', here's the truth about climate change Bryce Davies is the general manager of corporate relations at IAG, whose insurance brands include State and AMI. His job involves sustainability and corporate responsibility, government relations at central and local levels, and he is preparing for the impact of climate change. He's part of the government's climate change adaptation technical working group . The group comprises a range of experts including engineers, climate scientists, Maori leaders, farmers and business people. Its purpose is to help New Zealand prepare for climate change. Davies is acutely aware of the key role that insurers hold in the future of climate change and adaption in New Zealand. There's a big focus on the impacts of climate change-related sea level rise. However, there are other climate related issues that will impact insurance, like flooding. WHERE WILL THE INSURANCE COSTS HIT? Hawke's Bay areas including Haumoana are the most obvious examples of insurance cost rises related to climate change, Davies says. Low-lying areas around Napier are at risk. A large chunk of the Hauraki Plains lie below sea level. They're at risk as well, according to Davies. In the wider Auckland area, Helensville, Mission Bay and Kohimarama are on the list. Parts of Wellington are under threat. In the South Island, South Dunedin and the Taieri Plains could be impacted. Areas of Christchurch area under threat, too. And that's just considering areas affected by sea level rise. "There are tonnes." There is still a lot of work to be done for everyone to understand which areas are at risk, Davies says. LEGAL LIABILITY, INSURANCE AND THE RISKS OF CLIMATE CHANGE Catherine Lorns, from the Law Faculty at Victoria University of Wellington, is investigating sea level rise and climate change. She's looking into "tipping points" for when insurance companies might stop insuring coastal property owners and what would happen after that. Another aspect is investigating how much people can rely on the EQC or central government for compensation after being affected by coastal climate change-related incidents. WHAT ARE THE INSURANCE OPTIONS IN AT-RISK AREAS? So far, it's a bit theoretical and based on "insurance 101", according to Davies. "Insurance works by taking what you would expect to have lost and sharing the cost of that across a whole bunch of people," the IAG general manager of corporate relations says. It's called pooling, and losses are pooled over geography and over time. "Rather than you having to deal with the fact that your [home] burned down, we spread the cost of that." It makes it more affordable for everyone and means high-risk locations are subsidised by low-risk areas It's called community rating. The other way is to make people pay for the risks they have and the losses they're likely to incur. The higher risk the location, the more you pay. That's risk-based pricing. "We take physical impacts and turn them into economic impacts. That's how we price." Insurers in New Zealand err on the side of community rating. They could continue community rating high-risk locations based on the theory it was better for New Zealand they were insured and could afford to recover, according to Davies. Or decide it was better for them to understand the risk and make them pay their fair share. "The reality is, we are heading more towards risk-based pricing," Davies says. The risks would keep getting worse for some areas. "[Insurers] cover risks, not certainties. So if it's almost certain you are going to be flooded, then that's not the business we are in." More risk equals higher cost. Eventually, insurance wouldn't be provided. IS INSURANCE ALREADY CHANGING FOR SOME PLACES? There are a small number of locations where it has. "We've mentioned Haumoana. That's an obvious one. Because waves go into homes on the foreshore," Davies says. "For various reasons, Taihape is another interesting one. That's a landslide issue. "It's actually exceptionally rare that we don't insure people in New Zealand. Some people pay a bit more. Some people have higher excesses but by and large, most people get the same product. "We're kind of at the early point of a phase where that's likely to change for some locations. Are there huge examples of it? No, because we haven't really had to do that yet." But it's on its way. While there are some areas where risk-based pricing already exists, other factors may also play a part not just climate change. Earthquakes are the main cause. Davies says IAG looks at two main categories of threats. One is the physical impacts likely to become more frequent and more intense. It's keeping a "beady eye" on those. But it's focusing more on the social and economic consequences for households and businesses. Davies thinks New Zealand doesn't have a good handle on those yet. IS CLIMATE CHANGE ALREADY HAVING AN IMPACT ON THE INSURANCE INDUSTRY? Yes, but it's hard to say how much, according to Davies. "Everyone is trying to get a handle on it, so there's no real definitive answer," he says. "We can see in the money we pay out... the costs are going up. It's becoming more expensive. And it will only become more so. "For us, climate change is just exacerbating the risks we already had." In short, it's too early to say. It's a big issue and insurers have to consider a few other things. Earthquakes, for example. Competition, international expectations about managing the money of re-insurers, and the fact most are listed entities and have to return dividends to shareholders are some. On the other hand are customer expectations and a moral obligation to help keep people insured. "That's our job. We are here to insure people. So we're not doing our job very well if we start saying no," Davies says. "If we start saying no to people, that we are not wanting to insure a particular location... the banks are quite interested in that." Banks consider the security of their lending. They also rely on homes being insured so they can recover - if needed - the money home owners borrowed. The same applied for business lending. "If we say no, [banks] are probably going to say no," Davies says. "Now, if banks do that, what is that going to do to a community? If we get this wrong and communities don't start to adapt, there's some really big consequences." If insurers wont insure and banks won't lend, there's a harsh outcome. "That community can't be there anymore... That's really the consquence." Insurers will have to work with local and central government - and communities - to keep the communities safe. INSURANCE INDUSTRY'S POSITION Davies believesthe insurance industry has a unique position in terms of dealing with climate change, and a lot of responsibility. "We have a purpose as a company to make the world a safer place and helping communities be safe in the face of the impacts of climate change and other natural hazards," he says. "That's the most obvious way we can live out that purpose. In a way, the insurance industry holds a starting gun, Davies says. ""Through the price we charge, through the decisions we make about [who has cover], we are telling people about the risks they are facing and whether they should be there or [not]," he says. "We signal the risk. Overall, what we want people to do is make better decisions about risk." He believes the insurance industry needs to set parameters so that the country takes the right steps to deal with the issue. INSURANCE 'MUST REMAIN AFFORDABLE' The Insurance Council of New Zealand has warned that insurance "must remain available and affordable for everyone otherwise individuals, business, local and central government will end up bearing the brunt of the costs". It has recommended 15 steps to protect the country from natural hazards . They're grouped in four areas: strategy and legislation, information to make the right decisions, funding and insurance. The insurance section has one step: "Keep insurance affordable and available for all introduce comprehensive measures to reduce the risk of natural disasters and remove levies from insurance premiums to help keep the transfer of risk to insurance affordable." ASSESSING THE WAY FORWARD There's a fair bit of research happening in New Zealand focusing on climate change and insurance. The Deep South National Science Challenge's objective is to understand the role of the Antarctic and Southern Ocean in determining our climate and our future environment. One of its projects is looking into climate and insurance . The Challenge says high insurance premiums or unavailable insurance have a stronger impact than uncertain events in the future on how private decisions are made. "Escalating coastal hazards don't seem to be reflected in home-owners' decisions to purchase and renovate coastal property, and further, climate risk is likely not currently incorporated into the price of residential coastal property." Evidence suggests high insurance premiums or unavailability of insurance has a stronger impact on private decision. THE ECONOMIC IMPLICATIONS OF INSURANCE RETREAT Despite the risks associated with climate change, demand for coastal housing has increased, the Deep South Challenge notes. So has new and intensified development of existing urban coastal areas. Belinda Storey, Managing Director of Climate Sigma, is investigating how coastal housing markets might respond to "insurance retreat" what will happen if insurance becomes unavailable. Storey says the areas affected first by sea level rise will be those with small tidal ranges - that's the difference between low and high tides. "The smaller your tidal range the more exposed you are to a storm surge, because there is a bigger chance that the storm surge will be bigger than the tidal range." That means, for example, Wellington and Christchurch will be affected sooner than Auckland. When hazards start to affect access to insurance depends on insurance thresholds, Storey says. Early research suggests that will be once the probability of a devastating hazard reaches a one in fifty year event. "Once it reaches a one in 20 year event it is likely that you will be unable to find an insurance company that will renew your policy." The Parliamentary Commissioner for the Environment has shown that with 10 centimetres of sea level rise, a location currently exposed to costal inundation once every century will be exposed once every 22 years. POINT WHERE INSURANCE IS NOT AVAILABLE With a 10cm rise, we're likely to hit a point where insurance isn't available. And that 10cm rise will happen in the next 20 years. It's also "locked in". Any steps to minimise climate change and emissions might slow down sea level rise, but that 10cm rise is going to happen. A report on the issue states: "... global average sea levels will likely rise by between 44cm and 55cm by 2100, and around 1 metre with continued high emissions. "Across New Zealand... there are 43,683 homes within 1.5m of the present average spring high tide and 8806 homes within 50cm." Storey says the costs of living in coastal areas repairs and mitigation for example will go up and the relative value of those properties will fall. She's also found insurance availability is a stronger factor in property value than sea level rise. The water could be at your back step, so to speak, but if you still have insurance, you wouldn't notice as severe a drop in value. These are likelihoods. realities at some point. Not possibilities. PEOPLE DON'T WANT TO TALK ABOUT IT "Insurance policies are for, say, 12 months at a time. So you don't know you are no longer able to get insurance until you go your insurer and they say 'I'm sorry, we're not going to renew your policy'," Storey says. "But they may have a mortgage on that property for another 20 years. If you find yourself [that] you've lost insurance, you're not going to want to tell people about that because it undermines your ability to sell that property because whoever is buying it won't be able to get a mortgage. "You can't get a mortgage in New Zealand if you can't get insurance." The risk faced is accelerating and it's possible that awareness isn't keeping up, Storey says. But a dramatic or severe event could shock people into understanding. Storey says people should know coastal property has limited time left. People have been buying and selling it, expecting permanent ownership. "Once you realise that it's got this time limit on it, this lease with nature, I think that will shift people's thinking." Another part of the Deep South Challenge is investigating who should bear the responsibility of risk in terms of sea level rise. Individuals? Insurance companies? Or local and central government? EXTREME WEATHER, CLIMATE CHANGE & THE EQC While the Earthquake Commission mainly aids those affected by earthquakes, homeowners can also make EQC claims for some damage from extreme weather like storms, floods or landslips. The Deep South Challenge notes that "more frequent and more intense weather can therefore affect the EQC's long-term sustainability". The EQC manages the National Disaster Fund - which is built by levies paid when people insure their homes and contents - you automatically have EQCover if you have this. The EQC will usually pay the first $100,000 for damage to a home, up to $20,000 for contents and cover storm and flood damage to homes. An example of how the fund could be exhausted is the Christchurch and Kaikoura earthquakes. The fund was at $6.1 billion in 2010. Paying out for the quakes may use up all of it. Over the last 20 years, the EQC has paid out over $240 million, on more than 17,000 claims, to households affected by non-earthquake disasters, according to the Deep South Challenge. Deep South research will look into how the EQC has covered households after extreme weather events, if insurance pay-outs have supported households and communities to recover economically, and what the EQC's future, given climate change projections about extreme weather. THE MOTU REPORT ON INSURANCE, HOUSING AND CLIMATE CHANGE An all-encompassing report on the issue by Motu Economic and Public Policy Research, a non-profit economic and public policy research institute, assesses the situation. It is blunt. A single sentence in the report sums up the reality. "Climate change will render some currently inhabited locations uninhabitable". * comments on this article have been closed