Premiums under pressure: Is this the biggest question climate change poses for our insurance?

Reminder, this is a Premium article and requires a subscription to read. As climate change begins to put pressure on Kiwis insurance premiums, a new analysis by the Helen Clark Foundation and WSP suggests well soon need a better public backstop. What does the Government say? Jamie Morton reports. Jo Polands clifftop home gazes out upon a turquoise Tasman Sea that inches closer by the month. Soon enough, she worries, it will be inside her garage. The 72-year-old has lived in Port Waikatos Ocean View Rd, on the North Islands wild and beautiful west coast, for three decades. Tens of metres of shoreline have been swallowed by the sea in that time . A few have been lost from her beachfront section in just the past few months. Poland hopes a temporary dune wall, which she says should have been built years ago, might buy her some time. Or it may fail completely ... in which case Ive got 10 years before it reaches my garage. She might well be forced to abandon her house before then. The house next to me is being demolished and basically all the others have been shifted back or knocked down, so it does feel pretty threatening. There was little mention of the risk when she bought the house. Everything seemed to change one day in 2015 when, having just had surgery for lung cancer, a council letter arrived detailing a report about concerning erosion trends. Fast-forward a decade and council officials are still working through adaptation options, while Poland continues to live in limbo. The Natural Hazards Commission (NHC) might cover damage to land from storms and floods, but not from coastal erosion. Its a similar story with private house and contents insurance. Poland is mortgage-free but now faces the troubling possibility of losing her home and also having to fork out for its demolition. Then Ive got no equity, Ive got nowhere to live because I cant sell the property to go to a new place, and Im too old to start again. Port Waikatos woes arent unique. There are similar tales from Waitara in Taranaki, Haumoana in Hawkes Bay, or Bluecliffs in Southland. While much of the erosion in these coastal spots is the result of natural, decades-long cycles, climate change is beginning to compound the problem with rising seas and bigger storms. For policymakers, councils and insurers, cases like Polands pose a still-unanswered question: should the rest of us be chipping in to help climate-threatened homeowners ? New Zealands exposure to climate impacts like coastal flooding and storm surge is already startlingly high. Consider the 441,384 residential buildings with an estimated replacement value of $218b that recent Niwa and University of Auckland modelling revealed at risk of flooding. Or Aon-led research that found as many as 137,500 homes are endangered by one-in-100-year floods - with a further 88,000 considered extremely exposed and vulnerable to one-in-20-year floods. International experience suggests companies start pulling out of insuring properties when disasters like floods become one-in-50-year events as theyre increasingly starting to. Yet another analysis calculated that some 10,000 (a likely underestimate) coastal properties in Auckland, Wellington, Christchurch, and Dunedin could become uninsurable by 2050. After years of extreme storms and record payouts, premiums have already risen across the board. Some towns with high flood danger are now less likely to be able to access multiple online quotes. The Reserve Bank says that, while higher-risk properties may find insurance increasingly unaffordable, to date, full insurance retreat in New Zealand has been rare. In the meantime, insurers have been turning to risk-based pricing , using detailed new modelling, to spread costs fairly. First-cab-off-the-rank Tower has been rating customers for flood risk since 2021 , meaning about one in 10 customers have received a small hike in that portion of their premiums (a few hundred with high ratings saw increases of more than $500 a year). Its since eyed the approach for homes threatened with coastal erosion. The companys chief executive, Blair Turnbull, told the Herald that nine out of 10 policyholders had benefitted from the system. We believe its all about helping customers to understand ... the perils that apply to their homes, and how to best manage that through their insurance policy. For a country with an extraordinarily high (96%) uptake of residential insurance, its perhaps unsurprising our small but competitive industry has adopted a model that places the sharpest price rises on a comparatively small number of policyholders. On the one hand, it seems only fair and reasonable for those in high-risk locations to pay more to insure their properties, because they have chosen to live in those places, says Kali Mercier, the lead author of a major new report released by WSP and the Helen Clark Foundation. On the other, she says, fairness should require society to share the risks of natural hazards collectively. That includes protecting the interests of those who are the least advantaged, those with the greatest needs and those who are exposed to the most serious risks, she said. This approach is similar to the way New Zealand shares the costs of poor health in a collective way through the public health system, for example. Over time, she figured many people who live in safer areas may find their premiums go up regardless, as the global impacts of climate change heaped pressure on international reinsurance costs. Mercier expected gaps would emerge in private insurance and her report set out several ways where the state could help bridge them. A starting point was state subsidies, much like winter energy payments, for vulnerable Kiwis who couldnt afford their premiums. While this will cost us all a bit extra in the short term, a well-designed scheme will be much cheaper than the cost of rebuilding under-insured communities when the next big flood hits, she said. Then as premiums go up more, and as insurance companies start withdrawing coverage entirely for some areas, the country should implement some form of public insurance scheme for flooding, as many other countries have done. Mercier said such a scheme could sit within the NHC (its natural hazards cover is currently supported by a levy policyholders pay as part of their premiums) or be formed as a separate entity. It might insure only those at the highest risk of flooding, as the UKs Flood Re scheme does, or all homeowners, as Frances Cat Nat does. Coverage could include losses up to a certain amount as is the case with NHCs policy for earthquakes or other hazards or it might only apply to total losses when a house is no longer habitable. Mercier believed the latter option was particularly promising, as it could help Kiwis whove been left homeless while leaving private insurers to cover smaller flood events. She said another important step was agreeing on a criteria for what exactly constituted affordability in insurance. In other words, how much is too much for a household to pay for insurance? There are different ways to determine this, but I quite like the Australian method: affordability is seen as an issue where a household pays more than four weeks of their gross annual income towards home insurance premiums. One of New Zealands leading economists in the space, Climate Sigmas Belinda Storey , said if public insurance was extended in such a way, itd need to come with strict conditions. If a home was substantially damaged by flood, for instance, the insurance should come with a cast-iron requirement for the owner to move and not rebuild on the property. People are going to have to move from these locations sooner or later: move after the first major event, not the second, third, or fourth major event. Storey pointed to the US uncapped National Flood Insurance Programme, under which some homes had been rebuilt 40 times in the last 50 years. That doesnt help anyone. At this point, the Government has no plans for such a public scheme, Climate Change Minister Simon Watts told the Herald . The Government wants credible markets to support our climate transition, and we are not considering subsidising premiums for house insurance. Parliaments Finance and Expenditure Committee recommended the Government consider another objective: ensuring asset prices better reflected long-term natural hazard risk, which Watts said could be avoided by effective information sharing. Im considering the Committee recommendations carefully, and continuing to work on building a bipartisan approach to this difficult long-term challenge in ways which will help us to support an effective insurance market. With insurers already taking their own steps, Mercier questioned why New Zealand still didnt have a clear adaptation strategy in place. The Government has been working toward new legislation, but we still dont know what that will look like. In the meantime, councils are having to take an ad-hoc approach to managed retreat and property buy-outs, and development is still going on in risky places. In most places, too little is being done to prepare our communities for the increasing impacts of climate change, she said. Disappointingly, the recent cross-party inquiry on adaptation carried out by the Finance and Expenditure select committee once again failed to give any firm guidance on the question of who will pay. Yet, deciding who will pay for it is absolutely crucial to getting action on adaptation. If we didnt find a solution, she feared home premiums would rise much faster than they otherwise needed to. And the more homes we build on flood plains where insurance premiums will quickly climb the greater the number of people who very soon wont be able to afford insurance. Insurance Council of New Zealand (ICNZ) chief executive Kris Faafoi acknowledges flood risk poses a sizeable challenge to the sector. Some public schemes may have worked in other countries, he says, but New Zealand needed to consider its unique hazard profile: Lloyds of London has ranked it as the second riskiest nation in the world . Turnbull felt New Zealand already had a good system in the NHC and the private sectors risk-based approach and voiced his scepticism at the idea of centralised insurance for flood impacts. He pointed to the fallout in Florida of last months Hurricane Milton. Up to two-thirds of all properties that were impacted in Florida had no insurance, and yet, Florida has one of the largest centralised pooling insurance programmes of anywhere in the world. Do you think its working? Because I really dont. Our government, he said, simply couldnt afford to cover every single property especially those built in the wrong places. This is a market where [private] insurance does a very, very good job: dont muck it around, Turnbull said. On the flipside, we do have a portion of New Zealand homes that are in the way of climate change, and flooding in particular this is the area that I would encourage councils, government and the insurance industry to work together and support a plan about building infrastructure. Faafoi ultimately wanted a cross-party political consensus on climate adaptation, and to ensure that regulators and industry were working together to prepare for longer-term challenges. The sector has signalled that it will support communities even as risks evolve with climate change, but New Zealand as a whole needs to take action to manage and reduce risk. Our largest general insurer, IAG NZ, said the countrys primary focus right now should be on reducing risk in our most hazard-prone communities, as this is the only way to keep people and property safe and insurance affordable. We are advocates for targeted and practical steps that will reduce risk, including stronger, more consistent planning rules and greater investment in infrastructure, an IAG spokesperson told the Herald . Local Government New Zealand similarly wanted more support and direction from central Government, including a new levy that councils could draw from. We would like the government to set out a clear formula to calculate the share of costs each actor in the system will be expected to pay for climate adaptation measures, a spokesperson said. This must account for the varied levels of support communities will need and their capacity to pay. Mercier said significant Government funding would be essential to help under-resourced councils get the work underway urgently. If the Government decides not to contribute to local adaptation efforts, then others ratepayers, for example will have to pick up the slack, she said. This will increase the risk that the costs of climate change will fall disproportionately on those who can least afford it such as those on low incomes, retirees, tenants, homeowners with low equity, or those with health issues or disabilities. Watts insisted adaptation remained a key priority to the Government and would be responding to the Parliament committees recommendations within weeks. One of the areas the adaptation framework is looking at is how best to address the uncertainty property owners have about what they can and cannot expect as support for adaptation, and what risks their property faces, Watts said. A key question New Zealand has to grapple with is how the costs should be shared, over time. We cant expect the Crown to foot all the costs. Watts added that managed retreat was just one option when it came to adaptation. The best adaptation solutions could look different in different places. Mercier said much groundwork was laid by the former Labour-led Government, which had planned a dedicated adaptation act before its resource management reforms were torn up after the election. Its up to the coalition government now, and I really hope theyll start moving a bit faster to lock down a framework and a funding strategy, she said. This is really an issue that cant wait much longer. Jamie Morton is a specialist in science and environmental reporting. He joined the Herald in 2011 and writes about everything from conservation and climate change to natural hazards and new technology. Sign up to The Daily H , a free newsletter curated by our editors and delivered straight to your inbox every weekday. Reminder, this is a Premium article and requires a subscription to read. One officer was bitten under the armpit and taken to hospital for checks.