How can we secure affordable home insurance for everyone?
Janine Starks is the author of www.moneytips.nz and a financial commentator with expertise in banking, personal finance and funds management. OPINION: Flash floods, cyclones and now tornados have torn around New Zealand. While some Kiwis face a terrible clean-up, the rest of us wonder how to secure affordable insurance in the face of these headwinds. We have already built in spots where premiums will keep rising. We cannot retreat. These houses have known risks , but the carpet isnt wet yet. READ MORE: * Why 'insurance retreat' will drive our housing market away from flood risk * 15 home insurance surprises that could come back to bite you * Where to now for house insurance after floods and a cyclone? * 'I call it sharing the pain': The options banks have for borrowers in hardship Unlike Gabrielle-ravaged areas , a government-funded decision to walk away isnt in the mix. The cheapest time to leave a site or accommodate higher floor levels is always at the foot of a disaster. It will probably remain our only viable retreat and accommodation route, because insurers are funding some of the bill . We face more premium increases in 2023 as insurance models gain accuracy about climate change. We cant blame insurers for this. Their function is to sell a clinical contract, keep pay-outs under control and make a margin for shareholders. They are a risk management tool for our government to work alongside. If they dont price policies correctly, or take too much risk, theyll blow themselves up commercially. And we dont need another virtual collapse like AMI. The Earthquake Commission Act of 1993 is about to be retired into the dusty cracks of history. It makes way for the equally dry Natural Hazards Insurance Act (NHI) kicking in from July 1, 2024. David Friar, a partner in the law firm Bell Gully, points out: The new Act continues to provide the first $300,000 of cover for residential buildings in respect of earthquakes, landslips, volcanos, tsunamis and hydrothermal activity. It doesnt cover these buildings if they were damaged or lost due to a flood or storm. That risk still lies fully with private insurers. The continued omission of floods and storms appears deliberate. For most other hazards we all pay the same levy and cross subsidise each other up to $300,000. Friar adds: Its also important that New Zealanders realise that rising sea levels are not considered a natural hazard they create gradual damage and are not covered by the new NHI Act or private insurers. In the US, homeowners suffer from an affordability and availability crisis. Only 30% of people had flood insurance during Hurricane Ian last year. Six small insurers became insolvent. In areas of poverty, only 1% of homeowners had insurance. The main supplier of flood and storm cover is from a state-backed scheme, not the private market and this is still too pricey for most. As climate change digs in, protecting high-risk homes is like agreeing to buy a slot machine that always pays out. Insurers retreat and homeowners face a total wipe-out . The US government steps in with small rescue packages to help with repairs or renting. This runs out quickly and Americans accept they have to start life again. Florida-style risk isnt what we face here in New Zealand, but it gives some insight into the extreme. Do we go British and wrap our high-risk properties in a subsidised flood scheme? Flood Re , as its known, has an average policy discount of 50%. Its not available on new-builds as its a bailout for existing homes only. Discounts are funded from a levy on other policy-holders. And heres the catch. Protection from climate change cant be offered indefinitely its not random enough. Flood Re is aiming for an expiry date of 2039. Boom, the Titanic hits the iceberg and homeowners are left with no life jackets. Its sink or swim, depending on whether you can afford the market price of flood insurance. This is perhaps why the New Zealand EQC levy doesnt cover flood damage to our homes and reduces cover to land only. How would we extract these climate change risks from a scheme with no expiry date? Actually, its as easy as deleting S24(5), which excludes floods and storms and reinstating it at a predetermined date. Public perception would be the barrier. The British do have an advantage over us. They have dense populations and money to afford flood prevention infrastructure, such as sluice gates. Councils hope to get more in place by 2039 and attract insurers back to the table. For others, they face plummeting property values, unless the scheme is extended. Worryingly, homeowners dont seem to twig to this. House prices hold up well in areas where Flood Re policies are necessary. The optics of the scheme appear to confuse buyers about their real risks. Many New Zealanders own a house in the vicinity of a river, stream, or in the direct line of coastal storms. Others live in high-rainfall cities with old pipe infrastructure and flash-flood risk. Some of us live inches above the ground on a low concrete slab. But before we throw each other under the insurance bus, we need to consider how we view this predicament as a society. Under all flavours of government, we tend to help people and prefer the bailout model. Whether thats investors in South Canterbury Finance, wage earners in the pandemic, Air New Zealand or red-zone victims in Christchurch, theres a package to avoid ruin. Affordability of flood and storm insurance points in one direction; community-rated insurance, rather than risk-rated. Low-risk homes cross subsidise high risk, until there is a forced retreat. Only government intervention can create a flood and storm affordability scheme. Our current EQC Act and future NHI Act dont cover our homes. Perhaps this is wise, so climate change isnt viewed as random with perpetual community-rated insurance expected. However we dress it up, we require some sort of bridging scheme to prevent our high-risk homeowners from failing to insure and facing a financial wipe out.