A major insurer is eyeing risk-based pricing for coastal erosion, in what's being described as another symbolic step by the industry to confront climate threats. Photo / Brett Phibbs
A major insurer is eyeing risk-based pricing for coastal erosion, in what's being described as another symbolic step by the industry to confront climate threats. Photo / Brett Phibbs
A major insurer is eyeing risk-based pricing for coastal erosion, in what's being described as another landmark step by the industry to confront climate threats.
Last year, Tower became New Zealand's first insurer to introduce a new pricing model based on individual homes' risk of flooding from rainfall and rivers – and to make such ratings public.
It meant about 100,000 customers received either a low, medium or high rating for their home, reflecting the potential risk of a flood and the estimated cost of replacing or repairing.
About one in 10 customers received a small hike in the flood risk portion of their premiums – while a few hundred that received a high or very high ratings saw increases of more than $500 a year.
In some cases, the company needed to find customers alternative insurance cover, chief executive Blair Turnbull told the Herald.
"What we really wanted to do was help people understand their home and the risks that apply to them – but also then reflect that in the premium."
Insurance premiums were made up of many parts – such as insuring for damage from fire, accidents, burglary and weather events – and the flood risk portion of Tower policies were now matched to ratings specific to addresses.
While its flood risk ratings currently didn't extend to coastal erosion, that is set to change, with the company planning to target that risk next year.
The model underpinning the flood risk itself was being built by global company Risk Management Solutions (RMS) using data from institutions including councils, Niwa and Land Information New Zealand.
It drew on an analysis based on 50,000 years of continuous simulation of the entire precipitation cycle and all sources of flood – pluvial and fluvial – resulting in a catalogue of 350,000 simulated events.
According to New Zealand's most recent risk assessment, 72,065 people live in areas exposed to once-a-century coastal inundation flood risk, while about 675,500 live in areas prone to inland flooding.
But those figures are almost certainly underestimates.
One major new sea level rise study found that, in vast swathes of our coastline, one-in-100-year extreme flooding could become an annual occurrence within two decades.
While that modelling refined risk to two-kilometre blocks of coastline, Tower wanted to bring the resolution right down to individual coastal properties.
Global sea-level rise of 25-30 cm by 2060 is unavoidable regardless of our future emissions pathway. But in many of NZ’s most populated regions vertical land movements mean these changes may happen 20 to 30 years sooner than previously expected https://t.co/AC9EsguIJ3pic.twitter.com/IX2ovlb7lc
Its plan was to test it with customers, then share the data with councils and Government, before making it public.
"We definitely want to get the model right, and we're working with the University of Waikato and two or three other global modellers."
Turnbull said the worsening impacts of extreme weather in New Zealand – insurers paid out close to $200m for related claims over the last financial year – were worrying.
"Those storms that everyone expects in the tropics are now bearing down on us, with increasing frequency."
Turnbull said that, while it was Tower's preferred approach, not all insurers favoured risk-based pricing, with some instead choosing to put embargoes on providing cover in certain areas of the country.
This week, IAG chief executive Amanda Whiting told the Herald the company was looking to adopt more risk-based pricing to avoid customers in low-risk areas subsidising those in high-risk ones – but that wasn't on the immediate horizon.
"I can't put a timeline on it, but it's not in the next couple of years."
Turnbull said Tower's continuing stance was to not use embargoes.
"What we do say, is we will offer a price, [and that price] will reflect the risk of your home in that area."
But he acknowledged that, as climate-driven impacts gradually worsened, the proportion of customers currently unaffected by hikes from flood-risk ratings could change.
"If the frequency and severity of floods continue, like we've seen them, there is certainly that risk."
He welcomed the Government's just-released National Adaptation Plan for climate change, which detailed 120 actions to be carried out over the next six years, but left open the question of who should pay for what.
By the end of this year, the Government also expected to receive advice on flood insurance options, which would give more clarity on how costs would be shared.
And next year, law changes would require companies to disclose climate-related risks and councils to include more hazard information in property LIM reports, and enable vulnerable assets to be moved from high-risk areas.
"My overriding personal view, but also Tower's view, is that we need to pay much greater attention to not building on flood-prone areas."
That point was echoed by IAG, which, among a suggested three-point plan to address climate risk, called on the Government to implement a National Policy Statement that would cease development in these spots.
Whiting meanwhile maintained it would be unnecessary, at this point, for a Crown entity like the Earthquake Commission to cover flood risk.
Rough estimates put the cost of losing properties and assets in coastal and floodplain areas threatened by climate impacts at about $145 billion. Photo / George Novak
The Treasury is investigating if a state flood insurer should be established, and plans to report back to the Government by the end of the year.
"It might be the best idea in the world, but right now I don't think we need it," Whiting said, noting insurance remained available and affordable.
She feared a state insurer could create a moral hazard by removing the incentive for people to retreat from high-risk areas, knowing a state insurer would bail them out in the event of a flood.
Insurance retreat inevitable: expert
That's a risk that's also been repeatedly flagged by climate economist and modeller Belinda Storey, who this week warned that million-dollar properties on Wellington's Petone foreshore could cost as much as $100,000 to insure within two decades.
In all, rough estimates put the cost of losing properties and assets in coastal and floodplain areas threatened by climate impacts at about $145 billion.
Storey, of Climate Sigma, has also warned that homeowners living in seaside areas at risk of one-in-100-year flood events today could lose insurance within their lifetimes – and perhaps within the next 10 years.
She thought it was positive that, through its pricing model, Tower was sending a "much clearer signal" to homeowners about the risks their property faced.
But over the longer term, she saw insurance retreat from some locations as inevitable.
In a 2020 paper, Storey explored the risk for about 10,000 homes – a figure now likely closer to 40,000 - in Auckland, Wellington, Christchurch and Dunedin that lie in one-in-100-year coastal flood zones.
International experience and indications from New Zealand's insurance industry suggested companies start pulling out of insuring properties when disasters like floods become one-in-50-year events.
According to New Zealand's most recent risk assessment, 72,065 people live in areas exposed to once-a-century coastal inundation flood risk. Photo / Paul Taylor
By the time homeowners' exposure had risen to one-in-20-year occurrences, the cost of insurance premiums and excesses will have climbed sharply - if insurance could be renewed at all.
Hundreds of homeowners in Auckland with current median coastal flood premiums for once-in-a-century events of $2000 could reach that one-in-20-year threshold with just 15cm of sea level rise.
If insurance was still available at that point, premiums would have soared to $10,000.
For the 1740 Wellington homes modelled in her study, median premiums could jump from $1800 to $8700 for seas 12cm higher.
The research also suggested just small increases in sea level would likely cause at least partial retreat by insurers for most of those 10,000 homes, within 15 years.
"The other thing we'll likely see is companies will stop insuring some hazards – and they'll be the hazards most likely to cause you damage," Storey said.
"That will have quite a big impact for New Zealand, which is unusual in that we have what's called all-peril insurance where hazards are bundled together.
"We think it's likely that insurers will start unbundling, or saying that flood insurance is optional in certain locations.
"This would have significant implications for the entire insurance market, because once you've unbundled flood insurance, you'd be very tempted to unbundle earthquake insurance."
Because the Government was trying to develop policy on it, Storey wanted insurers to go further by telling its regulators whenever they retreat from a property.
She was also concerned that insurers might increasingly lobby for the Government and councils to fund mitigation measures like stop-banks and sea walls that wouldn't provide long-term protection against climate impacts.
"The big problem I have with that is there is a massive disconnect between the payback period for that intervention, and the promise of insurance availability in these places."
