A new report by the Helen Clark Foundation and engineering consultants WSP highlights a looming crisis for residential insurance in Aotearoa New Zealand. As climate-related extreme weather events escalate in frequency and intensity, ‘insurance retreat’ could leave thousands of properties unprotected.
An estimated 10,000 coastal properties in Auckland, Wellington, Christchurch, and Dunedin could become uninsurable by 2050 due to coastal erosion and inundation. Properties located in flood prone areas inland are similarly at risk.
The report – titled Premiums Under Pressure – How climate change will reshape residential property insurance, and what to do about it – finds that, without intervention, residential insurance premiums for flood prone properties will continue to rise steeply and become unaffordable for many, with insurers eventually expected to withdraw flood coverage altogether for the most at-risk properties.
Low-income households and communities will be disproportionately affected, with unaffordable premiums likely to leave many without coverage just when they need it most. This poses a serious social equity issue for the nation.
As insurers adopt ‘risk-based pricing’ due to climate change impacts, WSP Fellow and report author Kali Mercier says the thorny challenge facing policymakers is how to keep premiums accessible and affordable.
Maintaining high residential insurance coverage, especially for floods, is critical to safeguard the country’s economic and social resilience in the face of climate change, and to keep people in vulnerable locations from falling into poverty when weather-related disasters strike. Insurance helps individuals, communities, and the country as a whole bounce back from climate-related shocks.
There are several potential options to keep insurance accessible and affordable, and as a country we need to urgently decide which we are going to adopt. Some of the more promising include subsidies for those who can’t afford insurance, standardisation of insurance policies (so people know what they are covered for), and making pricing criteria more transparent. We also need to ensure that the insurance market remains as competitive as possible.
Among a suite of detailed recommendations, the report urges policymakers to stop inappropriate development in flood zones, flood-prone areas, and those coastal locations that are likely to become uninsurable within decades. The country must also invest in risk mitigation and climate adaptation measures to keep residential insurance premiums lower, for longer. For some properties, this will include a planned process of relocation to safer locations. The report recommends that the Government start planning now to develop a public residential flood insurance scheme, as other countries such as the United Kingdom and France have done. Such a scheme would fill a number of insurance ‘protection gaps’ as they arise, so that insurance remains accessible – though only for properties that are still safe to live in, and that meet agreed flood risk tolerance thresholds.
Richard Woods, service line leader for risk and resilience at WSP, says it’s uncertain just when, and in what form, insurance retreat will occur, but it’s inevitable in the not-too-distant future and is something that needs to be prepared for now.
He points to the devastating flooding and cyclone events of February 2023, which paid out over $2 billion in insurance claims.
These and other climate change-related extreme weather events are still very fresh in peoples’ minds. They’re a reminder that climate change is more than just an environmental issue. It’s a pressing economic and social challenge for communities.
The country is just one major disaster away from insurance retreat becoming a much more complex problem than it already is. We need a collaborative approach to adaptation and retreat, where decisions by insurance companies complement democratic decision-making about how we adapt to climate change, rather than leading it.
This report and its recommendations are intended to spark a serious conversation about how to maintain New Zealand’s current high level of residential home insurance. Our approach to insurance must evolve; it should support community resilience, not leave people behind.
The future of residential insurance depends on our willingness to act now, or we face a crisis that could engulf our most vulnerable communities. With a government work programme on climate adaptation and risk assessment well underway, now is the time to be having that discussion.
Key report recommendations include:
- Recognise the vital role of residential insurance in maintaining societal resilience in the context of increasing climate change-related risks.
- Avoid further developments in flood-risk areas that exceed agreed risk tolerances.
- Invest in climate risk mitigation and adaptation to keep residential insurance premiums accessible and affordable for longer. This must include setting out clear responsibilities and decision-making processes for how adaptation will be planned, funded and implemented at national and local levels.
- Agree a framework and a funding model for planned relocation for homes in risky areas where other types of intervention are not cost-effective or technically viable.
- Develop a public residential insurance scheme or schemes to fill current and future gaps in insurance caused by climate change, especially for flood risk.
- Consider other interventions in the residential insurance and financial markets to maintain high levels of insurance penetration, such as:
- Subsidising premiums for some homeowners.
- Standardising and simplifying insurance contracts.
- Agreeing on the level of transparency that is expected from insurance companies about how they make decisions affecting premiums prices.
- Monitoring and promoting competition in the insurance market.
