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, according to a report by the Helen Clark Foundation and engineering consultants WSP.
The report – titled "Premiums Under Pressure – How climate change will reshape residential property insurance, and what to do about it" – says that home insurance premiums in New Zealand have faced steep increases over the past few years. Premiums are expected to rise further over time as more insurers move to adopt ‘risk-based pricing’ for flood hazards and as the impacts of climate change increase, pushing up costs for insurance companies and their international underwriters. Without effective policy measures, these pressures will result in unaffordable premiums for some properties, leading households to reduce, or cancel, their insurance cover.
The report says that New Zealand must act now to maintain high levels of residential insurance and help protect the country from an uncertain future. Failing to do so will mean not just personal hardship for those who find themselves underinsured after a disaster – it could also have significant fiscal impacts for the government.
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 Ms 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.”
Ms Mercier added, “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.”
Key recommendations include:
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Recognise the vital role of residential insurance in maintaining societal resilience in the context of increasing climate change-related risks.
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Avoid further developments in flood-risk areas that exceed agreed risk tolerances.
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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.
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Agree on 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.
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Develop a public residential insurance scheme or schemes to fill current and future gaps in insurance caused by climate change, especially for flood risk.
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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.