Climate crisis: thousands of New Zealand households risk withdrawing insurance coverage

Thousands of seaside homes in New Zealand could face high insurance premiums, or even have some coverage removed within 15 years.

That’s the stark warning in a major new report assessing how insurers could be forced to cope with the country’s growing exposure to rising sea levels, prompting calls for urgent action from the government.

Nationwide, around 450,000 households currently within a kilometer of shoreline are likely to be affected by a combination of rising sea levels and more frequent and intense storms due to climate change.

The findings coincide with Prime Minister Jacinda Ardern poised to declare a climate change emergency in Parliament today.

The report, released through the government-funded Deep South Challenge, looked at the risk of around 10,000 households in Auckland, Wellington, Christchurch and Dunedin found in coastal areas of flooding one in 100 years.

That risk is expected to increase rapidly.

In Wellington, just another 10cm rise in sea level, expected in 2040, could increase the probability of a flood five times, making it a one event in 20 years.

International experience and indications from the New Zealand insurance industry suggest that companies begin to stop insuring properties when disasters such as floods turn into one-in-50-year events.

By the time the exposure has risen to one occurrence in every 20 years, the cost of premiums and insurance excesses will have increased dramatically, if the insurance could be renewed.

The report found that around 540 exposed houses in Auckland, with current median coastal flood premiums for one-time events in a century of $ 2,000, could reach that threshold of one in 20 years with just 15cm of sea level rise.

If insurance was still available at the time, premiums would have skyrocketed to $ 10,000.

For the 1,740 Wellington houses modeled, the average premiums could jump from $ 1,800 to $ 8,700 at 12 cm higher seas.

On the South Island, 4,850 properties in Christchurch and 3,100 in Dunedin could see a jump in premiums from $ 1,600 to $ 7,600 and $ 7,900, with 13 cm and 14 cm of sea level rise respectively.

The research also suggested that only small increases in sea level would likely cause an at least partial setback from insurers for most of those 10,000 households, within just 15 years.

Insurance was still a requirement for residential mortgages, and failure to maintain them could lead to defaults.

While mortgages were often granted with repayment periods of up to 30 years in New Zealand, insurance contracts were renewed annually.

An insurer could be out of a market in 12 months, while a lender could still have decades before its loans are due.

Despite the rules requiring mortgages to be insured, the general absence of compliance checks meant that banks currently did not know whether some properties they mortgaged remain insured after the first year of ownership.

New Zealand Insurance Council CEO Tim Grafton expected insurers to continue to flag weather risks through pricing and excesses.

“Insurers will likely continue to cover existing homeowners in areas of climate change or threatened by natural hazards, but we can expect premiums and excesses to rise,” he said.

“That could mean a floodplain property will have a $ 500 excess for fire damage, but a $ 10,000 excess for flood damage.

“However, some companies may choose not to acquire new customers in areas that have the highest known risk of sea level rise and flooding in 15 to 20 years.”

Insurers must work with clients to make sure they understand the reasons and costs involved in pricing certain risks, he said.

Meanwhile, homeowners continued to choose to buy, develop and renovate coastal properties, and new homes were being built in climate-risk locations, said the report’s lead author Dr. Belinda Storey of Climate Sigma.

“People tend to be very good at ignoring low probability events.

“This has been noticed internationally, even when there is significant risk facing a property.

“Although these events, like floods, are devastating, the low probability makes people think they are a long way off.”

Storey felt that market signals were not enough to effect the change and that the government could play a bigger role in informing owners of the risks.

Grafton said the sector continued to push for adaptation measures and backed a recent recommendation that the government create a dedicated Managed Retirement and Climate Change Act.

“We also strongly advocate for local government to take a 50 to 100 year long-term perspective and not consent to developments in high-risk areas,” he said.

“The sooner we adapt to our changing climate, the less it will cost us to adapt and the less we will be affected by the increasing frequency and severity of storms.”

New Zealand’s local government agreed to clearer rules, guiding where people could live and build, would also help city councils currently “caught between a rock and rising sea levels.”

“Certainty in the adaptation space would also help insurers and make their business model more sustainable and less prone to sudden changes in risk pricing,” said a spokesperson.

Climate Change Minister James Shaw said the risk at the national level had been mapped by an assessment published this year.

“Based on this, we are currently working on a National Adaptation Plan, which will establish how we plan to ensure that communities are more resistant to the impacts of climate change.”