Insurance and climate change: what you need to know

The report warns that without intervention, New Zealanders could face extreme insurance premium increases or, in high-risk areas, insurance companies withdrawing completely. It calls for a united effort from Government, insurance planners and communities to build resilience and keep coverage affordable and within reach.

Insurance premiums have put pressure on household budgets in recent times. Statistics NZ data reveals that residential home insurance in New Zealand increased 19.5% on average for the year ended December 2024. Although the increases are not all attributed to climate change, Insurance Council of New Zealand (ICNZ) Chief Executive Kris Faafoi says it plays a starring role.

“There have been a number of factors recently impacting premiums, including inflation, crime, weather events, reinsurance rates and taxes and levies,” he explains. “The Reserve Bank reported in May 2024 that premiums tend to trend upwards after large scale natural events such as the 2023 Auckland Anniversary Weekend flooding and Cyclone Gabrielle, and we are still seeing some of the effects of that reflected in premium levels.”

It's little wonder. Those two catastrophic events resulted in over $3.8 billion in insurance claims and Treasury estimates the cost to the New Zealand economy is up to $14.5 billion. These were the second and third largest ever insurance events in New Zealand history and they happened within a fortnight of each other.

As more becomes known about natural hazards, Kiwi insurers are moving away from community-based pricing, where the costs of risk are spread evenly across many policy holders, toward greater risk-based pricing, a method used to calculate premiums based on the specific risks associated with the property.

“While globally there have been more frequent and severe weather events causing an increase in claims and reinsurance costs, insurers in New Zealand are continuing to access global reinsurance markets to protect themselves against the financial impact of one-off major events,” Kris says.

So, what else can we do about it? Kris says building resilience is key.

“The recent impact of extreme weather events on lives and property has brought the issue of resilience into sharper focus. It’s important New Zealand takes a long-term view on the risks from natural hazards as we face the prospect of more frequent and severe weather events.

“The impacts we are seeing from climate change require a collective approach, led by government, to make sure we don’t build in dumb places and that we are investing in infrastructure to protect communities. That also sends the right signals to global reinsurers that New Zealand is taking action to reduce risk and ensure insurance is affordable and accessible,” he says.

Now for some good news. In January, the Government committed to introduce new legislation on a Climate Adaptation framework later this year – an announcement welcomed by ICNZ as a positive step toward providing certainty for New Zealanders. 

“We support a framework that provides long term clarity and certainty around our response to climate change and creates a consistent approach nationally but allows for local flexibility. This can lead to community and local and central government action to plan for and mitigate the impact of climate related damage, which can then lead to more resilient, safer and stronger communities which will have greater access to affordable insurance.

 “We also support the Government’s goal of a cross-party solution to ensure New Zealand’s approach is enduring. Adapting to climate change requires a long-term political commitment as reinsurers and insurers need long-term policy and investment certainty for some of the likely actions and investments required to safeguard Kiwis and minimise the insurance protection gap.”

A proactive approach to adaptation now makes economic sense; research shows that every dollar we invest in it yields substantial economic benefits.

A robust policy framework for climate change adaptation would include legislation around things such as who pays for what, which properties are deemed too risky to inhabit, and how much compensation people should get if they have to relocate. But in its absence, Jonathan says government responses to climate-related disasters have been “reactive and ad hoc”, with different funding approaches being adopted over time.

“Developing new policies in the wake of disasters runs a variety of risks, including greater potential for inconsistencies, unfairness and greater future uncertainty. The longer we delay putting in place a national policy framework for planned relocation, the more pressure from at-risk property owners there will be for building new protective structures, yet in many cases more protection will not be a wise or cost-effective long-term solution. Furthermore, local councils have been reluctant to make decisions about property buyouts in the absence of a national policy framework regarding who pays for what and which owners are eligible for compensation and on what basis, hence planning processes have been delayed.”

Even the question of when to protect properties (through defensive structures like sea walls and stop banks) versus when to relocate is fraught, and there’s the issue of “building in dumb places” to overcome.  

While some councils are working on adaptation measures, within a year of the Auckland Anniversary Weekend floods, more than 1,400 new house consents were granted in flood plains in Tāmaki Makaurau. When these developments in high-risk locations get the green light, it understandably raises concerns that people and communities continue to be put in harm’s way. Jonathan says unfortunately under the current framework, Councils don’t always have a choice.

“Councils have limited statutory powers and are up against powerful vested interests (e.g. developers) with big pockets and a ready willingness to challenge council decisions through the courts. Councils are reluctant to spend ratepayer funds on court cases, especially if they risk losing the case.”

It’s another reason New Zealand’s legislative frameworks need to adapt and evolve in response to the growing impacts of climate change. For decades, New Zealand has had a framework in place for natural disaster insurance via our Natural Hazards Commission Toka Tū Ake (NHC, formerly EQC). It means that if you have a home insurance policy that includes fire cover, you also get NHC cover for earthquakes, landslides, volcanic activity, and tsunamis.

However, there are limits to this cover, both in terms of pay-out amounts and eligibility. This is because, with limited exceptions, flood damage is not included in the scheme.

“The first step must be a clear recognition by the wider community that our current policy framework for disaster insurance needs to evolve due to the growing and unprecedented impacts of climate change – and thus the need for a proper public debate about policy options and their respective advantages and disadvantages.”

There are many international natural disaster insurance models to learn from, including UK’s Flood Re (a joint initiative between the government and insurers to make the flood cover aspect of household insurance temporarily more affordable, while stronger resilience measures are put in place), and the Australian Cyclone Reinsurance Pool. Established in 2022, the pool is part of Australia’s broader strategy to ensure insurance remains accessible in regions highly exposed to natural disasters. Backed by a $10 billion government guarantee, it is designed to improve insurance affordability for homes and business in cyclone-prone areas.

As Jonathan and Kris say, a proper debate on what climate adaption measures will work best to protect New Zealanders from the longer-term impacts of climate change needs to happen.

While the challenges of climate adaptation in New Zealand are significant, there is momentum for understanding and overcoming them.

With growing collaboration, investment in resilience infrastructure, policy innovation, and a shift towards proactive risk management, New Zealand will be well placed to move beyond crisis response towards long-term solutions.