Securing the future

Rising sea levels and other disasters could have a major impact on New Zealand in the future. With the Government announcing a climate emergency in December last year, how have insurance providers responded?

Chief Executive of AA Insurance, Chris Curtin, says that while it does not specifically make allowance for climate change and rising sea levels associated with it, the insurer looks at previous claims data for guidance.

“Every event is different, so when setting premium levels our pricing strategy is updated based on our claims experience,” he says.

For example, if a coastal city builds sea walls in preparation for rising sea levels, homeowners living near the ocean would be more likely to be able to buy insurance in the future. Insurance relies on many customers paying a relatively small amount in premiums to fund losses or claims, but this model only works when losses are unexpected and have a low chance of happening.

“Without mitigation, the risk of losing your home from rising sea levels may become more inevitable for some properties. If that occurs, then insurance would no longer be the solution to the problem,” Chris says.

“But if the risk of damage to the property is reduced, for example by building sea walls, this can help ensure ongoing access to insurance for losses caused by flooding. In situations where the risk wasn’t mitigated, insurance for flooding may become unavailable, but other events like fire and accidental damage may still be offered,” he says.

Considering the Government’s declaration of a climate emergency, Chris says a coordinated response between Government, councils, the insurance industry, businesses, and communities is needed for a balanced response to mitigation and adaption strategies.

“AA Insurance considers market conditions, including what a climate change emergency may mean, through our assessment of a property’s overall risk, which then helps us to calculate the appropriate price,” he says.

“There are companies that undertake modelling of risk for individual properties throughout New Zealand, reflecting factors such as closeness to the sea, a river or slope based on local government data and other data.

“Climate change means we’re seeing more frequent and severe weather events, sea level rise and droughts. These in turn lead to flooding and fires, which impact livelihoods and properties.”

In addition, Chris says the location of property developments has an impact on how those homes may be affected by climate change. This may prompt local authorities to consider building in lower-risk locations to prevent significant costs for insurers and property owners in the future.

"For AA Insurance, this means understanding the potential risk that climate change presents and providing affordable, accessible and appropriate cover.”

It is challenging for insurers to specifically plan for all natural disasters, as they are all different and have a varying impact on customers. However, what insurers do have is experience in dealing with natural disasters, and knowledge of how to scale-up and respond when something happens.

“We have a specific team of claims people who look after customers directly, including helping with repairs and organising temporary accommodation, should they need it,” he says.

When events are localised and damage is evident, the insurer applies mapping programmes to plot its insured properties.

“We can then proactively contact customers we suspect have been impacted. This also helps us prioritise where our event response teams need to assess damaged property,” he says.

Chris explains that data modelling for earthquakes, floods and windstorms helps to understand potential risks and likely costs from natural disasters, which is one component that contributes to a customer’s insurance premium. This forward planning means that when disaster strikes, the insurer can get on with the job of helping its customers during major disasters, such as the Christchurch earthquakes of 2010-12 and the flooding in Napier last year.

One way insurance companies prepare for disasters is through reinsurance, effectively insurance for the providers of insurance. This limits the insurer’s losses and helps keep premiums affordable.

Chris explains that reinsurance transfers some of the risk from the insurer, particularly from the costs associated with a natural disaster, and places it with reinsurers who have access to large amounts of capital.

Given Wellington’s potential for earthquakes, some insurers have moved to a risk-based assessment and have raised home insurance premiums there. Analysis from recent earthquakes are being applied to underlying earthquake models that are used to assess the risk. Chris says the results of these models may start to be reflected in insurance prices more broadly, as each insurer chooses how to apply this new information.

“Other insurers may also decide not to offer insurance for some particularly high-risk properties. The earthquake risk in Wellington is also a consideration for reinsurers, which will impact how much, and at what cost, insurers need to buy reinsurance. Insurers are required to ensure there is adequate cover, either in reinsurance or capital, to cover a one in 1000-year event in Wellington.”

“However, despite the uncertainty these once-in-a-lifetime events bring to the lives of Kiwis, one thing is guaranteed: the role of the insurer. And that’s to ensure we can be there for our customers before, during and after,” Chris says.