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Flooding, though not as costly as a major earthquake, is the most frequent natural hazard our country faces. Outside of the Canterbury and Kaikōura earthquakes, it contributes most to insured losses from natural hazard events.
Insured losses from all extreme weather events are on the rise due to climate change. Last year’s record insured loss in this category of $274 million has already been exceeded in 2021. Flood damage is a major contributor to those losses.
High tides and storm surges compound flood damage in low lying coastal areas. This effect will increase as sea level rise continues and extreme weather events become more frequent and severe. Extreme rain events are, of course, also related to major inland flooding events.
Academics have theorised that these factors could cause insurers to partially retreat from some locations in the 2030s, with full retreat occurring in the 2040s. Local communities are increasingly concerned about how to manage these risks and often wonder how insurers will respond. The Government is concerned that very high levels of insurance protection remain.
A raft of policy initiatives is in train with the objective of helping to manage these issues. With regard to land use, legislation to replace the Resource Management Act is expected to explicitly require local authorities to take the long view around managing climate risks.
For larger financial institutions, including insurers, mandatory climate-related disclosure obligations are coming. The Financial Market Authority expects such mandates will help ensure the effects of climate change are routinely considered in businesses’ investment, lending and underwriting decisions.
These will require disclosure of how reporting entities’ Governance, Risk Management, Strategy and Measures/Metrics are addressing climate risks. Investors will then be able to assess reporting entities based on comparable and consistent financial exposure data. Banks, in their role as long-term lenders, will also be better equipped to manage their own exposure to physical risks and allay concerns about financial stability. Climate related risks to the stability of the financial system are also a concern for the Reserve Bank of New Zealand. It is focusing on climate stress testing, initially for the banking sector, then for insurers.
All of these changes are welcomed because they go to the heart of what everyone needs to focus on - better understanding of risk enables better management and more precise pricing of that risk.
The insurance sector has much to contribute. By pricing to better reflect actual risk, insurers are well placed to communicate to their customers about their risks and potential options to reduce them.
Advances in flood modelling, more up-to-date and consistent flood mapping based on lidar technology to determine the height of land above sea-level, and better information on local hydrology are all improving understanding of risk.
Flood risk assessment at an individual property level is arguably fairer as area-wide pricing is blind to variations in vulnerability. Conversely, area-wide pricing may go some way to addressing concerns around the affordability and accessibility of cover by smoothing potential losses across a wider set of risks. Both approaches bring benefits and will reflect insurers’ own risk appetites and commercial strategies.
Calculating the annual average losses of properties in flood prone areas has other benefits. By drawing on future credible climate scenarios, loss data can be aggregated to inform cost-benefit analysis of measures needed to reduce these risks. In turn, this provides critical data to begin some hard conversations with communities, and across Government, about trade-offs, including where physical retreat may be a sensible long-term option.
If implemented well, all these developments stand to enhance the long-term resilience of communities, reduce the adverse economic, social and environmental impacts of climate change, and help keep insurance affordable and available. This approach underlines that climate risks are not just an issue for insurers, but for all of us.
