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New Zealand is a highly insured country relative to many others for residential property. This brings with it many benefits. For instance, when catastrophe strikes, as it did in Canterbury and Kaikoura, funds were available for rebuild and recovery without the need to call on the Government or taxpayers.
In many other countries, the absence or lack of insurance has left people dependent on uncertain and far less generous support from the State.
Lloyd’s of London has undertaken research that establishes that New Zealand is the second most risky country to natural hazards as measured by the average annual losses over 100 years in relation to the size of our economy. We are second to Bangladesh.
It is therefore important that we remain well insured. However, insurance is only one of four elements in the management of risk. Insurance is that part which accepts the transfer of risk.
The other three elements are the control of risk, the avoidance of risk and the acceptance of risk. New Zealand has failed over many decades to manage the natural hazard risks we face though there is a public perception that we do this well.
Property risk is created by where we choose to develop and how we build on it. We have managed to locate our capital city in one of the highest seismic risk areas of the country. We even have plaques on Lambton Quay pointing out how much property is built on what was once water and now lies on soft, vulnerable soil.
We have constructed billions of dollars of property close to the sea, on cliff-tops and on flood plains. So, we have done a very good job creating, but not avoiding risk.
Although successively over the decades we have revised building codes that have contributed to creating a more resilient housing stock, there are glaring gaps.
Commercial property owners have been encouraged by building regulators to construct to New Building Standards (NBS) that largely reflect life risk measures. While we need to minimise life risks, this measure does little to give confidence that a high NBS building is resilient and will not become a write-off after an earthquake.
This vulnerability was brought to stark realisation by the 2016 Kaikoura earthquake, epicentre 200km south of Wellington, which created well over a billion dollars of damage to commercial property in the city. Buildings constructed in the last decade or two, and to well above 100% of the NBS, were written off.
For commercial property owners we have also created a legal requirement under the Unit Titles Act that makes it illegal for owners not to fully insure. Consequently, the other risk management mechanism, acceptance of risk, is not available.
The net effect is that risk management is not well balanced, but heavily reliant on risk transfer. The problem this creates is that the risk is underpinned almost entirely by the availability and pricing of risk capital.
Understanding risk is important for insurers. Much has been learned from the recent catastrophes and modelling companies who inform insurers about the probable maximum loss they face from the risks they accept. This can affect insurers’ appetite to take on risk and if they are prepared to accept the risk, the price they charge.
In the years to come with sea-level rise and other climate risks becoming more intense in their impact, insurers will gain more understanding of the risks they accept. If we want New Zealand to be well insured, so insurance is affordable and accessible, we must enable the full range of risk management tools to be applied. Business as usual is not an option.
High insurance premiums are the canary in the mine. The real answer to this signal rests not with insurers alone, but with government, councils, regulators, banks, developers, engineers, building owners and so on. We need to manage risk much better.
