Climate change 'shifts insurers'

Climate change takes insurers outside the traditional "law of large numbers" philosophy, Tim Hardy, the international insurance law association AIDA’s climate change working party chair, told the NZILA conference.

He said insurers were being asked to bear the risk but also to finance adaptation. “It’s hard to assess the risks on a traditional basis. Past statistics won’t necessarily reflect future risks.”

Insurers had to improve their underwriting skills, customise policies and refine available data.

Mr Hardy said climate change was broader than property risks. As the burden of responsibility shifted, there was potential liability for failure to mitigate and adapt. For example, Holland was being held accountable for failing to “keep up with a pledge to mitigate against climate change”.

“Global rhetoric is often at odds with reality.” There were many good intentions, provided “someone else pays”.

Insurance and risk transfer were being seen as specific ways to achieve greenhouse gas neutrality, but the proposed responses “fall outside traditional risk”.

Mr Hardy said individual responses to climate change were often ahead of the government and corporate sectors. “Individual responses may be a bigger catalyst for change.”

AIDA’s climate change working party was trying to gather insurers’ wordings to assess how they responded to climate change risks but it was “slightly frustrating” that it was hard to get the documentation.

“I understand commercial sensitivities and the difficulties of pooling knowledge and expertise but we need a positive response from the market to identify the problems and seek solutions,” Mr Hardy said. 

Some carriers had conducted research and encouraged policyholders to make themselves more resilient. Sharing data with local authorities was “a necessary step, despite anxieties”.

Some insurers were reluctant to increase premiums for vulnerable properties because it affected their income streams.

“Wide, imaginative global collaboration is required,” Mr Hardy said. “Climate change is too often consigned to the ‘too difficult’ box.”

Insurance was traditionally “about winners and losers, but climate change is no game”.

Flood mitigation ‘needs funding’

In a separate presentation to the NZILA conference, Australia’s AIDA representative Chris Rodd said Australia allocated insufficient funding to flood risk mitigation.

For example, in 2012-13 the Queensland Government allocated only $41.9 million for four programs and the Federal Government allocated $104.4 million over four years. But the Federal Government spent $9 billion to rebuild Queensland after the 2010 and 2011 floods. The Queensland Government had not insured its infrastructure, but “expected other states to pay”.

Mr Rodd said too many areas remained vulnerable and there was a high reliance on emergency procedures.

Insurance pricing was “a race to the bottom for the basic product”. Aggregators were driving prices down and there was a plethora of cheap products with limited flood cover. But it remained unaffordable for those living on flood plains or in cyclone zones. Pricing was “contentious” for cyclone-prone far north Queensland.

“Whether you believe climate change is human induced or natural, it’s an assessment of risk, regardless of causation.”

Mr Rodd said Australia’s introduction of a standard definition of flood was “a bit of a side issue” because terminology was already similar among insurers, but it was “a way to sweep things under the carpet”.

Only 7% of Australian properties were exposed to repetitive flooding. Cover was available to all and 85% of property owners purchased it.

The 2011 National Disaster Insurance Review, chaired by John Trowbridge, recommended:
• Creating a Federal Government-sponsored agency to coordinate flood risk management and operate a system of premium discounts and a flood risk reinsurance facility, supported by a government-funding guarantee.
• That all home, home contents and home unit policies include flood cover, with a standard definition.
• Premium discounts so purchasers of home and home contents policies in flood risk areas could be eligible for discounts against the full cost of flood cover.
• The Federal Government guarantee claim payments whenever a funding shortfall occurred in the reinsurance facility.

Mr Rodd said most recommendations were ignored and the industry had argued against them.

The World Meteorological Organisation had said 2015 was the hottest year on record globally and 15 of the 16 warmest years had occurred in the last 100 years.

“For Australia, it is predicted we will experience storms and cyclones of greater severity and greater frequency,” Mr Rodd warned.

Meth labs ‘contaminate properties’

NZ underwriting agency Delta’s MD Ian Pollard told the NZILA conference NZ may have 20,000 to 30,000 properties contaminated from use as methamphetamine labs.

“No one knows” how may properties may be contaminated, but it was catastrophic for the housing industry and insurers. NZ had high methamphetamine use, with 3%-4% of the population using it because it was hard to import other illegal drugs but meth could be “cooked” in makeshift, clandestine laboratories, Mr Pollard said.

Criminals would “book a bach to cook a batch”, meaning they rented Kiwis’ holiday homes for temporary use as meth labs.

NZ’s environmental liability/pollution market’s annual premium income was now about $NZ4 million-$NZ5 million but Mr Pollard predicted it would rise to $NZ20 million over the next 20 years. Demand would be contractually driven and many brokers now recommended environmental liability cover.

Mr Pollard said pollution insurance was unlikely to become mandatory in NZ, unlike some Asian nations where it was required for high-risk industries, although “a lot of insurers don’t want high risk on their books”.

There was much demand in Christchurch for environmental liability cover because of the potential for asbestos in post-earthquake demolitions and rebuilds. Asbestos was NZ’s “number one workplace killer”.

Mr Pollard estimated the annual cost of pollution clean ups in NZ at $NZ4 billion. His agency writes pollution and environmental covers and said there were challenges in developing the product because of a lack of claims data. Delta conducted feasibility studies with brokers, then exposure analyses with Auckland University Business School before developing the policy wording with capacity provider Allied World.

Since the product’s October 2015 launch, Delta had bound nearly 50 policies and expected exponential growth.