Step change response for climate change

By Resolve Editor Kate Tilley

Climate change will force insurers to rethink the types of products they offer, the NZILA conference was told.

In a panel session on the impacts of climate change on the industry, Insurance Council of New Zealand Te Kāhui Inihua o Aotearoa CEO Tim Grafton said 2023 was an extraordinary year for weather events in New Zealand. Two events within two weeks – the Auckland floods and Cyclone Gabrielle – generating greater losses than all prior events combined in this century.

“Is this the new normal? The scientific community says we need to step change the response to managing risk.”

Mr Grafton said the industry had the data to price the risk and therefore to incentivise resilience. Flood mitigation took time and required new private-public partnerships. “Mitigation is not just about insurability.”

Protection gaps

Where protection gaps existed, governments needed to understand the risk and “come to the party”. There was no benefit in subsidising insurance for people living in areas that flooded frequently. “Governments must enable insurance to provide risk signals, but that’s only part of the solution.”

Mr Grafton said there was currently a recovery response approach but political parties could not sit on their hands. Long-term funding was required to build resilience.

IAG NZ CEO Amanda Whiting said the industry needed to balance the desire to accurately price risk and reward good risk decisions – meaning those in high-risk areas paid more – with the desire to keep people insured to reduce the costs of post-disaster recovery.

“We need to balance risk signalling and recovery but those outcomes conflict in
high-risk areas, especially with climate change making events more frequent,” she said.

Ms Whiting advocated a three-step plan:

• Collaborate with governments in high-risk areas
• Stop making “dumb” decisions to build in flood-prone areas
• Introduce a national program to invest in flood risk reduction.

Beyond black swans

Scott Reeves, Head of New Markets at Munich Re Australasia, said climate change modelling showed more property assets were exposed to flooding. A 1-in-100-year event did not mean another would not occur for 99 years, but there was a 1% chance of it occurring.

While the chance of two major catastrophe events occurring in New Zealand in the same year was improbable, it showed the industry had “moved past black swan terminology”.

The modelling was reliable but “a directional read”. Modelling was largely built on “looking backwards” but underwriting teams had to factor in likely future loss amounts and inflation.

Ms Whiting said insurance was built on history to predict the future, but that was shifting, with greater consideration required about what was likely to occur, rather than just what had previously occurred.

Reconsider products

Mr Reeves said property owners must look at the total cost of ownership and make informed decisions about the cost of insurance in the future.

Asked how to guarantee insurance for the most vulnerable, Ms Whiting said insurers needed to consider different product offerings. Mr Grafton said the scale of the problem had to be quantified. “How many people are at high risk and can’t afford insurance?”

Mr Reeves said Munich Re was prepared to remain in the territories it was currently reinsuring, but some reinsurers had exited more vulnerable markets. “Who provides their capital and what’s their time horizon? If the capital wants quarterly earnings, there will be a mismatch.”

Asked whether insurers should stop providing contract works cover for new buildings being built in high-risk areas, Ms Whiting said individual insurers had to make their own commercial decisions. Mr Grafton said not providing cover in a competitive market was challenging, however, “we’re reaching the point where we must say: Do not build in stupid places”.

He said climate change disclosure regimes had imposed responsibilities on directors, with implications for D&O insurance. Climate change reporting needed “careful monitoring”.

Disclosure standards

Mr Reeves said Australia’s climate change disclosure standards gave companies an out initially, but there was a hidden catch. “Those that make the fast-mover advantage will gain more.”

Organisations that considered it too difficult faced potential value loss. “Get in early, even if it’s not a perfect response,” he advised.

Asked whether NZ needed to consider product options like catastrophe insurance only, Ms Whiting said coverage types may need to be more modular and digitisation may make that easier.

However, a property was probably an owner’s highest value asset. “Insurance is a shock absorber for things you haven’t planned for.”