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Insurance, climate change and sharing risk

Insurance, climate change and sharing risk

First published in Energy and Environment on April 18, 2019.

Climate Change Minister James Shaw sees rising insurance premiums as an acceptable part of risk sharing as NZ deals with the economic impact of climate change.

His comments to an insurance conference came as the Earthquake Commission looks at the potential impact of it being left as the ‘insurer of last resort’ and local councils urge the Government to give some legal and policy clarity in the fraught area.

Shaw noted the impact of higher premiums or refusal to provide cover in the context of both seismic risk and sea level rise had a much more direct and stronger impact on private decision-making than the uncertainty of if or when extreme events might happen.

This had happened more internationally, but sea level rise was likely to have a significant impact on NZ’s urban development and infrastructure is in coastal areas. Though Shaw said in some area’s risks could be managed to ensure housing was still insurable.

"In others, where there is not a risk but a certainty, insurance withdrawal may be inevitable, and we need to look at how this can be managed."

Central government might bear some of the costs faced by landowners, but risk had to be shared with local government, individuals, and the insurance and banking industries.

A report on the Earthquake Commission shows it is also thinking about wider issues on what happens if the private sector withdraws insurance from some markets.

The Natural Disaster Fund was depleted by the Canterbury and Kaikoura earthquakes, and while it is being replenished and the Crown guarantees EQC’s ability to pay claims, it would require major assistance to deal with a large natural disaster. EQC is working to rebuild the Natural Disaster Fund to $1.75bn by 2030 with levies increased from 15 cents to 20 cents per $100 of cover to speed up the time it takes to rebuild the fund. Further increases could be on the horizon.

EQC is not responsible for providing cover for the direct consequences of climate change and sea level rise. However, as climate change may cause an increase in the frequency and severity of natural disasters and in particular storm events, EQC considers this when it is conducting financial modelling.

MPs in their review of the EQC expressed concerned about the possibility some properties will become uninsurable if a property was identified as being at high risk as a result of assumptions and extrapolations of data gathered.

The report said: “EQC said it has yet to see a significant number of cases where insurability has been an issue, but believes more may emerge. EQC has the ability to sell natural hazard insurance to those unable to obtain insurance in the private market. We hope not to see this becoming a frequent occurrence where it would be appropriate for private insurers to provide cover. EQC acknowledged that they are investigating the risks were they to become the insurer of last resort.”

Local Government NZ recently released a legal opinion from Jack Hodder QC which highlighted the absence of national climate change adaptation guidance, effectively leaving it to the courts to decide how to remedy climate change-related harms.

On one hand there was no legislative framework to support decisions on climate change risks. On the other hand, ratepayers – through councils – potentially faced significant costs through legal action by not adequately factoring climate risks into their decision-making, that subsequently result in physical or economic harm.

First published in Energy and Environment on April 18, 2019.

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