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Tower CEO Blair Turnbull says reinsurers are questioning their down under exposure, he sees a risk of uninsurable areas in the future

Insurance / news
Tower CEO Blair Turnbull says reinsurers are questioning their down under exposure, he sees a risk of uninsurable areas in the future
[updated]
Of Interest podcast
Illustration by Ross Payne

By Gareth Vaughan

Fresh from meeting with international reinsurers, Tower CEO Blair Turnbull says they are "questioning whether they want to be down under."

Turnbull spoke to interest.co.nz for the latest episode of our Of Interest Podcast about insurance and climate change.

Reinsurers are highlighting they've taken losses for several years in a row, Turnbull said.

"And they are looking very closely, as you would expect, about where they want to have insurance for insurers. And especially more recently with the floods in Australia, which are record $4 [billion] to $5 billion events, they are questioning whether they want to be down under. And that's a concern for us because we rely on that capacity. In our case we have catastrophe cover up to just below $1 billion, and we need that cover."

Reinsurance is often described as insurance for insurance companies like Tower, allowing them to transfer some of the financial risk they assume when issuing insurance policies to a reinsurer.

Turnbull said Tower's highlighting to reinsurers that New Zealand is not Australia. Although we too have floods, they're typically pluvial and fluvial, and not on the scale of Australia's inland river flooding where there are huge catchment areas.

"So what we're saying to reinsurers is 'please don't join us together and say you're the same. We're quite different and the nature of those storm events are quite different.' I think also in the case of Tower what reinsurers do like is things like risk-based pricing because we are working with customers and communities to really understand it, and to help mitigate it, and to also price appropriately for it."

Turnbull also spoke about the Government's draft national adaptation plan, which is currently open for consultation. When the draft plan was released in April, Climate Change Minister James Shaw said it was designed to help communities across New Zealand "adapt to the unavoidable impacts of climate change." The draft plan includes discussion of managed retreat, or moving people, property and infrastructure away from areas at high risk.

"We don't have uninsurable pockets at the moment, but if we look forward and these trends continue, that is a risk. So plans like the national adaptation plan, those discussions, the Natural Hazards Bill that's going through [parliament], that's really, really important to now start informing ourselves and responding," Turnbull said.

In the podcast he also talks about wanting councils to stop issuing consents that enable building in flood prone areas, on top of "a lot of newer subdivisions that are [already] in areas prone to flooding and that is causing problems."

He also talks about the impact of climate change on businesses and rural areas, what Tower's data tells it about the frequency and severity of major weather events, Westport and Buller's efforts to improve flood resilience, the recent floods in Canterbury and Kumeu, the UK's reinsurance scheme Flood Re, and much more.

"Today we don't have uninsurable areas but we want to make sure we don't have them in the future and that's the reason we must take action," Turnbull said. "The key thing about the national adaptation plan is we're round the table talking about it."

The final version of the adaptation plan is scheduled to be published in August, with a Climate Adaptation Act set to follow.

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26 Comments

the recent floods in Canterbury and Kumeu

Better buckle up then. That Kumeu/Huapai/Riverhead triangle is taking on a huge amount of new housing over the next few years, and it doesn't look like much thought has been given to how those areas would cope with a Tasman Tempest-level event. 

But that's the downside of forcing all of your development into the outer areas because inner city residents don't want to be confronted by the poors as they go about their daily lives. Eventually you're going to run into the limits of what is and isn't realistically insurable land. 

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Yes, it's crazy that councils are still enabling development in areas that are going to get hammered by floods in years to come, or be affected by sea level rise. Even Whakatane District Council, which is concluding a 18 year managed retreat project in Matatā was, during that process selling council-owned land for residential development that was prime real estate for storm surges and sea level rise.

Kapiti District Council was on the right track years ago when they were putting sea level rise risk on LIMs. That decision was overturned by a court because the council didn't follow due process, but it was the right call.

People get a LIM often when they buy a house. They don't usually (unlike me) check flood maps before purchasing to see whether they're at risk of insurance retreat. Info about risks like flooding should be on LIMs. Then the market can play a greater role in managing prices and ratepayers won't have to bail out fools who bought a flood prone house, and we don't have to endure them squealing in the media when their risk-based insurance premiums are $6000 p.a.

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Believe it was 1936 or '37 the Kapiti Coast was hit by two tropical cyclones in less than two months. These caused devastation along the coastline, at a time when there was considerably less built up areas. Westerly gales, torrential rains coming down from the mountains, and high tides. On  Raumati beach tree stumps used to be visible still sticking out of the sand. Over time these things do happen around NZ, regardless of the modern cultural narrative of climate change. 

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Kapiti District Council was on the right track years ago when they were putting sea level rise risk on LIMs.

All councils are required to put this type of hazard information on LIMs.  The problem KCDC had in court was that the information used to derive their new hazard lines was found to be inaccurate (i.e., the science was found faulty/not fit for the purpose of district planning)... as the PCE said about that situation:

In the Kapiti situation, Justice Williams concluded that there was  “a good argument”  for describing the result of the coastal assessment as the  “very worst case scenario”¹.  Judgements, such as those involved in adding safety margins or setting restrictions on development, should be made transparently by decision-makers, not rolled into technical assessments.

So, they tossed that out and more recently they started over again. 

NZ's coastal science community of consultants (and MFE as well) are over-egging the IPCC scientific findings to my mind.  MFE's guidance manual has created a totally NZ-only sea-level rise scenario that they call RCP8.5H+.  H+ standing for "high+" - meaning worse than the worst-case IPCC scenario (RCP8.5) - and more recently (last year in AR6) the IPCC has moved away from using that scenario for anything other than comparative purposes - as the scenario itself has been found to be implausible (i.e., it won't happen).

  

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Agree completely. We're still building and expanding under the assumption that things are the same as before. They're not. Climate change is here and we have to change our behaviours to match it. We need to change not only how we contribute to climate change (mitigating our emissions) but also how we act (adapting to the effects of climate change). The most interesting/flashiest example of this is that we will have to change how and where we build. We may even have to move existing towns.

Look at Westport. The place has been repeatedly flooded over the last ten years. The floods are more frequent and worse every time. Climate modelling says that as the climate gets worse, flooding will become even heavier and more frequent in that area. Westport is perfectly place to be repeatedly bowled over in the next ten to twenty years. It's not going to get better, only worse. And yet every time there's a flood in Westport, the council and central government stump up the cash and build everything back again, expecting things to somehow be better this time. At what point do you have to accept that you have to change your behaviour in the face of the changing climate (adapt or die)? 

If the country isn't proactive about changing our building behaviours, we're going to end up in a situation where:
1) We're flushing money down a drain out of pure stubbornness ('I don't want to move so I'll just build here again!')
2) We're slowing down the adaptation to climate change, prolonging the problem ('Don't leave the area of Westport and move on with your lives - let us keep building up your house so it can be bowled over by a flood again!')
3) We're stitching up the people who live in these areas, because eventually (as is set out in this article) the insurers and governments will cut off payments when the reality eventually sets in that things aren't going to change. Better to get people to move on now rather than hook them on a lifeline of perpetual insurance/government payouts that make the whole ordeal barely manageable - because eventually those payouts will end, and without those payouts it will no longer be viable to live there.

 

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Great comment.

Ultimately, though, events and circumstances will overtake the ability of even re-insurers to underwrite. Not just Climate - but all the systemic risks we see unfolding now. Laying-off bets onto the future, doesn't work when the future will be ever-smaller.

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Reinsurers have been able to overlook small markets like Australia and NZ for a very long time because even with our stupid property markets we represent chump change. Now things are happening in their primary markets, the reinsurers are looking more closely at their portfolios, and that's what we're seeing now.

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Australasia is not 'small' for reinsurers, it's a very significant market and slab of premium for them. For reinsurers who need to spread risk geographically it has always been a key diversification zone. I await with interested anticipation reinsurers confirming the assertion made by Turnbull on their behalf, that they are considering terminating their down under participation.           

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There's a term for #2: 'Moral hazard"

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"And yet every time there's a flood in Westport, the council and central government stump up the cash and build everything back again"

Are you sure taxpayers are paying for private losses? Doesn't ring true to me. And if it does happen, it shouldn't. 

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The maximum Government contribution for eligible damaged essential infrastructure is 60 percent of the rebuild or repair cost. The expectation is that councils have insurance for the rest.

Insurance cover and Government funding assistance relating to the rebuild or repair of damaged below ground and above ground essential infrastructure » National Emergency Management Agency (civildefence.govt.nz)

 

& for the scale of the costs:

Cost of natural disasters - ICNZ

 

 

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The Buller District Council proposed a sensible policy requiring the minimum floor height for houses to be at least 50cm above the level of a one in one-hundred year flood. And 60cm for critical community facilities for things like electricity and water supply. 
 

What happened? Vested property interests threatened court action until they backed down. 
 

https://stuff.co.nz/national/127286167/council-backs-down-on-floor-poli…

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I'm guessing they might not have mapped the areas of flood risk in their district plan at that stage?  If not, then a hazard area has not been legally defined.  Once a hazard area is legally defined, then the existing Building Act provisions can be lawfully implemented under s71 and 72;

https://www.legislation.govt.nz/act/public/2004/0072/latest/whole.html#DLM306818

71  Building on land subject to natural hazards

(1)

A building consent authority must refuse to grant a building consent for construction of a building, or major alterations to a building, if—

(a)

the land on which the building work is to be carried out is subject or is likely to be subject to 1 or more natural hazards; or

(b)

the building work is likely to accelerate, worsen, or result in a natural hazard on that land or any other property.

(2)

Subsection (1) does not apply if the building consent authority is satisfied that adequate provision has been or will be made to—

(a)

protect the land, building work, or other property referred to in that subsection from the natural hazard or hazards; or

(b)

restore any damage to that land or other property as a result of the building work.

(3)

In this section and sections 72 to 74, natural hazard means any of the following:

(a)

erosion (including coastal erosion, bank erosion, and sheet erosion):

(b)

falling debris (including soil, rock, snow, and ice):

(c)

subsidence:

(d)

inundation (including flooding, overland flow, storm surge, tidal effects, and ponding):

(e)

slippage.

 

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Agree completely. We're still building and expanding under the assumption that things are the same as before.

No better example than Auckland Council's support of NIMBYism and pushing development to the fringes, while its own silly zoning rules help drive up the cost of land and make infrastructure thus far more expensive. The council can't afford to maintain its own model of development.

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d.p.

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We might not have flooding like OZ but didn't we just recently have a fairly major event in Christchurch that cost insurers a shed load of money? If you're a re-insurer wouldn't our seismic activity look pretty unappealing?

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And don't forget Kaikoura.  I think that's why we have EQC - otherwise they'd (insurers and re-insurers) likely look at us with an even more discerning eye. 

I could be wrong because I haven't read the consultation paper yet, but an EQC-equivalent has been touted as a means to pay for any planned/managed retreat from coastal assets in the future (private homes being deemed 'red zoned' by virtue of plan changes (i.e., compensation like was paid to CHCH red zone and Matata properties).

Hornet's nest I think.  Tonkin & Taylor have just done a study on the cost of planned retreat in southern Hawkes Bay - these are the figures of current CV for all homes/properties needing to retreat within a 50-100 year timeframe:

Haumoana = $58,536,000. 

Te Awanga = $101,053,000

 

 

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The difference Kate with Matata and the Chch redzone is that it was not foreseeable to the homeowners that their land would become uninhabitable. I have no problem that they are compensated by the public purse.

But losing your home to coastal erosion, flooding and sea level rise is foreseeable and the owner would have bought the property cheaper because of that. The government should state now that they are on their own and their is no obligation for government to defend the coastline.

I agree the whole thing is a hornets nest so the sooner we establish who pays the better. 

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Yes, it is most certainly a distinction that should be made - and at this stage, I'm of the same opinion as you.  Although note that it isn't just the "coastline" under threat - it is also the flooding associated with climate change.  So, not just coastal erosion by any means.  Indeed it is the flooding effects where freshwater sources meet the sea that are causing the most havoc in terms of insurance claims.

I say "at this stage" because I'm about to read the MFE consultation paper on a draft national adaptation plan, Managed retreat - so am yet to understand what the government is proposing with respect to compensation (or not) for managed/planned retreat.

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Appreciate your knowledge and opinions on this subject Kate. Keep it up.

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Laughing allt he way to the bank. Reinsurance and climate change scares. AKA Bootleggers and Baptists.

"First-half global catastrophe losses may be “lighter than average” – JPM

As a result, the analysts believe first-half 2022 catastrophe industry losses may be as low as $22 billion to $24 billion, which is well-below the 11-year average of $34 billion."

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Someone mentioned Kapiti being hit by storms and flooding in the 1930's, surely that's a typo??? 

 

 

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Perhaps that's before the stop banks were built on the lower end of the Waikanae river?

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Its not just insurance - finance for business in areas that have high risk of damage from climate issues is rising. I was talking to the head of agri section of a large bank about the recent storm on the East Coast and the massive slipping on farms damaging fences, tracks and just loosing all the grass (alongside massive amounts of sediment into river and ultimately the ocean floor). He can see the day when the bank wont bank these lands anymore or to a very low level as the business risk is high alongside the unsustainable environmental nature of the activity - this is driven by bank requirements and societal expectations. 

Insurance and finance is not a right - someone has to be prepared to take a risk you will pay it back and wont be washed away.

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At the end of day its the reinsurers in London/Europe who will decide what is covered and at what cost. I know a couple of these companies and its very interesting talking to them. You need to understand these are number/data driven people (ie brilliant math people) - they record events with an astonishing degree of accuracy now (many would be surprised the detail they have down to even in NZ) and use actuals against forward projections from the best data sets they can get.

The reality is their risk is rising quickly based upon this data and some are withdrawing as the risk is to high for them or else rising premiums become unaffordable. New entrants may have a dabble but the trend is set they tell me (and I see it in premiums and access to insurance!!).

Now these aren't green "save the world" types - they are 100% focused on making money and lots of it. In many ways this will drive change in the world as people can say what they like but these data driven (super bright) people will decide what happens re finance and insurance.

In my view we should not socialise these costs. There is ample warning out there and time to withdraw now - there will be loosers but life is not fair. I have friends who had beach front places, ie VV expensive, and have sold - based upon sea level rise - I can assure you these people are to the right of Atilla the Hun and its simply recognition of risk on their part. If people think the risk is not real they can buy - just dont come running with your hand out to the taxpayer if it turns out you are wrong.

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This view may not be popular - but here goes.

Insurance that is provided by shareholder owned companies will become less and less available and affordable as shareholders seek to minimise risks of loss events and still generate a return for their capital.  This will mean the continued division of their portfolios into smaller and smaller risk units of equal risk grading - which will become finer and finer as more information is obtained.  At the end the risk unit will become the household, property, or even specific asset.  Against that will be exclusions and first loss sharing cover that will exclude more and more of the ideosynchratic and non modelled risks of these individual areas until the risk profile of the loss will be a pure normal distribution and therefore no more than chance.  

At that stage the insurer owners will have achieved their objective - become the house in a global casino of insurance; and insurance will be no more than pure gambling - with as in all cases of gambling - the odds favouring the house.

Insurance however, is the POOLING of risks with people wiht common risk profiles.  Therefore, historically insurance has been a mutual business which allowed large reserves to be built up - and reinsurance was was for truely significant events.

However in the 80s, the neoliberal lie indicated that these sleepy giants should be privatised, and their lazy capital used to generate more wealth for the barrow boys and the like.  So generations of accumulated reserve capital was stolen from the system and put into private hands.  Regulators then realised they had to do something about this capital stripping and started to regulate - albeit in NZ terms about 30 years too late.

At the same time - to increase profits, and to hold less capital, reinsurance ballooned and risk based pricing was invested as something that was a fair deal for all - those wiht the risk should pay for the risk - an anathema of the concept of insurance - which was risk pooling.

What resulted was a larger and larger body of uninsured risk or uninsurable risk that ended up exiting from the market.  

And then the large events started happening more regularly - or to be more accurate - our spread across the planet and our built environment had reached a tipping point in growth that local disasters would result in material losses in nearly all instances - not just only the odd time built environment was hit.  And so who ended up having to pay - the community - through bail outs, buy outs and the like - and the insurance market retreated more and more into just a simple gamble.

We need an absolute over-hall of the insurance market - a banning of risk based pricing and exclusions; a requirement to hold capital to keep reinsurance at minimal levels; and finally, a banning of shareholder based insurance models - for all forms of insurance.  And then - if reinsurance does become too expensive for NZ - perhaps a NZ wide reinsurer to deal wiht the global market - rather than smaller pockets dealing wiht each other.

heretical I know - but the way we are going and have gone results directly in asset and wealth transfer to shareholders in the good times rather than reserve building; and social costs in the bad times - which we as a community end up paying.

And unfortunately the regulators such as the RBNZ do not see this issue - why - because their regulatory premise is built on the assumption that shareholder models are the only way forward, and do not recognise - as our ancestors did over 100 years ago - that pooled risk insurance is not gambling - but risk based insurance is; and should be regulated as gambling.

This doesn't change the issue around stupid decisioning - like building in flood plains and the like - and the corrupt practices around property development that we see all across Aotearoa

 

 

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