Climate change will continue to bring 'substantial financial costs', need for change urgent - Independent Reference Group says in document on adaptation framework

Larger and more frequent costs for the country. Financial strain after major events. People having declining insurance, insurance withdrawal and unaffordable insurance cover.

Those are just some of the things New Zealand could face if it doesn’t make changes to how it deals with climate change, a group put together by the Ministry for the Environment says. 

The Independent Reference Group (IRG) was created to test policy ideas and to look at challenges experienced by sectors who are affected by natural hazards and climate change. This includes Treaty partners, banks and insurers, local government and others - and the group is made up of people in these areas too.

“The need for change is urgent and critical,” the group says. “Because the current state is leading to New Zealand being inadequately prepared for climate change.”

The group released a document on Wednesday which shares its proposed approach for New Zealand’s adaptation framework. The Government has been working to create a framework for Aotearoa that can prepare people and sectors for natural hazards and other climate change impacts.

While the group looks at the current challenges, it also suggests some areas for change - this includes putting the onus on people to know the risks that come with their properties and to make their own decisions. "People should not expect buyouts, IRG says in the document. 

“Climate change will continue to bring substantial financial costs to the country. Failing to act or delaying decisions will not avoid or reduce the costs that New Zealand governments, businesses and individuals face.”

As we are

Below are the things the group highlights as current challenges: 

• There’s variable information on climate and hazards in Aotearoa which makes it expensive and hard for property owners to access or understand this type of information. 
• Property prices don’t reflect the risk properties face in areas exposed to things like floods, erosion or sea-level rise.
• Local government doesn’t have full power to manage natural hazard risks and the responsibilities can be vague.  
• Local government carries out most of the investm0ent in flood protection but it isn’t required to invest. 

IRG says funding can be challenging to propose if councils have “constrained” abilities to increase rates.

“The value of flood protection, and councils’ ability to pay for it, is likely to decrease as the effects of climate change increase."

• The expectation of central and local governments to cover costs for individual homeowners.

“There is no legal or policy framework to require or guide these decisions,” the group says.

While in the past central and local governments have offered buyouts, “these decisions reduce incentives for people to understand and manage their own risk, can distort property prices, and have given rise to an expectation that buyouts will continue, creating a moral hazard”. 

• Processes like those under the Resource Management Act for example, can be slow, uncertain and may face legal challenges.  
• It’s hard to talk to owners or communities about the possibility of retreating from areas.

“There is no clear or straightforward existing pathway to retreat from an area that faces unacceptable risk,” the group says. 

And these are impacts that the group identifies from the current settings

• Larger and more frequent costs for the country 

In the document, the group mentions Cyclone Gabrielle as being “New Zealand’s costliest non-earthquake natural disaster, with economic losses expected to exceed the NZ$2 billion to $4 billion of losses from the 2016 Kaikōura earthquake”. 

The group also brings up the 2023 North Island weather events as a whole, which is estimated to have caused between $9 billion to $14.5 billion in damage to physical assets. 

“They also set new benchmarks for the costliest weather events ever in New Zealand for insurers.”

• Financial strain and unmanaged social expectations after major events

Due to previous buyouts from local and central government, IRG says there’s “growing public expectation to cover them, given New Zealand’s recent history of ad-hoc buyouts.

“This potential demand for central government assistance is uncapped and growing as a result. Local government is also exposed to costs, given that previous approaches have included cost sharing for buyouts.” 

The group says $4.1 billion in household assets could face “serious harm over the next 30 years”. 

• Declining insurance, insurance withdrawal and unaffordable insurance cover

In the document, the group says global insurers (the insurers of New Zealand’s insurance companies) were reportedly surprised by the costs of the 2023 North Island weather events.

“As a result, they have increased their prices, and are asking New Zealand insurance companies to carry more of the initial loss.”

This is happening as recent climate change scenario analysis suggests average annual losses from things like floods, storms and coastal inundation could increase between 19% to 26% by 2050. 

“If left unaddressed, the rising risks will lead to increased costs for insurers, which may affect the cost and availability of insurance coverage. 

“There is a risk of insurance premiums becoming unaffordable, especially for areas more exposed to natural hazards. Some areas could see insurance retreat, where insurance companies decline to provide coverage assets facing high levels of known risk.”

• Government expenditure usually happens after a major event

Proactive risk-reduction planning and investment provides the opportunity to reduce overall costs, IRG says. 

“The Group notes that major events bring a wider cost to society than solely the financial costs of damage to physical assets.” 

• Disproportionate impact on some communities

Lower socioeconomic communities, Māori and rural communities could face disproportionate impacts. 

The group says Māori land and assets are “particularly exposed to climate-change-related risk”.

So are rural communities that may have small ratepayer bases, the group says, or those who are dependent on critical infrastructure assets like a single bridge.

As for lower socioeconomic communities, IRG says they may not have enough resources or opportunities to respond to risk. 

“As prices of properties that are highly exposed to climate-change-related risks fall, lower socioeconomic communities will be more likely to live in them, increasing their financial and physical vulnerability.” 

Change is needed across three broad areas, group says

The group recommends the country needs to make decisions with urgency in order to “move towards a mature adaptation framework to manage risks from climate change”.

Below is what they suggest:

• New Zealanders need to have fair warning about the way natural hazards could impact them, so they can make informed decisions

This means people having easy access to risk information, knowing what is being done to adapt to or manage risk and what the financial implications are, the group says.

This could provide opportunities for public and private sectors to reduce future costs when risks are fully understood - and understood early enough. 

• New Zealand should take the broadest interpretation of ‘beneficiary pays’ approach to funding the increased investment in risk reduction because of climate change

“This would mean those who benefit most from these investments contribute more,” the group says.

“Central government should contribute to investment where the investment will protect Crown assets, or where broader national benefits can be realised. Central government investment or other financing strategies may be appropriate to help overcome challenges in particularly vulnerable areas, where there is less ability to pay.” 

• People and markets should adjust over time to a changing climate

“People should be responsible for knowing their risks and making their own decisions on whether to stay in a high-risk area or move away, unless there is a risk to life.

“Property values and the cost of ownership, such as insurance or mortgages, should reflect the changing level of risk,” the group says.

'People should not expect buyouts'

Any financial losses should be spread over time, IRG says.

"For example, the value of the property in a high-risk area might gradually decrease over time, meaning that the losses are gradually borne by successive owners, rather than only one owner bearing an abrupt fall in value.” 

The group says insurance and lending decisions should reflect up-to-date information about hazards and risks. “This would mean that riskier locations could be expected to have higher risk-adjusted premiums.” 

“The reverse must also be true,” the group says, “as people invest in actions that reduce risk, insurance premiums should adjust accordingly. This would illustrate to reinsurers that New Zealand is planning for the long term and taking positive action on risk reduction, to lessen the severity of problems in the future.”

The group see central government continuing to support those experiencing hardship, but says: “People should not expect buyouts. Following the transition period, the provision of hardship support should continue, but not be related to property values.” 

Māori communities should be “empowered and resourced to make local adaption decisions for whenua Māori and Māori assets”, IRG says.

Group calls for 20-year transition period

This time would allow New Zealand to “move towards sharing risks and costs over time, to smooth impacts on people’s well-being and on financial markets”. 

It would also give time for “fair warning” and people can adjust their expectations, the group says.