Despite lack of robust insurance data, academic Jonathan Boston says 'we can be pretty confident that affordability has been declining, and that insurance retreat, however small it might be at the moment, is going to increase rapidly'

We have to recognise that climate change constitutes a game changer, an academic says, and it requires a policy paradigm shift.

With New Zealand becoming increasingly exposed to natural hazard risk and extreme weather events, doubts hang over the future of insurance affordability and accessibility.

The country was a high-risk environment for property ownership with multiple and significant natural hazards, Victoria University of Wellington emeritus professor Jonathan Boston said on Wednesday, and that raised serious policy and fiscal issues.

“Because of climate change, those risks are increasing.”

Boston, along with Victoria University of Wellington professor Rebecca Bednarek, Helen Clark Foundation deputy director Kali Mercier and executive director Murray Bruges were part of a panel organised by the Helen Clark Foundation where they talked about reimagining home insurance in a climate-impacted world.

‘We can be pretty confident that affordability has been declining’

Boston, who has recently written a book on this topic, said from a global point of view, insurance losses had been increasing largely due to weather-related events which had driven up insurance premiums.

“It has meant that insurance affordability has been declining, and in some parts of the world, insurance retreat has been increasing. In other words, insurers are increasingly unwilling to provide cover for properties that are very vulnerable to damage,” he said.

Much of the same has been happening in New Zealand, he said. 

Since 2000, the price of house insurance has increased 916% - which consumer advocacy organisation Consumer NZ says is the biggest price rise for goods monitored by the Consumers Price Index (CPI) over the past 25 years. Alongside this, premiums have increased three times more than CPI inflation since 2011.

Boston said that increase had been general across the economy, but concentrated in areas that were more vulnerable to significant natural hazards risks such as places like Wellington.

“Many insurers have been increasingly adopting so-called risk-based pricing, in which they take a range of risks into account in setting their premiums such as flooding, earthquakes, landslips, and storm surge.

“Unfortunately, at the moment, we don't have robust data on affordability and availability issues, we don't know the extent, for example, of insurance retreat, but we can be pretty confident that affordability has been declining, and that retreat, however small it might be at the moment, is going to increase rapidly over time, particularly as a consequence of sea level rise.”

Boston said New Zealand had poor land-use planning and this was resulting in increased risk exposure, insufficient investment and risk avoidance.

“We have a large legacy risk with lots of properties in areas that weren’t previously thought to be at risk but which will become increasingly at risk due to climate change."

He also pointed to New Zealand’s “relatively small insurance market with concentrated ownership and a relative lack of competitiveness, which has been one of the factors that’s been contributing, in my view, and the view of others, to increased insurance costs”.

Boston also talked about the Natural Hazards Commission (NHC) which covers earthquakes, landslips, volcanic activity, hydrothermal activity, tsunami, storm or flood (land cover only) and fire (caused by the natural hazards it already covers).

He raised the question of whether the NHC should have its mandate extended to cover more weather-related perils.

So what are the ways forward?

Boston briefly put forward two approaches: a market model that focuses on individual responsibility, actuarial fairness and risk-related premiums or a social model that prioritises mutual responsibility, solidarity and "fairness in the face of divergent risks with flat rate or community-based premiums."

While both had their positives and negatives, Boston was in favour of a social approach. 

He said while some people might advocate to leave others to cope on their own and some may be able to manage in a market model; "the likely outcomes of relying on a market model going forward in the context of climate change will be increasing underinsurance and uninsurance, less economic and societal resilience ... more hardship, less social cohesion, higher fiscal costs, and so on."

A social model, he said, would; "minimise long-term societal costs from increasing natural hazard risk, minimise hardship and inequality, while at the same time retaining a viable private insurance market because that market helps protect properties and spreads the risk of different types of perils.”

But there was no silver bullet when it came to the social model, he said, and it would require an expansion of the NHC's role.

Boston said he believed there needed to be a review of the NHC’s levy setting and cover arrangement, and there was a case for a separate levy on land cover.

“There’s certainly a case for bespoke arrangements for communal property, particularly for Māori," Boston said.

“And we need to establish clear criteria to determine what constitutes insurance affordability, and then design or redesign our current means-tested subsidies for residential property insurance to ensure that to the greatest extent possible, homeowners are able to afford adequate cover for their properties, and all that will need to be phased in over a reasonable period of time," he said.

"The basic message of the social model is that you're not on your own. This is a collective endeavour to protect society over the long haul in the most cost-effective and fair way possible," Boston said.