By Jenée Tibshraeny
Climate Change Minister James Shaw isn’t concerned insurers and banks will beat the Government to it, and end up being the ones to effectively decide who pays for climate change.
Rather he says insurers are “acting very responsibly” and working with the Government as it figures out how to spread the financial burden of climate change.
Insurers made headlines in 2018, as their moves to price premiums in a more granular way sent a number of premiums through the roof.
While the availability of data has meant insurers have largely applied this risk-based pricing to earthquake risk, Robert Muir-Wood – the chief research officer of one of the world’s leading risk modellers RMS – at the end of last year told interest.co.nz his firm’s focus was turning to flood risk.
With property owners in the likes of Dunedin and the Hawke’s Bay already struggling to get insurance cover, one could argue insurers are deciding the rate at which coastal retreat occurs. Or how climate change is mitigated against and adapted to.
KPMG NZ’s sustainable value director, Charles Ehrhart, in November told interest.co.nz policymakers should keep an eye on the social repercussions of risk-based pricing.
The Reserve Bank, in its latest Financial Stability Report, also warned of risk-based pricing, taken to the extreme reducing the “risk-pooling benefits that insurance provides”.
Governor Adrian Orr added the regulator was making sure insurers were thinking about climate change long-term and not just seeing risk-based pricing as a money grab.
Nonetheless, Shaw doesn’t believe insurers and banks, equipped with the power to decide what they insure and what they finance, are dictating how the country deals with climate risk.
“They [insurers] do have a role to play and they are thinking about their pricing models and how this is going to go, and obviously that’ll affect the eventual outcome. But no, we’re working on this together,” he says.
“I think they completely understand that.”
Asked how concerned he is about the fact the general insurance market is dominated by two Australian-owned companies – IAG and Suncorp – so if one makes major policy or premium changes, or even decides to retreat from the New Zealand market, the effect could be detrimental, Shaw responds: “There are also risks to the insurance companies themselves.
“If they made any massive sudden moves that caused a shock in the economy that would actually blow back on them.
“It would have an impact on the banks, it would have an impact on their customers and that wouldn’t work out terribly well for the insurance companies themselves.
“They are in my view treading through this quite carefully and quite methodically.”
Govt working on model to distribute costs of climate change
Shaw’s comments follow Local Government New Zealand (LGNZ) on Thursday releasing a report that recommends central and local government form a “National Climate Change Adaptation Fund” to “ensure that costs of adaptation are shared equally, and do not over impact lower socioeconomic households”.
The research concluded $5.1 billion of local government infrastructure (roads, water networks, buildings, etc) was at risk if sea levels rose by a metre, $7.8 billion if these rose by 1.5 metres and $14.1 billion if they rose by 3 metres.
Shaw acknowledges central government will need to help local councils cover the costs associated with rising sea levels in the future.
He says work is underway to figure out how to split these costs, but it’s too early to talk about the funding models being considered, let alone put a date on when money will actually be put on the table.
Funding has been allocated, and Cabinet approval granted, for work on a National Climate Change Risk Assessment to begin in the first quarter of this financial year, ahead of the Zero Carbon Bill being passed by around July.
Part of the assessment will consider how the financial burden of climate impacts is spread.
“I think that there’s a model out there, which appropriately shares risk between private property owners, banks, insurance companies, local government and central government and does that in a way that doesn’t create any moral hazard,” Shaw says.
“Now that’s complex, and it’s worth taking the time to do…
“We don’t need that tomorrow, but what we do need to do is get started on it.”
The Government’s focus this year is getting a “more sophisticated view of what’s at risk, when is it likely to be at risk and how do you pay for it”.
Shaw wouldn’t be drawn on the funding models he’s mulling, saying he doesn’t want people to make decisions based on his comments at this stage.
He says he’s open to all options and not committed to any one option.
He recognises the LGNZ report saying there is a “window of roughly 25 years before government starts parking its ambulance at the bottom of a metaphorical hill”.
“There is some urgency, but there’s no need to panic,” Shaw says.
“But if we don’t act urgently, then we will be in a panic.”