Auckland Councillor says if politicians don’t take the lead on climate change adaptation, ‘it’s going to be done in a pretty blunt way because reinsurers are not going to back it up’

Climate change adaptation is going to happen so politicians have to push forward and empower communities, Auckland Councillor Richard Hills says.

“If we don’t do it as politicians, the banks and insurance companies are not going to lend and not going to insure anyway. So adaptation is going to be happening by the banks and the insurance companies," Hills said during a panel discussion last Thursday.

“Otherwise it’s going to be done in a pretty blunt way because the reinsurers are not going to back it up."

This panel discussion follows the Government's announcement of the National Adaptation Framework in October.

The framework includes creating a national flood map and introducing legislation clarifying the responsibility of local government by requiring adaptation plans in the highest priority areas.

Alongside this, the Government also made its intentions clear when it came to buyouts with a Cabinet paper saying its intent is to; "move towards an end state where the Crown no longer distorts risk signals and blunts incentive to manage risk by providing financial assistance where homeowners suffer significant losses after major events (especially in the form of residential property buyouts)."

The panel discussion was hosted by insurer Suncorp New Zealand and the Insurance Council of New Zealand (ICNZ) in Auckland as a way for people to unpack the adaptation framework.

The panel included Hills, Suncorp New Zealand Chief Executive Jimmy Higgins, Tonkin+Taylor New Zealand Chief Executive Penny Kneebone and ASB General Manager of Sustainability Carrie Gage. Climate Change Minister Simon Watts made a speech at the event and also took part in a panel question and answer session. 

Understanding our perils

ICNZ Chief Executive Kris Faafoi said when an ICNZ-led delegation to London met with global reinsurers earlier this year, they were clear about adaptation and that it wasn’t optional.

“It’s essential to protect people and keep insurance markets viable to attract and maintain global insurance capital,” Faafoi said. 

Higgins said the adaptation framework was “a hell of a start” but the devil would be in the details. 

“We know that there are areas within the four pillars [that make up the framework] that require more thought, more consideration - particularly around funding mechanisms and how we do this,” he said. 

Higgins, who was also part of the Independent Reference Group - a group put together by the Ministry for the Environment that shared a proposed approach for New Zealand’s adaptation framework in July, also took part in the trip to London.

When it came to what the reinsurers wanted to see in New Zealand in terms of keeping their appetite for risk and for capital deployment, Higgins said; “it’s quite clear they want to see New Zealand better understand its natural hazard risk, its perils”. 

The big dots

When it comes to who pays for adaptation, Watts said there was time between now and next May to refine aspects of that which he would be taking back to Cabinet. 

During the event, Watts was asked what advice he had as elected officials waited to get signals around what the Crown’s contribution would be in the future. He said high areas of risk would need to be prioritised. 

“Let’s focus on the big dots that are going to make the most impact … In the context around costing and consideration around that, the key conversation is what is the risk that we’re taking off the table and how does the risk correlate with, say, economic growth or other considerations.”

When asked by an audience member, how these high priority areas would be identified - as some councils were progressing faster than others when it came to climate change adaptation, Watts said: “I think that’s where the role of a central government is to step in here and identify, from what we can see, from our perspective of intervention…the areas of priority that are high risk.”

Officials were providing input but Watts said there would also be engagement with the local government sector as well as insurers and banks so that they had a good consensus around what is high priority.

Watts said they needed to identify those high priority areas and get those councils underway in terms of planning.

Not every council was the same size or had the same capabilities, Watts said.

“Central government aren’t head in the sand to that. We’re going to need to work and support local government on that process as well.”

Hills said: “If we don’t do it as politicians, the banks and insurance companies are not going to lend and not going to insure anyway so adaptation is going to be happening by the banks and the insurance companies.”

Hills said they had to push forward and empower communities when it comes to adaptation.

“Otherwise it’s going to be done in a pretty blunt way because the reinsurers are not going to back it up. So I think it’s clear that it has to be done.”

“But it will happen without us if politicians don’t help lead the conversation," Hills said.

Transparency

With the Government making it clear that it would not be footing the bill when it comes to buyouts, the question around who pays for adaptation have been consistently ongoing. 

Suncorp's Higgins said it was about trying to spread the financial cost in a different way.

“It’s not just homeowners that suffer the loss during natural hazards. It’s other entities that have got assets.”

“The Crown has got the biggest amount of assets that get disrupted whether it be roads, schools, hospitals,” Higgins said.

He also pointed out how business communities are impacted too, saying; “there’s an economic disruption to this”. 

“And so it’s trying to align who benefits from the investment, so that’s all about the cost of the natural disaster, but if you flip it and say, ‘well how do we prevent it or how do we build more resilience?’ That requires investment."

"So who benefits from the investment made in these areas that are higher priority for natural hazards? Well, it’s not just homeowners. It’s the Crown, it’s the councils, it’s business communities.

"It’s trying to think about that in the context of beneficiaries … It’s not something that necessarily has a clear answer to it today but it is one that we will need to get an answer to because everything hinges on that.” 

Hills said the responsibility going forward has to have some calculation from the Government. 

“It needs to be transparent. People won’t want to pay something that they don’t understand."

Hills said while it’s good to look ahead at 20 or 30 years from now but there would be an intermediary phase.

"Is it that we use the Super Fund somehow ... to set aside funding for when this pops up, and we can use it at least as a buffer for communities. Because I think if we just say we're not going to do buyouts again and we’re not going to do fast Government funding, then we are going to be very stuck.” 

Tonkin + Taylor New Zealand chief executive Penny Kneebone said: “I do think that very clear message in this framework about the value of investing before the damage not after is a really powerful piece of work and ultimately, it’s about fairness and clarity.”

“People deserve to know what sort of support they’re likely to get and they need to know what risk they carry. It’s not comfortable but we need to make that shift and help people understand that.”

ASB's Gage said the private sector has a critical role when it comes to adaptation - but it isn’t the only one. 

“[I] certainly appreciate the Government does have to be fiscally responsible but it is a critical enabler of capital,” Gage said. 

Gage said the local government had really pressured balance sheets so the path forward is partnership with all parties and seeing how all different groups can play a role. 

“Continued certainty, continued clarity is fundamental but the devil will be in the detail and looking to the value when you reduce risk before the event, I think will be something that we all need to think through and consider.”

An evolution of process

In his speech, Watts said: “I think it has not been lost on me as Minister or lost on Government or the Independent Reference Group, that we do have a role to send a signal acknowledging this is a multi-generational challenge.”

“There is a fiscal reality here that we cannot afford to continue just to write cheques in this area and that we need to ensure that responsibility and that accountability and that information that drives both of those aspects is more so available in a broad range and to all New Zealanders than where it is under the status quo.”

“That will be an evolution of a process but we must start on that journey,” Watts said. 

Watts said there was a layer of the population that they needed to be considerate around when it comes to information flow. 

“But in effect, there is a degree of personal responsibility that needs to be transitioned, and that is a process that as a government we’re signalling will be happening over the coming decades.”

“The reality is that more of these events are going to occur.

"The frequency and severity is probable to increase and as that risk grows, the market response and the way in which the market responds through its risk-based pricing is also going to be critical because if it doesn’t, it’s not going to be financially sustainable for the industry, nor for local government or central government, and actually not sustainable for homeowners or those that own property either.”

“We can’t put our head in the sand to just think this is an open chequebook scenario because it is fiscally not affordable for any Government to be able to continue to do that scale of investment or rebuild into the future,” Watts said.

More work to do

Higgins said insurers are risk-based pricing today.

“We are understanding our risk today. So we talk about price signals. I think homeowners [and] policyholders are getting more astute on understanding what their risk is and are starting to ask the right questions."

“And I think as an industry, it’s incumbent on us to be more upfront [and] clear on what makes up the premium and helping homeowners understand their risk,” Higgins said. 

“We need to pull people with us because the sophistication that’s happening now in risk-based pricing with artificial intelligence and data structures today is only going to accelerate in three to five years.”

In 20 years’ time, Higgins said it’ll be a completely different world when it comes to natural hazards and understanding natural hazard risk. 

“That’s why this framework is a really good first start … but we do know there’s more work to do and I think we’re up for it.”