Insurers’ ‘supporting role’ in natural hazard management

by Maryvonne Gray 28 Oct 2014

Insurers’ ‘supporting role’ in natural hazard management

The ability of the insurance sector to signal risk is hindered by multiple factors, according to a new ‘think piece’ produced by Local Government New Zealand.

The report, Managing natural hazard risk in New Zealand – towards more resilient communities, says theoretically the insurance sector could signal greater risk by increasing premiums or reducing cover through underwriting to remove excessive risk.

And with the increased adoption of risk-based pricing in the industry, further influence on land use and development towards more appropriate risk taking should be evident.

However, the effectiveness of those signals is being limited by factors such as the presence of the EQC; the fire service levy; the availability of risk data; the multi-hazard nature of insurance cover; and consumer attitudes towards insurance and affordability.

“Indeed, only around 30% of the cost of a typical home insurance policy relates to the risk present at the property,” the report says.

Banks and lending institutions could also play a role by adopting lending criteria that take account of the risk or loss or damage from natural hazard, it says, but in practice banks appear prepared to lend on any property that is insured.

While the EQC offers an important social service in terms of ensuring the affordability of insurance cover, it also mutes any price signals that might otherwise incentivise risk responsive behaviour by individual property owners, says the report.

“EQC is required to provide cover but has no input into the private investment decision. If a private insurance company is prepared to extend insurance cover that includes fire insurance, the EQC is obliged to also provide cover.

“These issues mean that risk signalling by insurers and lenders is not currently an efficient or effective means of influencing land use decisions.

“So, while it is tempting to think that many difficult and potentially costly public intervention decisions can be avoided by relying on financiers and insurers making decisions and pricing their service based on risk of natural hazards, theirs is a supporting role,” the report concludes.

The report emphasised the need for issue and place-specific responses to natural hazards, rather than a one size fits all approach, and called for integration and collaboration across the many players to develop and deliver effective responses.

The report found that while much is being done to manage the risks, it is not being coordinated with any real leadership and monitoring is poor.

The publication of the report coincides with the beginning of a four-day High Court hearing aimed at determining whether the EQC is liable to pay to remediate land that is at increased risk to flood damage due to the earthquakes.

In May, the EQC sought a declaratory judgment to test the way it hoped to settle claims that fall into the increased liquefaction vulnerability (ILV) and increased flooding vulnerability (IFV) categories.

It is hoped the judgment will clarify complex legal questions including whether it could settle claims on the basis of long-term loss of land value.

Sixteen lawyers representing the EQC, the Insurance Council of New Zealand, insurer Southern Response and a group of flood-prone residents known as the Flockton Cluster Group were in court, along with three high court judges.

To read the full Local Government report click here.