Tilting at windmills and tackling the real enemy

Tilting at windmills and tackling the real enemy | Insurance Business New Zealand

Tilting at windmills and tackling the real enemy

Over the past several months Westport has become the unenviable poster child for flooding.

More recently, the sight of residents sandbagging and then evacuating their homes evoked widespread public sympathy. The coasters’ stoic attitude, and now well practised response to the threat of flood, has made them more resilient despite the economic, social and environmental disruption they have sustained. However, it’s also clear that, for many, repeat flooding episodes are traumatic to deal with.

The long-term solution for Westport and other flood-prone areas is investment in measures to reduce the flood risk to a tolerable level. What is tolerable is for communities to determine and will need to be assessed alongside the cost.

There are examples where communities have acted to reduce flood risks. In Christchurch, the city council invested tens of millions of dollars to widen culverts and put in additional pumping stations to avert the frequent flooding in the city’s Flockton basin. These actions have meant that house insurance remains affordable and accessible.

Other councils, like the Porirua City Council and Northland Regional Council, have pro-actively informed insurers of mitigation measures they have undertaken which provides vital information to support ongoing insurance while reducing the economic and social impact of flood on their communities.

These councils know the real enemy is increasing climate change risk. They understand that insurance plays a major role in funding recovery and want it to stay that way. They also understand that unless mitigation action is taken insurance will, likely, in the long term, become less affordable and accessible in high-risk areas.

They are only too aware that much of the current cost of doing nothing to reduce flood risk falls to insurance. For instance, insurance played a huge role in funding the recovery from last July’s West Coast flood by paying out over $97 million in losses, with by far the lion’s share going to Westport, a town with a population a tad over 4,000.

As we all know insurance is not a bottomless pit of funds and nor does having it reduce risk. Underwriting must be sustainable in the interests of all policyholders. So, absent efforts to reduce risks when confronted with increasing frequency and intensity of flood events, we will see premiums change over time.  

There is the ability to price flood risk at an individual property level, which one insurer has moved to do, although there is no evidence yet that others are following suit. However, there is no market failure in New Zealand that should prompt Government to rush to intervene as has occurred elsewhere.

One such example is the UK’s Flood Re scheme borne from the situation where insurers had withdrawn flood insurance from flood prone areas despite their calls for action to be taken to invest in risk reduction. At the time, the UK government tilted its critical lance at insurers and market failure.

The target for those jabs should have been the real enemy, the neglect of adequate flood mitigation measures.

Flood Re charges all policyholders in order to subsidise premiums for those in flood-prone areas. The quid pro quo is supposed to be investment in flood mitigation by the government, but subsidising insurance cover for higher risk properties reduces the incentive on the government or councils to invest in doing that and masks risk signals.

It is legitimate to ask whether climate change impacts will see insurance become less affordable or available. At present, insurance remains available and affordable with over 95% of New Zealanders’ homes insured on an all-perils basis. We’re a world leader in this respect and not a broken market.

So, with insurance in place and absent a significant problem obtaining insurance cover, there is time for central and local government to develop an approach to assess, plan and fund initiatives to reduce flood risks. Tilting at a non-existent insurance problem instead of tackling the real underlying issue would be a mistake.