Climate change has been pinned as one of the most significant issues affecting insurance today, and, according to experts and industry players, New Zealand is in a unique position to lead the charge in creating a truly resilient and sustainable society in the face of ever increasing risks.
New Zealand already generates over 80% of its electricity from renewable sources, only one step behind Iceland’s 100%, and will see the introduction of its Zero Carbon Bill later in July 2019. Experts say that the rest of the world will soon be looking to this island to see how insurance can interplay with community and public policy to create a framework of ultimate resilience, while also keeping insurance at a price that is affordable and sustainable.
“The challenge of climate change for insurance was best summed up by the then chair and CEO of AXA,” ICNZ chief executive Tim Grafton stated, addressing the Insurance Council’s annual 2018 conference.
“He said in the lead-up to the 2015 COP Paris Agreement that a two-degree world may be insurable, but a four-degree world certainly is not. It was referring to the amount the earth has warmed relative to pre-industrial times - today, we are at 1.1 degrees.
“The most recent Intergovernmental Panel on Climate Change (IPCC) report released last month says that we could reach 1.5 degrees as early as the 2030s,” he stated. “The trajectory we are on is not good. Houston, we do have a problem.”
According to Rowan Douglas, CEO capital science and policy practice at Willis Towers Watson, insurance needs to become an ‘institution’ rather than simply an industry sector, and New Zealand is best placed to demonstrate this in action to the rest of the globe.
“Globally, New Zealand is the poster child for how a society blends public policy, science and capital through the insurance sector to help a society become resilient,” Douglas stated.
“The fact that this country has been able to maintain its resilience and has essentially mutualised the risk across its population –along with the fact that you’re able to export so much of that risk around the world that almost 20% of your GDP was brought in through international reinsurance – is a story that is told again and again around the world.
“New Zealand is also beginning to feel the effects of the risk of climate change, but my contention is that it will probably be New Zealand that teaches the world how to use insurance and its related capabilities, with the support of a public policy agenda, to address this issue. The lessons that you’ve learnt in the last 40-50 years will be replayed and repeated.”
Douglas says that insurance is the new ‘big idea’ in this space – which may sound odd for an industry that’s over 300 years old, but people often forget that it was insurance which helped society overcome massive structural challenges in the 19th century, from urbanisation and technical change to social protection.
He says society is now facing many new challenges, and policymakers are looking for a mechanism that they can use to understand risks and develop rules for sustainable behaviour, and ultimately to share that risk on a global scale. Insurance is increasingly being seen as that institution of society, and nowhere can insurance as an institution of society be better exemplified than in New Zealand.
Nonetheless, the sector is facing its own slew of challenges in response to the increasing risks. Affordability and sustainability have all been raised as issues following the rise of risk-based pricing, and the question of taxpayer subsidisation of the uninsured remains hotly debated.
“The question of whether taxpayers should subsidise people who don’t insure has been absolutely key,” Douglas said. “Clearly from a community point of view, something like the Edgecombe approach was absolutely the right thing to do. But there is clearly a trade-off between the insured and the part of the population getting support, and the latter is to some degree freeriding on the wider community and those who have been paying their premiums loyally for years on end.
This is why New Zealand is the ideal country to confront this head-on,” he explained. “Issues around affordability will be important, but there will also come a point where everybody will need to be insured as a moral duty. The issue of mutuality becomes a moral issue about citizenship that is beyond being a consumer, and that’s why insurance is an institution, and not just an industry.”
According to Richard Harding, CEO of Tower Insurance, methods such as risk-based pricing are a way of ensuring that each individual pays their fair share in premiums, and also have the potential to drive important conversations around risk mitigation – both on an individual and a community level.
“Through recent surveys, our consumers have actually found that risk-based pricing is a fairer overall approach,” Harding said.
“The conversation we’ve been having around risk-based pricing for earthquakes, for example, is about incentivising people to undertake risk mitigation, to make changes and to drive a reduction in risk. If you then translate earthquakes into either floods or sea level rises, it’s the same outcome across the board.
“The important part of risk-based pricing is that it drives the conversation with clients about what risks they need to be managing, what they can manage themselves, and where they might need help,” Harding continued.
“It also directs the conversation at government and council levels in terms of changing zoning practices, thinking about laws that drive construction standards, etc. Those things will all be really important as we start to grapple with all of these issues, which will be the front and centre of the discussion around the cost of insurance, remediation and individual risk profiles. Risk-based pricing is only one factor within all of that.”
“Affordability is certainly an issue now, and we’re not just talking about comparing Auckland and Wellington,” Allianz CEO Marc Guppy added. “We’re talking about potentially comparing different areas across Albany, for example. As insurers, we can actually look at the data that exists and price the risk accordingly.
“There is evidence that there are problems with councils’ zoning areas, and the issue of risk mitigation really lies with the government as well. Risk-based pricing is going to be the way of the future, but when an insurer reaches the point where they can’t insure a particular area any more, we know that something else has to change. Mitigation and working with the government reflects those community needs.”