This article was produced in partnership with Gallagher Bassett
If the New Zealand insurance sector was a sports car, last year was the year that it accelerated from zero to sixty in terms of understanding the need to adapt its model to more severe climate change impacts.
The twin disasters of the Auckland Anniversary floods and Cyclone Gabrielle made it abundantly clear that the ‘new normal’ of more frequent and more violent natural catastrophe events requires insurers to take a different approach.
“Insurers must prioritise proactive measures, such as strategic event planning, risk based premium pricing, and, when necessary, underwriting to preclude areas where relocation from vulnerable areas, to mitigate flooding and natural hazard risks, will be required,” said Steven Walsh, Chief Client Officer at Gallagher Bassett New Zealand.
Data from a new Gallagher Bassett survey, released as part of The Carrier Perspective: 2024 Claims Insights report, shows that the perceived frequency of natural catastrophe events among New Zealand and Australian insurers over the last two to three years is higher than for global peers at 80% versus 76%.
For New Zealand, this higher awareness isn’t surprising given that the 2023 events are separately the two largest insurance weather events in the country’s history with a combined estimated cost of $3.75bn.
While over 90% of related claims are now fully settled, the landscape for insurers has altered dramatically in this part of the world and there is a strong willingness to be ready for future events.
“There is a much-heightened level of preparedness, with 93% of insurers in New Zealand and Australia implementing moderate to transformative adjustments [in organisational readiness for climate change],” said Walsh.
This compares with 74% of global insurers at the same level of readiness – perhaps a reflection of the urgency of the issue for New Zealand, a small market with an outsize reliance and economic dependency on nature.
Another reason behind the shift in attitudes in the insurance sector may be the increasing prevalence of environmental, social and governance (ESG) frameworks.
The Gallagher Bassett survey shows that on a global scale, 75% of insurers are intensifying their focus on ESG considerations. In New Zealand, insurers are also facing the mandatory framework requiring climate-related disclosures (CRDs) by climate reporting entities under Part 7A of the Financial Markets Conduct Act 2013.
The ultimate aim of the Aotearoa New Zealand Climate Standards disclosures is to support the allocation of capital towards activities that are consistent with a transition to a low-emissions, climate-resilient future.
“A remarkable 81% of New Zealand and Australian insurers have intensified their focus on ESG considerations, adopting measures to align their strategies accordingly,” said Joe Powell, Senior Vice President of Analytics at Gallagher Bassett.
Some of these measures include establishing ESG policies, committees, and training programs, developing explicit ESG strategies and performance metrics, integrating ESG-focused initiatives into operational frameworks, and incorporating ESG discussions into board meetings.
Other surveys also show that climate related matters remain a key risk for organisations in New Zealand. The Director Sentiment Survey 2023 report released by the Institute of Directors New Zealand in November showed the increasing impacts of climate change as the fifth most important issue for boards last year.
Māori organisations were most likely to be paying attention to climate change, followed by local authorities and government organisations. Sectors with a strong reliance on the natural world such as primary production, tourism and manufacturing are also more at risk from climate change, with many of the lengthiest and most complex claims arising from extreme weather in 2023 being land related.
Having the right backing in this new risk environment becomes crucial with the larger scale of the challenges involved.
In this regard, Gallagher Bassett proved its mettle last year by quickly tapping into the company’s global resources to meet the unprecedented size of the disaster.
“Gallagher Bassett New Zealand responded by implementing an emergency-recovery strategy, which involved collaboration with global partners in Australia, the United Kingdom, North America, and Singapore. Across the globe, our teams joined forces to support claims resolutions and expedite recruitment initiatives, ensuring seamless recovery and timely service for clients,” said Walsh.
The result of this concentration of global resources in a localised area was successful claims resolutions on the ground.
“With access to Gallagher Bassett’s operational strategies, expertise, and disaster response capabilities, insurers were able to deliver timely outcomes.”
The events, and Gallagher Bassett’s robust response, underline the need for insurance solutions that can meet the different dynamics of catastrophes as they continue to increase in impact.
“To overcome these challenges and capitalise on the opportunities presented in 2024, insurers need to partner with experienced claims professionals… these experts can provide a comprehensive view of the upcoming hurdles and guide insurers in confidently overcoming them,” said Walsh.
In this fast-paced and ever-changing landscape, insurers who embrace proactive strategies will thrive.
“Strategies that leverage external expertise, data-driven insights, and generative AI can help insurers stay ahead of issues and gain advantage.”
The vulnerability of many properties in New Zealand has long been a cause of concern in terms of whether risks will continue to be insurable, especially with declining capacity globally to underwrite the natural catastrophe market.
A recent report from ratings agency Fitch highlighted the declining profitability of the natural catastrophe business and global reinsurers' increasing reluctance to provide natural catastrophe coverage. The implementation of tighter terms and conditions for natural catastrophe cover is considered a structural improvement that will enhance reinsurers' risk profiles in the medium term, Fitch said.
The end result is more properties not qualifying for insurance.
Amid such conditions, 58% of insurers in Australia and New Zealand report an increased demand for climate-specific insurance products or coverage options – a level higher than in many other regions.
“Considering the impact of natural catastrophes, we expect this number will continue to grow, and it is highly likely that initiating early preparations will become increasingly important for insurers,” said Walsh.
The trick will be to partner with companies like Gallagher Bassett that have the resources to meaningfully mitigate risks back into the fold of what is insurable and can evolve their response over the long term as the climate crisis escalates.
“Insurers must maintain agility and adaptability in their strategies to overcome these challenges. By staying proactive and adaptable, insurers can navigate through these changes and position themselves for success in the evolving industry,” said Walsh.
Gallagher Bassett (GB) is New Zealand’s leading provider of claims and risk management solutions for insurance carriers. GB is committed to providing solutions that reduce risk, improve efficiency, and deliver superior outcomes.
