How Another Country’s Insurance Industry Is Facing Climate Change

Tim Grafton, chief executive of the Insurance Council of New Zealand, lives in a country surrounded by risk on all sides, and he’s unabashed in his efforts to use flooding events, frequent storms or other out-of-the-usual weather phenomenon as opportunities to talk about dangers posed by climate change.

By 2050 roughly one million New Zealanders will be living in areas vulnerable to severe flooding, coastal storm surges, land slides and windstorms.

That statement from the head of the nation’s biggest insurance association – the association’s insurer and reinsurer members collectively write more than 95 percent of all fire and general insurance to New Zealand’s roughly 4.5 million populous – has appeared a number of times in the New Zealand press when the topic of climate change is covered.

It’s not difficult for so many New Zealanders to be close to risky areas. The island nation has an estimated 9,300 miles of coastline. The country also has plenty of rivers, as well as rocky terrain, its share of windstorms and it has some volcanic exposures.

The 2010 Canterbury Earthquake, or Christchurch Earthquake as it’s sometimes known, proved the nation’s seismic risks. Losses from the magnitude 7.1 quake and several sizeable aftershocks reached $40 billion New Zealand Dollars ($30.2 billion U.S.), or 20 percent of the nation’s gross domestic product, according to government estimates.

Grafton proudly noted that roughly 80 percent of the cost, which included commercial losses, was insured.

New Zealand’s rate of insurance penetration is impressive. Grafton estimates that more than 98 percent of residential properties are insured for a variety of perils.

“Just about every resident in this country has protection against earthquake, tsunami, landslip and hydrothermal perils,” Grafton said.

Credit the Earthquake Commission Levy for that high take-up rate. The levy, which includes all of the above named perils, is a mandatory $180 NZD ($136) assessment on any property that carries homeowners insurance. Since home buyers who must take out a loan are required by New Zealand law to purchase homeowners insurance, the assessment is irresistibly popular.

The levy covers losses for the first $100,000 NZD ($75,647), then homeowners insurance kicks in for losses above that.

Grafton said the levy protects consumers, insurers and the banks providing the loans. It also prevents a self-perpetuating mentality, or as Grafton put it “a moral hazard,” that those in the U.S. insurance industry can identify with.

That mentality is that after a disaster the government will come to the rescue, “and that will ensure that vicious circle where people say ‘Well, why buy insurance when government will just step in?'” Grafton said.

The country isn’t afraid to take robust measures to protect its people and resources, and in part it’s that sort of mentality that may explain Grafton’s stance on preaching about the dangers of climate change.

Of course the country’s vulnerability to risk makes that an easy task.

New Zealand was ranked in a 2012 Lloyd’s of London report as the third most vulnerable of 42 countries after Bangladesh and Chile based on percentage of annual GDP losses at risk to natural disasters. The Lloyd’s report used data going back to 1900, and shows the nation can expect on average for natural disasters to cost nearly 1 percent of its GDP, or $1.6 billion NZD ($1.2 billion).

It’s because of that risk, and risks outlined by scientists who forecast rising sea levels and more frequent severe storms, that the Insurance Council and other interests are lobbying for a plan that calls for legislation to update several existing Central Government acts to address the threat climate change poses to New Zealanders.

The group wants to update as well as align acts like the Building Act, and the Civil Defence and Emergency Management Act, to push for greater mitigation efforts, such as improved building codes.

“We’ve got a lot of legislation which is totally ill-equipped to deal with future inevitabilities that we’re trying to protect ourselves from,” Grafton said.

The situation is similar to what U.S. backers of measures to address climate change face. A plan from the Obama Administration and its Environmental Protection Agency to limit carbon dioxide emissions from turbines and electric utilities by 2030 falls under the domain of the Clean Air Act of 1970.

Grafton’s group is pushing for new legislation through a position paper, “Protecting New Zealand from Natural Hazards.”

“Climate change will raise the risks by increasing both the intensity and frequency of weather-related events,” the paper states. “This will be made more acute because most of New Zealand’s population is located in coastal areas and beside rivers.”

The paper also calls for changes at local permitting levels: “We need local authorities to deny consent applications where taking the long view shows risk from hazards will increase.”

To call attention to the need for more mitigation to prepare the nation and its insurance community for what awaits them, Grafton takes every opportunity he can to get the message out to the public.

“If there’s an extreme weather event we go out and publicly comment on that, especially when there are repeat events in areas where flooding will inevitably get more pronounced over the years to come,” Grafton said. “We take that opportunity to say ‘This is an area over the next 20 to 30 years that is going to flood more.'”

Do members of the Insurance Council have a problem with the face of the association taking such an aggressive stance on the issue, or accepting climate change as fact?

“No deniers,” Grafton replied with a chuckle.

Let’s take it a step further. Do you think climate change is manmade?

“I think our answer to that one is whether or not it’s anthropogenic doesn’t matter. What matters is the outcome,” Grafton said. “And the overwhelming majority of scientific evidence points to a bunch of probabilistic scenarios – all of those pointing to sea level rise and problems.”

He referred to a report from Commissioner for the Environment – which is where Grafton gets his oft-quoted figure that roughly one million New Zealanders will be living in vulnerable areas by 2050 – put out a late last year that cited figures from the Intergovernmental Panel on Climate Change showing sea levels could rise by anywhere from nearly 1-foot to more than 3-feet by 2100.

Even looking at conservative estimates the country is facing rising water and increasingly exposed property on all sides, Graton said.

For loss estimates due to that exposure he’s deferring to the second half of the commissioner’s report due out in the next few months, which is set to offer a detailed outlook that may be of interest to the insurance community.

“I guess the uncertainty for us is the expense of the impact,” he said.

Of course Grafton’s greatest concern is for the nation’s insurance industry. He believes climate change has the potential of hitting insurers and reinsurers with “a double-whammy,” because on one hand greater losses will mean more claims that must be paid out by the industry. At the same time, insurance reserves are often tied up in those assets at greatest risk, real estate.

“A lot of our assets are close to the sea or river mouths,” Grafton said.