Insurance Update: The cost and claims of climate change

This is not a temporary issue affecting sections of society, but rather one where a constant and concerted effort to adapt and modify how we do things is of paramount importance.

New Zealand has had a steady rise in climate-related insurance claims during the past 10 years. For the five years 2013 to 2017, the average cost of climate claims was $150 million. For 2018 to 2022, $276 million.

The past two years, 2021 and 2022, have come in at $324 million and $350 million respectively.

These rises have had to be factored into how our local insurers run their businesses, not just from premium setting and underwriting controls but also in increasing and realigning their teams and skillsets to help customers through more frequent and severe weather events.

Our local insurers and their reinsurance partners overseas have been well aware of climate-driven events across the globe – Hurricane Ian, to the major European floods, to the devastating floods and bushfires that have affected Australia in recent years. Each of the North Island’s recent events in isolation would have been, by far, the largest extreme weather event recorded in New Zealand. Insurers will be pumping more than $1 billion back into communities affected by the first event and likely as much – if not more – for Cyclone Gabrielle.

As insurance costs are claims driven, each insurer will now determine its own level of comfort for the immediate future and for many this will mean a reduction in risk appetite and offering capacity for certain risks. This in turn pushes up the premiums of those insurers that remain. Even before the recent events, insurers were seeking to reduce their exposure to natural catastrophes – weather related or not. The implications of this are significant and greater care when undertaking due diligence is needed to ascertain insurability of property and risks.

Premiums themselves will of course increase in the short term but, as the final cost of these events will take years to crystallise, these increases will likely continue for a number of years until the cost is accounted for. In addition to premium rises, wholesale changes within the industry will take place. Flood may be considered an optional add on (as it already is in Australia), rather than automatically included as it is now.

Properties will be risk assessed on a more granular level rather than region by region, with environmental risks such as cliff tops and waterfront properties being underwritten accordingly. The recent events have also been large enough to trigger the insurers’ catastrophe reinsurance cover, meaning reinsurers will be more selective about which insurers they choose to underwrite.

Insurers now have a greater collective duty to support their customers in mitigating environmental risk as part of general risk management and are very well placed to do so, benefitting communities as a whole. But the immediate concern is more generic, in that people need rapid answers about whether it is safe for some to return home or to have their homes rebuilt in the same places where they were so recently destroyed. The resilience of infrastructure is an urgent, and very expensive, question.

We can only cope better with this shift to more frequent and extreme weather events by building resilience into everything, which then supports insurers to keep insurance cover in place and relatively affordable. Unlike the pandemic and its flow on supply chain and inflation issues, this is not something that can be ridden out and eventually return to a form of normality.

What is clear is that insurance is only part of a much larger equation.

Dan Szegota is an Executive Broker at ICIB and leads the ICIB Gold Medal Vintage winery scheme.