Thousands of coastal homes in New Zealand might soon not be eligible for insurance due to the increasing risk posed on them by the effects of climate change, suggests a report by Motu Economic and Public Policy Research that discusses how insurance will adapt to a changing climate.
Under the most optimistic emissions scenario studied by the Intergovernmental Panel on Climate Change, global average sea levels will likely rise by between 44cm and 55cm by 2100, and around 1m with continued high emissions. Across New Zealand, there are 43,683 homes within 1.5m of the present average spring high tide and 8,806 homes within 50cm.
Evidence from international markets suggests that when a risk becomes uneconomic, insurers can decide that an area is ‘uninsurable’ and withdraw insurance altogether.
The New Zealand government plays a major role in the provision of natural disaster insurance through the Earthquake Commission (EQC).
EQC protects private residential property and contents from damage by earthquake, volcanic eruption, hydrothermal activity, landslip, tsunami, or fire caused by natural disaster. EQC land cover extends the range of perils to include storm and flood hazards but excludes coastal erosion. EQC does not cover damage to residential structures or contents from storm or floods (or coastal erosion).
Consequently, if private insurers withdraw from certain markets, homeowners would need to apply directly to EQC for cover. Retreat by private insurers from particular locations could increase the unfunded fiscal risk to the Crown associated with private property in natural disasters, should the Crown elect to provide a backstop insurance.
In addition, EQC does not protect against erosion caused by slow onset events or rising seas, but the courts may hold EQC liable for land loss caused by a storm – and that storm surge may be attributable to climate change. Given the rising value of coastal and riparian land, and the sea-level rise, EQC’s exposure could be orders of magnitude greater than historical averages, says the report.
Mr Tim Grafton, Chief Executive of the Insurance Council of New Zealand, told Radio NZ that insurers would eventually stop offering cover to coastal homes, but it would be gradual and well signalled.
"Insurance will signal in a gradual way areas and localities around the country where the risks are becoming increasingly higher.
"That will happen over time," he said.
Mr Grafton said the point of the research was to look at what could be done to reduce the risks.
"Whether that's in terms of people's behaviour or whether that's in terms of quantifying the costs and working out what the potential impacts and policy options are, all of that's really quite critical.
"For insurance it is a slow, but steady signalling that the risks are getting higher.
"Obviously when they get too high, then insurance does not insure certainty. It insures accidental and unexpected risks."