Victoria University’s Ilan Noy looks at the long-term risks of providing affordable and comprehensive natural disaster insurance to all New Zealanders

In the Canterbury Wellbeing Survey, conducted every six months since 2012, one consistent finding is that people in Christchurch have a lower quality of life if they: live in a rental property, are on a low income, have a health condition or disability, or have an unresolved insurance claim from the Canterbury earthquakes. This last observation motivated a QuakeCoRE-funded workshop last Friday at Victoria Business School to analyse ongoing, persistent and emerging issues in New Zealand’s natural disaster insurance arrangements.

The group of 30, from government, academia, and from insurance and actuarial firms, discussed two big questions: What ‘insurance lessons’ should be learnt from the Canterbury earthquakes? What are the long-term risks and concerns for New Zealand’s ability to continue providing affordable and comprehensive natural disaster insurance to all?

Discussions of the Crown-owned Earthquake Commission (EQC), and its role in providing residential natural disaster insurance, figured prominently. The EQC Act is currently being revised by government, and the outline of the proposed new law suggests it will no longer cover household contents. There will also be modifications to the way EQC covers damage to land (a unique cover offered almost exclusively in New Zealand). Tamara Jenkins, from Victoria University, noted there is substantial ambiguity in the way land is insured at the moment. This results from recent inconsistent case law that seems to have broadened significantly the types of risks this cover provides, going well beyond direct damage to the land.

Others noted that EQC land cover may become much costlier to the Crown with future increased risks associated with sea level rise. As Belinda Storey, from Victoria University, pointed out, these risks may mean demands placed on government to provide assistance to people living in uninsurable places create further unintended and undesirable consequences. In particular, this assistance further weakens the incentives of homeowners elsewhere to insure themselves against these risks when cover is available (the so-called Charity Hazard effect).

In addition to changing climate risk affecting some communities more than others, there were concerns about changes that may affect the affordability of premiums – with fears of potentially higher burdens placed on the most vulnerable. This, for example, can be seen in urban centres where the highest flood risk is often in relatively disadvantaged neighbourhoods.

It seems clear the insurance protection gap (how much is uninsured) in New Zealand is increasing. More catastrophic events here or internationally may increase this gap even more if international reinsurers get spooked by our fault lines.

The ways in which premiums are set by both private insurers and the EQC were analysed in some detail. Of particular concern was the current inability of insurance to provide guidance and incentives for homeowners to reduce their risks. As a result, insurance, as currently practised, is only an after-the-fact financial tool rather than a useful mechanism for prevention. That is, as if Benjamin Franklin’s observation that “an ounce of prevention is worth a pound of cure” does not apply to us.

The importance of wording in insurance contracts was noted. As Risk Management Solutions consultant Michael Drayton observed: “Insured damage is whatever the policy wording says it is.” Several participants pointed out that insurance contracts, as currently written, sometime lead to outcomes that are less than desirable. Two examples were: 1) how commercial insurance contracts in Christchurch led to demolition of many buildings that could have potentially been fixed; and 2) how some properties inside the Red Zone and CBD cordon in Christchurch found their contract wording meant they had no access to compensation from their insurers because of the particular details of events in these areas.

Some of the themes that came up in the second part of the workshop, on long-term emerging concerns, are equally noteworthy.

There was disagreement about whether underinsurance is a significant problem for residential homeowners.

Olga Filippova, from the University of Auckland, noted that in recent years insurance for some commercial buildings has no longer been affordable, especially outside the main urban centres and for buildings designated as earthquake prone (less than 34 percent of the national building standards). Several participants noted that this is puzzling, as the national building standards are aimed at minimizing casualties rather than structural damage. On this point, Ken Elwood, Director of QuakeCoRE, inquired whether we should also be developing alternative building standards that focus on the likelihood of damage rather than life safety.

It seems clear the insurance protection gap (how much is uninsured) in New Zealand is increasing. More catastrophic events here or internationally may increase this gap even more if international reinsurers get spooked by our fault lines.

Eric Ulm, from Victoria University, finished the day with some thoughts about the role big data may play in the future of insurance. Health and car insurance are already under pressure with the availability of cheap genetic screening and GPS-based ways to monitor drivers’ habits (for example, how often one drives to the neighbouring pub). There is no reason to think these changes will not also affect our insurance systems for floods, volcanic eruptions, earthquakes and everything else nature has to offer us.

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