The minister responsible for the Earthquake Commission wanted the Government to intervene at haste with a flood reinsurance scheme; instead he was reined in and told it should be debated as part of this week’s National Adaptation Plan.

David Clark was concerned other insurers would quickly follow Tower’s lead at the end of last year and move to risk-based pricing for flood protection, a situation that would hike premiums and could leave thousands of homeowners unable to secure, or afford, residential property cover.

“The information driving Tower’s decisions is available to other insurers,” Treasury officials briefed him. “But the path of change and its timing over the longer-term is still highly uncertain … there is already a significant insurance coverage gap in many countries, which may widen as a result of climate change.

“Almost all insurers said they are planning to investigate new models for fluvial and pluvial flood risk (river and surface flooding) and consider pricing changes in the next year or two. As the new models do not cover coastal flood risk, this may be considered later and, we are told by insurers, could present much more significant insurability challenges.”

Given the potential fallout, in December last year Clark asked Treasury to work up plans for a flood re-insurance scheme, similar to the Flood Re model in the UK.

Officials told him it could be implemented within a year, but urged against it, advising to progress the work though the National Adaptation Plan instead.

“It would be concerning if homeowners were unable to access adequate insurance for flood risk and this is something the Government continues to actively monitor.”
– David Clark, Minister Responsible for the EQC

“If you wanted to move faster, we could develop a flood insurance intervention as quickly as practicable, without being subject to, or informed by, the wider National Adaptation Plan process or public consultation, and provide you with further advice in early 2022 (including more detail on the design of potential solutions) for starting to implement a flood insurance support scheme within the next 12 months.

“If a key concern for you is the insurance market moving faster than expected and the individual wellbeing issues that would create, you may prefer [to not go through the NAP].”

However, officials warned this would have “significant downsides”.

“Including limiting our ability to engage with the insurance industry on options, limiting our ability to consult with the wider public and increasing the likelihood of any intervention being inconsistent with, and setting unhelpful precedents for, the Government’s to-be-determined climate adaptation policies.”

“Transferring risk to insurance does not reduce risk.”
– Insurance Council

The Insurance Council and its members have been firmly opposed to a government-funded flood insurance scheme, which they warn would encourage home-owners to continue building and living in risky coastal areas and flood plans, rather than tackling the tough issues of coastal retreat.

In a submission on this week’s National Adaptation Plan, the council says government is moving too slowly to reduce risk, and expresses scepticism of its proposal for a flood insurance scheme modelled on the UK’s Flood Re. “Transferring risk to insurance does not reduce risk,” the council says.

Despite his officials’ warning, Clark forged ahead and met with officials to discuss the scheme including objectives and design features in February.

Two weeks later the Minister of Finance stepped in.

“The Minister of Finance wrote to the Minister Responsible for the EQC noting that he understood the Minister Responsible for the EQC wanted to progress this work at pace with ambitious timelines. The Minister of Finance expressed his preference to progress policy work on flood insurance issues in closer alignment with the wider work on climate adaptation policy, including the National Adaptation Plan noting that the benefits this would afford outweighed the benefits of moving at speed,” a March briefing noted.

The next day the Climate Response Ministers Group agreed the work was better suited as part of the NAP.

Clark said he had been concerned other insurers would swiftly follow Tower’s lead, but was now comfortable there were not immediate plans for a widespread move to risk-based pricing, “…allowing more time for consideration of any intervention by the Government.

“Treasury will be reporting back to ministers in the coming months on the results of the flood insurance questions in the National Adaptation Plan consultation. It would be concerning if homeowners were unable to access adequate insurance for flood risk and this is something the Government continues to actively monitor.”

River and pooling flood risk modelling from Aon found the vast majority of homes were not at risk of flooding, but 58,000 were deemed medium risk and if covered under risk-based pricing would pay about 1 percent of their sum-insured value, while a further 38,000 homes were deemed high risk and would see premiums rise to 2 percent of the home’s value – e.g. a flood risk premium over $10,000 for a home insured for $500,000.

Homes with no or low risk could see the flood-risk proportion of their premium reduce.

Flood Re

The UK reinsurance scheme came into effect in 2016 and offers per-home flood reinsurance to insurers. The insurer continues to be responsible to the homeowner but Flood Re reimburses insurers for flood costs arising from claims.

It is funded through a mix of compulsory levies on all residential property insurers combined with reinsurance premiums on flood-prone homes reinsured with the scheme.

It has resulted in more affordable insurance for those living in flood-prone areas but has been criticised for reducing incentives to invest in flood protection and adaptation by homeowners and government.

Treasury officials also noted there was a risk the scheme may expand to include homes built before 2009 (which are currently excluded) and that it would extend beyond its planned end date of 2039 as the effects of climate change become more pronounced and political pressure to ease the financial burden intensifies.

In its submission on the National Adaptation Plan the Insurance Council called a Flood Re scheme in New Zealand a “grossly disproportionate response” adding the vast majority of homes were insurable and there was no market failure that called for such an intervention.

Consultation on the National Adaptation Plan closed in June and further details from the Government are expected this week. 

Emma Hatton is a business reporter based in Wellington.

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