Seismic shift in climate risk

New Zealand has “systemic problems” in managing climate change risk, says Tim Grafton CMInstD, outgoing chief executive of the Insurance Council.

Despite major flooding across Auckland and Northland in 2023, and the tragic loss of life and property due to Cyclone Gabrielle soon afterwards, the finance industry is still prepared to fund, and councils prepared to consent, developments in areas known to be prone to flooding, Grafton says.

In January this year, Auckland Council revealed 1,415 new homes had been consented on flood plains since the Anniversary Weekend floods of 2023. This represents more than 10 per cent of new homes consented during that time.

From an insurance industry perspective, regulatory and legislative settings that continue to see building on areas that will one day flood is a real problem, Grafton says. It shows the risks associated with more frequent, and more severe, extreme weather events have not yet been fully understood.

“While we have always known extreme weather events would become more frequent and impactful, what happened last year – the double whammy of two very big events – was a massive wake-up call,” Grafton says.

“For the first time, New Zealand has seen what these events could look like. They are huge. The question is, ‘What do we do to reduce risk and make New Zealand more resilient?’ ”

With a business model based on assessing risk, the insurance industry has always been ahead of the game. Globally, it has been a topic of concern among reinsurers (firms that insure insurance companies against the cost of major payouts) for many years.

“For some reinsurers, we can go back three or four decades to when changing climate patterns were beginning to become discernible. What we talk about these days is the increasing frequency and severity of extreme weather events. We have started to see, globally, some of the most impactful climate events that countries have experienced.”

In the global reinsurance marketplace, the wake-up call of 2023’s floods has been heard loud and clear.

“It is now a narrative of seismic plus climate risk," says Grafton. “Up until last year we would typically expect to experience claims from extreme weather events of $250-$330 million per year, which could be accommodated off the balance sheet of the primary insurer. Claims from those two events last year are somewhere between $3.5 billion and $4 billion. That is an order of magnitude much, much higher and it has triggered reinsurance claims.”

But the business-as-usual approach to residential development is not the only systemic problem with climate risk that Grafton sees.

There is a broader question about what the Government will introduce to replace the Resource Management Act 1991, after scrapping the previous government’s reforms. The current rules do not factor in climate risk as we know it today.

Science institutions, while reliable and publicly funded, do not always make their information free of charge to help New Zealanders make informed decisions. Emergency services are good at responding to events, but “probably not as good” at considering resilience to reduce the risk ahead of events.

For Grafton, there is a risk that some parts of New Zealand may become difficult – even impossible – to insure. “That is what we would like to avoid,” he says.

Grafton recommends boards take a close look at the insurance their organisations have purchased and understand how climate risk is covered – or not covered – in their policies. Doing this will not only help ensure their insurance is appropriate, it may also stimulate better understanding of future risks. 

For example, supply chain vulnerability may be something boards need to understand. Are your suppliers vulnerable to flood or earthquake. What would happen if they were unable to work? Can we find alternative suppliers?

Business interruption insurance also needs to be considered, he says. “When catastrophe happens your employees will be looking to one thing only, their properties and their families. You are going to face business interruption even if your property is undamaged.”

Mandatory reporting of climate disclosures for some large companies has led boards to develop scenarios over short, medium and long-term horizons to understand the risks and opportunities climate change brings. This is influencing board oversight and the strategy needed to respond to these changes.

Grafton says boards that are not mandated to make disclosures would gain insights from undertaking similar scenario planning to ensure the resilience of their organisations.

The insurance industry is now working with its customers to explain climate risk and how it relates to policies. “We are now absolutely focused, as a sector, on how New Zealand needs to reduce its climate risks. That’s not simply something that insurers can do, or even local or central government. It has to be right across the system.

“These events are going to become more frequent and more severe. If we haven’t heard the wake-up call from last year, then one day it will shake us until finally we realise, ‘Oh, we need to get something done’. The sooner we learn that, the better.”