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The Tide Is Changing For Waterfront Living

No property in New Zealand is more than 130 kilometres from the sea; some formerly desirable ones are now almost in it. But insurance premiums are rising along with sea levels and flooding risks, as Sally Lindsay discovers.

By: Sally Lindsay

1 May 2022

Living near water, particularly the sea, is a rite of passage for Kiwis, but unfortunately many of those areas will be prone to flooding when sea levels rise.

According to Lloyd’s of London’s Insurance Risk Report, New Zealand is the second-riskiest country in the world when it comes to natural disasters. Only Bangladesh is ahead.

The risk of flooding has long been a fact of life in many coastal communities across the country, but increasingly volatile conditions due to the changing climate may mean more serious, and more frequent floods.

A major storm surge and coastal flooding in Wellington last year was a reminder the sea is lapping close to a lot of Kiwis’ front doors. The question, says Canterbury University civil systems engineering lecturer Tom Logan, is who will pay when the water crosses those front doors?

Insurance companies have made it clear they will be reluctant and the Insurance Council expects people to adapt to climate change and make localised decisions that will not leave their property uninsurable.

A major report released at the end of 2020 by the Deep South National Science Challenge assessed the risk for 10,000 homes in one-in-100-year coastal flood zones in Auckland, Wellington, Christchurch and Dunedin.

Across the country about 450,000 homes are situated within a kilometre of the coast, and are likely to experience a combination of sea-level rise and storm surges.

The research says properties will start to lose insurance cover within the next 10 years, if not sooner.

Technically, according to the report, if a property has a 1% chance of coastal damage with today’s sea level, the owner will likely lose all private insurance once the chance rises to 5% – anticipated to be less than 25 years away.

That means potentially more than 30,000 residential properties, valued at over $17 billion, are expected to be uninsurable within the next few decades.

Risk Horizon

Insurance Council chief executive Tim Grafton does not agree with this assessment. He says in general people will not lose insurance within that time.

“With specific regard to coastal hazards such as sea-level rise, coastal erosion and the risk of inundation resulting from storm surge, it is expected people will act to reduce localised risks. For the majority of coastal properties, the risk horizon is longer.”

Grafton says the insurance industry does not use a specific definition of coastal property. “House insurance across the country is offered on an all- perils basis covering all natural hazards, so assessments are made on a wide range of risks.”

Belinda Storey is a climate and insurance specialist and the report’s principal investigator. Her research focused on insurance because she believes it will probably be a retreat by insurers, banks and property buyers that eventually forces coastal home owners to adapt to rising sea levels.

Evidence from overseas suggests high insurance premiums and the unavailability of insurance has a stronger impact on private decision-making than the uncertain risk of extreme events.

Anecdotal evidence from the insurance industry, says Storey, suggests companies start pulling out at 2% annual flood risk and there was full retreat by 5%. However, evidence from the UK suggests insurers could retreat much sooner.

This leaves at-risk homeowners with no insurance, either private or through the Earthquake Commission. In the meantime, homeowners are likely to continue paying rising premiums, possibly unaware of the tenuous nature of their coverage.

Insurance premiums are not based on only one factor, says Grafton. “Premiums are typically priced on the risk profile for properties, construction type, claims history and a host of other factors and also how granular an insurer chooses to underwrite certain risks.

“All of these contribute to cost pressures. While this will vary by location, the largest cost pressures facing insurance today are generally those related to earthquake risk and soaring rebuilding costs.”

The first to be hit with uninsurable coastal homes, the report says, will be Wellington. Christchurch will be the hardest hit, but all four major cities will be affected, the report says. By 2050 at least 10,000 homes will be effectively uninsurable. However, spiking premiums and policy exclusions could start being felt as soon as 2031.

In Auckland, 540 homes were identified as being in the risk zone. Their insurance premiums to cover flooding will be five times as large as today – reaching $10,000 a year – after 15 centimetres of sea-level rise, if insurers fully priced the increased risk into policies, the report found.

Christchurch and Dunedin have the largest numbers of homes affected by premiums quadrupling or worse – at least 4,850 and 3,100, respectively, after 13-14cm of sea-level rise.

At those levels people may effectively find they have no insurance cover, says Storey.

Grafton says the report points to the need for society to adapt/reduce risks from climate change and not simply sit on its hands, do nothing and expect insurance to cover the risks no matter how high they are.

“The scenario painted by the report is simply not realistic. Society will respond and avoid the do-nothing approach,” he says.

Other major projects are underway to better map the parts of the coast that will be worst affected by sea-level rise.

'Baked-In' Factor

Although the report only looks at four cities, it offers clues for the whole country: Storey found coasts with a small tidal range will be affected first because storm surges are less likely to be absorbed within the normal tidal range.

That’s why cities such as Wellington, Napier and Tauranga will see their flood risk spike before Auckland, New Plymouth and Nelson, which have greater natural tidal buffers.

Current estimates project the sea level to rise by at least 10 centimetres by 2040 and about 25-30cm by 2060.

These changes are considered “baked- in” to the climate system, whatever happens with carbon emissions, because of the lag between people releasing greenhouse gases, and seeing the full effects of warming on melting ice and warming oceans.

“There is huge uncertainty about just how much the sea level will rise by 2050,” says Grafton.

“Ongoing work will always be required. The more work that is done, and particularly the more councils that do so and publish updated hazard maps, the better.

“When councils act like this it’s an excellent way to bring people’s attention to the issue, and more importantly, what to do about it.”

He says insurers draw on hazard models as an input to develop loss models to estimate the likely level of loss from a given scale of event. So, it’s not a matter of being better, what’s important is that insurers, councils and communities work together to better understand the risks and what actions would be appropriate in reducing risk. Everybody has their own expertise and knowledge to bring to the discussion, Grafton says.

If coastal dwellers do lose insurance it will have knock-on effects for mortgages, because banks typically require borrowers to have insurance. Difficulty borrowing for home loans could in turn make properties hard to sell, the report says.

Tower's Approach

Tower Insurance has flood-risk rated customers’ individual homes, which has meant some at higher risk of flooding being billed more for insurance.

Homes were rated at green (low risk), amber (medium risk) or red (high risk) and the higher premium increases range from a few dollars up to hundreds of dollars a year. However, nearly 90% of Tower’s customers received a reduction in the flood risk portion of their premiums.

Tower chief underwriting officer Ron Mudaliar says the model Tower is using is based on 50,000 years of continuous simulation of the entire precipitation cycle capturing the spatial and temporal correlations of flood risk from rivers and rain, resulting in a catalogue of 350,000 simulated events.”

He says the global trend in risk-based pricing is a fairer way to price insurance as it means customers only pay for risks they actually have. “The response from customers has been positive.”

Mudaliar says Tower has used the ratings to help educate customers, communities and other stakeholders about their risks, and to encourage action to help mitigate and reduce the impacts of flooding, earthquake, climate change and other natural disasters.

He says Tower has already met several district councils and government bodies, to share insights from the flood- risk project. “It’s clear climate change is impacting the country and these trends are expected to continue. Tower’s ratings help simplify some of these impacts in a format that is simple and easy to understand, and one that people are more likely to engage with and more often, compared to a LIM report.”

Despite the risks of sea levels rising and more flooding, the country’s local councils are continuing to grant consent for development in immediately exposed places.

‘Christchurch and Dunedin have the largest number of homes affected by premiums quadrupling or worse’

Christchurch City Council – already with one of the highest exposures to coastal hazards – last year approved a 65-home development in New Brighton on the old site of Central New Brighton School, which is 500 metres from the beach, an area modelling suggests is prone to coastal flooding.

The Insurance Council has been saying for years local councils across New Zealand should be seriously considering whether they should allow building or subdivision on coastal property because of sea-level rise and flooding risks.

Financial Threat

Grafton says while not all coastal development is particularly risky, great care should be taken to check the risks on a case-by-case basis. “You can also be close to the coast and be located on a cliff-top where the risks are not sea-level rise but erosion.”

Many councils do not have the resources or expertise to take a risk- based approach. Aside from the financial threat, there are the associated physical upheavals and mental health issues facing residents.

Other solutions will also be needed.

A more sustainable approach proposed in Hawke’s Bay involves charging ratepayers $30 a year for a coastal defence or managed retreat fund. The cost to Hastings and Napier residents of protecting their coastline over the next 100 years has been estimated to be between $131.2 million and $286.5 million with a rating impact of $3.2m a year over the first 20 years.

Initially lauded as the country’s most sophisticated engagement process and strategy, it stalled due to Napier City, Hastings District and Hawke’s Bay regional councils being unable to agree which rates bill it should be on and retired High Court Judge Raynor Asher was called on to give an opinion on the impasse.

In a ground-breaking legal view he says rates collected for coast defences, such as groynes and seawalls and managed retreats, should be done at regional council level. He added the regional council should take charge of all aspects of the prevention and mitigation of coastal hazards ... “including deciding on preventative, mitigating or remedial works”.


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