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Jonathan Milne

Govt to pick up some flood retreat costs insurance firms can't cover

Repairs to Takitimu-Waihirere marae and replacing its ablution block are estimated at more than $3m – but the greater fear, for members of the Wairoa marae, is that they won't be allowed to rebuild at all. Photo: Gisborne Herald

Facing resistance to moving people off their disaster-prone family land, Finance Minister Grant Robertson will need to use this month's Budget to meet some of the anticipated $8 billion shortfall in rebuild costs

Analysis: Takitimu-Waihirere marae sits low on the banks of the Wairoa River. When Cyclone Gabrielle hit, a marae member raced the wall of water to warn the 20 families living on the papakainga.

"We went down the road to warn farmers. We ended up losing a car and had to walk back," says marae chair Wiki Hauraki. "By then it was too late for the marae."

Their mostly uninsured homes have been stickered. The Government is now preparing to consult with their community, and others in Hawkes Bay and Tairawhiti, over which properties can be rebuilt, which can be protected, and which should never be built on again.

Retreating home and business owners need publicly-funded compo * Prof Jonathan Boston: Urgent multi-party agreement needed * Chris Nicoll: We must fight climate enemy instead of fiddling while Rome burns

Ahead of this month's Budget, Newsroom understands Finance Minister Grant Robertson will lay out more details of a financing package to pick up at least some of the shortfall in insurance cover. 

The cost to insurers is forecast at $3b-$4.2b; the shortfall including reinstating infrastructure, claims on Toka Tū Ake EQC, and loss of uninsured property, is expected to top $8b.

"Insurers have considerable reinsurance in place for the recent weather events," the Reserve Bank says, "but claims for these events will cause a drop in insurers’ profitability for some time and will increase reinsurance costs for New Zealand."

How will managed retreat affect your community? Email or comment on this article.

Now flood-hit communities are bracing for a new impact: the Government’s decisions on which homes and infrastructure can be rebuilt, and which must be abandoned. 

Hauraki says the families of the historic Takitimu marae won't be moved. "Hell no. To lift up a piece of history like that – that would be one of the biggest mistakes they could ever make."

Wairoa mayor Craig Little says it’s critical the Government carefully consult those affected communities. Councils haven’t got the money to contribute, he says, and insurers won’t meet more than a fraction of the cost.

About 200 Wairoa households were white-stickered; another 200 were yellow- or red-stickered. "A lot of these people don't want to relocate, trust me. It's been family land for many, many hundreds of years. So it's gonna be difficult."

Initial risk categories and definitions

“As a kid, I always wondered how insurance worked. Obviously, it depends on a large number of people insured that smooth out the payments. But here in Wairoa, a lot of people aren't insured."

Ahead of this month’s Budget, it’s become apparent the size of the gap between what will be covered by insurers, and what won’t. It’s massive.

The Reserve Bank, which regulates the insurance industry, estimates the Auckland Anniversary Floods will result in total insurance claim costs of $1.6b-$2.1b; Cyclone Gabrielle will cost $1.4b-$2.1b. "While most of the cost of claims from the North Island weather events will be met by reinsurance, there will be an ongoing impact on insurer profitability from reinsurance excesses."

Property insurers will record a loss this year; their claim costs, plus additional reinsurance premiums, have exceeded normal profits. In addition, insurers have recorded material investment losses from rising interest rates.

"While these losses have depressed solvency for the relevant insurers to varying degrees, they are not seen as risks to financial stability," this week's Reserve Bank financial stability report says. "Some insurers have injected additional capital from their parents in response. With weaker solvency, some property insurers are at risk of breaching regulatory solvency requirements if there is a further large event in the next few months."

That $4b insurance bill, though, is only a third of the total economic costs of these events. According to the financial stability report this week, public costs like the reinstatement of infrastructure, claims on EQC, and loss of uninsured property, will be at least double the insurance bill.

The Government has revealed its first steps towards managed retreat, before a more comprehensive cyclone recovery package in the Budget.

The families of Takitimu-Waihirere marae clean up silt after Cyclone Gabrielle. Photo: Gisborne Herald

Revenue Minister David Parker announced this week that he’ll introduce a law to provide tax relief for businesses hit by the Auckland floods and Cyclone Gabrielle – and this time, it will encompass managed retreat to safer properties that aren’t at risk of further floods. 

Flood-damaged North Island businesses won’t have to pay tax on insurance or compensation they might receive for their damaged buildings, plant and equipment, Parker says.

Similar tax relief was provided for assets destroyed by the Canterbury and Hurunui-Kaikoura earthquakes, although the recent North Island flooding events differ because managed retreat is being considered. “Because of that, a proposed key difference from the earthquake relief is that there would be no requirement that replacement buildings be located in the same region.”

"The challenges we're going to face over the coming century and beyond are radically different from anything that humanity anticipates – we have not previously had to move vast numbers of people away from an incoming tide." – Professor Jonathan Boston

A bigger question applies to compensation for residential properties. Toka Tū Ake EQC says its natural disaster fund has $370m – that's going to take a hit as the claims roll in from January and February. And for floods and storms, it only covers the land beneath insured homes, out to an 8m perimeter, and the main driveway. That won't go far.

“We recognise the need to provide certainty as soon as possible to individuals in affected areas," says Finance Minister Grant Robertson. "There’s no one-size-fits-all approach – each area is unique and influenced by a number of different factors which is why we are taking the time to get this right.”

Thus far, Robertson has refused to make any speedy decisions on financing managed retreat after his year's floods that might set an unhelpful precedent for a comprehensive law to adapt to climate change.

Robertson’s position is becoming more difficult to sustain, and the cyclone recovery package in the Budget is expect to provide some short-term funding. 

Professor Jonathan Boston, who advises on managed retreat, rejects the Government's concerns about setting a precedent; governments always have and always will adapt the law to fit changing circumstances, he says.

That shouldn't be a reason to stall on the more manageable immediate challenge of buying out Auckland, Tairawhiti and Hawkes Bay residents whose homes can't safely be rebuilt. "The Government is talking about a total cost of between $9b and $14b from these events," he says. "In that context, the actual cost of buying out several hundred property owners is going to be very modest. Most of them, though not all, will have insurance."

The big fix

For the severe weather events of January and February, there is little existing public funding provision – only Toka Tū Ake EQC's levy-funded natural disaster fund is in place and designed to meet some of these eventualities. That means that payments to move people off their land will need to come out of existing Budget operating and capital allowances and borrowing.

For future events, there is a fast-closing window to set in place new financing tools – both for insurers and for the Government. 

According to a National Science Challenge research paper, homeowners already facing a 1 percent probability of coastal inundation will see a “partial insurance retreat" over the next 15 years, where an insurer imposes restrictions such as a large excess or excluding that specific hazards from cover. By 2050, the paper says, these homes will experience "full insurance retreat" – they won't be able to get any private insurance.

"These events may accelerate the adoption of risk-based pricing and reduce the availability of flooding insurance in some areas." – Reserve Bank

Insurers are already setting in place more granular risk pricing and selection, and designing new products such as parametric insurance – these are contracts that insure policyholders by paying a set amount based on the magnitude of the event, rather than a payout based on the magnitude of the losses in a traditional indemnity policy.

Reinsurance premiums are also likely to rise for New Zealand, which insurers will pass on as higher premiums to customers. "In turn, this may lead to underinsurance, particularly in higher risk areas," this week's Reserve Bank report says. "Looking ahead, these events may accelerate the adoption of risk-based pricing and reduce the availability of flooding insurance in some areas."

Already, there are small numbers of home-owners whose residential buildings are deemed uninsurable by private underwriters. EQC already sells a policy called Direct EQCover, to protect against natural disaster damage for those whose homes have been refused insurance in the private market.

Thus far, a spokesperson says, there are only five customers in that circumstance, in Rotorua, Palmerston North, and Christchurch. But it's expected to grow.

For the Government, options include reinsuring private firms to provide temporary cover for existing homes in vulnerable areas, until they can relocate elsewhere. This is similar to the UK's Flood Re model, which charges higher premiums for those in low-risk areas, to subsidise those still living in high-risk areas in homes built before 2009. 

When the Treasury consulted on this model last year, it met fierce resistance from insurers and their industry body, the NZ Insurance Council. The council's chief executive, Tim Grafton, warned such a scheme would be a "grossly disproportionate" response: "The last thing we want to be doing is encouraging people to live in high-risk areas by devising a scheme to subsidise the cost of insurance.”

Former EQC Minister David Clark had championed a Flood Re model and wanted to intervene at haste with such a scheme, worried at the introduction of risk-based pricing by the big Tower insurance company; instead Robertson reined him in and said it should be debated as part of the National Adaptation Plan.

A more viable solution for the Government may be to build on the existing EQC model. In October last year, the maximum EQC cover on private homes was doubled to $300,000 plus GST, with premiums set at a flat rate regardless of the risk to a particular house.

And already, the Natural Hazards Insurance Act, which comes into effect in July 2024, extends the EQC's scope – as signified by its very name, which will be changed to Toka Tū Āke Natural Hazards Commission.

This law change is in response to the recommendations of the Public Inquiry into the Earthquake Commission and lessons learnt from the Canterbury earthquakes, but goes further. The commission already provides a “first loss” insurance scheme. The law adds a new requirement that claims must be settled in a timely and fair way. It also provides for a code of claimants’ rights, together with the ability for claimants to take any dispute to a dispute resolution scheme.

Already, the EQC buy more reinsurance than any New Zealand insurance firm. And under the new law, the minister can authorise the commission to buy reinsurance or other risk transfer products in respect of other Crown risks – which is a step towards the wider scope that may yet be required of it.

But that law change does not extend to pre-funding the costs of managed retreat, or insuring uninsurable properties in the interim. As Chris Nicoll from the University of Auckland law school wrote at Newsroom earlier this year: "It is common sense and well-documented by research that money spent in advance on a principled response to natural catastrophe – including clear qualifications for taxpayer assistance, a socially just funding mechanism and an appropriate governance structure – is many times more cost effective than discretionary government spending in the aftermath."

Boston suggests EQC is probably preferable to a Flood Re-type solution. "I certainly think it's worth exploring," he says.

He argues that the effect of the Direct EQCover is already to provide a state subsidy, insuring those whom the market deems uninsurable – so philosophically, it's not a big step to extend it to homes that will be subject to managed retreat.

"If it became impossible for people to get private insurance, and it's going to take 10 years to move a town to a new site, possibly even longer, then someone's got to step in and provide insurance, obviously, and that probably has to be the Crown." 

On one thing, Boston is unequivocal.

"We are entering a new world," he emphasises. "The challenges we're going to face over the coming century and beyond are radically different from anything that humanity anticipates – we have not previously had to move vast numbers of people away from an incoming tide."

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