Insurance shake up coming

Managed retreat

The insurance industry is in the process of moving towards a system where flood risk is priced into premiums based on how likely it is that individual houses will be flooded. This will result in unaffordable insurance premiums or loss of access to flood insurance for those most affected.

Insurance markets currently work on a system of pooling risk: everyone pays a regular premium into a collective fund that insurance companies invest and re-insure so that when one or two people experience loss, they get paid out. But in large flood events, when so many people are at risk of loss all at once and its predictable which houses will be affected, these companies need to think about alternative ways to organise the services and policies that they offer.

One of the ways that insurers can manage the impacts from climate change is by exploring risk-based pricing.

Kendon Bell (Ngāti Maru, Ngāti Porou ki Harataunga ki Mataora) and Selai Letica’s (Ngāpuhi, Ngāti Porou, Tonga) work on risk-based approaches considers what would happen if insurance companies continue the trend of breaking down insurance policies by specific and individual risks, rather than the collective way that risk was spread in the past.

It’s not for everyone

This change in approach potentially has a significant impact on pricing for Māori whanau and marae communities who are spread disproportionately around vulnerable flood areas, like undeveloped coasts and flood plains.

One of the problems with insurance in the age of climate change adaptation is equity – in that already inequitable market forces are becoming more inequitable.

Community researcher Selai Letica focused on the role of insurance as a means of “financial adaptation”, but pointed out through her research that the significant drop in Māori home ownership since the 1960s means there have been less opportunities for whanau to engage with insurance as a tool to manage risk.

Financial literacy, she says, is an intergenerational issue, and understanding how insurance markets can be embraced to protect whanau is now a part of our resilience too. There are sometimes differences in how Māori respond to weather impacts – as tohu (environmental signs) – compared to technical responses to climate change impacts. She also sees this as an opportunity for Māori to play with a “full hand” as they grapple with these issues, taking the best from an increasing understanding of and connection to mātauranga, but also making use of the financial tools available in a market-driven economy.

What does the data say?

Modern flood modelling allows risk to be priced with more accuracy than ever before, and this was the focus of Kendon Bell’s part of the project. Flooding data simulations are available for purchase on the commercial market and Kendon used these as a basis for exploring how different groups could be affected by a risk-based insurance pricing system.

Kendon’s research partners from NIWA and RMS modelled risk-based premiums for inland and coastal flooding. These premiums represent what insurers might charge under a risk-based pricing system.

What it found was that under a risk-based model, taking all of these factors into account, a lack of equity is stark – Māori are 34% more likely to have a higher flood insurance premium, and those with lower material wellbeing are even more likely to experience a higher premium.

What does this mean for the future of the market?

Some insurance companies have already made progress in changing where and how they offer coverage. The business incentives of this are that insurers want to get the worst risk off their books first. However, there hasn’t been a noticeable widespread move to a different model or major examples of insurance withdrawal, leaving those in the most vulnerable areas uninsured.

This research hints at concerning changes to come. The impacts of this for government also mustn’t be understated – where loss can’t or won’t be covered by the private insurance market, often it’s the government who picks up the tab.

As Selai and Kendon’s work shows, understanding the complexities of this market is critical for marae and whanau who need to consider the fate of individually and collectively-owned property. This work sits in a collection of research mahi in the Deep South Challenge that looks at insurance and related issues, and it’s an area of the adaptation conversation that will need to continue at every level of society so that the benefits of climate adaptation are shared fairly.