1 Sep 2022

Climate change and insurance: Weighing up the risk

From The Detail, 5:00 am on 1 September 2022

Flooding in Nelson and the West Coast has already cost millions of dollars in damage - and the dust has barely settled. As climate risk goes up, how do we continue to insure our health and homes?

Flooding gouged holes in the road at Devenish Place, Nelson.

Flooding gouged holes in the road at Devenish Place, Nelson. Photo: Nelson City Council

Last year, the World Meteorological Organization released research suggesting the number of weather-related disasters had increased five-fold over the past 50 years. 

Eleven thousand disasters happened between 1970 and 2019, the research said, killing more than two million people, and costing more than $3.6 trillion USD.

While people might quibble over whether these weather variations are cyclical, most climate scientists agree that human-caused climate change is contributing to the issue.

The thing is, disasters do happen. Accidents happen. People move to locations which might be uninhabitable in 100 years' time, and that's not their fault, per se, it's just how it is.

And when misfortune does befall us, one thing that can take the sting out of a loss is insurance.

But insurance is an industry which is shrouded in mystery: the process of figuring out premiums, of assessing the risk of different things happening, the role big insurance firms play in the global economic system, and how an industry based fundamentally on calculating risk as accurately as possible is adjusting to climate change, and how severely the industry - and property-owners - will be affected. 

Emma Vitz, an actuary who specialises in natural perils and climate-based risk, talks to The Detail about the work she does, and how this crucial, global industry is approaching the known-unknowns of climate change. 

"Think about the work an actuary does in three broad categories: there's pricing...that's looking at how much should an insurer be charging for a particular risk.

"Then we've got the reserving side of things, which is looking at how much money an insurer should be holding on to for claims.

"And then there's capital, which is looking at what an insurer should invest in."

Vitz's work with consulting firm Finity Consulting is mainly in climate-based risk - an area the insurance industry has always been alive to. 

Emma Vitz looks at the camera with a serious expression. She is pictured from the shoulders up, wearing a white blouse and standing side on to the camera. She is against a dark backdrop.

Emma Vitz is an actuary specialising in natural perils and climate-based risk at Finity Consulting. Photo: Emma Vitz / Supplied

"The questions of: 'is climate change a thing? Is it going to have a significant impact? Are we seeing the beginnings of that already?' I think pretty much everyone agrees that's the case. 

"General insurers are very interested in [climate change] in terms of natural disasters and that kind of thing.

"You've also got what we would describe as 'transition risks': if we come back to that idea that insurers invest money, as we transition to an economy that's less reliant on fossil fuels, a greener economy, reacting to climate change - the investment side of insurance has to think of that as well.

"And there's also the fact that if we decide as a society that we're not going to be using those energy sources as much, the value of those companies goes down. So if you're an insurance company holding a lot of assets concentrated in those industries, that becomes a problem."

In the national climate adaptation plan released earlier this year, the idea of a national flood insurance scheme is mooted, which would make flood insurance more easily accessible to people in flood-prone areas, whose properties private insurers wouldn't touch. 

Discussion around this idea intensified following the devastating floods in Nelson and along the West Coast of the South Island in August. 

Asked whether New Zealand could introduce an insurance model addressing all types of climate-related disasters, Vitz says the only way it could possibly be functional is if it were well-funded, like EQC, but may face backlash due to the inherent cross-subsidisation.

"One thing I question is: are people going to be as happy with the idea of cross-subsidisation when it's happening at a dwelling level?

"If you're sitting at the top of a hill, and you're looking down on your neighbour down the road, they're right next to the ocean, and they're being flooded, and you can see that very clearly, are people willing to accept cross-subsidisation in that situation?"

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