Twin disasters changed the risk narrative in New Zealand

New Zealand’s insurers have learned some lessons and become more proactive following the twin disasters of the Auckland Anniversary Weekend floods and Cyclone Gabrielle in early 2023.

Tim Grafton, an independent director, consultant, and CEO of the Insurance Council of New Zealand (ICNZ) from 2012 to April 2024, says these events changed the narrative for New Zealand risk.

Before the events, he says flood events were localised with insurance losses seldom, if ever, triggering reinsurance support. The 2023 events, however, saw insurance claims approach NZ$4 billion, triggering significant reinsurance support. 

“In comparison, 2022 had set the record for insured claims from weather events at about $350 million in insurance pay-outs for the entire year. 

“The twin events in early 2023 accounted for ten times more than that. It is clear now that weather-related perils are part of the reinsurance narrative for New Zealand’s natural hazard risk in a way that they were not before 2023.” 

Insurance lessons learned

Grafton notes that following the twin events, insurers have shared aggregated claims data and risk modelling with central and local governments to help inform decisions made about where people can live in the future and where greater flood mitigation work is needed. 

“This now points the way for the industry to be able to contribute toward decisions that can make New Zealand more resilient to natural hazards in future,” says Grafton. 

“Insurers have also been more vocal and explicit about the need to manage insurance affordability and availability by working with central and local governments, sectors like banking, building, science and others to reduce risks and build resilience to natural hazards.

“They are also keenly aware of the need to meet a surge in resource demand when disaster strikes and have developed arrangements to source resources from offshore if needed.”

Indeed, the twin events resulted in more than a year’s worth of claims being received in just two weeks, requiring insurers to bring in resources from other parts of the country and overseas.

Grafton says New Zealand’s insurers are now providing more advice to their customers about the risks they face. Plus, they are working with the Natural Hazards Commission (NHC) to improve the ways land claims can be assessed more expeditiously.  

He explains that the events caused many damaging landslides giving rise to both flood and land damage to homes. The NHC meets the cost of land damage while insurers act as their agents for those claims and manage flood claims for their customers. 

However, the events showed the NHC and insurers that claims can take much longer to settle than expected. 

Grafton says, “It may take weeks to safely access land to undertake geotechnical assessments of the damage. Local authorities often undertake their own geotech assessments before permitting insurers and their geotech experts on site. The volume of claims overruns the available geotech resources in the country, all of which delays the settlement process. 

“Some local authorities took many months to determine whether to classify homes as unrepairable, unable to be rebuilt and determine sites where individual or area-aide mitigation work would be required,” he says. 

“This left homeowners in limbo and unsure how they wanted to proceed with their insurance claim until they had certainty about their future situation.” 

Data sharing and disaster response

Grafton says the twin events also led to a response from the central government which was different to the Kaikoūra earthquake which was again distinct from the Canterbury earthquakes. 

“The Canterbury earthquakes saw a response led by the central government, the Kakikoūra earthquake was a mix of central and locally led responses and the 2023 events were locally led. 

“This points to the need for consistency and clarity in future before a catastrophe occurs as to how central and local government will respond. It matters because government decisions affect how well insurers can respond to their customers.”

Grafton says while insurance premiums have increased in New Zealand since the twin disasters of 2023, these events are only part of the reason for the increase.

That’s because insurance premiums worldwide have increased sharply over the past two years.

“In the United Kingdom, annual insurance costs rose nearly 20 per cent and over 30 per cent for houses. In the United States, there are reports of home insurance increases in parts of the country of 40-60 per cent. In Australia, annual insurance has risen 16 per cent. 

“Globally, reinsurers have seen weather-related disaster costs surge well above 10-year averages in recent years. This has led to significant rate increases (which have since plateaued) and more limited capacity.”

Grafton adds that several drivers of premium levels are out of insurers’ control in New Zealand. These include building cost inflation which ran significantly higher than the consumer price index as well as rising global reinsurance costs.

However, he notes, “Insurance remains widely available throughout New Zealand. The only material change in accessibility has been to those areas that were assessed by local authorities after the twin events to present such a risk to life that they prohibited any further residential development. 

“In those areas, insurers have not been offering house insurance. In other areas, a high risk remains until flood mitigation measures have been completed. In such areas, insurers have generally offered cover on a case-by-case basis.”

Grafton says the twin events highlighted New Zealand’s vulnerability to climate events and the significant infrastructure deficit that exists to mitigate the risks. 

“They raised awareness of historically poor decisions which resulted in homes and businesses being in places they should have never been put. The country must act to become more resilient and reduce the risks.” 

From premium hikes to future risks

Grafton adds that solutions do not lie in the hands of insurers alone.

“They will require central and local government as well as many other sectors to work together in managing natural hazard risks,” he says. 

“Doing that will support the affordability and availability of insurance as well as avoiding the social, economic and environmental harm that catastrophes bring.”
According to Grafton, it is widely accepted that there will be more frequent and impactful climate events.

“It is highly unlikely we'll experience events on the scale of Cyclone Gabrielle every year, but we are likely to experience more severe weather events than Cyclone Gabrielle in the future, and more frequent large flood events,” he says. 

“This is primarily because as the atmosphere warms it can retain more moisture which is then released in convective storms and cyclones. 

“We know that many homes and businesses are located in flood plains and close to the coast which over time will be affected by sea level rise. 

“Many flood mitigation measures and infrastructure have been built at a time that did not factor in this changing climate. These factors collectively increase the flood risk outlook.” 

Grafton expects those who have never experienced a natural catastrophe will come away from this year’s ANZIIF New Zealand Business Breakfast with an understanding of what to expect. 

“While those who have responded to a natural catastrophe will know what they experienced, events of this scale have so many aspects to them that there is still so much to learn from listening to the experiences of others,” he says. 

Join us at ANZIIF's annual New Zealand Business Breakfast