Cyclone and floods redefine NZ risk

Climate change is having a real and tangible impact on New Zealanders' lives, as the frequency and severity of extreme weather events increased during this summer's devastating floods. The events are set to have a significant impact on the insurance sector.

Following the unprecedented and widespread damage caused by the Auckland Anniversary Weekend flooding in the North Island and Cyclone Gabrielle, it is expected that insurance premiums will continue to increase. The major events have followed years of heavy flooding across Aotearoa, with the South Island and West Coast badly hit in recent times.

Insurance providers have reported significant claims numbers following these devastating events, exacerbating the market conditions, testing claims resources and response capacity. Accordingly, insurance providers are asking for patience as they work through the recovery.

“The insurance industry continues to experience very challenging market conditions, which will be with us for the foreseeable future,” says Paul Munton, executive general manager - broking branches at Rothbury Insurance Brokers.

“This is primarily being driven by current environmental factors, such as the rising frequency and severity of extreme weather events, general inflationary pressures and supply chain disruptions, none of which will abate in the short term.”

As the insurance market is significantly influenced by the claims experience, it is expected that insurance providers will determine their own level of comfort and for many, this will mean reducing their risk appetite.

Given current market conditions, insurance providers are seeking to limit their exposure to natural catastrophe due to the reduction in reinsurance capacity, escalating the price of property catastrophe reinsurance, and increasing frequency and severity of losses, says Munton.

But that’s not all. In fact, Munton says the recent extreme weather events are likely to test the willingness of insurance providers to even offer or accept business in areas exposed to natural disasters.

The implications are significant, and property investors should exercise caution and undertake due diligence in terms of the insurability prior to any commitment, Munton adds.

According to Munton, brokers and clients need to work more closely together than ever to ensure New

Zealanders are adequately covered, prepared, and protected.

“We all recognise the challenge of affordability today and clients now more than ever need personal service and quality advice about their insurance. We work hard to ensure our clients access appropriate insurance solutions to best protect their assets, securing the right combination of risk, coverage and cost. Know your client, know your market, and know your worth” says Munton.

Claire Holt, a financial adviser at SHARE, says the immediate impact of the Auckland floods and Cyclone Gabrielle will be in the large volume of claims lodged by customers.

“This affects everyone in our industry, especially our broking staff, loss adjusters and insurer claims staff. It’s been an extremely hard start to the year with the extreme weather events but it’s our job to look after our clients first and foremost and to make this a priority.”

As of the end of February, the Insurance Council of NZ – Te Kāhui Inihua o Aotearoa says more than 40,000 claims from the Auckland

Anniversary Weekend floods have been processed, with that number “rising fast”.

For Cyclone Gabrielle, it is still early days and the ICNZ doesn’t yet have a to-date number on how many claims have been lodged.

“But clearly, this is a major event and there will be many, many thousands of claims,” says chief executive Tim Grafton. “So far, some members have given claims numbers totalling a few thousand, but that will clearly grow. We do know the total claims for extreme weather events for

2022 totalled about $350 million and it is clear already that the Auckland Anniversary Weekend event and Cyclone Gabrielle will exceed that.”

IAG, which owns the AMI, State and NZI Insurance brands, says it has received 2300 claims so far from property owners from Cyclone Gabrielle, in addition to more than 21,000 claims already received for the Auckland Anniversary Weekend floods.

Tower says it had so far received about 6000 claims for both weather events and expected to receive hundreds more.

Holt expects to see insurance rates increase due to the two extreme weather events.

“The insurance industry has learnt lessons from previous events in terms of resilience but there is still room for improvement,” she says. “Going forward I would expect rate increases but this will be a year or so down the track once costs are accounted for so it’s not an immediate concern.”

Wholesale changes

In addition to the expected rate increases, Holt says the recent extreme weather events will lead to wholesale changes in the industry over the next few years.

It will be “most likely” that insurers will be seriously considering whether to offer flood as an optional addon to policies rather than it being automatically included in the cover as it is now, she says. “This is common in Australia already (and) I would expect insurers to look more closely at homes with adverse environmental risks such as on cliff tops and waterfront properties. I hope that it doesn’t come to this but can see it being on the cards.”

Then there are insurance premiums. The devasting nature of the two most extreme weather events in New Zealand have created several profitability challenges for insurers with flow-on effects for those insured.

So, will the impacts of Cyclone Gabrielle mean premiums will rise? The short answer is yes, says Tower chief executive Blair Turnbull.

“Insurance pricing is based on a range of factors, and we work hard to ensure our premiums are competitive and provide value. For example, Tower has invested in technology and in streamlining our operations which enables us to absorb cost increase.”

The last two years of Covidrelated inflation, however, has been challenging for everyone, the insurance industry included, he says. “Inflation coupled with the increase in weather events we are seeing will inevitably result in higher premiums.”

Turnbull praises New Zealand’s high rates of insurance, with more than 90% of homes having coverage.

“This is something to be very proud of and is certainly something we want to continue. New Zealand has a strong and resilient insurance industry and it’s critical that it stays that way.”

Tower is actively managing climate change risks to its business by continuing to expand its riskbased pricing strategy to include more climate-related hazards, says Turnbull, including implementing risk-based pricing for coastal and landslide risks this year in addition to its existing inland flood risk model.

“We are budgeting for increasing large events in our planning to manage financial impacts and we have a robust reinsurance programme to provide protection from financial volatility.”

Tower is also developing new products and models to support communities through climate change, like its Cyclone Response Cover in Fiji - a parametric insurance product that provides a rapid cash pay-out when a customer is impacted by cyclone, regardless of damage and without the need for an insurance assessor’s signoff.

“Insurance of course is only one part of the equation. As a country we need to adapt our approaches and improve our infrastructure to help protect communities,” says Turnbull.

While one of the top effects of severe and frequent extreme weather events will be to push up insurance premiums, it is widely expected that the reinsurance market will also be affected.

Suncorp has already warned that the Auckland Anniversary Weekend floods and Cyclone Gabrielle could trigger its reinsurance cover, and now Tower says it is “likely” the same will happen to them.

“Tower has previously disclosed that the Auckland and upper North Island weather event will predominantly be covered by our catastrophe reinsurance, and we believe it is likely that Cyclone Gabrielle will also trigger our catastrophe reinsurance cover,” says Turnbull. “We are currently working with reinsurers on reinstating our reinsurance arrangements to ensure we have full levels of catastrophe cover going forward.”

The severe weather events both here in New Zealand and globally mean that reinsurers will be increasingly selective about which insurers they choose to underwrite, says Turnbull.

“Reinsurers have been attracted to Tower’s robust risk management capabilities and strong underwriting, including our approach to risk-based pricing, and our dynamic rating capability. We are pleased to have strong relationships with an excellent reinsurance panel, and we are working closely with our reinsurers as we respond to these events.”

Meanwhile, Holt says there are opportunities to improve client resilience by learning from the summer’s events and keeping New Zealanders better informed.

“We’ve seen first-hand a mismatch in advice to clients about mitigating their losses and the steps they can take now, especially where the client is directly insured or through a non-adviser intermediary - they appear to have no idea of where to start nor have they had any advice,” she says.

“We’ve got more to do collectively as an industry to provide the insured in general with advice. A collective solution across both the intermediated and direct market, including industry organisations such as ICNZ, insurers and IBANZ, to all clients as to what to do in events such as large-scale flooding would be helpful, as all insurers would benefit from insureds being able to mitigate loss immediately following large scale events.”

Until then it’s “business as usual” for brokers, says Holt. “We will be looking to work with insurers more closely in the future in aligning ourselves with their suppliers and building relationships with them to get the best outcomes for our clients. I can also see cluster groups forming direct relationships with suppliers to look after our clients first and foremost.”