How can we secure affordable home insurance for everyone?

Flash floods, cyclones and now tornados have torn around New Zealand.

While some Kiwis face a terrible clean-up, the rest of us wonder how to secure affordable insurance in the face of these headwinds.

We have already built in spots where premiums will keep rising. We cannot retreat. These houses have known risks, but the carpet isn’t wet yet.

Unlike Gabrielle-ravaged areas, a government-funded decision to walk away isn’t in the mix. The cheapest time to leave a site or accommodate higher floor levels is always at the foot of a disaster. It will probably remain our only viable retreat and accommodation route, because insurers are funding some of the bill.

We face more premium increases in 2023 as insurance models gain accuracy about climate change.

We can’t blame insurers for this. Their function is to sell a clinical contract, keep pay-outs under control and make a margin for shareholders. They are a risk management tool for our government to work alongside. If they don’t price policies correctly, or take too much risk, they’ll blow themselves up commercially. And we don’t need another virtual collapse like AMI.

No government-funded flood insurance

The Earthquake Commission Act of 1993 is about to be retired into the dusty cracks of history. It makes way for the equally dry Natural Hazards Insurance Act (NHI) kicking in from July 1, 2024.

David Friar, a partner in the law firm Bell Gully, points out: “The new Act continues to provide the first $300,000 of cover for residential buildings in respect of earthquakes, landslips, volcanos, tsunamis and hydrothermal activity. It doesn’t cover these buildings if they were damaged or lost due to a flood or storm. That risk still lies fully with private insurers”.

The continued omission of floods and storms appears deliberate. For most other hazards we all pay the same levy and cross subsidise each other up to $300,000.

Friar adds: “It’s also important that New Zealanders realise that rising sea levels are not considered a natural hazard – they create gradual damage and are not covered by the new NHI Act or private insurers”.

The American horror movie

In the US, homeowners suffer from an affordability and availability crisis. Only 30% of people had flood insurance during Hurricane Ian last year. Six small insurers became insolvent. In areas of poverty, only 1% of homeowners had insurance. The main supplier of flood and storm cover is from a state-backed scheme, not the private market and this is still too pricey for most.

As climate change digs in, protecting high-risk homes is like agreeing to buy a slot machine that always pays out. Insurers retreat and homeowners face a total wipe-out. The US government steps in with small rescue packages to help with repairs or renting. This runs out quickly and Americans accept they have to start life again.

Florida-style risk isn’t what we face here in New Zealand, but it gives some insight into the extreme.

The long-running British drama

Do we go British and wrap our high-risk properties in a subsidised flood scheme? “Flood Re,” as it’s known, has an average policy discount of 50%. It’s not available on new-builds as it’s a bailout for existing homes only. Discounts are funded from a levy on other policy-holders.

And here’s the catch. Protection from climate change can’t be offered indefinitely – it’s not random enough. Flood Re is aiming for an expiry date of 2039. Boom, the Titanic hits the iceberg and homeowners are left with no life jackets. It’s sink or swim, depending on whether you can afford the market price of flood insurance.

This is perhaps why the New Zealand EQC levy doesn’t cover flood damage to our homes and reduces cover to land only. How would we extract these climate change risks from a scheme with no expiry date? Actually, it’s as easy as deleting S24(5), which excludes floods and storms and reinstating it at a predetermined date. Public perception would be the barrier.

The British do have an advantage over us. They have dense populations and money to afford flood prevention infrastructure, such as sluice gates. Councils hope to get more in place by 2039 and attract insurers back to the table. For others, they face plummeting property values, unless the scheme is extended.

Worryingly, homeowners don’t seem to twig to this. House prices hold up well in areas where Flood Re policies are necessary. The optics of the scheme appear to confuse buyers about their real risks.

The Kiwi blockbuster

Many New Zealanders own a house in the vicinity of a river, stream, or in the direct line of coastal storms. Others live in high-rainfall cities with old pipe infrastructure and flash-flood risk. Some of us live inches above the ground on a low concrete slab. But before we throw each other under the insurance bus, we need to consider how we view this predicament as a society.

Under all flavours of government, we tend to help people and prefer the bailout model. Whether that’s investors in South Canterbury Finance, wage earners in the pandemic, Air New Zealand or red-zone victims in Christchurch, there’s a “package” to avoid ruin.

Affordability of flood and storm insurance points in one direction; community-rated insurance, rather than risk-rated. Low-risk homes cross subsidise high risk, until there is a forced retreat. Only government intervention can create a flood and storm affordability scheme.

Our current EQC Act and future NHI Act don’t cover our homes. Perhaps this is wise, so climate change isn’t viewed as random with perpetual community-rated insurance expected.

However we dress it up, we require some sort of bridging scheme to prevent our high-risk homeowners from failing to insure and facing a financial wipe out.