A relatively small increase in sea level rise will likely cause at least partial insurance retreat within only 15 years for the vast majority of coastal residential properties at risk of floods, according to a new report. By 2050, most homes in such locations are likely to have experienced full insurance retreat.
The forecast is presented in the report, “Insurance Retreat Sea level rise and the withdrawal of residential insurance in Aotearoa New Zealand”. The paper analyses at-risk residential properties, with key results focusing on those which are both within the reach of existing 1% Annual Exceedance Probabilities (AEP) storm surges and within 1km from the coast.
The study, on which the report is based, was funded by the New Zealand Ministry of Business, Innovation and Employment (MBIE) through the Deep South National Science Challenge.
Homes in Wellington and Christchurch which currently have a 1% probability of coastal inundation are expected to face a partial insurance retreat from 2030, with homes in similarly exposed locations in Auckland and Dunedin following only a few years later.
In these four cities, full insurance retreat is likely to occur for at least 10,000 properties by 2050. A 0.2% AEP (1 in 500 years) event making landfall in Tauranga is unlikely to be expensive enough to trigger reinsurance contracts but highlights that Aotearoa New Zealand is still moving into and building in hazardous coastal locations.
Insurance retreat takes place when sea level rise makes it too costly for insurance companies to insure properties that are exposed to coastal disasters. It occurs when a private or public insurer declines an application for insurance coverage or stops offering renewal of existing coverage, based on the property’s exposure and vulnerability to an escalating hazard.
Partial retreat refers to situations where an insurer introduces terms that transfer a significant proportion of a property’s risk back onto the policyholder. These are usually seen through monetary caps on coverage, hazard specific excesses and the exclusion of an entire hazard.
A common response to increasing climate risk is to “harden the coasts” to defend property from inundation. However, engineering solutions like sea walls, stop banks and levees only delay damage at best and might even be counterproductive, as it encourages intensification in hazardous locations. Responses to sea level rise insurance retreat should attempt to eliminate the underlying risk by moving homes out of harm’s way.
Insurance companies work with Annual Exceedance Probabilities (AEP) to decide what to charge for coverage and when to stop insuring a property. A 1% AEP event occurs on average once every 100 years, a 2% AEP event occurs on average once every 50 years and a 5% AEP event occurs approximately once every 20 years. Anecdotal evidence from the insurance industry suggests that partial insurance retreat begins to occur when the likelihood of an event reaches the 2% AEP threshold, and full retreat will have occurred by the time this reaches 5%.
People use insurance as a way of transferring risk, however it does not reduce the risk itself.