Wellington residents should no longer assume that risk can be transferred to insurers to mitigate the impact of natural disasters, says the Wellington Mayor’s Insurance Taskforce in a discussion paper released earlier this week.
The taskforce was formed in June in response to concerns around the affordability and accessibility of insurance for building and home owners. The risk market has undergone recalibration following repeated earthquakes affecting central New Zealand and ex-tropical cyclones affecting the northern regions in the past decade.
The document says that the signals being sent by insurers cannot be ignored. “Further evidence would be useful and must be gathered, but it is clear that insurers are reacting to knowledge about natural hazard risks in Wellington (and elsewhere). Wellingtonians should no longer take for granted our cultural assumption that risk can be transferred on to insurers. That means the City needs to rethink how we manage risk, with a better balance of transfer, mitigation, acceptance and avoidance.”
Risk leadership group
The taskforce considered the establishment of an integrated Wellington risk leadership group to oversee an agreed implementation plan. This could be co-chaired by the mayor of Wellington and the Minister with responsibility for the Earthquake Commission and membership would be adapted from that of the Mayor’s Taskforce.
Overall, the implementation plan could:
• In the short term, promote strategies which property owners can use to maximise the availability of cost effective insurance cover.
• Commission research to obtain sufficient data to assess the scope of the insurance “problem”.
• Review the building regulatory framework with a view to giving more attention to the resilience of the buildings to damage.
• Review the way in which city plans address the interaction between natural hazards and building, including how best to obtain input from insurers, financial institutions, and the science community.
• Review the way in which natural hazard risk is assessed and communicated to the community with a view to improving the information available, and thereby improving the quality of investment decision making.
• Identify options to maximise competition and transparency in the insurance market
• Review the role of the state in the insurance market via EQC.
• It would be useful to organise work streams into residential, commercial and multi-unit residential, as the challenges for these building types are related but not identical.
• The Taskforce felt that the leadership group could oversee a shift away from simply transferring risk towards a more balanced blend of transfer, mitigate, accept and avoid.
Elements of plan
In more detail, the integrated Wellington risk leadership group would oversee the design of an implementation plan based on the following elements:
• With Treasury, insurers, brokers, EQC, RBNZ and building owners, develop a pragmatic mechanism to monitor:
o Dynamics in market pricing of insurance and the drivers related to market risk appetite.
o Actual limitations on the availability of insurance in Wellington.
o If building owners (and particularly bodies corporate) are not taking out insurance because of price or availability issues.
o Trends or factors that might indicate systematic under-insurance of Wellington households.
• Further analysis to determine what, if any, monitoring and interventions are required to maintain an understanding of the state of the property insurance market and the drivers of cost and availability.
• Consider options for increasing competition in and transparency of the insurance market.
• Investigate options for addressing the affordability of insurance for some classes of residential buildings in Wellington. The Taskforce identified that one of the options is the possibility of increasing the Earthquake Commission (EQC) first-loss limit to NZ$400k ($254k), and considers that should be one of the options considered by Treasury. Another option is to investigate EQC going back to providing some form of insurance for commercial property. The Insurance Council of New Zealand, though, does not agree with this recommendation.
• Clarify the Government’s and local governments’ respective position and capacity for funding repairs to horizontal infrastructure damaged by natural hazard events.
• Facilitate dialogue with insurance brokers about alternative insurance products (protected cells for example) for those who do not currently have access to such products, and where that might result in lower premiums.
• Facilitate dialogue with the banking sector’s risk manager group to clarify that sector’s perspectives on portfolio exposure of lending institutions to Wellington risk.
Short term initiatives
• Most of the above are medium term initiatives. In the short term, Government, local government and the insurance sector could:
o Provide advice to building owners on options to help consumers test whether they are receiving the best value insurance available.
o Promote strategies for optimising premium cost.
o Investigate the potential for pooling buying power and access to off-shore insurance (through brokers, or a Crown entity such as EQC).
o Investigate the possibility of multi-unit building owners purchasing insurance layers to spread insurer risk.
o Investigate potential for purchasing private insurance excluding earthquake perils to at least secure EQC cover. This option would require careful communication management in regards to transparency with EQC’s reinsurers. If private insurance cannot be obtained, investigate the availability of voluntary insurance from EQC.