Why the cost of coastal insurance is set to rise

Having a coastal property is a bit of a kiwi dream. But when it comes to insurance, it could soon become a nightmare to insure beachfront properties. The cost of coastal insurance could be on the rise and climate change is to blame. Not only will climate change affect the landscape of New Zealand, but it could also affect your chances of insuring your beach house for a reasonable rate. Let’s look why that is…

The effects of climate change: New Zealand is incredibly vulnerable when it comes to natural disasters. In fact, according to the Insurance Council, our country is one of the most vulnerable in the world when it comes to the impact a natural disaster could have on our economy.

Flooding, earthquakes, storms and cyclones all contribute towards an average cost of $1.6 billion a year in repair costs. Without a significant risk reduction plan in place, that annual figure could rise.

The government have implemented a Climate Change Adaptation Technical Working Group who are undertaking risk assessment work. The group comprises of experts including engineers, climate scientists, Māori leaders, farmers and business people. It has been established specifically to help New Zealand prepare for climate change.

There are many areas of New Zealand that have been assessed as being at high risk of damage as a result of natural phenomenons. These areas include Hawke’s Bay, the Hauraki Plains, Helensville, Mission Bay, Kohimarama, some areas of Wellington, South Dunedin, the Taieri Plains, and some parts of Christchurch. Those are just the areas that are below sea level, there are many more at risk in other areas.

What does it mean for coastal insurance?: insurance is designed to protect you against risks - those unexpected things that you don’t see coming. But when natural disasters and the effects of climate change become predictable, the eventualities are no longer a risk. They become a certainty.

Insurance companies will be forced to raise the premiums on coastal properties in some areas to compensate for this.

There may even be some areas that are viewed as too high risk, and will effectively be uninsurable.

How does NZ insurance work?: most New Zealand insurers follow a community based approach. Regardless of where you live in the country, your premium costs will be similar. The thought process behind it is that the low risk areas will compensate for the high risk areas. Everything balances out in the end.

But as the threat of natural disasters increases, insurers may be forced to move to a risk based model. That is where homes in high risk areas pay a larger premium than those in low risk areas. They will pay for the privilege of having their home insured when the risk of needing to claim is higher.

Currently, the majority of New Zealand all enjoy the same insurance product. Some might have a slightly higher excess, some pay a bit more for their premiums, but it is incredibly rare for insurers to deny people some form of cover.

But change is on the horizon. Insurance companies have noticed an increase in the amount they are paying out for nature related reasons. The payouts cannot continue to increase without some modifications made to their systems.

There will need to be a way for them to continue making payouts as their costs increase.

What does it all mean?

It is not all doom and gloom. The Insurance Council maintains that insurance should remain accessible and affordable for all. We are still in the research stage of the effects of mother nature. There is simply not enough data and information available to make an informed decision at this stage.

It seems that insurance costs will rise in the future. But we cannot completely predict how that will affect coastal property owners in high risk and low risk areas.

What we do know is that insurance is a must for any home. So much that banks will not issue a mortgage without insurance on the property. So the thought of insurance companies not renewing coastal insurance policies is scary for those with a mortgage, and could hinder their chances of resale.

But right now it is a case of watch this space for future developments...


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