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Building For Climate Change: Why the Insurance Industry Should Have a Say
Climate change is a big consideration for many stakeholders in the building and construction sector, especially as New Zealand strengthens its efforts for a better future environment. However, there's a key stakeholder that shouldn't be dismissed when planning new residential properties – insurers.
Insurers are critical in the future discussions of building standards, playing a key role in deciding New Zealand's 'red zones,' areas that are unsuited for residential home builds.
The Risk of Climate Change
Climate change threatens New Zealand's ecosystem and all who live here. From 1909 to 2022, it was recorded that the country's average temperature had increased by 1.26 degrees Celsius. In fact, 8 out of 10 of the warmest years on record have been recorded in the last decade alone.
This warming temperature brings about worsening weather systems, such as floods, damaging winds, and cyclones in areas inhabited by many residential properties. Earlier this year, 750 properties were classified as red-zoned in North Island because of Cyclone Gabrielle.
Additionally, over three thousand buildings were restricted from access, and four thousand buildings were marked as unsafe. These natural disasters are becoming more frequent, pushing insurers to respond by encouraging customers who live in high-risk areas to increase their excesses, or by raising insurance premiums.
It's also not uncommon for insurers to adopt risk-based pricing, such as charging premiums based on individual property risk and expanding their insurance premium increases to cover more natural disasters.
A Negative Effect on Insurers and Home Ownership
The rising threat of climate change brings about undesirable consequences for both insurers and homeowners. Insurers will have no choice but to increase its premiums and may even choose to withdraw from selling insurance to a certain area.
While insurance companies generally assess insurance premiums based on natural disasters that occur on a once-every-30-years basis, this assessment is set to change with a higher risk of natural disasters in certain areas.
Reinsurers, companies that protect insurers financially, could decide that covering specific areas of New Zealand is simply too risky. In this case, the best course of action would be to withdraw all covers for residential properties in that area.
So where does this leave homeowners? Many will grapple with the unaffordable costs of home insurance premiums and the pressure to increase their policy excess. If an insurer decides to withdraw their insurance in a certain area or not cover homes in areas they deem high risk, this could also affect their bank loans.
Many Kiwi banks generally require homeowners to take out home insurance before approving their home loan. It's also understood that banks will be more averse to lending in areas that are high risk - but what if the home is forecasted to be high risk in the foreseeable future?
This leads to a challenging situation where homeowners and banks are left with insurers who have withdrawn their cover on homes that’s still under mortgage repayment.
Banks would also be reluctant to loan in areas likely to be uninsurable in the future, affecting where homeowners should buy and where builders should build. This unhelpful chain of events is a cycle that puts builders in a situation beyond their control.
The Way Forward
When deciding where and how to build, an expert group with various insurers, council members and builders should be involved. This sets a standard with a multidimensional approach that covers all scenarios.
Currently, the home-building process looks at past climate events and statistics to determine if an area is suitable for residential properties. This method is now flawed due to the unpredictable nature of climate change. Instead, the group needs to consider multiple scenarios that include data for past and future climate changes.
Insurers play a key role in shaping the guidelines for new home builds, contributing to suggestions such as:
- Red-zoning assessments of certain housing areas before building
- Understanding the feasibility of housing developments in a rural area
- Assessing the likelihood and costs of residential development being insured in certain areas
By allowing these types of input during the planning stages, insurers can compete based on price and services instead of hidden property risks. It also ensures consumers get a fair price on their homes and not get caught out at the last minute.
More importantly, it ensures that builders' developments are not wasted due to mortgage constraints and high insurance premiums.
How Builders Can Secure Themselves Against Climate Change
Climate change increases the risk of builders completing their projects on time and within the allocated resources. To secure themselves, Kiwi builders should consider investing in construction insurance that protects their assets and builds their reputation in the industry.
Bonded NZ helps builders find the best insurance, warranties, and surety bonds that keep their best interests in mind. Whether it's a big or small project, our cost-effective options help them secure their projects at every angle.
For more information about our services, contact our team today.