Government intervention to create a flood insurance scheme to help manage the impacts of climate change would be a “grossly disproportionate response”, the Insurance Council (ICNZ) warns.

The submission responds to one of the few concrete proposals contained in the draft national climate change adaptation plan (NAP) published by the government last month.

The draft plan asked for submissions on the potential value for New Zealand of a scheme like that introduced in Britain, known as Flood Re, to make flood insurance available to homeowners in flood-prone areas who had been unable to get reasonably priced or any flood insurance.

The ICNZ submission suggests that the focus is wrong for NZ, where flood insurance remains readily available, misunderstands the climate change adaptation issue, and would risk making adaptation to sea-level rise and flooding more difficult by encouraging more people to live in flood-prone areas.

“Triggers for action to reduce climate change risks and build resilience are not determined by whether insurance remains affordable and available,” the council’s submission says.

“Indeed, the time for action is now for those areas most at risk, while insurance is still widely affordable and available throughout New Zealand.”

With between 96% and 98% of homes insured, “New Zealand enjoys one of the highest levels of insurance penetration in the world”, the submission says. “There is no failure in the flood insurance market that requires intervention.”

Flood insurance intervention should only be considered where there was a market failure.

Raising the potential for such a scheme was “a disproportionate, inappropriate response to a barely articulated short-term ‘problem’, focusing on one symptom of climate change rather than the underlying cause or wider consequences”.

Cart before horse

In fact, focusing on climate change adaptation through an insurance lens risked a loss of focus on the fact that taking actions to adapt to emerging threats is the most important, immediate task.

That should start with a systematic, national process of identifying the areas where adaptation was likely to be required and how to pursue and fund such activity, particularly in areas where “future intolerable risks” had been identified.

“Transferring risk to insurance does not reduce risk,” the council’s submission says, although the insurance industry’s ability to price risk should help signal where the need for adaptation is likely to be greatest.

Where intolerable future risks existed, managed retreat should be regarded as a last resort option, with many stages of policy and action available before that was necessary.

“ICNZ is concerned … that the way in which the NAP addresses managed retreat seems to suggest that the availability or affordability of insurance would be a trigger for retreat” when the triggers should be loss of social wellbeing, environmental and cultural harm, and economic loss.

Not all those factors were insurable.

“Retreat should … be thought of as pre-emptive, so it is not enacted at the point when intolerable disaster strikes,” the council argues. “While the affordability and availability of insurance is important, adaptation planning should be designed to avoid that from occurring.

“Risk reduction measures support the availability and affordability of insurance.

“Transferring risk to insurance does not reduce risk,” the council’s submission says.

Risk of opposite effect

Conversely, if the government created a flood insurance scheme to lower the cost of flood insurance, it could have the opposite to the intended effect and increase the costs of climate change.

“There is a very real risk that such a scheme will hinder climate change adaptation if people are supported and encouraged to remain in increasingly risk areas,” ICNZ says.

That would create a “moral hazard”, with the increased public expectation that the government would subsidise “insurance for all hazards, including sea-level rise, which of itself is not insurable”.

Targeted assistance, based on income, may be justified if evidence emerged that insurance was becoming unaffordable in some areas, but “insurance is readily available and affordable for the vast majority of New Zealanders in flood-prone areas, so an expensive and heavy-handed intervention is not required”.

Properly managed, however, existing properties in an identified flood zone would continue to be able to get flood insurance cover since they did not add to the existing risk.

The issue was new developments in high-risk areas.

There should also be “a clear line drawn so New Zealanders understand that there will be no assistance if development occurs in a high-risk area”.

System ill-prepared

The council takes aim at a deeper problem it suggests the government is unwilling to acknowledge: that the “first step” of quantifying the scale of the problem has “not been taken”.

The draft plan published last month was “a piecemeal collation of current initiatives” but without a cohesive plan.

The plan mixed up responses to the long term challenges and consideration of short term responses, such as flood protection scheme.

It suggests also that the three pieces of legislation currently being developed both to replace the Resource Management Act and establish the approach to climate change adaptation are not up to the task.

The NAP “should concede that climate change adaptation is not given sufficient primacy in addressing future development, that the challenges will prove too much for local government to manage its own.

“In short, current institutional arrangements and planning processes are incapable of addressing the problem.”

Flood maps needed 

The council says there is an urgent need for national flood maps, a nationally consistent policy approach to identifying flood risk to ensure responses are consistent between regions.

The ICNZ also questions why the insurance issues are only addressed to residential property rather than commercial property.