Nearly two years ago, I posted about climate risk and disaster insurance, noting that insurance premiums for the homes most at risk as a result of climate change, including coastal properties, were likely to face increasing insurance premiums. The most surprising thing is that, nearly two years on, there hasn't yet been a major shift by the insurers. Until now, as the New Zealand Herald reported last month:
A major insurer is eyeing risk-based pricing for coastal erosion, in what's being described as another landmark step by the industry to confront climate threats.
Last year, Tower became New Zealand's first insurer to introduce a new pricing model based on individual homes' risk of flooding from rainfall and rivers – and to make such ratings public.
It meant about 100,000 customers received either a low, medium or high rating for their home, reflecting the potential risk of a flood and the estimated cost of replacing or repairing.
About one in 10 customers received a small hike in the flood risk portion of their premiums – while a few hundred that received a high or very high ratings saw increases of more than $500 a year.
In some cases, the company needed to find customers alternative insurance cover, chief executive Blair Turnbull told the Herald.
That story came hot on the heels of this one the day before, also from the New Zealand Herald:
Properties worth $1 million on Wellington's Petone foreshore could cost $100,000 a year to insure in 20 years, a climate risk expert says.
The warning came as the Government grappled with whether to set up its own flood insurance scheme to cover people as private insurers become less willing to.
Climate change is driving increasingly common and damaging storms, and it, coupled with sea level rise, means thousands of homeowners in harm's way face spiralling premiums or having cover pulled altogether.
The scary thing about that story is the mere suggestion that the government might get involved in offering insurance to high-risk properties. That is exactly the problem I was concerned about in my post from two years ago. The government offering insurance to coastal properties, or properties on flood plains, or those at risk of severe erosion, or whatever, leads to a problem of moral hazard.
Moral hazard arises when one of the parties to an agreement has an incentive, after the agreement is made, to act differently than they would have acted without the agreement. In this case, the agreement is between the government, and homeowners (or potential homeowners) of high-risk properties. After the government creates an insurance scheme for high-risk properties (or agrees to subsidise insurance premiums in some way), that reduces the costs of owning an at-risk property. When the cost of something decreases, we tend to do more of it than we would otherwise. At the margin, people will be a little more likely to buy or live in at-risk properties, or to construct more at-risk properties. It likely makes the problem of the amount of assets (and people) at risk of sea level rise, coastal inundation, erosion, etc. even worse.
This is not just an issue that New Zealand is grappling with. As this July article in The Conversation, by Brian Cook and Tim Werner (both University of Melbourne) notes in relation to the Sydney floods that month:
In flood risk management, there’s a well-known idea called the “levee effect.” Floodplain expert Gilbert White popularised it in 1945 by demonstrating how building flood control measures in the Mississippi catchment contributed to increased flood damage. People felt more secure knowing a levee was nearby, and developers built further into the flood plains. When levees broke or were overtopped, much more development was exposed and the damages were magnified. “Dealing with floods in all their capricious and violent aspects is a problem in part of adjusting human occupance,” White wrote.
Cook and Werner note that:
To tackle flood risk, we have to respond to the social, political, economic, and environmental factors that drive development and occupation of floodplains.
Surprisingly, Cook and Werner don't note the additional problems that providing additional insurance to at-risk property owners would create. They are right that there are a range of inter-related factors that lead to development in at-risk and largely inappropriate locations. Their solution is to prohibit development in those areas. Prohibition is a very blunt instrument, but at the very least government shouldn't be considering policies that would incentivise more at-risk development. We need to ensure that homeowners and developers adequately take into account the actual climate risks that their properties face. There is evidence that coastal properties are not sufficiently risk-priced (see this post). Only then will we see a reduction in at-risk developments, as well as saving the taxpayer from covering the costs of coastal property owners' and developers' decisions.
*****
Read more:
No comments:
Post a Comment