This Climate Business podcast: The Global Warming Premium – Kali Mercier (edited excerpts)
Listen to the full episode here.
Ross
"What do we know about how much climate change is going to cost homeowners?"
Kali
"Some insurance companies have recently started moving to risk-based pricing for flood risk, which essentially means that rather than everyone sharing the cost of flood risks equally, insurance companies are now starting to say, well, actually, we know now because we've got better data and better technology, that your house is actually twice as risky as the house down the road. So, we're going to charge you twice as much for flood risk. And that means some people have seen not just gradual increases to their premiums, but pretty steep increases.
"And that's only going to get worse as climate change starts to bite, because those people that are in very risky areas, those risks are going to go up pretty quickly. And so some people are going to find they can no longer afford insurance. And others are going to find not just that they can't afford it, but insurance companies are going to be saying, well, actually, we don't want to insure you at all, because your property is actually just simply not economic for us to cover.”
Ross
“So what kind of numbers are we talking about? What are the proportions of this challenge?”
Kali
"Very hard to say. We don't know exactly how fast climate change is going to happen. If you look at places like Auckland and Dunedin, Christchurch and Wellington, there's likely at least 10,000 properties going to be struggling to get insurance within 20, 25 years. That's just for coastal erosion. There's also, we're going to see increase in rainfall and surface water flooding like we saw during Cyclone Gabriel and the Auckland floods, and river flooding and things like that.
"So there's lots of different risks that are going to be increasing. And we don't have a clear figure. What I can tell you is that about 15% of our current housing stock is in a flood risk zone currently. Some of those houses are only at a tiny risk of flooding, but about 5% of our houses are at an extreme risk of flooding currently, and that will increase over time.”
Ross
“How did we get to the point where those houses were built in flood zones?”
Kali
“Well, you can build a house in a flood zone, and it'd be okay if you put in place proper risk mitigation. Not building in flood zones is actually pretty hard in New Zealand. A lot of our land is subject to floods, slips, volcanoes or earthquakes. It's pretty hard to find a little stable patch of land anywhere in New Zealand that isn't vulnerable to one of those things. And it's been manageable up till now. But the issue is really the fact that climate change is going to make those risks worse.”
Ross
“So devil's advocate here, risky houses are going to get more expensive to ensure, presumably, risk-free houses or lower-risk houses, less so. Why don't we just let the market take care of it and fix this problem?”
Kali
“I think we would run into some really serious equity issues if we did that. One of the big things I'm worried about is that some communities are really subject to climate change more than others. If we leave it to the market, there'll be whole swathes of people and communities that are under-insured, and that are particularly vulnerable to climate change, and we'll all pay the price, really.
Ross
“I suppose you could see this challenge as the first time that climate change gets real for many of us at a personal financial level. It's the first time it's costing us?”
Kali
Absolutely. And I think that people have had a bit of a rude shock and a bit of a rude awakening about it, I think, last year, particularly with the big weather events in the North Island. A lot of people have really struggled.
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