“Weather losses are closing the gap to earthquake risk” in New Zealand

“Weather losses are closing the gap to earthquake risk” in New Zealand | Insurance Business New Zealand

Catastrophe & Flood

“Weather losses are closing the gap to earthquake risk” in New Zealand

Lead underwriter says recent events not so unprecedented

Catastrophe & Flood

By
Terry Gangcuangco

New Zealand’s weather loss potential is higher than we have come to believe, according to reinsurance giant Swiss Re.

In an interview with Insurance Business, Swiss Re’s lead underwriter for Australia and New Zealand David Sinai (pictured) said: “‘Unprecedented’ is a word often used to describe the latest record weather loss. However, a search of historical weather records may reveal that the physical characteristics of the weather event itself are not so unprecedented.

“Cyclone Giselle is one such example, where we believe this historical event, from 55 years ago, would likely be capable of generating insured losses of the same magnitude of each of the 2023 events. Cyclone Bola is another event, occurring 35 years ago, which would also be capable of generating significant weather losses in today’s values.”

The Auckland Anniversary event, for instance, was deemed unprecedented in terms of insured loss before being eclipsed by Cyclone Gabrielle, which hit New Zealand just two weeks later.

“We now have four weather events capable of generating considerable insured losses occurring within a 55-year period,” Sinai highlighted. “Each additional event added to our observation period shortens our perception of how often we can expect similarly large losses to occur.

“While there’s too much uncertainty to conclude on the return period of these losses, with the benefit of hindsight we should also ask whether any of these events truly fall into the ‘unprecedented’ category. Indeed, these events could actually help to reframe our thoughts on what a truly extreme NZ weather event could cost the industry.”

Earthquakes, meanwhile, aren’t about to relinquish their crown as New Zealand’s top threat.

Sinai, who joined Swiss Re in 1997 as a natural catastrophe analyst, told Insurance Business: “Earthquake will remain the peak peril in New Zealand. However, earthquake risk tends to be of a lower frequency, higher severity nature than weather losses.

“New Zealand also appears to have benefitted from a relatively benign period of severe weather losses over the last few decades. We have to go back some 35 years, to Cyclone Bola, to find a weather event that would be capable of generating claims of a similar scale to the Auckland event, or Gabrielle. It is possible that this quiet period has lulled us into believing that NZ’s weather loss potential was lower than it really is.

“The 2023 events not only remind us of the large-loss potential of weather-related events – $4 billion in claims, and counting, for 2023 – but should also reframe our perspective of overall risk drivers in New Zealand. The increase in frequency and severity of weather claims would suggest that weather losses are closing the gap to earthquake risk.”

What this means for insurers

According to Sinai, we should expect to see a continued upwards trend in terms of large loss frequency and severity in any case, as asset accumulation continues to grow and as climate trends begin to drive more extreme weather events. It’s important then for insurers not only to be adequately prepared, but also to work with governments in improving community resilience to weather loss trends.

“More frequent and larger claims will require higher insurance premiums to service those claims,” Sinai said. “Insurers need to stay ahead of loss trends to ensure that the premiums collected are adequate to cover their obligations to policyholders and protect their shareholders’ interests. However, increasing premiums in perpetuity is simply not viable, as this will eventually lead to affordability issues, especially for assets located in the highest risk areas [such as those] near fault lines or on floodplains.

“While government pools may help keep insurance more affordable for insureds in high-risk areas, by spreading the cost of risk across the whole insured community, the ultimate cost to the pool of insuring those highest-risk assets remains high. Worse, we expect that weather claims will continue to increase according to global weather loss trends, which are driven by a combination of underlying exposure growth and climate impacts.”

In Sinai’s view, to help keep the cost of funding claims as low as possible, it is crucial to reduce risk and improve resilience to weather events, regardless of whether the risks are insured via government schemes or the private market.

The underwriter told Insurance Business: “Insurers have developed methods and techniques to apply risk-based rating approaches, whereby assets exposed to higher risk (by virtue of their location and/or vulnerability to risk) are charged higher premiums.

“Not only does risk-based assessment enable insurers to put a price signal on risk, but this pricing approach also means the insurance industry is perfectly equipped to assist policymakers to decide where resilience, mitigation, or managed retreat options will yield the best outcomes and benefits.”

Sinai believes collaboration and co-operation between insurers and governments will be key to improving community resilience and delivering an insurance offering that is both affordable and sustainable.

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