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NZILA ‘Climate Change – Implications for Insurance and Reinsurance’ 4 September 2013

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Contents Tim Grafton, ICNZ CEO » What may happen? » What should we be doing? John Lucas, ICNZ Insurance Manager » What does the NZ data tell us? » The Queenstown experience » Using technology for underwriting

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ICNZ Presentation to The Press

What may happen?

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What does climate change look like? » Warmer atmosphere holds more moisture = heavier rain (8% more for ever 1 degree rise in temperature) » Mountainous NZ, increased risk of flooding – West Coast, Nelson, Manawatu » Mean westerly winds will increase by 10%, particularly winter/spring » Uncertain, but ex-tropical cyclones may decrease but severity increase » Sea-level rise of 1.8 mm per year – combined with increased westerlies = pronounced risk for those living on west coastal areas, but all coastal areas at risk » More drought areas - Northland, Bay of Plenty, Hawkes Bay, Wairarapa, Marlborough and Canterbury 4


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ICNZ Presentation to The Press

What we should be doing?

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Ignore Resilience - the vicious circle Ignore Risk

Economic and Social

Look at it tomorrow

Damage

Carry on as we are

Slow recovery

Complain to govt. if insurers won’t provide cover

Hopefully insurers will still cover us

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Resilience - the virtuous circle Risk Identification Economic and Social

Research

Benefits

Speedier

Adaptation

Recovery

Risk Transfer

Insurance Affordability

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Research, dependencies and cross-cutting themes » Frequency + magnitude of weather events and high resolution modelling » Consequence of cascading events e.g. flood/landslide, wind/tide/storm surges » Remote sensing equipment, detailed hazard maps, high resolution computing » Assess impacts on built infrastructure - what level of resilience is ‘good enough’? » Indirect impact assessment – social and economic costs » Cost-benefit analysis to demonstrate value of pre-event adaptation measures

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Encourage adaptation! » Why? o because it saves $ o helps keep insurance affordable for all o Avoids the trap of poor policy e.g. subsidising high risks » Engage a coalition of interests – central + local government, private sector and community: o promote risk-based planning/consenting, construction standards etc, o regulate to support affordable insurance and keep the market attractive = an effective and competitive risk transfer mechanism o incentivise adaptation measures e.g. protective infrastructure

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Other initiatives » Support mitigation/adaptation measures - discount premiums » Signal through premiums, exclusions, deductibles etc higher risk areas to live » Identify exposure density to manage risk » Develop flexible post-disaster claims management (capture the learnings from Canterbury) » Educate: o insurance is a risk transfer mechanism; not a substitute for adaptation o more cost effective to plan now to reduce post disaster impacts o high-levels of insurance penetration through affordable insurance = most effective post-disaster recovery + reduces capital tied up to cover future losses that can be invested for growth 12


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A case study – Bay of Plenty tsunami » GNS science model 12 potential tsunami scenarios – return period, wave height, inundation distance, loss of life and building damage for each » Scenarios range from 3m to 14 m tsunami with return periods between 50 and 800 years » Tauranga City, Bay of Plenty District and Regional Councils worked with industry and community groups » Using a risk-based approach councils proposed tolerable and intolerable thresholds for death » Recommended measures to be incorporated into land use planning o preserve existing sand dunes as a natural barrier o erect vertical evacuation structures o detailed evacuation routes to safe, sheltered and water stocked areas 13


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But we need that penetration – NZ is a big risk » Given the size of our economy New Zealand faces one of the biggest risks in the world to its economic well-being » Centre for Economic and Business Research study for Lloyd’s rated New Zealand No3 for likely losses in any given year as a % of GDP behind Chile and Bangladesh » 2011 Japanese quake/tsunami caused over US$350 million damage but only $US35 billion was insured loss » 1% increase in insurance coverage = 11% reduction in uninured loss

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Segue to John Lucas

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What’s a good risk?...good credit, no loss history, no hazard notification

Must be good

Must be good

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And good here too‌

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Mmm…

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Climate change reflected in ICNZ’s weather-loss statistics 1981 – 1990 25 recorded weather events $458m 1991 – 2000 34 recorded weather events $127m 2001 – 2010 51 recorded weather events $564m The number of recorded events has doubled over a 30-year period. 21


Tornadoes making landfall in New Zealand 1981 – 1990 1 recorded tornado event – Auckland $4.46 m 1991 – 2000 2 recorded tornado events – both Auckland

$3.53 m

2001 – 2010 5 recorded tornado events – Greymouth, Taranaki, Cambridge, Kaitaia, Taranaki $22.26 m 2011 – 2012 3 recorded tornado events in 2 years – Auckland, Taranaki, Auckland

$10.3 m 22


Queenstown Floods 1999 – what happened? • Lake Wakatipu normally sits at 310.5 metres • 72-hour weather bomb. Lake increased at 50mm per hour • Lake reaching 312.77 metres flooding lake front properties • Total insurance payout $64 million. 23


Climate change adaptation following Queenstown Floods 1999

Must be good

Must be good

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Future flood cover became a problem • Flood cover withdrawn on lake edge properties • Deductibles between $10,000 - $25,000 • Business owner self insurance • Business owner adaptation by controlling risk 25


Must be good

Must be good

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Insurers adaptation to climate change • The traditional insurance pool has cross subsidization between the good and not so good risks • Move to granular property level underwriting • Example: US lightning peril pricing 27


New Zealand insurers moving to geospatial data technology for individual property underwriting • Flood mapping incorporating inundation models from NIWA and local councils • Soil type – landslip risk • Accuracy down to one metre is possible 28


It will take a few more years before all insurers are using this new underwriting technology • Anti-risk selection issues • Will the technology include other hazards like tornadoes and wild fire? • Other providers now with this technology • Tools allowing climate change to have a positive effect on influencing New Zealand’s future financial 29 decisions


Adapting to nature’s perils can be challenging

Must be good

Must be good

THANK YOU 30


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