Restricted and expensive insurance brings flood risk closer to home
Image credit: NZ Stuff

Restricted and expensive insurance brings flood risk closer to home

Cyclone Gabrielle hit New Zealand, leaving destruction in its wake. The impacts of these events are even more severe if you are not insured.

Summary: Starting around the 12th February Cyclone Gabrielle swept down the east coast of the North Island of New Zealand, leaving destruction in its wake. This particularly resonates for me as I have friends whose families live along that coast, but this blog could equally have been about Nilam hitting Sri Lanka and India, the Philippines typhoon, flooding in Pakistan and Germany, or Hurricane Sandy. The impacts of these events are even more severe if you are not insured.

Why this is important: the '1-in-100 year storm' may be more of a '1-in-20 year event'

The big theme: The UN estimates that climate adaptation spending, just in developing countries, could reach $300bn by 2030. This is on top of the tens of billions being spent by national and regional governments in developed countries. This covers a range of investment themes, including construction of flood defences, building resilience into our essential services, and enhancing disaster responses.‌ ‌‌


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The details


Summary of a working paper from CESIFO

Accelerating sea level rise and increasing storminess, two effects of a warming climate, mean that coastal developments are becoming increasingly exposed to more frequent and severe hazards. Residential insurance transfers risks that are of low enough probability. When the likelihood of damage increases, insurance becomes increasingly costly, until it is no longer viably supplied by commercial insurance companies. Insurance retreat from coastal locations is thus an inevitability once sea level rise causes insurers’ insurability thresholds to be crossed.

Except for the near-term occurrence of an actual disaster, it is the loss of residential insurance that will likely be the first mechanism by which homeowners will experience material economic loss directly attributable to climate change. Since mortgages are typically conditional on insurance (especially at the time of issuance), the withdrawal of residential insurance results in an immediate drop in property values.

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