Is wild weather the new pandemic for property?

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This year was a wake-up call on the impacts of natural catastrophes on commercial property, but Berkshire Hathaway Specialty Insurance is well positioned to help the market through future storms

SIX MONTHS after the twin disasters of the Auckland Anniversary floods and Cyclone Gabrielle, it seems clear that the impact on commercial property insurance and its future insureds will be more long-term than the usual after-storm clean-up. Like those in overseas markets, New Zealand property owners are adjusting to the ‘new normal’ of more frequent and more violent weather catastrophes occurring as regular events. “Customers have an increasing awareness of extreme weather and how it could impact their businesses,” says John Hardiman, head of property at Berkshire Hathaway Specialty Insurance (BHSI) New Zealand. “We regularly speak to risk managers and business owners who have updated their business continuity plans to include impacts from weather events and climate change.”

Berkshire Hathaway Specialty Insurance (BHSI) New Zealand provides commercial property, mining and energy, construction, casualty, executive and professional lines, marine, transport and logistics liability, accident and health, healthcare liability, surety, and multinational solutions and risk engineering. BHSI’s wide range of insurance products is expanding; this is combined with financial strength, a yes-oriented culture and great flexibility in customising solutions for customers’ needs. BHSI is customer-first, through and through. It views every claim as an opportunity to strengthen its customer relationships and industry reputation because, as BHSI says, “Claims is our product”.

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Claims data: Auckland Anniversary 2023 flood and Cyclone Gabrielle

112,812 as of 1 Sep

“As more land is being urbanised, is enough being done to consider the risks of increasing weather events? These are big issues that affect us all – a longer-term view is key”

John Hardiman, Berkshire Hathaway Specialty Insurance New Zealand

Designed for a time when there were fewer and smaller weather disasters, the insurance industry traditionally operates on a boom-and-bust pattern, only ramping up capacity when a cyclone or flood strikes but rarely investing in a constant level of readiness throughout the year. This mismatch in resourcing was laid bare by the 2023 weather events. “The key difference from previous events was the sheer scale of the damage across such a wide geographical area,” Hardiman says.

“Access issues compounded the difficulty for customers, many of whom could not reach their properties for some time, delaying the start of any claim process and making it difficult for customers to source the information required to make a claim.” The two events also created significant demand for loss adjusting and expert resources, which struggled to keep up with the workload. Scarcity of materials and labour results in higher costs and repair delays, which can also lead to an increase in the business interruption claim value. “All of this has meant that it’s been challenging to progress claims as quickly as the industry would normally like to,” Hardiman says. Another factor that has slowed progress is the large number of land damage claims, which are generally more complex than building or contents insurance claims. Some of these are expected to take more than a year to complete.

The implications are not lost on the insurance world, which is coming to terms with the enormous risk more extreme weather poses to its operating model. Insurers like BHSI are well positioned to help the commercial property markets mitigate risks, by focusing on the need for measures that are implemented over the long term – a reality that plays well into BHSI’s strength of building a 'forever business’ and riding out short-term periods of transition. Like the lessons learned from the pandemic, paradigm-changing threats require sweeping measures to effectively reduce risk to a level where it is manageable with the tools at hand.

One rather drastic step is to remove from the equation land that is more vulnerable to major damage from weather – the town planning equivalent of closing the borders. But unlike the pandemic, the time frame for how long this countermeasure must be in play is much longer than a couple of years. Indeed, the question is whether we will be able to adequately predict the extent of the property that is too risky to build on as climate change accelerates. What might look safe in 2023 could be a bad risk in 2033. “As more land is being urbanised, is enough being done to consider the risks of increasing weather events? These are big issues that affect us all – a longer-term view is key,” Hardiman says. More immediate steps to safeguard existing vulnerable infrastructure are also essential – this is the weather equivalent of masking, a temporary measure until defences can be bolstered. “Where an increasing risk becomes known, we need to ensure that all parties are aware and all reasonable steps are taken to help reduce it. This could include practical steps for existing property, such as raising important assets or electronics away from ground floors or basements,” says Hardiman.

Another change likely to be needed is a move away from compartmentalisation in the industry towards broader industry cooperation – not quite the ‘team of five million’ but more coordination among key stakeholders than is the case now. A recent study by the University of Waikato also highlighted the strengthening of early-warning systems, social connectedness, as well as knowledge, skills and awareness of natural hazards to improve risk perception and increase self-protective action. “I feel that it will be important for all stakeholders to work together. This includes councils, developers, business owners, brokers and insurers,” Hardiman says.

While the challenges are large, Hardiman is optimistic that the industry can meet them. “There is always an opportunity to improve our understanding of risk and make underwriting decisions as a result. Data is getting better every year, and our underwriting tools are improving,” he says. New Zealand also has good channels for communicating forecasts of extreme rainfall. Significant warning was able to be given for Cyclone Gabrielle, which may have reduced its impacts. Hardiman doesn’t expect major insurers to pull out en masse here as they have in Florida with its history of much more powerful hurricanes. “The New Zealand insurance market has a strong history of providing full property coverage, despite the significant risk of earthquakes, in particular. I have confidence that our industry would wish to continue to provide wide coverage, despite increasing challenges from climate change and weather events.” But there is a danger that a failure to move on from the boom-and-bust model will cause some insurers to reassess whether parts of the market are viable. “We still operate on the basis that insured damage should be sudden and unforeseen. Regular flooding events can affect this view, and insurers will undoubtedly seek to manage their exposures.” BHSI is already taking steps to ensure that larger capacity is available for future extreme weather events. “Retaining an ability to scale up claims-handling resources to manage major events is important,” Hardiman says. “At BHSI, we have enlisted the help of our teammates in other countries to help with the increased claims volume created this year.” Perhaps most importantly, BHSI recognises that commercial property insurance needs to be customer focused to be effective. Just because the scale of the crisis is greater than before doesn’t mean that people aren’t still at the heart of it. “A key priority for us is always ensuring our claims proposition is proactive, efficient, transparent and fair. We want to provide the best service we can to help our customers get back on their feet as soon as they can.”

Rain storm cloud aerial view. Natural catastrophe and commercial property.

A proportionate response

Living with the virus

Published 09 Oct 2023

“I feel that it will be important for all stakeholders to work together – this includes councils, developers, business owners, brokers and insurers”

John Hardiman, Berkshire Hathaway Specialty Insurance New Zealand

Number of claims

$2.05bn as of 1 Sep

Value of claims paid

$3.5bn

Total expected claims value

Source: Insurance Council of New Zealand

Endgame for insurance in Hawke’s Bay coastal hazard zones?

Source: Eaves, A., Kench, P., McDonald, G., Dickson, M., & Storey, B. (2023). Modelling economic risk to sea-level rise and storms at the coastal margin. Journal of Flood Risk Management, e12903.

Year by which insureds lose willingness to pay higher premiums

Year by which insurers lose willingness to take on risk

Low-emissions scenario

Peak annual premium

High-emissions scenario

Peak annual premium

2027

$3,514

2027

$3,355

2029

$3,308

2025

$3,087

A different type of disaster

The stakes are high: if steps are not implemented in the next few years, the next big storm may result in capacity being overwhelmed again, with a repeat of lengthy wait times for loss adjusting and expert assessment. A longer period without better mitigation may lead to more serious consequences, especially for property in coastal hazard zones. A recent study funded by the Ministry for Business Innovation and Employment looked at the likely behavioural response of communities in such hazard zones as Hawke’s Bay, which is expected to experience 44 significant storm events over the next 40 years. It found that, in a low-emissions scenario, property owners’ willingness to pay higher insurance premiums would end in 2027, while the cost of insurers remaining in the market would outweigh the benefits by 2029. In a high-emissions scenario, insurers would pull out of coastal hazard zones earlier, in 2025, while insureds in those areas would become unwilling to pay the higher premiums by 2027.

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