New research from the New Zealand Infrastructure Commission, Te Waihanga shows how insurance can help us to manage natural hazard risks and choose how to prepare infrastructure for a changing climate.
“New Zealand has experienced some significant natural events in recent years,” says the Commission’s General Manager Strategy, Peter Nunns. “In dollar terms alone, we’ve seen at least $10 billion in infrastructure rebuilding costs from two large earthquakes and two storms since 2012. And that doesn’t of course include the impact of these events on people’s lives and businesses or the economy.”
Nunns says that not only is the likelihood and size of events such as storms expected to grow in coming years, but the replacement cost of infrastructure is growing too.
“On an inflation-adjusted, per-person basis, public infrastructure is now worth 70% more that it was in 1990. So, the cost of replacing it after a natural disaster is rising at the same time as the likelihood of a disaster is rising. It’s more important than ever to make good decisions about when and how to reduce risks and minimise costs.”
The Commission’s report Invest or insure? Preparing infrastructure for natural hazards looks at how insurance can help us decide if, when and by how much to invest in infrastructure adaptation or resilience.
The report shows that insurance prices rise as risks to assets, like the chance of flooding, and the cost to repair or re-build go up. Investing to make infrastructure more resilient or adapt to changing risks can bring down the cost of insurance. When infrastructure providers measure their risks and price them through insurance, they can make better risk management decisions by looking at whether the cost of resilience investments are matched by benefits from lower insurance premiums.
Providers must also factor in other costs – such as risks to public safety or damage caused by the failure of their infrastructure. These economic and social consequences can also be added to the providers’ insurance / resilience appraisal.
However, Nunns says that overall New Zealand has an incomplete picture of the hazards it faces, the risks these pose for our infrastructure, and how these are being managed. For instance, the last time a review of insurance coverage for public assets was undertaken – over 10 years ago – it found that less than half of public assets were insured.
“This is challenging, as our research shows that, in addition to helping to smooth out the costs of responding to natural hazards, insurance can also help infrastructure providers make better decisions about when and how to reduce risk and minimise costs.”
“Risks change over time. A risk management decision made yesterday might not be the best decision for tomorrow. It’s important that infrastructure providers consider this in their long-term asset management planning.”
Report key findings
– There is no single best approach to managing natural hazard risk to infrastructure. Instead, the optimal approach will vary depending on many factors, including likelihood and consequence of the hazard, and the relative cost of different options in different situations.
– To manage risk well, infrastructure providers need to have a good understanding of their assets and the risks to which they are exposed. They will also need the capability to assess their options and optimise their response to risks from natural hazards. However, at a national level, we lack comprehensive and consistent hazard data for providers to use to assess their risk.
– Quantifying risk and/or pricing it through insurance premiums, can help clarify the optimal risk management approach for infrastructure assets. Optimal resilience investments should reduce risk management costs, compared to continuing to pay risk related insurance premiums. When resilience investments are more costly than insuring risk, they may not be warranted.
– The optimal level of resilience will depend on the relative cost of resilience investments compared to the expected cost of (and the benefits we get from) the assets being protected. We can increase the case for resilience investment by focusing on keeping infrastructure delivery costs down. Conversely, rising infrastructure delivery costs will erode the case for resilience investments.
Background notes
– Our understanding of both the probability and severity of natural hazards continues to improve as scientific research progresses. Improving our scientific understanding and investigating hazards in more detail sometimes results in increased estimates of risk. For example, pre-2021 modelling estimated that there was a 30% chance of a major earthquake on the Alpine Fault over the next 50 years. More recent research has estimated the probability to be much higher, with a 75% probability of occurring over the next 50 years.
– In some cases, the underlying risks are also changing as climate change is expected to make severe weather events both more frequent and more severe.
– In recent decades, New Zealand has experienced annual reported losses equal to almost 0.6% of gross domestic product (GDP). These losses mainly reflect damage to residential property and businesses, as well as damage to infrastructure.
– Already, natural disasters cost New Zealanders more as a share of GDP than anyone else except Chileans. Some hazards will grow significantly in their frequency and intensity as our climate changes over the next 30-80 years.
