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Underinsurance poses a threat to inclusive progress in Aotearoa

Without intervention, we will see groups and communities already facing economic and social hardship further disadvantaged as a result of inadequate risk protection. To create inclusive progress, we need to ensure all New Zealanders are resilient to shock events.

We are seeing more large scale shock events disrupting lives and livelihoods, with far-reaching effects beyond the immediate and obvious impacts. The COVID-19 pandemic, the war in Ukraine, and the flooding in Tairāwhiti Gisborne, Marlborough and Tāmaki Makaurau Auckland are just a few of the recent examples of such events. And now, with the increased frequency of these events, communities are facing higher levels of risk than ever before. It’s the most disadvantaged groups who are most exposed, and typically have the least protection, therefore experiencing the greatest consequences.

Our public and private sectors both have an important role to play in distributing risks to incomes more equitably and exploring how to improve insurance accessibility to underserved communities.

By default, individuals and families bear the burden of the risk posed by shock events. Through the social support system in Aotearoa some risk is transferred from the individual to the state, but this is not comprehensive. Under consideration are government insurance schemes that would transfer further risk to the state (the Government Flood Insurance Scheme and Income Insurance Scheme), alongside the existing Toka Tū Ake EQC (The Earthquake Commission) which provides insurance to homes for natural disasters – albeit at a cost. The timing of new schemes is unclear with the Income Insurance scheme deprioritised for the current term. Even with the proposed schemes adopted, the ability of our social support system to provide adequate support in the face of emergencies is uncertain and as it stands today, there is a residual burden of risk that sits with individuals and whānau. 

Research shows that Aotearoa is significantly underinsured, meaning many New Zealanders are likely to have inadequate protection. Underinsurance can be understood as the gap between the value of an asset, and how much it is insured for. Globally, Aotearoa ranks 26th out of 56 OECD countries for insurance spend, at 3% of GDP, compared to the OECD average of 9.4%. 

Inadequate protection means that when faced with a shock event, many households and whānau will be unable to recover. A UK study found that a third of households moved into a lower income quintile after a shock event, and 20% fell into poverty. For a portion of New Zealanders, insurance can be the barrier between financial resilience to shocks, and falling (back) into poverty. 

Affordability is consistently cited as a barrier to insurance access, and is worsening. Premiums will continue to rise as risk increases. With the use of risk-based pricing and data-driven models, we may even see some communities become uninsurable. As prices increase and the spending power of lower income households reduces with the current cost of living crisis, it’s likely that risk protection will drop even further. It’s the most disadvantaged groups who are most exposed to the increasing risks we are facing, in particular to the environmental risks as a result of climate change. New Zealand is rated the second highest country globally for natural disaster risk, and flooding has been recognised as one of the most common types of natural disasters.

The January 2023 Auckland flooding demonstrates how this inequity is playing out. We saw some of our poorest communities disporportionately impacted by an extreme weather event where South Auckland, and parts of West Auckland were the areas most devastated. Anecdotally, we know many of those impacted did not have sufficient insurance or the means to recover. It remains to be seen what the long term impacts on these communities will be, however, we can assume that a devastation of this scale is likely to widen the existing economic divide between poor and wealthy in Auckland.

We recognise for climate related events in particular there are levers beyond insurance that need to be pulled to protect communities and mitigate risk (for example, managed retreat from exposed areas).

Insurers have started to address affordability through product design. Two examples are on-demand insurance and micro-insurance. On-demand insurance provides customers the ability to turn insurance on and off based on usage. For example, paying for car insurance by the kilometre rather than based on a premium with assumptions about usage. Micro-insurance provides cover for specific losses. For example in Kenya and Rwanda, Kilimo Salama offers a low-cost policy covering the cost of a farmer’s crop only in the event of a loss due to extreme drought or excessive rain. These innovations have made in-roads to expanding accessibility, but still leave vulnerable groups more exposed. The ultimate test for any innovation will be how equitably it spreads risks to incomes.

This issue calls for public and private sector collaboration, radical thinking, innovation and leadership with a strong equity mandate. As we look to build inclusive progress, this topic should be high on the Board and Executive agenda. 

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