By Trent Thomson, Head Australia & New Zealand, and David Sinai, Head Property Underwriting Australia & New Zealand, Swiss Re

Just shy of one year after the eastern Australia floods, severe floods brought Auckland, New Zealand's largest city, to a standstill, marking another record-breaking flood event in the region.

La Nina played a role in both events, so recent reports of the end of the 'triple-dip' is likely welcome news to many readers.

While these are considered the largest and costliest flood events in their respective countries, a look at their similarities and differences provides some insights into the risks we face today, and prompt our industry and governments to ask the question: what more must be done to ensure flood risk remains insurable?

An elevated risk challenge

Losses from flooding events are on an upward trajectory. The Swiss Re Institute's annual natural catastrophe sigma released this week shows that global losses from floods were just above average – the main event, the eastern Australia floods ($US4.3bn insured loss).

Figure 1: Global insured losses from natural catastrophes in 2022 by category, in USD billion, at 2022 prices (source: Swiss Re Institute, sigma 1/2023)

The increased losses are largely driven by higher exposure due to economic development, population growth, and urbanisation.

Put simply, more assets are becoming exposed to increasing catastrophes. In addition to this exposure growth, the recent events in Australia and New Zealand also resulted from a combination of longer- and shorter-term weather risk drivers.

First, a warming atmosphere, which can lead to more intense rainfall. Second, higher ocean temperatures due to the prolonged La Nina conditions in the Pacific. Third, the La Nina wet period in the east of Australia had pre-saturated catchments, providing perfect antecedent conditions for major flooding.

In all respects the system was primed. Last, synoptic-scale weather systems in each event enabled extreme rainfall conditions to form, resulting in record-breaking flooding in Australia and New Zealand, in consecutive years.

Scientific findings are unambiguous: global climate change is making extreme events more likely.

Both the eastern Australia and Auckland floods are a case in point – Central Auckland experienced more than 45% of its yearly rainfall in just one month; and in Australia, by early March 2022, Southeast Queensland and Northern New South Wales had each received more than a year’s worth of rainfall in a week.

Macroeconomic factors like the resurgence of inflation, supply chain disruptions, labour shortages and rising construction costs are also adding to the financial burden of recovery. In Australia, construction costs surged a record 11.9% in 2022, ending the year at a new high. New Zealand is now facing a similar challenge with inflation surging to 7.2% in 2022, driven by more expensive materials and higher labour costs.

The collective resources and expertise of the re/insurance industry are immense, but finite. Protection strategies that function perfectly when a city is in a zone that experiences flooding once every 20 years may no longer be fit for purpose when floods become an annual occurrence.

We are already seeing Australia's insurers adjust underwriting guidelines and policy wording to safeguard sustainable protection, while the government supports disaster preparedness through initiatives such as the Disaster Ready Fund. But if current trends persist and mitigation and adaptation doesn't keep pace, affordability and accessibility will continue to pose a challenge in some areas.

Restructuring the risk management agenda

So how can we realistically respond? For the re/insurance industry, we must continue to build our capacity to model and accurately price rising flood risk. We can also redouble our efforts to improve insurance penetration by developing more flexible and efficient forms of coverage, such as parametric solutions.

That said, when challenges reach this magnitude, they warrant more proactive strategies and collective resolve, involving all stakeholders, and spanning risk mitigation, adaptation, and transfer. We must ensure that action isn't delayed and that central to all of this, the focus remains on the increasing risk itself.

Infrastructure is one area that could clearly be targeted for improvement. Experts have pointed out how Auckland’s abundance of hard surfaces prevented the absorption of rainfall into the soil, while the stormwater system was incapable of dealing with the deluge, resulting in the city being quickly overwhelmed.

In Australia, it’s encouraging to see the government taking steps like boosting investment in flood mitigation and resilience, including updating flood warning systems and targeted risk assessments, and allocating funds for home raising projects in riverine areas. However, urban infrastructure seems more and more unable to manage increasing rainfall intensities.

Land-use planning is another area to explore for enhanced risk mitigation. With a better understanding of where flooding events will occur and their probable impact, policymakers can make more informed decision for new housing development by, for example, ensuring they include parklands to act as natural sponges; or restricting construction in areas that have become too hazardous.

New Zealand and Australia’s recent experiences are a troubling reminder that devastating floods are happening more frequently, as climate scientists have predicted. Beyond the more immediate efforts to shore up capacity to deal with natural catastrophes, we must grapple with the questions of how climate change will further impact flood intensity, and whether our infrastructure planning is evolving at the same pace. We can also continue to tackle the climate crisis at its source, by accelerating and funding the transition to greener infrastructure and lower-emission energy.

Re/insurers can continue to contribute to this process by providing specialised knowledge and data and ensuring more future-proof infrastructure remains financially viable. We do, however, need governments, businesses, and other stakeholders to act with us – and to recognise that a drastically changing risk environment in our region will not allow us to revert to what was once business as usual.