Wellington council’s insurance shortfall jumps billions
The gap between Wellington’s City Council’s insurance cover and asset value has grown by billions in just three years.
If the big one hit tomorrow – or another natural disaster came along – the Wellington City Council would be left with about $2.7 billion worth of losses, according to the latest council modelling. Those losses would come after taking into account the expected contributions from central government and insurers.
Since 2021, that gap has widened by more than $2.5b. Three years ago, it was enough for the council to set aside its $272 million of debt headroom to virtually close the gap between insurance cover and asset value.
That was before council chief financial officer Andrea Reeves was in the job, but she understood that “it was just a simple matter of going to the market and getting insurance”.
Insurers are now looking at New Zealand as an increasingly risky place after the Kaikōura earthquake and Cyclone Gabrielle, making it near-impossible for the council to increase insurance cover from the $750m it already has. In the same three-year period the council’s premiums have jumped by $7m.
The council has to think about how to cover the gap to protect the city’s $14.8b of assets and be prepared for “the unthinkable but absolutely catastrophic”, Reeves said – which might be an earthquake, but could be a cyclone or tsunami or other natural disaster.
The gap widened rapidly because of increased seismic risk and increased asset value, both of which hit the council about the same time in 2022.
The model used to assess the likelihood of earthquakes throughout the country – National Seismic Hazard Model by GNS Science – was updated in 2022, seeing the severity of a likely earthquake in Wellington more than double. It was and still is the highest likelihood of a big earthquake in the country.
Then the council revalued its assets at the “worst possible time”, the peak of supply chain issues, according to council treasurer Sarah Houston-Eastergaard. The assets now have a total book value of $14.8b.
It was important to put into perspective, said chief financial officer Andrea Reeves, that on the ground nothing had changed. The increased seismic risk was always there, but it was not updated until 2022.
“That's a really good thing that we do [know], because then we can actually plan for it. And we can think about these things and we can have really informed discussions with governance, internally and with the community.”
The gap in insurance was an “increasing problem”, said councillor Rebecca Matthews, and one that would be familiar to residents on a smaller scale as they grappled with the increasing cost of insurance.
“The mixture of climate change and seismic risk has created a growing gap in council finances.”
There were significant questions ahead, as natural disasters became more common with climate change, about how much risk central and local government should accept and how they could manage it.
Councillor Tim Brown was concerned that the council was embarking on expensive projects – a $400m sludge plant and $329m Town Hall upgrade – while having such a gap in insurance cover.
“I just look at it and think I can’t believe we signed this stuff off. Council, surely, has got a responsibility to look after the assets owned by the people of Wellington,” he said.
Coming from a corporate background at Infratil, Brown said he viewed insurance as a “must-have”.
He came up with the idea to sell the council’s airport shares in order to set up a self insurance fund to fix the problem.
The proposal will go out for public consultation this month as part of the LongTerm Plan consultation.
The problem with the airport shares as an asset was that they would be useless in a natural disaster, Brown said. If an earthquake hit, they would be affected along with the council’s other assets. He compared it to self-insuring a home with a crystal glass collection – if an earthquake hit, the owner would lose both at the same time.
Selling the airport shares was critical to this, Brown said, because the council didn’t have other assets it could use to plug the gap. “This is the only thing we can do, the only lever we can pull.”
Councillor John Apanowicz also saw that lack of insurance cover as a significant problem. He agreed with Brown that part of the solution was to set up the proposed green investment fund with the proceeds from the sale of the airport shares, to self insure the council assets.
Going forward, Reeves and Houston Eastergaard said the council would look into options like parametric insurance – where a fixed amount is paid out on the occurrence of a specific event like an earthquake or a cyclone, regardless of how much loss the council suffered.
They were working on modelling the risks for Wellington and their assets much more closely to seek custom arrangements from international insurance companies. There was a lot of misunderstanding from the market about New Zealand and Wellington – so it was incumbent on the council to outline the situation, which they hoped would eventually help residents deal with insurers too.
Insurance Council of New Zealand chief executive Kris Faafoi said parametric insurance arrangements – triggered by defined seismic or climate events – could help provide another protection option in natural disasters “and we expect to see the development of these type of products over time”.
Public consultation on the sale of the airport shares to establish an insurance fund opened yesterday.
The public will also be consulted on two other major decisions: how much funding should go towards water infrastructure, and whether to go ahead with a plan for new council wheelie bins, food scrap and garden waste collection.
“The mixture of climate change and seismic risk has created a growing gap in council finances.”
Rebecca Matthews Wellington City councillor