Flood risk

By Eric Crampton 15/01/2014

Christchurch Council’s starting to worry about sea level rises and global warming. As much of the land on the east side of town sank with the earthquake, these risks are a bit bigger than they’d previously been.

There’s been a bit of speculation about how this will affect zoning in future, with some recommendations of higher minimum floor heights above sea level. Here’s the Tonkin and Taylor report; Cresswell has a skeptical take.

Wouldn’t it make more sense simply to have EQC set risk adjusted insurance premiums? Zoning changes mandating higher floor levels only really apply on new builds or, potentially, on substantial-enough building redevelopments. While new buildings will then get the higher floor levels, some older ones will have replacement or refurbishment delayed because the relative cost of a new building’s gone up. If EQC set actuarially fair rates for their disaster insurance, the distortion would be gone. We’d also then avoid all of the fights and rent-seeking that will result when Council starts deciding where people will be allowed to build in future due to flood risk, arguments about how seriously we should take the upper-limit projections on sea level changes, and the like. Let the insurers set the premiums, then let individuals sort out whether they like current beachside property. And let EQC’s premiums basically reflect the incremental effects of insuring different types of properties on EQC’s reinsurance costs. If Swiss Re won’t provide reinsurance for my house except at additional charge, I should be paying the costs of that. Where EQC’s trying to minimise its reinsurance costs and where the international reinsurance markets are at least somewhat competitive, this knocks the political fights around global warming out of the mix.

Tim Harford comments usefully on distortions caused when government subsidises living on flood plains. EQC premiums are scaled by value at risk, but not by the likelihood of adverse events. The country varies in seismic and flood risk; buildings vary in robustness to those risks. But nobody pays more than $150 per year for their EQC cover. While you might think the distortion can’t be that big as EQC only covers the first $100,000 in damage to your house, with insurers charging actuarially fair premiums taking on the bigger part, EQC also covers land remediation.

Conflicts disclosure: Our house in South Brighton, two blocks from the beach, is a couple of meters above road level. The road’s a meter or two above sea level. I expect that, as we’re at least a meter higher than neighbours down the road, the regulatory changes likely aren’t binding on us. But I sure wouldn’t be happy about any zoning designations saying that the spit south of Bridge Street needed to go back to bush and sand because of worries about sea level rises a century out.

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