Stalled EQC policy review leaves global reinsurers uncertain over NZ environment

Wednesday 4th February 2015

The long running government review of the Earthquake Commission's funding and policy structures is one of major challenges facing global insurers as they try to assess the risk profile posed by natural disasters in New Zealand after a series of earthquakes in 2010 and 2011 levelled the country's second biggest city, Christchurch.

The review, led by Treasury, was launched in September 2012 to gauge the government's disaster contingency fund's future after its resources were exhausted by the Canterbury quakes that caused billions of dollars of damage and killed 185 people. The review was initially meant to lead to a Cabinet decision in mid 2013, though that's since been delayed, and continues to pose a major uncertainty for the reinsurance industry, according to Mike Mitchell, head of structure RI & head property UW Asia at Swiss Re.

The reinsurer still wants a better understanding of building construction quality, which creates uncertainty in terms of vulnerability, but how that all ties in together is still a major unknown, Mitchell said.

"The mechanism between the value of risk, the claim being presented, and the cheque you write at the end, there's fundamental challenges that we faced in New Zealand that make it very, very difficult for us in the existing environment to have certainty," Mitchell told a briefing in Wellington. "That's an area around policy, around EQC, the interaction between EQC and the commercial insurance sector which various industry representations has been made and there's been a lot of discussion about whether the model the EQC has is the most sustainable in the long term."

Global reinsurers underestimated the cost of the Canterbury earthquakes by about 50 percent after they were surprised by the impact of the liquefaction, and with local insurance policies providing full replacement value cover rather than the international norm of sum insured.

New Zealand's level of insurance penetration is about 80 percent, with the EQC providing cover for the first $100,000 on disasters including quakes, natural landslips, volcanic eruptions, hydrothermal activity, tsunami and natural disaster fires.

Mitchell said Swiss Re has since adjusted its hazard models and that the shift by local insurers to sum insured policy cover for earthquakes has been a "critical piece of change" to improve certainty.

Mitchell and Munich RE's New Zealand regional manager Martin Kreft are touring the country with EQC head Ian Simpson and Insurance Council boss Tim Grafton presenting their views to business audiences on how the Canterbury earthquakes caused reinsurers to reassess their view of New Zealand's risk profile.

Munich RE's Kreft said his firm has told the government that it needs to decide on whether it will go with a social model, where it ensures EQC could put everybody into an average house after an earthquake, or a capital protection model, which would essentially turn the agency into a type of reinsurer to protect the Crown's balance sheet.

"We can respond either way, but it's not up to us to dictate which way it goes," Kreft said.

Grafton said the Insurance Council last made a submission to the Treasury in May or June 2013, but hasn't had any feedback since then. He said the lobby group will assess what's happened in the past 20 months when assessing whether its position has changed.

"Government needs to move ahead now and start to examine what we've learned from Christchurch," Grafton said. "We've provided submissions to Treasury, at the moment we're regrouping on that."

BusinessDesk.co.nz

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