UPDATED: Stalled EQC policy review leaves global reinsurers uncertain over market

UPDATED: The government review of the Earthquake Commission's funding and policy structures is leaving global reinsurers uncertain as they try to assess the risk profile posed by natural disasters in New Zealand after the Christchurch earthquakes.

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 has been delayed, and has posed 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."

The review terms of reference covered what the EQC insures, including the layer of loss covered, which natural disasters are covered, how multiple events should be treated, which types of property should be covered, the coverage of land, building and contents, what caps should be on the scheme, and whether it should be voluntary or mandatory.

Earthquake Recovery Minister Gerry Brownlee says the review is almost completed and a report will likely to go before Cabinet in the next month or two, with only minor changes likely to be recommended.

"We’ve carefully considered over the past 18 months the experience of EQC over such a major event and concluded EQC’s model is reasonably sound," Brownlee said in an emailed statement. "We’ve been encouraged by the willingness of reinsurers to reinvest in the EQC programme.  I expect a report will come to Cabinet in the first quarter of this year suggesting minor changes to EQC’s model, and we’ll have more to say about that then."

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)