New Zealand Earthquake Commission predicts 2013 softening

27-11-2012

Despite its reinsurance bill trebling since 2010, Ian Simpson, the chief executive of New Zealand’s Earthquake Commission (EQC), says he remains impressed by the way international reinsurers have responded since devastating earthquakes hit the country in 2010 and 2011. But he now anticipates a softening of rates in 2013.

The EQC recently renewed its programme, adjusting its terms slightly but paying a lot more for the coverage. Previously, the programme provided reinsurance up to NZ$4 billion ($3.3 billion) with EQC absorbing the first NZ$1.5 billion of claims from an event. The new programme changes those levels to NZ$5 billion and NZ$1.75 billion.

Accordingly, EQC will meet the first NZ$1.75 billion of claims from an event, and reinsurers the next NZ$3.25 billion. Although it did not confirm exact numbers, it appears the EQC paid NZ$130 million for the coverage, a big increase from the NZ$40 million it was paying before the first 2010 earthquake. Simpson says he accepts the increases, however, and believes rates will start to fall again in 2013.

“In general, the rate we are paying has trebled since 2010. But we are happy given the hardening in the market over the previous two years. We feel the market has peaked and rates should soften in 2013,” Simpson says.

He admits that market conditions were difficult after the high catastrophe losses absorbed by the reinsurance industry globally in 2011. The organisation tried to retain the same reinsurance partners during this period but did make some additions to its programme. He also notes that a sticking point during talks was the pricing at the lower end of the programme.

“But we continue to be impressed with the longer-term view taken by the reinsurers. We think the groundwork we have done over the years to build long-term relationships with the reinsurers to help increase their knowledge and understanding of risk in New Zealand has been very helpful.

"Our research over the years and the completely transparent way we have handled the response to the Canterbury earthquakes have enabled a constructive dialogue with reinsurers and given the market enough confidence that they were happy to increase cover.”

Simpson says the organisation is also investing more in technology that will both mitigate disasters and help gain a better understanding of natural catastrophe risks in New Zealand. “We invest more than NZ$10 million per year in research infrastructure (GeoNet) and capabilities to understand and mitigate natural disaster risk,” he says.

“The data and information arising from the Canterbury earthquake sequence will inform changes to land use and building practices and EQC anticipates strong uptake of lessons learned during the few years.” Meanwhile, rating agency AM Best has issued a report suggesting that a combination of the 2010 and 2011 earthquakes and regulatory reform in New Zealand will likely trigger an increase in demand for reinsurance in the future.

New Zealand, Earthquake Commission, GeoNet, Canterbury