California company behind IAG's realisation it was overexposed in Wellington

Thursday, 14 March 2019

A California company's New Zealand model running the cost of potential earthquakes and the damage they could cause to properties may be behind IAG's reticence to take on more Wellington clients.

In 2016, RMS debuted its latest New Zealand earthquake hazard – its first update to its country-wide model since 2007.

It's now used by Tower, IAG and other New Zealand insurers to get a granular idea of the cost of insuring properties for earthquakes, down to the individual building.

The 2016 earthquakes, which shook Wellington, were a major claims event for insurers. Pictured here is demolition of the quake-damaged Reading Cinema carparking building.

RMS spokesman Michael Longbottom said the system was not as glamorous as it may sound.

Insurer IAG, which owns the AMI, State and NZI brands, is limiting cover in Wellington.

* Climate change costs are hitting households through insurance premiums

* Tower hits homeowner with $10,000 premium hike under new quake risk assessment**

'It looks like a very big spreadsheet with lots of numbers.'

Insurers are swimming in earthquake data, climate change data not so much.

RMS consultant Michael Drayton said the system is not used to assign your premium, but it does give insurers estimates on the cost of insuring hundreds of thousands of hypothetical quakes.

'Insurance companies can look at that and decide individually what they would charge, the model gives all the insurance companies all the same information.'

By looking at specific faults, how frequently they rupture and the size earthquakes they produce, as well as the ground motions that result in those events, the system can model the damage for every individual building in any insurers portfolio and assign it a cost.

'We get a cost of damage for each building for each event and then the model adds it all up and then it takes into account the deductible of that location, what are our limits, when does reinsurance kick in.'

'It's a way of classifying what is the risk, then it's up to the insurer using the model to decide what they want to do with that output so our job is to quantify the risk as accurately as we can so as to inform their decision making.'

Drayton said the increased focus on earthquake risk in New Zealand was understandably triggered by the Canterbury earthquake sequence.

'Over time I think we lost track of what is the real risk and then Christchurch happened and that was a shock to everyone.'

'Insurers are getting much better quality data about the properties they insure, so the questions have moved on to what's next.'

For climate economist Belinda Story the answer is obvious – climate change.

Storey is the managing director of Climate Sigma and principal investigator with the Deep South National Science Challenge, a multi-million dollar project to help improve climate models.

'With earthquakes, the risk itself isn't changing. In climate change, the hazards are escalating.'

Storey said international research has shown insurers start to 'partially withdraw' insurance, which could mean they start charging very high excesses, around $10,000, when a risk has a 2 per cent probability of occurring any given year – roughly equivalent to a 1 in 50-year event.

'When probability rises to a five per cent probability per year [a one in 20-year event], then insurers are very unlikely to provide insurance.'

Though there are outliers, she said. In the United Kingdom, insurers began refusing cover to houses particularly at risk of flooding, even though the risk was only equivalent to a one in 75-year event.

Storey said there are cases overseas, especially in the southern states of the United States, where insurers are required to tell regulators why they refuse to cover someone.

'So when an insurer pulls out of an area they are obliged to tell the person that they are withdrawing insurance from but also the regulator.'

'One of the key problems we have, and something that the Wellington situation is putting into stark relief, is that consumers and policymakers don't have that information.'

While insurers are swimming in data and models on earthquake risk, there's less to go on when it comes to climate risks.

'The challenge that insurers face, especially in the climate change space is that we simply don't have enough understanding about the concentration and the escalation of risk.'

'We don't know what would happen if a cyclone hit Tauranga.'