NZ's biggest insurer confident $10 billion earthquake reinsurance cover is enough

Friday, 13 January 2023

Subduction zones have produced the five largest earthquakes ever measured. The zone near New Zealand will produce a similar earthquake at some point.

The country’s largest insurer says it is confident it could pay out claims in the event of a major earthquake despite not increasing its reinsurance cover for the single worst-case scenario it could face, during the past three years.

Trans-Tasman insurer IAG, which owns State Insurance, AMI and NZI, announced last week that it had obtained back-up cover of up to A$10 billion each for up two separate major disasters in either New Zealand or Australia in 2023.

In addition to that, IAG also has just over A$4.3b of its own capital that regulators assess it could use to meet claims.

Despite recent high inflation, including a 17% jump in the cost of building new houses in the year to September, IAG has not increased the reinsurance cover that it could be able to call on to meet the cost of a major earthquake since 2020, when it upped that from A$9b.

* House insurance premiums will rise despite EQC cap rise

* House insurance - how long will we be able to afford it?

Insurer IAG says the fact EQC will pick up the table for first $300,000 of earthquake damage to insured properties has eased its own need for extra cover.

* 'Risks aren't worth it': QBE says parts of planet becoming uninsurable due to climate concerns

An IAG spokesperson said an increase had not been necessary given that the Earthquake Commission (EQC) last year agreed to increase the maximum amount it would pay out in the event of a disaster from $150,000 per insured property, up to a new limit of $300,000 per property.

“This means that EQC’s liability for damage to homes across New Zealand, including in Wellington, has doubled,” she said.

“This has significantly reduced the potential liability of insurers. We are confident that this more than offsets any increases from inflation or the number of properties we insure.”

The Insurance Council estimated in 2021 that the Canterbury earthquakes cost private insurers $21b.

It is often assumed the bill for a Wellington rebuild in the aftermath of a major quake could be higher.

Moody’s stated in 2020 that New Zealand remained “one of the most highly-insured countries in the world”.

But it also said it was clear that before the Canterbury and Kaikoura earthquakes “few had truly understood their risk”, which it said had exposed insurers and reinsurers to considerable losses.

IAG said it was “confident in our capital position and ability to pay claims, should a major event occur anywhere in the country”.

IAG is not a name familiar to many households, but the many insurance brands it owns are: State, AMI, NZI, Lantern Insurance, Swann Insurance, NAC Insurance and Lumley.

”IAG NZ has an ‘AA-’ financial strength rating from Standard and Poor’s, which means we have a ‘very strong’ claims-paying ability.”

The Reserve Bank is currently reviewing insurance industry regulations.

IAG said it complied with a Reserve Bank requirement that it hold enough capital or reinsurance to allow it to financially withstand a “one-in-1000-year” earthquake.

A Reserve Bank spokesperson said insurers used sophisticated models, under the oversight of the Reserve Bank, that involved “simulating many thousands of potential earthquake events” to calculate what such an event was and could cost them.

A new “interim solvency standard” will apply to individual insurers this year, from the date that each rolls over into their new financial year.

That was designed to ensure that insurers held enough capital to be able to pay claims “even in the face of quite adverse future events”, he said.

It does not yet appear clear whether the new standard could see the bank demand any insurers buy extra reinsurance or otherwise improved cover.

The bank’s spokesperson said it was restricted from commenting on matters relating to the regulation of individual insurers.

Inflation in the construction industry was less likely to increase insurers’ possible liabilities by as much as it might have done in the past, given that “property insurance has moved from replacement cover to a sum-insured basis”, he suggested.

He implied the Reserve Bank believed a proportion of homeowners might now be underinsured, saying “at least for earthquakes, the risk that sum-insured is lower than replacement cost is primarily borne by policyholders rather than insurers”.