Toka Tū Ake EQC issues country's first ever 'catastrophe' bonds

Thursday, 1 June 2023

Earthquakes, often called rū whenua in te reo Māori, have shaken communities ever since people have called Aotearoa home.

Toka Tū Ake EQC has issued its first-ever catastrophe bonds.

The recently renamed crown entity runs New Zealand’s natural disaster scheme, which covers the first $300,000 of natural disaster damage to homes, and helped pay for rebuilds after the Christchurch and Kaikōura earthquakes.

Claims to the scheme are paid from the Natural Disaster Fund, but Toka Tū Ake buys reinsurance from a panel of 70 global reinsurers to help pay claims following massive natural disasters.

Chief executive Tina Mitchell said Toka Tū Ake had put in a place a record $8.2 billion of reinsurance, an increase of $800 million on the previous year.

More reinsurance was needed because the amount Toka Tū Ake was liable to pay to fix damaged homes had been lifted from $150,000 to $300,000, she said.

And for the first time, Toka Tū Ake had issued $225m of catastrophe bonds through a special-purposed Singapore entity, she said.

The first person to enter the Christ Church Cathedral since the 2011 Canterbury earthquakes wore a GoPro camera on his helmet to capture the moment. (First published August 2022)

The bonds have been issued to investors for four years, and act like reinsurance, except they do not have to be renegotiated each year. Toka Tū Ake pays an annual premium of 8.75% on the bonds, Mitchell said.

“If there’s no disaster, the investors get back their capital,” she said.

In the event of a natural disaster, Toka Tū Ake pays the first $2b of claims using money from the Natural Disaster Fund, topped up, if necessary, by the taxpayer.

If claims on a natural disaster go above $2b, Toka Tū Ake can draw on the catastrophe bonds, and only after that, can it call on its reinsurance cover.

The Christchurch and Kaikoura earthquakes had reduced the assets in the Natural Disaster Fund, which Mitchell said currently sat around $370m. The fund is being rebuilt using levies collected from homeowners paid on their private house insurance.

Toka Tū Ake decided to issue the bonds both as a pilot project to gain experience in them, but also as a step towards diversifying its reinsurance, however Mitchell said catastrophe bonds would only ever make up a small part of Toka Tū Ake’s reinsurance needs.

Globally, catastrophe bonds are big business.

The Toka Tū Ake bonds were the first to be issued in New Zealand dollars, Mitchell said, and were unusual because they provided cover for more than one kind of natural disaster.

“It’s a little bit unique because it covers all the five perils we cover under our scheme,” she said.

Toka Tū Ake EQCover provides natural disaster insurance for residential homes, and some areas of residential land, after earthquakes, landslips, volcanoes, tsunami and hydrothermal activity.

It also provides cover for storm or flood damage for residential land.

Kenny Ransbottom walks through debris inside his auto parts store after an earthquake in Rio Dell, California in December.

While catastrophe bonds are new for Toka Tū Ake, Mitchell said the California Earthquake Authority used them to back some of the cover it provided to homeowners.

While Toka Tū Ake’s catastrophe bonds are the first catastrophe bonds issued by EQC, they are not the country's first brush with them.

New Zealand’s sovereign wealth fund has invested in catastrophe bonds for several years.

At the end of June, the New Zealand Superannuation Fund, which was set up to help pay some of the future costs of NZ Super, had over half-a-billion dollars in insurance-linked catastrophe bonds.

Toka Tū Ake EQC chief executive Tina Mitchell says catastrophe bonds give Toka Tū Ake EQC more options in the future.

Global reinsurers have been hard-hit by rising claims for extreme weather events, and are charging more for their reinsurance.

“Some people are calling it a ‘once-in-a-generation’ hardened market,” Mitchell said.

“When markets harden, the fact reinsurers come to us, shows that loyalty and that unwavering belief in the scheme that we have,” she said.

New Zealanders are having to get used to the Toka Tū Ake name.

The Public Inquiry into the Earthquake Commission following criticism of its performance after the Christchurch earthquakes recommended it change its name to something that better reflected the fact that it covered more than just earthquakes.

It elected to go with a te reo Māori name, following some other government entities including Kāinga Ora, Waka Kotahi and Oranga Tamariki. It says Toka Tū Ake means the foundation from which we stand strong, together.

“It’s the rock you use to get back on your feet after a disaster,” Mitchell said.