Today is ‘Waitangi Day’ in New Zealand; it’s mid-summertime and many New Zealanders will be grabbing their “togs,” slipping on their “jandals” and with a bit of a “slip, slop, slap and wrap” will be preparing to enjoy a day off by hitting the beach with family or friends…
Waitangi Day is New Zealand’s principal national holiday that marks the signing of the Treaty of Waitangi in 1840 when New Zealand’s founding document was signed between the early Polynesian migrants, known as Maoris, and the British.
New Zealanders will be looking forward to a day off after a tumultuous year of highs and lows from the All Blacks winning the Rugby World Cup to the devastating 6.3 magnitude earthquake that rocked Christchurch in February 2011.
The quake, in conjunction with an earlier September 2010 quake, not only had a major impact on society and changed the cityscape, but they were also a real game changer in the local insurance and reinsurance marketplace. Before I go into the impact of the quake on our industry, it’s worth taking some time to look at how the New Zealand insurance market functions.
Uniquely New Zealand Insurance Market
So if we call our beach holiday houses “baches” or “cribs” and our sandals “jandals” then presumably we must have some unique features in our insurance environment? For sure. The most striking feature of our market is that all personal injury is compensated on a no-fault basis by a state agency called the Accident Compensation Corporation (ACC).
Common law claims for damages are not allowed in any circumstances where compensation is available from ACC. Traditional liability classes such as motor third party personal injury liability and workers’ compensation therefore do not exist here.
An example of the extent to which the ACC compensates citizens is the tragic 2010 Pike River Coal Mine explosions which left 29 people dead. The ACC will pay compensation of around NZD 10mn (USD 7.35mn) to the dead men’s families.
Earthquake cover for residential buildings and contents is available through the Earthquake Commission. Along with the ACC, these two public sector funds account for approximately half of non-life premiums.
The non-life insurance market is dominated by a number of large insurers many of which have Australian parent companies. The largest four control about three quarters of the non-life market. There are approximately 200 brokers in New Zealand and the Insurance Brokers Association of New Zealand (IBANZ) has 180 member firms controlling annual premiums of about NZD 2.3bn. Brokers account for about 85% of commercial risks and 15% of personal risks.
The Impact of the 2011 Quake
The Christchurch earthquake on 22 February caused considerably more damage than the 7.1 Christchurch quake in September 2010 and resulted in 182 fatalities, making it the deadliest quake in New Zealand in 80 years.
This massive event and the 8,000 or so aftershocks in the Canterbury region since February have in a large way transformed the insurance market here in little old NZ. Inadequate catastrophe modelling left reinsurers unprepared for an event of such magnitude. Reinsurance coverage is now more restrictive and comes at a significantly higher price.
While rebuilding projects present opportunities for growth in insurance premiums, construction programmes are being stalled until the ground settles. In the meantime, insurers that are continuing to underwrite earthquake risk are passing on the bulk of these increased reinsurance costs to policy holders. The financial shocks of the earthquakes are being felt by homeowners throughout the country right now in January and February 2012 with the arrival of insurance bills in the post showing average increases of up to 30%.
Commercial properties and apartment blocks around the country have been hit particularly hard, in many cases their premiums have doubled or tripled and their excesses have increased 10-fold.
Insurance Penetration, and the real “game changer”
Global reinsurer Swiss Re estimates that the New Zealand insurance industry will cover about 80% of the $20 billion in economic losses caused by both Christchurch quakes.This high rate of earthquake insurance penetration led to annual property catastrophe reinsurance rate increases ranging from 80% to 150% for insurers at the recent 1 January renewals (according to Willis Re).
This share of the total economic loss from the quakes demonstrates that New Zealand has one of the “highest rates of earthquake insurance penetration in the world”, says Swiss Re in a new report, “Lessons from Recent Major Earthquakes.” Even in the most developed insurance markets, like the US, “insured cover rarely exceeds 50% of economic loss in the case of major natural catastrophes,” says Swiss Re.
The Swiss Re report compared the cost to the insurance industry of the 2011 New Zealand quakes and the Japanese quake and tsunami which resulted in a significantly lower insurance bill of only “17% of $120bn.” Which means that the two events “had a roughly similar impact on the global insurance industry.” said Swiss Re, even though Japan’s total economic losses were six times more than New Zealand’s.
But perhaps the real game changer is an announcement by the country’s financial services regulator, the Reserve Bank of New Zealand, that local insurers will need to purchase reinsurance capital for earthquake to a 1-in-1,000-year event by 2016, a considerable movement from what was required before, namely a 1-in-250-year event. Add to this the tripling of the earthquake levy (EQC levy) and it spells continuous insurance price increases for several years to come for New Zealanders.
There’s no doubt this leads to a different perspective for everyone’s thinking: insurers, reinsurers, brokers and customers. The words “affordability” and “availability” will be ever more increasingly associated with insurance over the next few years. And rather frighteningly in the short term, especially for those toughing it out on the South Island, who knows what’s really going on under the Canterbury plains?
Guest blogger Jeremy Andrew is a Business Development Manager for Willis New Zealand, based in Auckland. Jeremy started his career in the UK where he obtained his ACII qualification before moving to New Zealand. He is responsible for sales in the Auckland region, developing opportunities across all industrial and economic sectors.