Delayed review creates risk
02 Nov 2016
The world’s second largest reinsurer says the Government should make hay while the sun shines, and get on with amending the Earthquake Commission (EQC) Act before insurers are forced to start paying a premium for the uncertainty caused by the legislative review being delayed.
In a world awash with capital, Swiss Re says reinsurers’ risk appetites are relatively high.
So they aren’t noticeably penalising insurers, unsure about how they and the Government will share the burden of natural disaster damage in the future, with the EQC Act review still up in the air three years after it was meant to be completed.
Yet things can change quickly, warns Swiss Re’s Asia Pacific head of Property Casualty Facultative, Mike Mitchell.
“Inevitably market cycles wax and wane and I think strategically for New Zealand it’s quite important to use the window that there is currently in the post-event environment - where the issues are front of mind, but also where reinsurance capacity is relatively freely available - to fix the challenges there are in the current operating model.”
Speaking to interest.co.nz, he says New Zealand shouldn’t be “lulled into complacency by the fact there is reinsurance capacity”.
“If either the reinsurance market cycle were to turn - which could happen in a number of circumstances outside of the New Zealand environment - or if there were to be another large event without there having been any real rectification of the structural issues that are causing challenges at the moment, then that could put New Zealand, from a reinsurance capacity perspective, in quite a difficult position.”
NZ economy ‘rather vulnerable’
Why does this matter? Mitchell explains New Zealand is very well insured against natural disasters compared to other developed countries.
While insurers recovered around 80% of economic losses after the 2010/11 Canterbury earthquakes, they only recovered around 25% of losses after the 2011 Tohoku quake in Japan.
With so much at stake, the way EQC is structured has a huge impact on the insurance industry.
For example, Mitchell points out EQC’s claims management structure has resulted in 400-500 new over-cap claims (claims worth more than EQC’s $100,000 cap) continuing to trickle from EQC to private insurers every quarter.
“Six years on from an event - that’s really quite unparalleled,” he says.
“The structural challenges that there are in terms of the formulation and execution of coverage under the EQC Act with the private sector coming in, just creates a significant degree of uncertainty as what the end game will look like.
“One thing that insurers and reinsurers are very wary of is uncertainty.
“That I think makes the New Zealand economy, which is very significantly reliant upon transferring this significant risk burden and diversifying it globally, rather vulnerable.”