The long-running review of how to fund and structure New Zealand's earthquake insurance body is keeping global insurers on tenterhooks.

The Treasury-led review was launched in September 2012 after the disaster contingency fund was exhausted by the Canterbury quakes, which killed 185 people and caused billions of dollars of damage.

The review was meant to lead to a Cabinet decision in mid-2013 but continues to pose a major uncertainty for the reinsurance industry, according to Mike Mitchell, head of structure RI & head property UW Asia at Swiss Re.

The reinsurer still wants a better understanding of building construction quality, which creates uncertainty in terms of vulnerability, but how that all ties in together is still a major unknown, Mr Mitchell said.

“The mechanism between the value of risk, the claim being presented, and the cheque you write at the end – there’s fundamental challenges that we faced in New Zealand that make it very, very difficult for us in the existing environment to have certainty,” Mr Mitchell told a briefing in Wellington.

“There’s been a lot of discussion about whether the model the EQC has is the most sustainable in the long-term.”

Global reinsurers underestimated the cost of the Canterbury earthquakes by about 50 per cent – surprised by the impact of the liquefaction. Local insurance policies provided full replacement cover rather than the international norm of sum insured.

New Zealand’s level of insurance penetration is about 80 per cent, with EQC providing cover for the first $100,000 on natural disasters.

Mr Mitchell said Swiss Re has since adjusted its hazard models and that the shift by local insurers to sum insured policy cover for earthquakes has been a “critical piece of change” to improve certainty.

Mitchell and Munich RE’s New Zealand regional manager Martin Kreft are touring the country with EQC head Ian Simpson and Insurance Council boss Tim Grafton presenting their views to business audiences.

Mr Kreft said his firm has told the government that it needs to decide on whether it will go with a social model – where it ensures EQC could put everybody into an average house after an earthquake – or a capital protection model.

“We can respond either way, but it’s not up to us to dictate which way it goes,” Mr Kreft said.


By Paul McBeth