A string of earthquakes in New Zealand is sending tremors through the global insurance market with some companies delaying underwriting policies and others turning to capital markets to offset the risk of pile-on damage and costly claims.
“Although there has been speculation around ongoing coverage, recent feedback and announcements from local insurers is that capacity remains available, but the cost has increased,” said John Birch, director of Financial Institutions at Sydney, Australia-based Fitch Ratings.
Five tremors of magnitude 4.3 or greater rattled the New Zealand city of Christchurch on Monday.
In February, a magnitude 6.3 quake devastated Christchurch, killing almost 200 people. A force 7.1 quake struck the city last September causing widespread damage and minor injuries. The region has had thousands of aftershocks since September, and New Zealand’s government has said parts of Christchurch would have to be abandoned.
One senior industry underwriting source, who requested anonymity because contracts were still being negotiated for July 1 renewals, said he had heard that Japanese insurers were avoiding writing quake policies until next year, fearing Japan could see New Zealand-style aftershocks.
Three senior reinsurance underwriting sources disputed the $3 billion to $5 billion loss estimate from catastrophe modeler Eqecat for Monday’s earthquake, putting insured losses below $1 billion. The sources agreed that insurers were reassessing coverage plans in the wake of New Zealand having had three major earthquakes in nine months.
Even before Monday’s earthquake, some reinsurers were forecasting contracts that renewed on July 1 would be 30 percent more expensive than a year ago, while others predicted over 100 percent increases in local property catastrophe lines.
Claims from the September earthquake were so great that it looked as if New Zealand’s government would have to dip into its own coffers to top up the New Zealand Earthquake Commission (EQC) for claims from the February 22 quake.
The EQC’s coverage was reset in June, meaning any claims from Monday’s quake would be absorbed by fresh reinsurance capacity.
Two industry underwriting sources said that the EQC had already seen its reinsurance costs double at its June 1 renewal, albeit off a low base relative to most other places.
One of the sources said it was likely New Zealand insurers would continue to pay elevated rates for years.
The other source said there were questions about whether the EQC has enough coverage for the current year, only two weeks into the term and with a major quake having already occurred.
The risk, the source said, was that the commission could have to incur further payouts on new quakes from the portion of its losses it has to pay out directly, much like a deductible.
“Two more retention hits and they all of a sudden have to go back to the market or rely on the New Zealand sovereign state to back them going forward,” the source said.
With the squeeze in reinsurance in New Zealand, and with rates looking as if they will remain high for years, the capital markets have become an increasingly attractive option.
“We would hope to see more transactions coming from New Zealand, at best a catastrophe bond issued on behalf of the EQC pool or a portion of the pool being transacted only with the collateralized market,” said Michael Stahel, head of insurance-linked investments at Swiss private bank Clariden Leu.
So called “cat bonds” are issued by reinsurers seeking collateralized protection from investors, as opposed to traditional reinsurance market.
The notion about the pool issuing a cat bond to cover some of their liabilities has never before been addressed because it did not pay a high enough return to attract investors.
“However, where we stand now in terms of loss activity, it may be possible to pay the necessary level of premium to place a cat bond for the high excess layer of the pool as a cat bond in the market,” said Stahel.
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