Insurance costs tipped to skyrocket

Tuesday's earthquake sparked a fall in the shares of international reinsurance companies. Photo / Simon Baker

Insurance premiums, Earthquake Commission levies and the cost of buying reinsurance look set to spiral after Tuesday's quake, putting insurance out of reach of many New Zealanders.

Experts in the sector yesterday predicted big hikes and shares in international reinsurers fell.

Reuters reported that reinsurance businesses suffered share price drops and said September's earthquake was one of the world's costliest disasters last year.

John Balmforth, chief executive of Christchurch-headquartered AMI Insurance which is the largest New Zealand-owned insurer operating here, said the earthquake was the worst disaster his firm had faced.

"We have not had events of this magnitude before. But we had $600 million reinsurance for the first event and we have another tranche of $600 million we can draw down on and another tranche of $400 millon we can draw down on," he said.

AMI had no issues meeting its commitments but he predicts insurance costs will rise.

"There will be increases in premiums nationally. I think these will be across the board, that's just going to be a flow-on effect," Balmforth said.

New Zealand companies offered more affordable insurance than in many other parts of the world.

"In the United States and particularly California, earthquake cover is around 1 per cent of the value of the property which would be US$3000 [$4018] a year on a US$300,000 property. So people just don't buy insurance there. I don't think we would even get anywhere near that in New Zealand, but that's just an example," Balmforth said.

Other experts predicted changes to the Earthquake Commission which they said would be unable to meet demands, having endured years without any levy increases.

Balmforth refused to be drawn on commission levy hikes, saying this was the Government's decision and would require a law change.

"We collect it and we would adjust what's required."

Yesterday, Balmforth said AMI was backed by some of the largest international reinsurers based in Bermuda and other parts of the world. Claims would be met.

"I'm completely confident we can cover this. I've had messages from reinsurers offering support and saying they are ready to assist."

AMI was forced to abandon its Latimer Square headquarters for its emergency earthquake management centre at Addington.

"We have crews on standby ready to go first thing tomorrow morning to waterproof houses," he said. Tarpaulins would be secured temporarily on many properties.

AMI has 73 branches and the September earthquake cost it $5 million with international reinsurers paying the rest. The same scenario would apply after Tuesday's quake.

Ian McLean, former Earthquake Commission chairman and an international insurance expert, said premium price rises were inevitable.

"It's going to increase the rates reinsurers charge so premiums across New Zealand will go up."

But he is confident the commission has the ability to meet demand and said New Zealand was in a better position than virtually any other country to handle such a massive disaster.

"I've looked at schemes around the world, set up schemes in Turkey and Romania and been involved with California and Taiwan earthquake authorities. We have a high degree of protection and a high percentage of homes covered and we're better than almost any other scheme in the world," said McLean. "The commission will be able to handle this from their own resources. They won't need to call on the Government guarantee."

One insurance expert disagreed, saying the commission could not pay for the disaster and had been under-funded for years. Changes to the system were needed, he said.

The commission itself declared problems after a review panel examined issues and reported misalignment of role expectations between the state and the commission, minimal guidance on what constitutes acceptable processing times for a moderate or large-scale event, duplication of effort in processing and claims approval, small staff numbers which could compromise the commission, limited internal capacity and minimal collaboration with the private sector.