Earthquake Commission faces surge in reinsurance rate

Photo / Sarah Ivey

The Earthquake Commission is facing a 130 per cent price rise for reinsurance when the first part of its forward cover is renewed next month, according to an industry publication.

A portion of EQC's reinsurance renewal programme comes up on June 1 and that "will see a 130 per cent premium increase", Insurance Insider says.

EQC said yesterday that negotiations on reinsurance prevented any comment on the speculation.

Gordon Irving, EQC communications adviser, yesterday confirmed that the Crown-owned business was holding discussions with global reinsurance partners. But because of those discussions, EQC could not comment, Irving said.

To ensure the Crown-owned entity can meet disaster coverage, it buys reinsurance in tranches that expire in stepped phases.

The first step is due at the start of next month, prompting industry speculation of the big price rise.

Although New Zealanders' EQC fees are a small portion of their total insurance, a rise in that part of the bill indicates premiums charged by insurance companies could also rise steeply.

The Insurance Council warns that "logic suggests" premiums will rise given they are exposed to the same rising reinsurance market the commission was. Council chief executive Chris Ryan said he was not prepared to put a figure on premium rises across the industry, but one company had already warned of increases of 50 per cent.

EQC has issued reassurances on its forward cover, indicating it can withstand the September and February Christchurch disasters with a big fund accumulation.

"There is currently around $5.6 billion in the fund which is backed up by reinsurance from overseas groups and a government guarantee. The government guarantee ensures that EQC will always be able to meet its obligations, regardless of the circumstances," EQC says.

Six decades of funds enable it to withstand disasters, it says.

"For more than 60 years it has been collecting premiums from insured people and during that time a substantial nest egg against damage, called the Natural Disaster Fund, has built up," EQC says.

The commission's part of premiums is 5c (excluding GST) for every $100 of insurance cover it offers, to a maximum of $67.50 a year.

But the Insider has raised questions about the cost of EQC's own insurance, saying although only a portion of its reinsurance comes up for renewal annually, costs will rise after the Christchurch quakes.

All EQC's reinsurance cover will fall due by next year, it says.

"The complex renewal structure means post-loss price increases take two years to filter through and it will not be until June 1, 2012, that all of the business will have been re-priced since the pair of earthquakes. It is understood that the programme was designed by Aon Benfield to smooth out price fluctuations for its client.

"According to a government report in April, the EQC expects losses from the September and February earthquakes to be contained within its reinsurance cover. Market sources suggest that the EQC's loss notification for the first quake remains unchanged at $2.75 billion to $3.5 billion, suggesting a reinsured loss of between $1.25 billion and $2 billion.

"An EQC delegation to Bermuda this spring told reinsurers that there was a 66 per cent probability of a gross loss of $3.8 billion or more for the second event. This equates to a reinsured loss of $2.3 billion and would take the reinsurance programme towards its outer limit."

How EQC works
* Covers houses up to $100,000 plus GST.
* Covers personal effects of $20,000 plus GST.
* Pays out on the value of damaged land.
* Covers most personal property but not cars or art.
* Covers earthquake, natural landslip, volcanic eruption, hydrothermal activity, tsunami.

Source: Earthquake Commission