Bollard highlights costs of safety

Reserve Bank Governor Alan Bollard has warned against a regulatory over-reaction to the Canterbury earthquakes.

"Disaster preparedness is necessary and desirable, but not costless. Increases in safety standards, such as seismic strengthening, can result in significant costs for an economy that linger long after the risks they aim to address have occurred. They can also create a complicated regulatory environment that may result in significant impediments for activity," he told a conference in Wellington yesterday.

Preparing for unlikely but highly damaging events might be "constraining in terms of activity and prohibitive in terms of costs", Bollard said.

But such considerations had to be balanced against the fact that New Zealand was geographically and economically isolated.

The Reserve Bank has been given regulatory responsibility for the insurance industry.

Its working assumption for the cost of rebuilding Christchurch is $20 billion, give or take $5 billion. That is equivalent to 10 per cent of New Zealand's gross domestic product, while the massive earthquake and tsunami that hit Japan in March are estimated to have caused damage equivalent to 3 or 4 per cent of its GDP.

This highlights the importance of the offshore reinsurance market, which Bollard said "has worked as we would hope".

Property insurers who had renewed their reinsurance since February had generally been able to maintain or increase their reinsurance cover.

"However, reinsurance premiums have more than doubled, and in many cases a higher retention - claims borne by the insurer before reinsurance starts to pay out - also applies. We are now seeing delays in payouts and some litigation around liabilities. This may look untidy, but it may also be inevitable in such a complex situation."

While the ground was still moving the availability of new cover against earthquakes in the Christchurch area was "limited", Bollard said, and some earthquake-prone buildings and infrastructure both in Canterbury and elsewhere in New Zealand could no longer get insurance.

Natural disasters, like financial crises, had highly specific dimensions and unfolded in different ways.

"This means institutions need to focus on general preparedness, competency, leadership, delegation powers and resilience, rather than on detailed plans for specific situations which may not repeat themselves."

One of the lessons from the February quake was that structural damage is only part of the story and soil liquefaction is highly problematic.

"Given that private insurance does not cover this, it presents major problems for rebuild."

The reconstruction required in Canterbury would provide a large boost to economic growth for five years or more, Bollard said. But it would also boost inflationary pressures.

"It would therefore be inappropriate, all else [being] equal, for monetary policy to be stimulatory during the reconstruction period."