EQC review creates headache for insurers

Gerry Brownlee.

The government review of the Earthquake Commission's funding and policy structures is leaving global reinsurers uncertain as they try to assess the risk profile posed by natural disasters in New Zealand after the Christchurch earthquakes.

The review, led by Treasury, was launched in September 2012 to gauge the Government's disaster contingency fund's future after its resources were exhausted by the Canterbury quakes that caused billions of dollars of damage and killed 185 people.

The review was initially meant to lead to a Cabinet decision in mid-2013, though has been delayed, and has posed a major uncertainty for the reinsurance industry, according to Mike Mitchell at Swiss Re.

The reinsurer still wanted a better understanding of building construction quality, which creates uncertainty in terms of vulnerability, but how that all ties in together was still a major unknown, 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," Mitchell told a briefing in Wellington.

"That's an area around policy, around EQC, the interaction between EQC and the commercial insurance sector on which various industry representations have been made, and there's been a lot of discussion about whether the model the EQC has is the most sustainable in the long term."

The review terms of reference covered what the EQC insures, including the layer of loss covered, which natural disasters are covered, how multiple events should be treated, which types of property should be covered, the coverage of land, building and contents, what caps should be on the scheme, and whether it should be voluntary or mandatory.

Earthquake Recovery Minister Gerry Brownlee says the review is almost completed and a report will likely go before Cabinet in the next month or two, with only minor changes likely to be recommended.

"We've carefully considered over the past 18 months the experience of EQC over such a major event and concluded EQC's model is reasonably sound," Brownlee said. "We've been encouraged by the willingness of reinsurers to reinvest in the EQC programme. I expect a report will come to Cabinet in the first quarter of this year suggesting minor changes to EQC's model, and we'll have more to say about that then."

Global reinsurers underestimated the cost of the Canterbury earthquakes by about 50 per cent after they were surprised by the impact of the liquefaction, and with local insurance policies providing full replacement value cover rather than sum insured.