Insurers face higher earthquake costs

There are still substantial claims outstanding says the Reserve Bank.

Insurers may face higher costs over the Canterbury earthquake after several firms recently increased estimates for the final bill, according to the Reserve Bank.

The central bank now estimates the cost of the 2010 and 2011 quakes will be between $33 billion and $38 billion, and says "there remains a risk of negative surprises to individual insurers". As at March 31, insurers had paid out $24 billion in earthquake claims, and increased costs have been funded through a combination of reinsurance, reduced existing capital, and injections of new capital.

"In aggregate, estimated outstanding Canterbury earthquake claims have not reduced by much in recent months, with payments roughly matching increases in estimated ultimate costs," the bank said in its six-monthly financial stability report.

"The substantial claim amounts still outstanding suggest it will be challenging for insurers to meet their announced target for completing the settlement of all Canterbury earthquake claims within the next year or so."

New Zealand's general insurance sector has been benefiting from global trends where firms have found it relatively easy to raise capital, which has made reinsurance costs cheaper, though Asia-Pacific rates are higher than in other regions.

Those falling costs have put downward pressure on domestic insurance premiums, though the Reserve Bank said that hadn't necessarily been fully reflected in retail pricing, with some insurers exposed to losses from recent regional weather events.

"In this competitive market, it is important that insurers maintain sound underwriting standards so that premiums remain appropriately priced in relation to the risks."

The bank reviewed the quality of insurers' risk governance through the second half of last year, and found that while the quality was varied, insurers recognise the importance of risk governance.