Next will come the mammoth task of futureproofing infrastructure to make it more resilient in the face of climate change, and figuring out how to compensate those who will need to move to safer ground.
Estimating the immediate, let alone longer-term costs, is a fool’s game at this stage. It’s obviously going to be massive.
Nonetheless, the events of the past few weeks have put one piece of the system in the spotlight – the country’s state disaster insurer, Toka Tū Ake EQC.
EQC was designed to be funded by home insurance policyholders, supported by reinsurers, and backstopped by the Crown.
However, it is possible the Crown may have to help pay out homeowners affected by the late-January floods and Cyclone Gabrielle.
Should there be another major disaster in the next few years, the Crown would likely have to come to the party again.
EQC still recovering from the quakes
Why? Pre-weather events, EQC only had about $300 million in its Disaster Recovery Fund, which is mostly funded by levies paid by home insurance policyholders.
Before the 2010/11 Canterbury and 2016 Kaikoura earthquakes, the fund had a balance of $6.1 billion.
On Monday, EQC’s board chair Chris Black told Parliament’s Environment select committee the organisation had received around 1600 claims, worth $100m-plus, related to the upper North Island floods.
Black said it was unlikely, at that stage, that EQC would need to draw on its Crown guarantee.
The Crown would have to step in to cover costs that exceed what’s available in the fund, up to $1.75b. This is the point at which EQC could start drawing on its $7.2b of reinsurance cover.
So, the question is whether the floods and cyclone will cost EQC more than what’s available in the fund ($250m to be specific, as EQC is required to maintain a minimum of $50m).
By all accounts, this seems possible, despite the fact EQC’s flood cover is limited to damage to insured residential land.
EQC will cover the cost of removing flood debris such as silt and fallen trees and repairing land scour damage, but flood damage to homes, contents and cars are covered by private insurers.
EQC will also cover damage caused by a landslip to residential land or a home.
Cover for a damaged home is available up to the building cap, which was doubled to $300,000 in October. Policyholders only get this new amount of cover when their annual private insurance policy comes up for renewal.
Meanwhile, the amount of cover available for land damage caused by a slip is the lesser of the value of the damaged land and the cost to repair or reinstate that land.
Black recognised it was hard to model the cost to EQC of landslips.
So, even if EQC doesn’t face claims worth more than $250m, it’s Disaster Relief Fund will still be depleted.
Until it is rebuilt, much of the cost of a disaster in the near to medium-term will fall on the Crown.
Reinsurance deductible could rise
This could be more so the case if EQC increases its reinsurance deductible, or the point at which its reinsurance kicks in, when it renews its annual reinsurance programme on June 1.
Black, at the select committee, said this trigger point “probably” would increase from $1.75b.
Asked to elaborate on this comment, he told the Herald the reinsurance deductible hadn’t changed since 2012.
Black said it was “not uncommon for an organisation’s deductible to increase over time as the overall level of risk it covers increases”.
He noted the cap on EQC’s building cover was doubling, the value of New Zealand’s building stock had increased, and inflation had impacted the cost of construction.
“Final decisions on the structure of the programme are subject to negotiations with reinsurers which we will begin in early March and will look to conclude in May,” Black said.
EQC eyes alternative risk finance
There is another element to this story.
EQC is looking at diversifying how it’s financed, as climate change increases the cost of reinsurance.
Specifically, it’s looking at using catastrophe bonds to complement the reinsurance it buys from more than 70 reinsurers.
These would effectively see EQC pay institutional investors to share the risk of a specific disaster occurring in New Zealand.
EQC would pay investors to put money into a trust account, which EQC would draw down on if agreed conditions were met. If there was no event that triggered a claim during the term of the bond (typically three to four years), the investors would get their money back.
The catastrophe bond market has been around for more than 25 years, and is estimated to be worth around US$100b. The traditional reinsurance market is worth around US$600b.
EQC’s chief financial officer Chris Chainey told the Herald “any alternative support sourced via say a catastrophe bond would provide a valuable source of additional and separate long-term capital to complement the overall core reinsurance programme”.
While Chainey noted catastrophe bonds could provide additional protection for the Crown, he said EQC was still figuring out where they would sit in relation to its reinsurance programme.
In the meantime, the depletion of EQC’s Disaster Recovery Fund, possibly coupled with a higher reinsurance deductible, will see the Crown more exposed to losses suffered by homeowners in a natural disaster.
