Quake cover 10% cheaper

The 6.3 magnitude Earthquake, Christchurch. Photo / NZPA

Improved terms in overseas market let EQC boost reinsurance pool by $1.25 billion

The Earthquake Commission has been able to increase its reinsurance cover after securing better terms in its latest annual round of negotiations.

The commission will spend $150 million or around 63 per cent of its levy income in the financial year just ahead buying cover from around 50 overseas reinsurers.

"The pricing we achieved this year for the equivalent cover we bought last year was down 10 per cent," said chief executive Ian Simpson.

The commission has used the saving to buy an additional $1.25 billion layer of reinsurance, lifting the total to $4.5 billion. In 2010, prior to the first of the Canterbury quakes, it spent $40 million for $2.5 billion of reinsurance cover.

The first $1.75 billion of the commission's liability to earthquake victims is borne by the taxpayer. After that the layers of reinsurance kick in.

The combined $6.25 billion from the first tranche of taxpayer's liability plus the $4.5 billion of reinsurance compares with a median estimate of $7.5 billion for what the commission's share of the cost of a major earthquake hitting Wellington would be.

Simpson said the improved terms the commission has been able to secure this year partly reflected an increase in the capital available to the global reinsurance market as the likes of US pension funds seek higher-yielding investments.

"Also EQC is one of the few insurers with a significant exposure to Canterbury that has been able to introduce a slight reduction to its liability [relative to earlier estimates], which went down very well," Simpson said.

"Now that we are 80 per cent of the way through all the building claims we are dealing with actual data rather than the conservative assumptions made earlier on."

The latest (December 2013) estimate of the commission's Canterbury liabilities was nearly $400 million lower than the previous one in June last year. The benefits of the revision are split roughly equally between the Crown and the reinsurers.

Whether a dedicated fund, like the $6 billion Natural Disaster Fund cleared out by the Canterbury quakes, should be reinstated and "reseeded" is one of the issues for the Treasury-led review of the Earthquake Commission Act which has been under way for nearly two years.