Quake insurance at risk
Industry giant warns of possible ‘knee-jerk reaction’
A global reinsurer is warning commercial building owners that earthquake cover could be axed because of New Zealand’s seismic risks.
Scott Hawkins, of reinsurance giant Munich Re, told a building industry conference in Wellington yesterday there could be a ‘‘kneejerk reaction’’ by insurers if New Zealand had more quakes.
‘‘The provision of insurance might be something that becomes unattainable, which would be an undesired consequence for the economy,’’ Hawkins said.
After September 11, terrorism cover was taken away, and governments had to step in.
As a result, the insurance industry needed to carefully consider its responses to quake insurance claims, he said.
‘‘What we don’t want is the capital providers, or the insurers, saying: ‘OK, we won’t cover anything that’s non-compliant [with the building standard] from tomorrow’, because that’s also not something that is going to be useful for the people or the economy or businesses.’’
There was a danger investors would stop funding reinsurance companies because ‘‘the level of risk is too high for the return’’, which would limit the amount of insurance coverage available for earthquake damage, Hawkins said.
The total cost of November’s magnitude-7.8 Kaikoura earthquake is yet to be finalised. However, as at June 21, insurance claims totalled $1.84 billion, with more than half of that for damage to Wellington buildings and businesses.
‘‘[The insurance industry] absolutely cannot deal with the earthquake risk that New Zealand faces purely in New Zealand, nor can we do it purely by insurance,’’ Hawkins said. ‘‘Insurance is a risk-management tool, [but] it’s not the only risk-management tool.’’
But John Lucas, insurance manager at the Insurance Council, said New Zealand was not yet at the point where anyone needed to worry about quake cover disappearing.
New Zealand had a high level of insurance cover and it was reasonably cheap, he said. But insurers were starting to ask more questions about the risks they covered.
People wanting cover would find it easier if they had better buildings, or good information about those buildings, to make their case to the insurance companies, he said.
‘‘If we don’t act now, one day insurance terms could change. It could become more expensive or restrictive in cover for certain building owners. ‘‘But not at this stage.’’ ‘‘Risk management can’t be: ‘I won’t do anything as a building owner because when it falls down, it will be put up properly the next time.’ ’’
Munich Re suffered its biggest loss as a result of the 2010 and 2011 Canterbury earthquakes, Hawkins said.
Insurance commentator Michael Naylor, of Massey University, said: ‘‘Certainly, reinsurers will take decades to recover their Canterbury losses.
‘‘Basically, the industry has underestimated New Zealand’s quake risk.’’
He said New Zealand would always be able to get reinsurance, but it was a question of price.
‘‘I’m of the opinion that the major roles of the Earthquake Commission should not be paying out minor claims but backing insurers in terms of ensuring reinsurance access,’’ Naylor said.
An Insurance Council of New Zealand spokeswoman said the Kaikoura earthquake affected the ability of businesses to stay open and highlighted Wellington’s potential vulnerability.
Argosy chief executive Peter Mence thought it was unlikely reinsurers would withdraw from New Zealand. Argosy owns several Wellington buildings, including Stewart Dawsons Corner.
‘‘That’s a wee bit dramatic because the total property industry in New Zealand is a very, very small proportion of global insurance. We wouldn’t even move the needle.’’
However, he said it could be more difficult for a new building owner to get insurance than a landlord like Argosy, which had been with the same insurer for 25 years.
Mence said premiums had spiked after the Christchurch quakes, reduced, and then jumped again after last November’s Kaikoura quake.
Some premiums in Wellington had increased 30 per cent, depending on the resilience of the building and ‘‘all kinds of things’’.
But any reinsurer that was not aware of Wellington’s quake history had not done its homework, Mence said.
‘‘Insurers are pretty professional and they value the business out of New Zealand . . .
‘‘At the end of the day, is the same going to apply because we have a tsunami risk in Auckland? There’s a risk wherever you are.’’
Quake exposes ‘unacceptable’ failure,
The performance of Statistics House during November’s 7.8-magnitude earthquake, which caused the Wellington building to partially collapse, was ‘‘unacceptable’’, Building and Construction Minister Dr Nick Smith says.
Smith expressed his concerns about the five-storey waterfront building, which remains closed, at a conference yesterday.
The conference was organised to discuss internal fitout failure that can occur during a quake.
A ‘‘real complex bit [is] coming out’’ soon about the base and effects of the Statistics House building, Smith said, including how seismic waves affect structural and non-structural elements.
Non-structural seismic restraints hold airconditioning, fire-sprinkler, telecommunication, electricity, lighting and ceiling support systems in ceiling cavities and other parts of the building.
These can collapse and pose risks to life and property.
Hugh Cowan, general manager of reinsurance, research and education at the Earthquake Commission (EQC), said non-structural elements and fitout was responsible for up to 70 per cent of the building’s value.
‘‘They contribute significantly to the cost of repair when they do fail … and determines whether or not the building can continue to operate and function. It can be the difference between carrying on or moving out.’’
Earthquake damage to nonstructural elements was ‘‘not necessarily a regulatory system failure’’, but there were areas for improvement, Cowan said.
They included making seismic design criteria information more widely and easily available, making it clear who was responsible and for what, improving the visibility of costs for design, and encouraging education.
The Kaikoura earthquake in November last year affected the ability of businesses to stay open and highlighted Wellington’s vulnerability, an Insurance Council of New Zealand spokeswoman said.
A significant amount of the commercial property damage that occurred during the 2010-11 Canterbury quakes was due to the failure of non-structural seismic restraints, she said.
It was also a significant cause of the damage to the BNZ building on Harbour Quays in 2013 following the Seddon earthquakes.
Using Wellington as a case study, yesterday’s seminar showed how another earthquake could leave some existing buildings unusable for some time.
The conference is being hosted by the Insurance Council of New Zealand, the Building Research Association of New Zealand (BRANZ), the Wellington City Council and EQC.