Quake insurance facing shakeup
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 ‘‘knee-jerk reaction’’ by insurers if New Zealand suffered more earthquakes.
‘‘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 industry need 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 noncompliant [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 the 7.8-magnitude Kaikoura earthquake in November last year is yet to be finalised.
However, as at June 21, insurance claims totalled $1.84 billion, with more than half 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 earthquake cover disappearing. ‘‘That would be a long way up.’’
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 … 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 similar claims were made after the Canterbury earthquakes.
‘‘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.
Argosy chief executive Peter Mence thought it was unlikely reinsurers would withdraw from New Zealand. Argosy owns several Wellington buildings.
‘‘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 any reinsurer who was not aware of Wellington’s quake history had not done its homework.
‘‘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.’’