Insurance

Personal finance editor Amanda Morrall talks to Suzanne Wolton with AA Insurance about rate increases, bargaining hunting and the security of your insurer.

Amanda Morrall — Thu, 02 Feb 2012 02:46:35 +0000

Personal finance editor Amanda Morrall talks to Suzanne Wolton with AA Insurance about rate increases, bargaining hunting and the security of your insurer.

By Amanda Morrall

With EQC levies tripling at the start on this month in addition to home insurance premiums increasing by as much as 50%, householders can prepare themselves for a seismic case of bill shock if they haven't already.

It's not only cash-strapped Cantabrians who can expect to be hit with higher insurance costs. Nation-wide insurance companies impacted by the Christchurch earthquakes have raised their rates (and many) readjusted their policies in some cases after reinsurance hikes at their end.

The Earthquake Commission, hit with approximately NZ$10.8 billion in claims (so far NZ$2.8 billion of that has been paid), is also looking to rebuild its reserve. Earthquake levies have now shifted from a maximum of NZ$50 to NZ$150.

AA Insurance head of corporate affairs Suzanne Wolton said the average customer used to pay approximately NZ$200 to cover reinsurance, GST, fire service and earthquake levies. From Feb.1, that jumped to NZ$600.

"It's a significant increase,'' concedes Wolton.

"When people open their bill this year, no doubt they aren't going to be particularly happy.''

Consumers may be defenceless against reinsurance risks being priced into their policies however those who shop around could mitigate some of the financial pressure.

A common mistake many people make is thinking that by using the same insurer for all their rquirements (car, contents and home cover) that they'll get a better deal.

Wolton said while that might have been the case at one time, it was no longer true.

"We need to dispel this notion that you need to have all your insurance with one provider.''

Wolton offered the following tips for customers.

1) Separate the costs for each type of cover and find out if and by how much it is increasing. While some insurers have raised insurance on home cover by 50%, others have increased insurance premiums across the board but by a smaller amount.

2) Shop around for each insurance requirement to find the best price.

3) Take into account the insurer's financial stability as part of your decision making. New Zealand insurers require a credit rating from AM Best or Standard and Poor's.

According to the RBNZ, a credit rating is an independent opinion of the capability and willingness of a financial institution or company to repay its debts – in other words, its financial strength or creditworthiness. (See interest.co.nz's credit rating explained section here).

4) Get quotes from a number of different insurers but make sure you're comparing like with like in terms of what protection you're buying.

5) Ask specific questions of the potential insurers and give them scenarios that explain your circumstances or concerns.

6) Don't put the brochures in your bottom drawer, read them thoroughly.

Commerce Commission to mull banks' role in insurance as part of decision on whether to clear IAG's NZ$380 mln AMI bid

Gareth Vaughan — Tue, 24 Jan 2012 20:41:13 +0000

Insurance Australia Group's citing of the big banks as potential major competitors, if its NZ$380 million AMI acquisition is approved giving the combined group 56% and 61% market share respectively of the home-contents and motor insurance markets, is to come under Commerce Commission scrutiny.

The consumer watchdog published its statement of preliminary issues relating to the application by IAG, which owns State Insurance and NZI, seeking clearance to acquire AMI today. In it the Commerce Commission notes IAG's suggestion in its application to have the deal approved that a combined IAG-AMI would face strong competition from both existing insurers and from banks.

"The Commission understands that no New Zealand bank offering general insurance products underwrites its own policies," the Commerce Commission says. "Instead, it will resell a product of an insurance company. The Commission will assess whether or not banks are able to provide competitive constraint as a result of this relationship."

The proposed deal, which also requires the Overseas Investment Office's approval, would lift IAG's share of the general insurance market to 40% from 31%, well ahead of second placed Vero Insurance, owned by Australian rival Suncorp, with 23%. Third is Wesfarmers' Lumley with 9%.

The deal would see AMI's Christchurch earthquake exposure remain with the taxpayer after the government stepped in with a NZ$500 million support package for what until now has been a mutually owned AMI after the devastating February 22 Christchurch earthquake.

The Christchurch-based AMI subsequently reported a NZ$705 million annual loss and breached its Crown Support Deed arrangement through a NZ$76 million shortfall to its NZ$198.6 million regulatory capital requirement. Finance Minister Bill English says Treasury's best estimate of the proposed IAG deal is that it will reduce the AMI earthquake liability being carried by taxpayers to just NZ$120 million. The Government's June year financial statements estimated the AMI support package would cost taxpayers $335 million. Treasury's new prediction is based on AMI's estimated NZ$1.8 billion in earthquake liabilities, reduced by NZ$1.3 billion reinsurance and the NZ$380 million IAG purchase price.

The Commerce Commission says IAG's proposed purchase of AMI would result in aggregation of market share in three insurance product categories being domestic house, domestic contents, and domestic motor vehicles. As for market definition, it says it will consider there are separate underwriting and retail insurance markets.

"The Commission will also assess whether other related markets such as windscreen or motor vehicle repairs are relevant to the proposed acquisition."

The watchdog plans to make its decision by February 29 but notes this timetable could change.

Meanwhile, the Commerce Commission invites submissions from any other parties "who consider they have information relevant to the Commission’s consideration of this matter."

In a December research report Sydney-based analysts at Merrill Lynch suggested the Commerce Commission could potentially block the deal because it would make the New Zealand general insurance market "all but a duopoly" given the combined IAG-AMI's 40% market share alongside Vero's 23%.

The analysts also argued IAG is overpaying for AMI and say without IAG's recent NZ$325 million bond issue to New Zealand retail investors, it wouldn't have been able to fund the AMI purchase through internal funds. See the full story on the Merrill Lynch report here.

For its part the Commerce Commission says when considering a proposed merger, it must decide whether the competition that is lost in a market when two businesses merge is substantial.

"We will give clearance to a proposed merger only if we are satisfied that the merger is unlikely to have the effect of substantially lessening competition in a market."

BusinessDesk: Insurers set to cover 80% of Christchurch quake costs, Swiss Re says

BusinessDesk — Wed, 18 Jan 2012 00:51:55 +0000

Insurers look likely to foot 80 percent of the $20 billion price tag put on the Christchurch earthquakes, according to industry research.

Global reinsurer Swiss Re says the New Zealand insurance industry will cover about 80 percent of the overall cost of the Feb. 22 quake and 81 percent of the earlier September quake according to its internal database. That’s significantly higher than similar coverage for seismic events, and shows New Zealand has one of the highest rates of earthquake insurance penetration.

“The insurance industry is playing a key role in post-disaster financing of the countries affected,” said Lucia Bevere, Swiss Re senior catastrophe data analyst. “The low frequency of major earthquakes tends to create the perception that earthquake risk is low, even in places where there have been very deadly and damaging occurrence.”

In November, the Reserve Bank estimated the Canterbury quakes will result in claims worth some $30 billion as local firms seek to recover costs from interrupted business, temporary accommodation, inflation and other adjustments. Government officials have forecast the quakes caused more than $20 billion of damage to property in the region, though that predates the recent swarm of temblors since Christmas.

The Swiss Re research shows the insurance sector will only cover up to 17 percent of Japan’s March earthquake last year, while a February quake Chile will have about 27 percent of the US$30 billion in economic losses covered.

Worldwide seismic events between 2010 and 2011 caused economic losses of about US$276 billion and highly earthquake-prone countries remain underinsure, Swiss Re said.

The insurance industry will contribute just 1 percent to Haiti’s magnitude seven quake in 2010, which killed as estimated 316,000 people and caused economic losses of about $8 billion, while the 7.2 magnitude October quake in Turkey, which killed more than 600 people, will only receive a 4 percent contribution from insurers.

Insurance specialist Andrew Hooker speculates on a possible insurance aftershock that could wipe out many Christchurch businesses Feb. 22

Andrew Hooker — Mon, 16 Jan 2012 22:51:18 +0000

By Andrew Hooker*

As we approach the first anniversary of the devastating February 22 earthquake, there is more than sentimental relevance to the date.

Most businesses hold insurance for loss of profits. That way, if their business is destroyed they will be reimbursed for lost profit while it is repaired.

However, the cover is for a limited time. It's called the indemnity period. This indemnity period defines how long the insurance company will pay for loss of profits.

Indemnity periods vary, depending on how much you want to pay. The most common is 12 months and so on Feb. 22, 2012, a large number of businesses will lose their lifeline and will have to find funds to meet outgoings. It seems likely that a large number of Christchurch businesses will collapse after this lifeline ends.

When arranging insurance, a broker or business person will allocate an indemnity period that reflects a best guess about how long it will take to get back to business. No one could be criticised for assuming things would be back to normal in 12 months in Christchurch but the reality is that many businesses have not even started work because the insurance company has not yet decided on whether to repair or destroy the building.

There are many possible reasons for the delay. Insurance companies blame it on many factors including the inability to rebuild while zoning is clarified, or a shortage of construction companies and engineers.

That may well be the case, but should the insurance company be able to delay for over 12 months particularly where the building used by a business is apparently irreparable?

Is the delay reasonable?

Chain dragging?

A cynic might suggest that there are other reasons that the insurance companies are less likely to publicise:

• The longer the delay between the event and payment the more money the insurance company makes. If your claim is $1,000,000 then the insurance company makes (at say 8%) over $5,000 per month, $80,000 per year by keeping your money. With losses in the billions, the overall benefit to the insurance companies, or their reinsurers is huge.

• If the insurance company is having trouble paying, the longer it delays the more money it gets in the door allowing it to meet its liabilities out of future premium income.

• Many businesses made temporary repairs and got back to business, planning to get repairs underway once the dust settled. The trouble is, the indemnity period continues to tick away and now, nearly 12 months later, they face a serious problem when they have to close down for repairs at a time when their indemnity period has expired. In that case the insurance company will directly gain from the delay in commencing reinstatement.

No quick fix

It has become reasonably well known that insurance companies are looking at some quite novel processes for repairing what was previously thought to be irreparable. One process involves injection of resin into the foundation ground beneath the building to lift the building back to level at its original height.

There are cases in which this is being considered for severely distorted and cracked concrete slabs. So perhaps the delays can be attributed to insurance companies frantically attempting to reduce their losses by trying to find ways to repair the irreparable.

Who knows the real reason for the delays but it does seem somewhat incredible that 12 months after the event, insurance companies are still trying to decide whether to repair or replace. When Feb.22 rolls around it seems that many Christchurch businesses will find their financial situation will seriously take a turn for the worse.

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*Andrew Hooker practises as a specialist insurance lawyer in Albany, on Auckland’s north shore and a director of Claims Information Specialists Ltd, running an insurance information website – www.claimshelp.co.nz.

Commerce Commission wants more time to consider IAG takeover of AMI, which would see IAG snaring around 60% of home and car insurance markets

Alex Tarrant — Mon, 16 Jan 2012 03:34:39 +0000

By Alex Tarrant

The Commerce Commission has asked insurer IAG for an extension of the time it has to review IAG's application to buy most of earthquake-hit competitor AMI.

The deadline for the decision has been extended from January 25 to February 29. The Commerce Commission published the date on its website Tuesday evening. Earlier, the insurer had told interest.co.nz it was set to formally allow the application, as this was expected general practice by the Commerce Commission, and given the holiday period.

A spokeswoman for the Commerce Commission told interest.co.nz it was seeking to extend the timeframe due to the size and nature of the application. The spokeswoman said this was usual practice for the Commission.

The NZ$380 million aquisition of AMI's non earthquake-related book would create a "near duopoly" in New Zealand's retail insurance market, according to Merrill Lynch analysts. See Gareth Vaughan's December 22 article, IAG 'taking out mutual competitor' AMI would create 'near duopoly', Merrill Lynch analysts say, meaning Commerce Commission could block deal. The government will take over AMI's earthquake-related assets, at an expected cost of NZ$120 million to the taxpayer.

Merrill Lynch pointed out an IAG-AMI hook up would give the new, expanded IAG 56% and 61% market share, respectively, in the home and contents and motor insurance markets. See more here in an IAG presentation to investors (page 7).

See Amanda Morall's December 16 article, AMI accepts conditional NZ$380 mln IAG offer for its "good" business, Gov't to retain AMI's earthquake related exposure.

The Commerce Commission spokeswoman said the Commission was progressing the application from IAG as per its normal processes.

"The Commerce Act stipulates 10 working days for the Commission to make a decision on a clearance application unless an extension of time is agreed between the applicant and the Commission. We are currently seeking an extension of time and will be able to confirm an expected decision date once this has been agreed," the Commerce Commission spokeswoman said.

"Some clearance applications can be quite straightforward, but some, just by the nature of the businesses, or how big they are and how much there is to do, can require a bit more time than the statutory 10 working days deadline," she said.

The statutory 10 working days deadline did not include a lot of days through the holiday period, with a decision on IAG's December 20 application initially due on Janurary 25.

On Monday afternoon, IAG confirmed it had received the application, but had not yet formally responded to the Commission.

“We understand that this sort of notification is almost always necessary. It’s not surprising to us given the holiday period,” an IAG spokesman said.

IAG was comfortable with how the application was progressing and keen there was a thorough and robust process, he said.

(Updates with new date - alters second paragraph from saying Commission could not say how long extension would be for until formally accepted, to Commission announcing extention.)

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