Insurance

Helping the over 10,000 uninsured quake victims will create a moral hazard

John Grant — Tue, 07 Sep 2010 03:24:22 +0000

According to estimates provided by the Insurance Council of New Zealand, more than 10,000 properties damaged in the Christchurch earthquake could be without any insurance cover.

In previous major disasters the level of those without insurance cover has been as high as a third, but according to chief executive Chris Ryan, the numbers of uninsured properties is expected to be lower in Christchurch but it could still be around 10,000 properties which, along with their contents, are without any insurance cover.

To claim from the Earthquake Commission (EQC) on a residential property you must have house insurance with a private insurer. Likewise you must have contents insurance with a private insurer to have EQC contents cover.

Cover for land damage which is excluded by private insurers house policies is also only applicable through the EQC for those with a valid House insurance cover in place.

Therefore if you have no insurance cover on the house or contents then you have no cover at all from EQC.

This will raise issues around what level of support, if any, should be provided for people who have opted to take the risk of going without insurance cover on their home or it's contents.

Prime Minister John Key said the government faced a "moral dilemma" over what to do with the uninsured.

He said there would be assistance for people suffering hardship, but there would be some that are going to find it a very "distressing experience".

"For everybody else, we'll need to work our way through it."

Worse for companies

The situation in the commercial sector could be even more challenging.

Ryan said the valuations on many properties that were used as the basis of insurance could well be old and no longer a reflection of their current value and the true loss. Some of those old valuations were based on a building code that has been changed over time, and the additional costs to comply to the new code will add to a potential gap between the insurance cover and the cost of repairs.

Business interruption cover will play a vital role in providing a cash flow for companies impacted by the quake while they rebuild and re-establish themselves, for those businesses that have this type of cover. But it will still be very difficult for those businesses that were struggling before the earthquake, as the business interruption cover is only based on the trading history of the business.

In addition to the uninsured, there will also be a high level of under insurance. Ryan says that the true extent of that problem will not be known for sometime.

Streamlined claims processes may cause new issues

John Grant — Mon, 06 Sep 2010 02:04:14 +0000

By John Grant

The Earthquake Commission and insurers have agreed on a new process that will go some of the way to streamlining how claims involving EQC and private insurers are managed.

Lance Dixon, a spokesperson for the EQC has outlined to interest.co.nz a new protocol on how claims will be managed where both private insurers and the EQC are involved in the same loss.

With the EQC providing cover to a maximum of only $112,500 ($115,000 post the 1 October GST rise) on houses and $22,500 ($23,000) on contents and many claims that will certainly exceed these limits, then cooperation between the two insurers will be vital.

In the past there has been limited cooperation, with EQC and insurers managing their claims independently. This has to some extent seen a double up on the resources required to manage the loss.

It has involved one loss adjuster for EQC and a different loss adjuster for the insurer.

For this event the Insurance Council and the EQC have developed a more streamlined approach. Where a claim is likely to exceed the loss limits of EQC or where cover is limited and private insurers will be involved, then EQC and private insurers have agreed to the sharing of information and resources.

This will eliminate the double up on key resources like insurance assessors whose reports will be used by both parties.

The EQC are expecting at least 75% of approximately 150,000 residential properties in the Christchurch region to lodge claims.

Of these many will spill over to private insurers. This will be where the damage is in excess of the limits of EQC cover or where there are differences in the cover provided.

Examples of this would be in relation to swimming pools which are not covered by EQC but are covered by private insures. Retaining walls are covered by EQC for 'market value' and are covered by some private insurers for replacement.

Under contents policies, EQC excludes some items such as jewellery and this is insured by private insurers.

It can become very confusing and messy for customers. For example, EQC pays claims irrespective of the status of the claim with the private insurer.

Normally they will check if a property is mortgaged and then ask the mortgagor if the payment is to be made to them or the customer. According to EQC, around 70% of claims end up being paid direct to the insured.

'Complications'

This provides a complication to the private insurer who has a reinstatement policy based on sq meters, and there is a shortfall, is the EQC claim money to be paid directly to the customer? There have been many instances where that money has been used for other purposes, such as a new car or uninsured losses and is not available to contribute to the reinstatement.

In other cases if the customer has had issues around the payment of their mortgage then their lender can insist the payment is made to them and again is not available to be uses to reinstate the property.

It puts the private insurer in a very awkward position.

In a practical sense the industry sees the best solution to be for a change to the law, where this amount is paid to the insurer who can offset it against their reinstatement costs for the property.

Am I covered? - A guide to how earthquake insurance cover works

John Grant — Sun, 05 Sep 2010 21:56:47 +0000

By John Grant

The size of the damage bill from the Canterbury earthquake will take weeks if not months to be understood.

It impacts both the private and commercial sectors - houses, contents and personal property, commercial buildings, damage to stock, business interruption and the damage to public infrastructure, roads, bridges, retaining walls, water supplies, power and sewage.

The end result will be a figure that will no doubt surprise many. Current estimates of between $1.5 and $2 billion are likely to be revised upwards as more detailed investigations reveal the true extent of the damage.

The government's Earthquake Commission (EQC) was established in 1945 to provide earthquake and war damage cover for purchasers of fire insurance. Later, cover for other natural disasters was included and, later still, cover for war damage dropped. The modern EQC is a Government-owned Crown Entity.

Cover is now capped at maximum claim amounts.

To obtain EQC insurance you must hold a current fire insurance policy on the property with a private insurer.

The private insurer is required to collect a premium on behalf of the EQC. You pay 5c for every $100 of cover plus GST. As the cover is limited to $100,000 (plus GST) for houses and $20,000 plus GST for contents this means most people pay $67.50 per annum as part of their House and Contents insurance.

In addition to the limited EQC cover, private insurers provide cover beyond the EQC cover to the limit of the cover you have on your house and contents policies.

In most cases these days houses are insured for replacement cover to a physical size of the property. This means a property of 300 sq metres is insured for the cost to replace a 300sq m property.

The benefits of this type of cover will now become very apparent as costs are bound to escalate due to scarcity of material and the labour to rebuild.

Therefore if your loss is of a minor nature then you will probably be dealing with the EQC.

However larger residential losses that will exceed the $100,000 cap will require a coordinated role between your private insurer and EQC. In these cases your insurer will be your primary point of contact and they will liaise with EQC.

EQC only cover physical damage to your property. Therefore if the house is not habitable then you will need to claim for temporary accommodation costs from your insurer.

All claims for non residential losses will need to be made to your private insurer.

Claims for damage to commercial buildings will be substantial. However the largest cost is likely to be for business interruption claims. This is where an insurer will cover loss of profits from the inability to trade. It also provides cover for reduced profits due to damage or restricted access through an event such as this earthquake.

Uninsured and under insured problems

The difficulty will come from those who are either not insured or underinsured. The size and extent of this problem will become increasingly apparent in coming weeks.

In previous large disasters, it has been found that one third of people impacted are uninsured, a further third are underinsured, while the remaining third have adequate cover.

Those who do not hold a house or contents cover and have suffered loss or damage to their house or contents are not insured by the Earthquake Commission.

Dorchester appoints ex Lumley exec Greg Main as General Manager, Insurance and Lending

Nick Jones — Wed, 08 Sep 2010 00:03:13 +0000

Finance company and insurer Dorchester Pacific has announced the appointment of Greg Main, previously with Lumley General Insurance, to the role of General Manager, Insurance and Lending.

“Greg brings a wealth of knowledge to our business, based on more than 15 years experience in senior leadership positions at major international insurance and banking companies both in New Zealand and overseas," said Dorchester CEO Paul Byrnes on the appointment.

It will be our largest natural disaster, but it may give a fillip to the economy

John Grant — Sat, 04 Sep 2010 00:47:00 +0000

By John Grant

It's been talked about for years and there has been a bucket load of research done on the potential cost of a major earthquake. (Update 2 with the Prime Minister's comment about the overall cost of the damage.)

Most of this research has centered around the potential for an earthquake in Wellington. Christchurch was never a city that was seen as having the potential for a major event; well that was the case until 4.30am this morning.

An earthquake initially thought to have been of 7.4 magnitude and then downgraded to 7.1 on the Ricter scale struck just west of Christchurch city in an outlying rural area of Darfield.

It was estimated to be at a depth of 33 km's and was felt as far noth as the central parts of the North Island. People were woken from their beds in Wellington.

The previous largest eathquake to strike in a modern residential area was in 2007 in Gisborne, an earthquake that measured 6.8. The 1931 Napier earthquake measured 7.8

The damage caused by this event is extensive. Many facades on buildings have collapsed and their is considerable damage to infrastructure with some roads and bridges closed.

Water and raw sewage has been running down some local streets.

But the significant areas of cost will be in the numerous houses that have suffered damage to the structure of the buildings, and to the contents. Many precious items from TV's to antiques have been smashed to pieces during the 1 minute shake.

The Earthquake Commission (EQC) will bear the brunt of the residential losses. They cover the first $100,000 of damage to houses and $20,000 on contents. A 1% excess (minimum of $200) applies to every claim.

Insurers will also be counting the cost. They will foot the bill for all commercial losses including the majority of the infrastructural costs where councils insure this through specialist insurance companies.They will also foot the bill for residential claims in excess of the EQC limits.

Re-insurers will be impacted as catastrophe treaties are triggered.

What will it end up costing?

The cost of the cleanup could run into billions of dollars, Prime Minister John Key said. Treasury has advised him that their estimate is about $2 billion.

It's a real guesstimate at this early stage. However the Gisborne earthquake cost the EQC $28m. Christchurch is around 10 times the size of Gisborne and this earthquake is larger. It is therefore likely that the EQC share of the cost will likely be in the $300 to $500 million mark as a minimum.

The insurer's share of this can be also measured from the Gisborne benchmark. That earlier one cost insurers $31 million and on this basis Christchurch is likely to be something in excess of $750 million.

Uninsured losses (and those covered by insurers that are not part of the Insurance Council of New Zealand) are likely to add to this. This disaster is likely to end up costing something north of $1.5 billion.

It is somewhat ironic that this is a similar figure to the estimated initial losses surrounding recently collapsed South Canterbury Finance.

The upcoming remedial projects will however have a positive upside for the economy, as money is transferred from overseas re-insurers accounts to local builders, and others involved in repair work in Canterbury.

Here are pictures from a reader, ChrisJ.