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When the big one comes, how will you recover?

Posted in News

By John Grant

There has been a recent spate of earthquakes - what would happen if the big one did strike in a populated and high risk part of New Zealand, like Wellington. The July 15 magnitude 7.8 Richter earthquake near Fiordland was the largest earthquake in New Zealand for nearly 80 years.

That one has so far produced 4,450 claims to the Earthquake Commission (EQC) exceeding $6 million. Had that earthquake struck in the heart of Wellington, the Commission has estimated that their losses alone would be more than $5.6 billion.

The Commission only provides limited cover, and only for residential property. The maximum amount payable is $112,500 for houses ($100,000 plus GST) and $22,500 for contents. According to QV, the average house value in Wellington is $430,000. If you use insurance company guides for contents values then the average for chattels and personal effects is more than $100,000.

Therefore Earthquake Commission cover would be wholly insufficient on its own to replace the loss that could be suffered from such an event.

If you have insured your home and contents (and you need to be insured to have EQC cover) then check your fire insurance policy, as in most cases your insurer will make up the difference between what the Earthquake Commission pay and the total cover in place on your home and its contents.

The Natural Disaster Fund (NDF) which comprises EQC's capital and reserves stands at $5.6 billion and EQC purchases $2.5 billion of reinsurance. There seems to be sufficient to meet the likely claims on them with some possible margin if the expected loss is exceeded. There will also be enough to re-seed the NDF.

But the main issue to be answered is the question of whether insurers themselves have sufficient means to provide payouts in such circumstances.

The answer to this is probably yes. Like the EQ Commission, insurers purchase what is known as Catastrophe Insurance. Here they are effectively buying their own insurance policy to protect them from significant events. These re-insurers who provide Catastrophe Insurance look closely at their exposure to geographical hot spots and adjust rates accordingly. Re-insurers we have spoken to are still prepared to write earthquake risk cover in Wellington, showing that capacity is still available in the global market.

In Australia the issues are more likely to arise from bush fires and floods. In New Zealand it's hard to go beyond earthquake. Our major non earthquake events over the last several years were storms in the lower North Island that cost insurers over $120 million - not a lot when you compare to a 7.8 Magnitude earthquake in Wellington that could see a bill of many billions of dollars.

In addition to personal and residential losses, commercial losses will be substantial and would lift the figure well above the estimated limited loss protection provided to home owners and tenants by the Earthquake Commission.

But there are many uninsured and underinsured homes and contents, and they will generate a huge additional burden.

It is not wise to underinsure. You would face big problems at a time when you can least afford the problem. The base level of cover provided by the government through EQC is a helpful start but make sure you are adequately insured and that your insurer does provide the additional cover over and above the EQC cover.

In an important move, the Reserve Bank will soon be taking prudential supervision over insurers in New Zealand. We need to be satisfied that each company has programs in place to ensure that it can pay its obligations in times of such disasters. Remember the FAI/HIH corporate failures in Australian insurance industry? They rang big warning bells across this side of the Tasman.

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John Grant edits the insurance coverage on interest.co.nz

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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When wgtn cops its 8.5,

When wgtn cops its 8.5, you had better hope you are living in Perth or the Alice.

Wally : Wellington couldn't get

Wally : Wellington couldn't get 8.5 ......... unless they're playing Counties..........We got the Shield , ha ha ha !!!!!!!!!

Cantab, when wgtn cops its

Cantab, when wgtn cops its 8.5 (same as the 1855 shake) you will be robbed blind by the pollies to pay for the rebuilding. Might have to sell the log of wood!

Lets not forget the volcano

Lets not forget the volcano due in Auckland...thu this will have some predictability, unlike the big earthquake due to hit Wellington.

Think they are stuck with

Think they are stuck with Auck the way it is Steps. I have a notion the rising magma that made the place is now under the line running nor east through White Island. Wgtn is a different kettle of crap. The place has been squeezed up 18 inches since 1855, so the measurements say. It's a bomb waiting to go off again.

Auckland's got the volcanos .

Auckland's got the volcanos . Wellington to get the earthquakes . And Christchurch has the boy racers...........It seems that the pain is equally divvied out ! ( Dunedin has the students.......ooooooooooh , that is scarey )

Will the anti USA lobby

Will the anti USA lobby say no to US warships sailing in with aid then?

The might not get in

The might not get in Kowtow. Wgtn will uplift 2 to 4 metres and the channel aint so deep. We might get more aid from Beijing old thing.

Christchurch shouldn't be so cocky.

Christchurch shouldn't be so cocky.
There is a length of the alpine fault near Arthurs Pass that is 'locked'.
When that goes Chch will shake in to the mud of the Avon.

@Roger What about Chch has

@Roger
What about Chch has Roger Thompson :-)

CantabrianYob; you may have the

CantabrianYob; you may have the shield but after last night you should do the decent and proper thing and hand it over to that fine young bunch at Mt Maunganui.
We won, you lost but there is no justice for the young.

You can always let of steam at our place!Ha

Actually anywhere in NZ could

Actually anywhere in NZ could face a major earthquake. It is just that Wellington is understood to be overdue for a big one. However it is just as possible for a 8.0 earthquake to hit Napier tomorrow

Remind me again , Robert

Remind me again , Robert , who has the log of wood ? Ha ha de hah !