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When the big one comes, how will you recover?
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.
John Grant edits the insurance coverage on interest.co.nz