New Zealand needs reinsurance. Does the reinsurance market need New Zealand?

“New Zealand needs reinsurance. Does the reinsurance market need New Zealand?”

This was a question posed near the end of the Insurance Council of New Zealand’s conference on Thursday by Cameron Green, Australia Chair and International Head of Casualty at global insurer Gallagher Re.

Green was chairing the conference’s reinsurance panel which included members from Swiss Re, Lloyds Bank and the Reserve Bank of New Zealand (RBNZ). Reinsurance, or insurance for insurers, transfers risk to another company to reduce the likelihood of large payouts for a claim.

Andrea Dry, Swiss Re Director and Head of Client Underwriting ANZ, said the question around New Zealand being potentially less desirable in the future came down to the global reinsurer having “confidence and good understanding” of the risks on the table.

“We’ve been in this market for the last 60 years plus and we think New Zealand is a very valuable one for us on an ongoing basis,” she said.

“One of the key factors in terms of being able to continue to provide substantial risk cover is to have a good understanding of risks.”

Chris Mackinnon, Lloyd's Australia Director Asia-Pacific, Middle East and Africa, described it as New Zealand being “effectively a customer” in its own right when looking for insurance from a reinsurer.

“It's about the premium you're prepared to pay for the risk that they're going to take on from you,” he said.

“It's a very simple insurance transaction, but at the end of the day, the primary thing that you need to do in New Zealand is to ensure that you don't undersell the value of the market that you're trading in when you're talking to reinsurers.”

“If as an economy, as a country, New Zealand can continue to demonstrate to the reinsurance industry, then yes, it is a risky place, but there is a risk premium attached to that. But the risks we have here, we are managing well. We're working in collaboration, in partnership with government. We're taking care of these things internally and domestically, so you can rely on us to actually produce a reasonable return for your risk premium.”

Green said that a lot of the reinsurance industry now ran essentially across the North American summer. 

“If there is a hurricane in North America, it has a major impact on the rest of the world in terms of what we can do from a buying reinsurance perspective.”

He also touched on changes in reinsurers entry and exit points and the hikes in insurance retention due to the increase in severe weather events.

Reinsurance retention is the portion of risk an insurance company retains instead of transferring to a reinsurer.

“It sort of effectively says to any institution operating in this market, actually, suddenly now you've got to eat more of your own risk,” Green said.

Dry said reinsurers hadn’t been very good at assessing risk in this space as a lot of losses were coming from secondary perils – like floods, storms, bushfires – things that typically haven’t been as well modeled as earthquakes.

Dry said over the last five years, Swiss Re had paid out a “very significant” amount and much more than it had anticipated – and had realised that insurance companies were much better equipped to understand these risks.

“This is probably not the space we're particularly good at,” she said. 

Quite an appetite

Green wanted to know what RBNZ’s Senior Actuarial Advisor Adrian Allott thought of the state of the insurance market and if the central bank sat back “amused”.

“We certainly don't sit back amused,” Allott replied. 

“We have teams who constantly talk to insurers and try to monitor what’s going on and we also try to monitor what's going on through our data returns.”

But he added that the risk “is what the risk is” – and it was the same for the financial position of insurers.

The RBNZ could only work alongside insurers to overcome those difficulties, he said.

Green also asked Allott later in the panel how he felt about non-traditional capital alternative products.

Lloyd’s Mackinnon commented that there was “quite an appetite” for people to look outside of traditional reinsurance.

Allott described it as a “little scary” but said theoretically, the central bank was “indifferent” to how the insurer managed its risks – whether that was reinsurance or retaining the risk and holding capital against it.

Green also asked the broader panel how reinsurers viewed EQC’s involvement in the market – and if it reduced the amount of risk.

Swiss Re’s Dry said the involvement was “definitely positive”.

“So what we saw was EQC taking on a significant increase in the personal insurance cover provided. And so that meant that a lot of the peak exposure that local insurance was purchasing in the international insurance market reduced. And so effectively, probably in terms of that demand for earthquake cover reducing, I think that was a benefit,” she said.

Cameron said EQC’s involvement had a “profound” impact on the renewals that we recall with EQC taking that step. 

“It was particularly complicated to begin with and trying to explain it to the reinsurers is hard because everybody's got data, everybody's covered on a different basis. And eventually we sort of came to a landing position with most of the reinsurers that was, I think, beneficial,” he said.

He added that if it wasn't for the EQC’s involvement in New Zealand’s catastrophes, reinsurers would be having a “much more complicated discussion”.