Government insists Tuesday's quake definitely a new event in terms of EQC's NZ$2.5 billion reinsurance

Government insists Tuesday's quake definitely a new event in terms of EQC's NZ$2.5 billion reinsurance

The government "definitely" has reinsurance cover for the latest Christchurch Earthquake, as it is classified as a separate event from the quake on September 4 last year, spokesmen for Finance Minister Bill English and the Earthquake Commission have confirmed.

An article in the Sydney Morning Herald today questioned whether the government would be covered for NZ$2.5 billion of reinsurance cover that will be called upon after the Earthquake Commission's initial NZ$1.5 billion payment for costs arising from the quake. The article touched on doubts that, if the quake were classed as an aftershock of the September quake, whether government would be covered for the NZ$2.5 billion payout.

From a geological point of view, seizmologists have described Tuesday's quake as an aftershock from the September 4 quake.

Spokesmen for Finance Minister Bill English and the Earthquake Commission confirmed to interest.co.nz that Tuesday's deadly 6.3 magnitude quake was classed as a new event in terms of the government's reinsurance cover.

"Definitely a separate event," English's spokesman said.

People would need to check with their private insurers on whether they were covered for the latest quake as a new event.

The first quake and all the aftershocks up to Tuesday's quake were one event, "then it's a new event from this one," EQC spokesman Barry Cook said.

EQC was due to start talking to reinsurers again in a month or so about the next year, he said.

Standard and Poor's later said its AAA rating for EQC was unaffected.

See its full statement below:  

Standard & Poor’s Ratings Services said today that its rating on New Zealand’s Earthquake Commission (EQC, AAA/Stable/--) remains unchanged despite its significant exposure to the Christchurch earthquake of Feb. 22, 2011. The rating reflects the ownership by, and extremely strong support from, the government of New Zealand (rated AAA for long-term local currency debt obligations). Standard & Poor’s believes the EQC is financially well structured to meet its residential property and contents insurance obligations to policyholders. These obligations can be met through its substantial natural disaster fund, reinsurance protection, and, in need, its legislated mechanism to call on the Crown for additional funding. Standard & Poor’s believes the New Zealand government will honor its financial obligations to the EQC, if called, given the government’s financial ability and moral and legal obligation to help rebuild communities after a natural disaster.

At this stage it is too early to assess the likely cost of the Christchurch earthquake to insurers, reinsurers, and the EQC, but we believe it is likely to be one of the world’s costliest insurance events in recent times, and follows the significant losses from the September earthquake (see media release titled "Christchurch Earthquake Will Worsen Insurance Earnings, But Capital And Reinsurance Remain Rating Strengths", published Feb. 23, 2011)

EQC previously released estimates of the claims cost of the September earthquake, which ranged from NZ$2.8 billion to NZ$3.5 billion, from around 160,000 claims. Subsequent aftershocks have increased those numbers to around 185,000 claims, and the upper estimate is now likely to be exceeded. With reference to those figures, the increased scale and damage of the February earthquake would likely generate claims costs well in excess of the earlier event.

EQC also updated the market on Dec. 23, 2010, stating that it had NZ$4.5 billion in its Natural Disaster Fund as well as NZ$2.5 billion of reinsurance, which would be in place for subsequent natural disaster events. We understand the February earthquake would be treated as a second event, and the EQC would benefit from this NZ$2.5 billion in reinstated cover.

On this basis, should the cost of the February event, as well as attritional events, exceed this NZ$7 billion, it is likely, in our opinion, that the EQC would call on established support mechanisms from the government. The support mechanism is provided under Section 16 of the Earthquake Commission Act 1993, which states that grants or advances shall be provided by the Crown to EQC if EQC’s assets are insufficient to meet its liabilities.

On our earlier assessment of the EQC and review of its own published studies and mandate, it was acknowledged that if certain catastrophe events were to occur in excess of NZ$8.1 billion, or a 1-in-1000 year event, EQC would exhaust its own resources and require a call on government funds.

(Updated with Standard and Poor's statement)

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Two questions to insurance experts out there:

1) The head of Munich-Re said the reinsurance costs were $600 million US. What does this relate to - the total reinsurance costs, the reinsurance costs relating to the EQC, or the costs faced by Munich-Re only.

2) According to the EQC report:

In order to protect itself from the effects of many claims following a major disaster, EQC has substantial reinsurance cover. The Commission again managed to renegotiate favourable terms, despite events in the world catastrophe insurance market over the last year. Reinsurance now provides cover to $3.1 billion, from an attachment point of $1.3 billion. Also, should another event costing more than $2.6 billion occur during the same year, further cover is activated at the lower attachment point of $800 million.

As this is "another event", does the lower attachment point apply?

Thank you.

The second event classification definition will be tested. That is what I am aware of.