By Alex Tarrant
The Japanese and Christchurch earthquakes, along with natural disasters like the Queensland floods, will put stress on the global insurance system, but international insurance payouts for the Christchurch earthquake will not be affected, Prime Minister John Key says.
The earthquake that hit Christchurch on February 22 was tipped as the biggest global insurance event since 2008. New Zealand’s Earthquake Commission is covered by reinsurance of NZ$2.5 billion for an event after an initial NZ$1.5 billion payout from the EQC disaster fund. This was triggered twice in the last six months, with the first being the September 4 quake to hit the Christchurch region.
The EQC has said previously it would have enough in its fund for a third such event, although the costs for replacing its reinsurance would rise considerably.
Following the February quake, Prime Minister John Key said EQC premiums were likely to rise by up to three times current levels of about NZ$60 per policy due to higher reinsurance costs and a desire from the government to replenish the fund to NZ$6 billion within nine years.
Early reports suggest much of the costs of the Magnitude 9 earthquake in Japan, and the subsequent tsunami, will be covered by local companies to a greater extent than the Christchurch quakes.
Bloomberg reported Robert Hartwig, president of the Insurance Information Institute, saying, “A larger share of losses are likely to be retained by domestic Japanese insurers and reinsurers than was the case with recent earthquakes in Chile and New Zealand.”
Asked on TVNZ’s Breakfast this morning whether he thought the Japanese quake would hit international insurance payouts for the Christchurch quake, Key said he thought the global insurance industry would cope.
“But there’s no question that it’s putting quite a lot of stress on the system,” Key said.
“If you think about the way insurance works, we all pay out premiums and the actuaries go away in those companies and work out what’s the probability of us paying out. They know they’re going to pay out some, but they don’t expect to pay out all of their premiums and their reserves,” he said.
“The Christchurch earthquake was the largest single insurance event in 2011, and one of the largest predicted insurance payouts in the world. People say, ‘how can that be the case,’ but of course countries like Haiti and Chile, they haven’t been insured to the degree that we have," Key said.
“So it certainly puts stress on the system, but of course, it’s a very large system with great capacity to pay.”
Key said he did not think the Japanese disaster would affect New Zealand’s ability to access its reinsurance funds.
“If you think about EQC, they go and buy reinsurance from big insurance companies like the Swiss Re’s of the world, so we lay off the risk [and] are not holding it all ourselves – they’ve got huge resources and they’re a very, very large companies. So no, it won’t affect them,” Key said.
Meanwhile on Newstalk ZB, Key said the Japanese quake did not help the global economic picture as the Japanese economy was one of the biggest in the world.
“It’s certainly a very, very big economy. We tend to discard it sometimes because it hasn’t grown much in the last decade or two, but it’s a wealthy economy and they consume quite a lot even if they sell a lot to themselves, so it has a big impact,” Key said.
“I guess like Christchurch there’ll be a massive rebuild, but in the short term, you have this significant economic contraction,” he said.
On Radio Live, Key said the a worrying factor was the Japanese economy was much bigger than people realised.
“We spend a lot of time commenting on the fact that Japan hasn’t grown much in the last 20 years, but it’s still a very large wealthy economy, so yes it has an impact,” Key said.
“I guess ultimately like Christchurch these things also have a double-edged sword. There’s the short-term contraction in economic activity, and then there’s the very large stimulus which comes with the rebuild. But for the short-term that’s not something the Japanese are going to be focussed on – it will simply be trying to get on top of the current situation,” he said.