Insurers say losses from back to back quakes will push up premiums by a minumum of 20%. Your view?

By Amanda Morrall

Insurance premiums are poised to skyrocket in coming months with insurers recovering earthquake losses and reinsurance hikes by lifting prices as policies are renewed.

AA Insurance head of corporate Suzanne Wolton said this week premiums would likely increase by a minimum of 20%.

"Without a doubt premiums are going to go up,'' said Wolton.

"We've seen two major events in New Zealand and this huge tragedy in Japan and all these things are going to have an impact on global reinsurance rates, and as a result insurers are going to need to absorb those things and pass them onto policy holders.''

The EQC reports that as of Friday April 15, the commission had received 184,329 claims from the September 4 earthquake and another 111,318 from February 22. Residents have until May 23 to file their claims. Unofficially, the numbers have been tagged at 470,000.

Catastrophe modelling firm Air Worldwide earlier projected insurance losses of between A$3.5 to A$8 billion from the  February 22 quake.

While the insurance sector in New Zealand has been bracing for such an event, the scale and location clearly took the industry by surprise.

AMI, with a reported 35% exposure in the Christchurch region, had to be propped up with a NZ$500 million Government guarantee. The claims toll is expected  to blow its reinsurance cover of NZ$600 million as well as its own reserves of NZ$554 million. See more in our earlier article.

Having coasted so long incident free, one might expected the reserves held by New Zealand and other leading insurers including Australian-owned State, AA Insurance and Vero, to be sufficiently stocked to handle the load.

According to the Insurance Council of New Zealand, the industry (in the years 2004 and 2009) collected NZ$665 million on earthquake premiums and paid out only NZ$31 million, averaging a loss ratio of 4.61%. Including losses from September 4, in the seven years from 2004, the industry would be in a net surplus of more than half a billion on its earthquake premiums revenue alone. (For details see ICNZ statistics).

While the data on the council's website does not extend any further than 2004, the cummulative reserves would be comfortably higher.

'Shop around'

Consumers would do well to shop around. (For an indication of rates and policy differences see our insurance section here).

Rate increases could prove another double whammy for householders.

Waimakariri District Council, which suffered significant earthquake damage from Sept.4, has been forced to raise its rates by 6-8% to cover the rebuild. In some cases individuals would be hit with a 14% rate increase to cover the cost of a new water treatment plant.

Can Christchurch rate payers, already among highest in the country, expect the same over the long-term?

Council rates are influenced to a high degree by capital values. 

But with property values have been whalloped by the earthquake, it would stand to reason that rates would plummet.  Yet with rates also being determined by land value (including "developmental work" for example drainage, excavation, filling, retaining walls) the opposite could happen.

Up-market eastern suburbs Red Cliffs and Sumner suffered extensive damage to roads, sewers, and power lines.

Following the September 4 earthquake, Christchurch City Council agreed to rate relief of 40% for those whose land was affected. (For rate relief application click here).

It's not clear whether the same offer will be extended to the wider ratepayer base affected by Feb.22. Council is reviewing the matter. (See Christchurch City Council statement here).

Residential

The residential package is to remit:

• 40% of rates for residential properties on land requiring remediation by the EQC, from 1 September 2010 until rebuilding has been completed or six months after land remediation has been completed if building has not commenced – whichever is earlier;
• 40% of rates for residential properties requiring demolition and rebuild by insurance companies, for the period which the house is unable to be occupied;
• 40% of rates for three months to those properties that remained unable to connect to the reticulated wastewater network at 31 October 2010.