By Jenée Tibshraeny
Insurance as we know it isn’t here to stay.
The 2010/11 Canterbury earthquakes saw insurers move full replacement home insurance policies, to sum insured, giving them more certainty about the risk they were taking on and transferring risk to policyholders.
Six years on, they’re tackling a new disaster, bruised and battered and still dealing with a raft of complex claims from Christchurch.
Tower’s chairman, Michael Stiassny, on Tuesday said the system was “broken”.
Something has to change. The chief risk officer and disaster recovery lead of the country’s largest general, IAG, explains what.
An end to ‘cross-subsidisation’ on the horizon
Speaking to interest.co.nz in a Double Shot Interview, Karl Armstrong says insurance premiums had been “hardening” since before the Kaikoura quakes.
“Now you’re going to see an exacerbation of that.”
A time will also come when those of us in parts of the country less prone to earthquakes will stop subsidising policyholders in more risky parts of the country.
In other words, Aucklanders may stop picking up the tab for Wellingtonians, sitting on vulnerable fault lines.
“What we must consider at some stage in the future is a user-based pay system,” Armstrong says.
Those in risk-prone places like Wellington will pay for it.
“At the moment there is still an element of cross-subsidisation going on in the industry. We see that across the Earthquake Commission (EQC) as well. It’s a community rate from North Cape to Bluff,” Armstrong says.
He notes commercial policyholders are already paying premiums according to where their properties are located, how they’re constructed and the type of soil they’re built on.
While high-risk residential policyholders in Christchurch for example have already had their premiums bumped up, this risk-based division may become more pronounced.
Armstrong says insurers will “return to more disciplined underwriting”.
Asked whether he believes people in Wellington will struggle to get insurance, he says “not at the moment”.
IAG has no intention of withdrawing from Wellington and reinsurers are still committed to the New Zealand market. Reinsurers have recovered from Christchurch and are benefiting from a world currently awash with capital.
IAG not directing customers to EQC
The other change the Kaikoura quakes have brought about is around the way claims are handled by EQC and private insurers.
Armstrong says the Insurance Council of New Zealand (ICNZ) is working on a memorandum of understanding with EQC, to enable private insurers to deal with their clients’ claims on the first instance.
Up until now, those who have suffered damage to their homes, contents and in some instances land, due to a natural disaster, have had to submit claims with EQC first.
The government agency has assessed these claims, passing those over its $100,000 cap on to private insurers.
This system has seen a substantial number of new claims continue to drip through to private insurers nearly six years after the quakes, causing insurers to buy additional reinsurance and increase their provisions for the quakes.
“Scopes were wrong, clients, as they’ve been paid to go and do their own repair work, have discovered further losses,” Armstrong says.
“We’re frustrated that we haven’t had clear sight of this. However there’s a working party currently with EQC and the rest of the industry to highlight some of the gaps in the data.”
The escalation of costs in the wake of the Canterbury quakes saw IAG buy another $900 million of costly emergency reinsurance, known as Adverse Development Cover, in the 2016 financial year. This is a significant amount, relative to the $4.4 billion of regular reinsurance cover IAG Group Limited has exhausted for the February 2011 quake.
Should we brace ourselves for a similar scenario with the Kaikoura quakes?
Armstrong says IAG is adamant to avoid “claim fatigue”.
“Most of our [Christchurch] clients were subjected to multiple agencies - EQC, ourselves, external loss adjustors, external claims advocates - all of those people creating confusion. Confusion because they expected one party to talk to them.
“We’re now working, trying to get a collaborative agreement with EQC so that we can actually approach this as one party - a seamless approach from the customer’s perspective.”
Armstrong says this requires real time data being made available to both EQC and private insurers.
While the ICNZ is still working through the details of the arrangement with EQC, Armstrong says in the meantime: “If the customer comes to us, we’re not directing them to EQC necessarily. We’re dealing with the claim ourselves.”
Insurance industry taking matters into their own hands
The pinch is that the EQC Act 1993 review, which was meant to be completed in 2013, but has now been pushed back to next year, deals with this issue around whether EQC or private insurers deal with claims in the first instance.
Insurers have been vocal in urging the government to get on with the review; Swiss Re a month ago saying the New Zealand economy is vulnerable to the risk of reinsurers charging insurers a premium for the uncertainty caused by the delayed review.
While it now appears the industry is taking matters into its own hands, Armstrong denies it is working “separately” from the government.
“There’s a reality here that we have to deal with the customer that’s got a challenged situation.
“Working with EQC and ourselves, how do we come to one solution? We don’t know if this is quite the right solution. We don’t know if this is where the review will end up, but what we are saying is, we have to have a seamless approach so that the customer is protected.”
Armstrong also acknowledges being involved in a claim from the get-go, should give IAG “comfort” that costs won’t keep escalating as they did with Christchurch.
Yet the bulk of IAG customers affected by the Kaikoura quakes have still lodged claims with EQC first. Armstrong says 7500 IAG customers have made claims with EQC so far, while 1500 have lodged their claims direct with the insurer.
He says it’s too early to tell what the total cost of the quakes will be for IAG.
He says the US$3.5 billion figure AIR Worldwide has said the insured cost could reach is “just a figure that a modelling agency rightfully does at the time. Most modelling agencies do this. Everyone’s under pressure to give figures as quickly as they possibly can.”
People waking up to the fact they’re under insured
IAG is reviewing the insurance freezes it has on quake affected parts of the country, from the Waimakariri River to the lower part of the North Island including Wellington, every 24 to 48 hours.
Armstrong says it has lifted restrictions in Christchurch, the West Coast and Buller. Nelson and possibly Marlborough may not be far off.
Freezes usually last for 30 days after a shake of a certain size but could be longer.
Armstrong assures property buyers, who need insurance to secure mortgages, will be able to take over the insurance cover the vendor had on the property.
Asked whether mortgage applicants have run into problems if the vendor of the property they want to purchase is under-insured, he says, “there is underinsurance regardless of this issue” due to sum insured.
While Armstrong is seeing some under insurance, he says, “What we are seeing is the knock-on effect outside the zone of freeze… People are immediately reviewing their covers and immediately waking up to the fact that they don’t have enough.
“We’re seeing a tremendous amount of activity in reviews going on at the moment… As the zones open up, we’ll see the same activity.”
Asked whether insurers are secure enough to deal with a catastrophic quake in Wellington, in the wake of 2010/11, Armstrong says: “An organisation like IAG has got incredible backing from a parent in Australia.
“It is a market lead in terms of the size of the organisation, it has a high S&P rating, it has a superb reinsurance programme.”
He says insurers’ reinsurance programmes have improved immensely since before the Canterbury quakes, with the Reserve Bank now requiring them to have enough capital to get through a one in 1000-year event.
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