Insurers looking to Government for stop-gap measures to address earthquake vulnerability and depletion of EQC reserves

By Amanda Morrall

The over-run costs of the Christchurch earthquakes, which have drained EQC reserves, have insurers calling on the Government to introduce "short-term stabilisation measures" to buffer the impact of another potential natural disaster.

New Zealand insurers say they have been in discussions with government to address the worrying possibility and implications of another big quake, given that the emergency fund set up for such an event has effectively been emptied.

Yesterday Finance Minister Bill English announced that the costs related to pay-outs for earthquake damaged homes had swelled from an original prediction of NZ$4 billion to NZ$7.1 billion depleting Government reserves. The revelation has Earthquake Minister Gerry Brownlee headed to Europe next week in search of support from reinsurers.

English said the Government would step in if EQC could not meet its obligations in the event of another quake.

"The important thing is that New Zealanders who have cover from EQC can be reassured that if there is a natural disaster they are covered and if EQC don't have the money Government will produce it."

'Tenuous situation'

AA Insurance head of corporate affairs Suzanne Wolton said the tenuous situation left New Zealanders highly exposed.

"There is a short-term stabilisation need that we need to address," said Wolton.

Wolton said in the absence of insurance to cover EQC's liabilities, the financial burden would fall to the Government and ultimately over-stretched taxpayers.

She suggested the Government might have to adopt some international natural disaster models to reduce the country's risk exposure or else look seriously at some of the proposals put forward by minor parties, such as the Green Party, to restock the emergency fund.

"All those things have massive advantages and massive disadvantages and nothing is perfect for a country like New Zealand which has a tiny population and quite a bit of seismic activity. So whichever way we solve this problem, is going to cause some short term pain."

While AA insurance has ruled out any imminent increases to premiums having already introduced average premium hikes of 50% across its building product line, the fate of other insurers is less clear.

AMI, with the largest exposure to the residential insurance market in Christchurch, has a government guarantee of NZ$500 million but could potentially breach that border given claims costs on its book.

What happens if there's another earthquake?

Wolton said most companies knew by now what their liabilities were as a result of the combined earthquakes and had adequate reinsurance in place to cover that. But the dilemma now reported by the Government with respect to EQC's blow-out raised some concerns about where that left New Zealanders.

"It's a unfortunate tragedy that it has happened twice in Canterbury but the next one could happen in Wellington or Auckland or Gisborne or somewhere else so the whole country needs to think about how well it is prepared for another earthquake not only in terms of a disaster kit but it terms of it financial capability to deal with it."

"As soon as there is another event in New Zealand that requires the reinstatement of reinsurance cover either for ourselves or the industry at large then that's going to have upward pressures on premiums but if everything stays stable, we ought to be fine.''

Wolton suggested EQC's role in the finance of earthquake-related damage, while one of the "best" systems in the world, needed to be reassessed.

"I don't think we should be having a knee jerk reaction and saying the EQC has to go. It is a very well set up scheme and if you think about it, it did was it was supposed to. But the fact remains, there is short-term stabilisation need that we have to address.''

"The other thing we need to point out is that it is not Canterbury's problem, it is New Zealand's problem."