New Zealand’s Earthquake Commission, a state owned disaster insurer which will pay the first layer of claims from the recent Christchurch earthquake, has received permission to sell stocks and bonds it holds to raise cash to cover claims. The government has agreed that it needs to sell the assets so that it holds enough cash to quickly make good ts claims obligations.
This is fine but does raise the question of what happens should another major disaster strike? Would the Earthquake Commission have enough assets left to cover more claims and how quickly would their reinsurance kick in? It also raises the question of whether the commissions own reinsurance layer is structured in the most efficient manner and whether they should be looking at parametric products which are triggered by the event itself.
To us this highlights the need for these types of state funded vehicles to have robust risk transfer and capital markets protection in the form of catastrophe bonds, contingent facilities or parametric products to ensure they can pay claims promptly in emergencies. This is what these vehicles are designed to do after all.
We assume New Zealand will be looking to top up its Commission’s reserves again as soon as they can after the claims are paid. Potentially this is an opportunity for the reinsurance and risk transfer markets to propose new solutions. What do you think?
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