NZ Earthquake Commission fails to secure multi-year reinsurance

by Artemis on July 27, 2011

The New Zealand Earthquake Commission (NZ EQC) has failed to renew any of its multi-year reinsurance contracts and has had to replace them with annual contracts instead. Since the damaging earthquakes in Christchurch it has been difficult for many to secure enough cover to replace expiring re/insurance. The ECQ has replaced all of its cover however on an annual basis rather than with three-yearly renewal terms.

In the past the EQC had a number of different sets of reinsurance cover. One of those was on an annual basis and renewed yearly, the other three were multi-year reinsurance agreements each lasting three years and expiring in three successive years. This ensured that the EQC never had to negotiate renewal of all of their reinsurance in one go and helped to smooth out any volatility in premium increases.

The benefits of multi-year cover are clear, allowing the reinsured to lock in cover at a cost that is predictable over a number of years. Now the EQC is at the mercy of renewals and rate rises on an annual basis.

Could this force them to look again at catastrophe bonds as a replacement for some of their reinsurance cover? It’s possible, as they will be attracted to the multi-year, fixed cost and collateralized nature of a cat bond transaction. A cat bond, if it could be issued at reasonable cost, would be very attractive to them as a way to have at least a layer of multi-year cover. We’ve spoken with cat bond investors who would be willing to take on NZ earthquake risk if the premium was right but the problem could be the cost of issuance for the poorly capitalised EQC. Perhaps their reinsurers will look at the capital markets on their behalf?

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