Cat bonds still an option for New Zealand as insurance market adjusts post-quakes

by Artemis on November 15, 2011

A new report from ratings agency A.M. Best on the state of the insurance market in New Zealand, as it recovers from the earthquakes in Christchurch and huge number of aftershocks, suggests that the market is on the cusp of transformation. A.M. Best says that the operating environment for insurers and reinsurers has changed dramatically after the earthquakes and even the countries Earthquake Commission is under review.

As if the two major quakes weren’t enough, the region has had to deal with an estimated 8,000 aftershocks in the past year. At the same time, rebuilding projects have been stalled as they wait for the ground to settle.

Reinsurance capacity is still available but rates have jumped significantly and imposed more difficult terms and conditions on insurers seeking coverage. Insurers have also raised rates significantly and are passing on most of their increased reinsurance costs to policyholders.

It’s not just the natural catastrophes that are affecting the insurance and reinsurance markets in New Zealand, there has also been a major regulatory change in the form of the Insurance Act 2010 which continues to be rolled out.

Alternative risk transfer techniques are being discussed, particularly by insurers seeking to avoid the huge reinsurance rate hikes. One option on the table is the use of captives. Some of the larger insurance brokers are carrying out feasibility studies into the use of captives with Singapore a suggested domicile, according to A.M. Best’s report.

On the subject of catastrophe bonds, there continues to be some discussion with regard to using cat bonds to transfer these peak risks to the capital markets. However, the report says that the traditional re/insurance market is still considered the preferable option to alternative risk transfer techniques.

It’s probably inevitable that some New Zealand quake risk ends up being issued in a cat bond in the future given the extremely high costs of reinsurance there.

You can read the full report ‘New Zealand’s Insurance Market On Cusp of Transformation‘.

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