NZ Earthquake Commission benefits from softer reinsurance pricing

The New Zealand Earthquake Commission, who buys one of the world’s largest reinsurance programmes, has benefited from softer catastrophe reinsurance pricing in its latest renewal, allowing it to buy more cover while rates were down approximately 10%.

In 2013 the New Zealand Earthquake Commission purchased $3.25 billion of reinsurance cover, but this year the EQC’s reinsurance programme purchase has grown to $4.5 billion. According to chief executive Ian Simpson the pricing on New Zealand earthquake catastrophe reinsurance has dropped by approximately 10%, with the EQC putting the savings towards the increased limit.

The $4.5 billion of reinsurance protection has cost the EQC approximately $150m and the latest reinsurance renewal includes a reinstatement clause, so allowing the EQC to more easily reload its reinsurance protection if an event occurs.

This article from Fairfax Media compares the 2014 pricing, of $4.5 billion of reinsurance cover for $150m, with the EQC’s 2010 reinsurance purchase, when $2.5 billion of cover cost it just $40m.

The 2010 reinsurance renewal was before the Canterbury, New Zealand earthquakes, so the cost comparison shows that reinsurance rates are still above the level seen before the most recent major earthquake events struck the country.

Simpson told Fairfax Media; “I think it will be some time before we see the pricing we saw before 2010.”

Simpson also told the media that the NZ EQC’s 2014 reinsurance programme involves around 50 global reinsurers. He said that the reinsurance markets are getting noticeably softer and that there is a lot of new capital available, as well as the prospect of catastrophe bonds, although the EQC did not use those in this renewal.

There is a possibility that some collateralized reinsurance providers may have participated in the EQC’s reinsurance renewal this year. Given the size and reach of some of the larger providers of fully-collateralized reinsurance, such as ILS specialists Nephila Capital who now participate in many of the world’s largest reinsurance programmes, it stands to reason that there will be an element of non-traditional capital in the EQC’s reinsurance programme now.

It’s also not clear at this stage whether the EQC has purchased more multi-year protection within its reinsurance renewal. Again, it’s highly likely that it does as the EQC had some three-year covers in place previously.

The EQC now has total cover of $6.25 billion, including $1.75 billion which is covered by the Crown. That still leaves a potential shortfall considering that it believes a median exposure for a large Wellington earthquake could be as much as $7.5 billion and it has paid out $7.4 billion in claims for the Canterbury quake already.

The EQC’s reinsurance premium spend had risen in 2011 and 2012, then the cost of its reinsurance remained relatively level at its 2013 renewal, so this year sees the first softening of its renewal rates. With rates remaining above the pre-2010 pricing if there are no major earthquake events New Zealand earthquake reinsurance could soften further over the coming year.

As rates continue to remain soft and risk models improve in New Zealand there is a good chance that we will see the EQC, or perhaps one of the reinsurers providing its cover, tapping the catastrophe bond market to diversify the sources of risk capital supporting this major reinsurance programme.