Fronted ILS capital only a “small share” of NZ EQC’s $7bn renewal

Traditional reinsurance capacity continues to dominate the reinsurance program of New Zealand’s state-owned residential property disaster insurance entity the Earthquake Commission (EQC), with fronted capacity from alternative or ILS markets only contributing a “small share” in 2021.

As we explained recently, the New Zealand Earthquake Commission (EQC) placed its largest reinsurance program tower in history at its renewal, securing almost $7 billion of protection for the 2021/22 financial year.

That represents an increase in size of the NZ EQC reinsurance tower of more than 12%, having purchased $6.2 billion of reinsurance a year earlier.

The Commission told us last year that it had utilised a small amount of alternative capital within its 2020 reinsurance program renewal.

The situation hasn’t changed significantly, as this year Fraser Gardiner, Chief Financial Officer of the New Zealand Earthquake Commission told us that fronted alternative reinsurance or ILS capital only constitutes a “small share” of the $7 billion 2021 renewal placement.

Gardiner explained that the number of counterparties hadn’t changed significantly either for 2021, being around 70 reinsurers in total again.

He also explained that structurally the reinsurance tower remains similar, with all of the earthquake coverage on a per-occurrence basis.

On the participation of alternative capital players and ILS funds, Gardiner explained, “The programme does utilise a limited amount of alternative capital, however this is accessed via fronting arrangements managed by global reinsurers.”

Which proportionally only means that, “A small share of the programme is supported by capital alternative sources.”

Alternative reinsurance structures, including the use of ILS or catastrophe bonds remains something the NZ EQC assesses each year though.

Gardiner explained, “EQC continue to review their reinsurance programme and the sources of capital available. We have been very happy with the level of support and pricing we have been able to achieve from our existing reinsurance partners through this renewal, but we will continue to monitor a range of alternatives.”

So alternative or ILS capital participation does continue in the NZ EQC reinsurance program, albeit on a relatively small basis.

It’s encouraging that the alternatives continue to be looked at though, as there may be a case for the EQC sponsoring catastrophe bonds to lock-in multi-year protection in years to come, so it’s important the ILS market continues to engage with the Commission and its brokers.