New Zealand Earthquake Commission may need govt help to pay claims

The New Zealand Earthquake Commission (EQC) may fully deplete its reserves paying claims for the recent Christchurch earthquake and have to call on the government to help them pay the remainder from the 6.3 magnitude quake. Standard & Poor’s have kept the EQC’s triple-A rating intact but point out that if the insured loss is as high as some suggest it won’t be able to pay all claims without calling on government funds.

If the insured loss surpasses $8.1 billion then the EQC may need the governments helps. With claims to pay from the September quake as well it is likely that it will exhaust its disaster fund and reinsurance.

Some difference of opinion still exists about whether Tuesday’s quake was an aftershock of the September event or a separate event. The EQC has announced that it sees the event as a separate earthquake and it will be treated as such. Swiss Re Australia-New Zealand have said that they expect it to be classed as a separate event too. Meanwhile geologists and seismologists are suggesting that it was an aftershock of Septembers quake and as such should be classed as the same event.

Should the event be classed as two events by the major reinsurers then Australia’s general insurers (who are most exposed in NZ) will find themselves liable for double payments of their exposure limits. This has lead many to suggest that reinsurance rates are likely to rise significantly for the region (especially with the flooding and cyclone losses in Australia to deal with too) and that will be passed down the line to buyers of insurance in the area. A.M. Best also suggest that London and European underwriters will see higher commercial lines losses from this quake.

There’s likely to be some discussion before a final decision is made by all parties. There are also the issues of buildings which may already have been made structurally unsound after the September quake and also liquefaction of the soil, where soil becomes less stable after an earthquake event.

This event is beginning to show a lack of reinsurance for the really big disaster events in this part of the world. It’s likely now that the New Zealand EQC will take a serious look at other forms of risk transfer including catastrophe bonds to provide them with greater protection in case of future earthquakes (as we first suggested after the September quake). If reinsurance rates rise significantly in Australia and New Zealand we may also see the general insurers in that region looking for ways to increase their protection and the global reinsurers including more risk in that region in future catastrophe bond transactions.