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Original Risk: A Society for Change Agents

New Zealand earthquake loss continues deterioration trend


The 2011 Canterbury, New Zealand earthquakes continue to demonstrate how complicated an event major earthquakes can be, in terms of calculating losses, as Insurance Australia Group (IAG) revealed further impacts to its bottom-line from claims deterioration.

New Zealand earthquake photo from Time.comEarlier this year, IAG reported reserve strengthening for its loss reserves for the 2011 NZ quakes, which took the insurance group’s gross claims above the $4 billion (USD$2.7 billion) group reinsurance program limit.

Now IAG has revealed the impact that this has had to its bottom-line, reporting a $592.4 million loss for the 2014-15 financial year.

Having burned through the reinsurance program limit there is nothing else for IAG to collect from the world’s reinsurers or ILS and capital market players who could have had any exposure.

But the extent of the deterioration revealed in the latest filing from IAG should perhaps be a warning to ILS players to carefully assess quake exposures and ensure there are program limits in place to prevent deterioration having a knock-on effect on investors or resulting in collateral lock-up for significant periods.

For the 2014 financial year IAG had reported that its claims from the Canterbury earthquakes were expected to exceed its reinsurance program limits by $223.9 million. That figure has jumped significantly, with the latest estimate sitting at $1.1535 billion for the 2015 financial year.

IAG said that it “continues to be impacted by the Canterbury earthquakes” but that its “reinsurance arrangements have significantly mitigated the gross costs.” The reinsurance arrangements helped to “substantially immunise” the IAG group against the costs of significant natural disasters, the firm said.

The ongoing deterioration of Canterbury earthquake claims won’t hit the insurance-linked securities (ILS) market, we believe, as collateralized reinsurance and retrocession claims that fell to ILS fund managers were settled long ago.

But the worse these claims get the more apparent it is that, where quakes are concerned, it’s vital to cap liability for reinsurance claims, with strict program limits in place, and also to settle where possible as the ongoing deterioration could become very painful otherwise.

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