The recent magnitude 7.8 earthquake that struck the Kaikoura area of New Zealand could result in a cost to the economy of up to NZ$8 billion, with insurance and reinsurance potentially paying as much as NZ$5 billion (almost US$3.6 billion) of the loss, according to the country’s Reserve Bank.
The estimate from the Reserve Bank of New Zealand, an organisation also responsible for regulation of the insurance industry, is among the first to suggest a potential impact to insurance and reinsurance capital.
The cost to repair earthquake damage to buildings and infrastructure is estimated at anywhere from NZ$3 billion to NZ$8 billion, with the New Zealand government expected to foot up to NZ$3 billion and the remainder falling to insurers and the global reinsurance market.
Risk modelling firm AIR Worldwide had also estimated the insurance industry loss from the recent quake at up to US$3.5 billion, which is aligned with the Reserve Bank’s announcement.
The Reserve Bank said that the insurance industry is well capitalised and has sufficient access to capital to pay claims from the earthquake event.
It estimates that the insurance industry in New Zealand has around NZ$14 billion more of capital and reinsurance protection since the 2011 Canterbury quakes, suggesting a greater use of reinsurance capital perhaps which could result in a greater proportion of the claims from this latest event falling to reinsurers and perhaps insurance-linked securities (ILS) funds.
According to reports, the insurance and reinsurance sector paid for over 85% of the cost of the Canterbury earthquakes.
An additional factor that could exacerbate the eventual final insurance bill from the recent Kaikoura, New Zealand earthquake is business interruption.
The earthquake damage to Wellington’s CentrePort, one of the regions main maritime port’s, is set to result in a sizeable insurance claim, both for repairing the damage and business interruption costs.
Radio New Zealand reports that CentrePort has NZ$600 million of insurance coverage in place, including business interruption cover that could pay-out for as long as three years if the damage was not resolved swiftly.
The port suffered severe structural damage, including large cracks to wharf’s, liquefaction affecting the main container terminal, a number of buildings set to be pulled down, other key buildings closed and unable to reopen for perhaps months or years and ships unable to dock.
With key infrastructure and commercial hubs, such as CentrePort, badly damaged and unlikely to become fully operational for many months, the chance of large business interruption insurance claims is high and this could exacerbate the hit on exposed reinsurance capacity providers.