Some fronted ILS capacity in NZ Earthquake Commission renewal

New Zealand’s state-owned residential property disaster insurance entity the Earthquake Commission (EQC) has utilised some alternative capital within its recently completed $6.2 billion reinsurance program renewal, the entity has told us.

The New Zealand Earthquake Commission (EQC) successfully completed a renewal of its NZ $6.2 billion reinsurance program recently, keeping the size of the program flat with the prior year, but citing reinsurers ongoing confidence in the country and assuming its disaster risks.

When we reported on the renewal completion last week, we explained that it was likely some insurance-linked securities (ILS) funds participated, given their focus on peak catastrophe reinsurance peril zones, such as New Zealand earthquake risk.

After our enquiry on the role of ILS or alternative capital in its reinsurance renewal, Fraser Gardiner, Chief Financial Officer of the New Zealand Earthquake Commission, explained to us that the reinsurance program features a wide-range of markets from around the globe.

All of these reinsurance markets are providing much-needed support for the Commission’s claims paying ability and as a result assume some of the country’s peak NZ earthquake risk, reducing the potential burden on taxpayers should a major quake or other natural disaster event occur.

The risk is therefore widely distributed around the globe and into the reinsurance and retrocession market.

In total, Gardiner told us that, “EQC’s programme has a panel of more than 70 highly rated global reinsurers participating.”

As we suspected, the EQC’s reinsurance program does feature some capital markets backed capacity.

Gardiner explained, “The programme utilises a limited amount alternative capital which is accessed via fronting arrangements managed by global reinsurers.”

So far this is only on a fronted and rated paper basis it seems and the EQC has yet to dip its toes into fully collateralised reinsurance, or other insurance-linked securities (ILS) structures such as catastrophe bonds, although it is allowable to do so.

However it is benefiting from capital markets support through these fronted alternative reinsurance capital arrangements, which will also be enabling some of the larger ILS funds to access a source of diversifying risk that can be beneficial to their funds and portfolios.

It’s possible we could see alternative capital playing an steadily increasing role here and as the EQC gets more familiar with the process of engaging with ILS funds and other capital markets backed reinsurance providers we’d hope it may edge towards testing out issuance of a small catastrophe bond in future.

Gardiner continued saying, “EQC continues to review the resilience and value of its risk financing programme.

“Globally, catastrophe bonds and other alternative capital products provide access to additional cover, but at this stage we have not participated in these markets.”

It also hasn’t ruled it out and the EQC does have a mandate to explore alternative sources of reinsurance capital, to identify the most efficient ways to place its program with the assistance of its broker Aon, a process that has been ongoing for the last year or so, we understand.