Re-insurers will take the bulk of earthquake losses - Moody's

Grant Cambpell and Denis Moore move equipment in Denis's Auto workshop, damaged by the Christchurch earthquake. Photo / Greg Bowker

Re-insurance companies will probably take the bulk of losses for claims from the New Zealand earthquake that are not covered by EQC, says Moody's Investors Service.

Re-insurance companies cover the big and rare risks taken on primary insurance companies, typically earthquakes, floods or hurricanes, the Dow Jones newsagency reported from Zurich.

Another financial agency, JP Morgan, has separately estimated the potential cost to re-insurers could amount to US$4.3 billion ($5.8 billion), but re-insurance companies themselves said it was too early to estimate the size of their losses.

Early estimates from Treasury have indicated the quake could cost $4 billion, with the bulk of the losses covered by the Government's Earthquake Commission (EQC), and the private sector providing insurance for losses above the EQC exposure, as well as for commercial exposures, such as business interruption.

"These claims are likely to be significant, but based on the conservative nature of the re-insurance arrangements disclosed by primary insurers, the bulk of losses will be passed on to re-insurers," Moody's said.

Moody's expects the cost of re-insurance for natural disasters to increase for Australian insurers.

This would come as a welcome break for re-insurers, which had for years been unable to demand higher premiums from their clients because of fierce competition and the absence of huge natural catastrophes in recent years. Despite earthquakes in Chile and Haiti, as well as floods in Pakistan this year, the economic damage from the events had been too moderate to result in higher premiums.

According to JP Morgan economist Helen Kevans, the quake hit at the right time for the construction industry.

"You will probably see a massive lift to the construction sector, which has been dwindling in recent quarters," she told financial news service Bloomberg.

"It'll create tens of thousands of jobs, most of which will have to be sourced from outside of Christchurch. There will be a flood of immigration into the city."

Not only would it boost construction, but the city's retailers should enjoy a boom from residents replacing damaged electronics, furniture, crockery, and all the other items destroyed in the quake.

"It should give a pretty big lift to household spending, and should have some knock-on effects throughout the economy," Ms Kevans said.

There might also be "multiplier" effects from this spending - the technical name for Kevans' "knock-on effects" - as the workers employed on the reconstruction spend their wages elsewhere in the economy, generating further income for somebody else, the ABC reported.

- NZPA