EQC renews cover, at a premium

The Earthquake Commission has successfully arranged its reinsurance cover for the coming year - at a price.

Chief executive Ian Simpson, interviewed by Radio New Zealand on his return from overseas to renegotiate the commission's reinsurance programme, said there had been concern that reinsurers might start to withdraw from the local market, given the severity of the February 2011 Canterbury earthquakes.

"But we were limited by the amount that we wanted to spend, not by the amount of cover that was available, so this year we bought an extra half a billion of cover," he said.

"This year the great news is that New Zealand is still a very attractive place to do business for reinsurers."

Last year was a disaster for insurers and reinsurers because of the Canterbury earthquakes, the earthquakes and tsunamis in Japan and floods in Thailand.

Before that, the reinsurance industry had to absorb the cost of an 8.8-magnitude earthquake in Chile in 2010.

Simpson said the disasters were so called "tail" events - well outside the range of losses that could normally be expected.

Two reinsurers pulled out of New Zealand last year and Simpson said the talk in the market was that reinsurers had become reluctant to commit to this part of the world.

"But what we have found - for the few that pulled out - there were more coming forward to try and offer cover at renewed pricing levels," he said.

"So we were not constrained by the capacity that the market may be offering - it was actually how much we wanted to spend on the programme."

Simpson said that he understood the private insurance companies, most of them part of large Australian insurance companies, were not having trouble obtaining reinsurance but, like EQC, they were having to pay sharply higher prices. In 2010, EQC paid about $40 million in premiums for $2.5 billion in reinsurance cover.

"Our original premium doubled after the first earthquake to roughly $80 million," Simpson said. "This year we are looking at an extra 50 per cent, so we will be looking at $120 million this year, but it will involve slightly more cover."

Simpson said the Government's decision to buy out houses in the so-called "red zone" - the most susceptible in terms of future risk - helped to allay reinsurers' concerns.

"From the reinsurers' perspective, the red zone offers are unprecedented in terms of their generosity."

EQC has so far paid out $3.1 billion in claims.

Simpson said the scale of the Canterbury earthquakes, as far as natural disasters go, was huge.

The largest insurance loss in history was Hurricane Katrina in 2005, which resulted in 700,000 claims.

By comparison, EQC is handling 690,000 land, building and contents claims from Canterbury alone.

EQC, established by the Government in 1945, is backed by reinsurance from overseas groups and a Government guarantee.

About 90 per cent of New Zealand homes have EQC cover.

Last week, insurance news website The Insurance Insider said Warren Buffett's Berkshire Hathaway has agreed to write the whole limit of Suncorp New Zealand's catastrophe reinsurance cover, thought to be around US$200 million ($257 million).