The Reserve Bank has warned New Zealand’s state disaster insurer that it would likely need to absorb half of the country’s insured losses in the event of a massive earthquake.
Given this could total tens of billions of
Reserve Bank warns Government it will be lumped with a bigger bill than insurers in the event of a disaster
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David Seymour, the minister responsible for the Natural Hazards Commission, is expected to announce hikes to levies in coming months. Photo / RNZ
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The NHC must cover the first $2.1 billion of claims related to an event before it can tap into its $9.2b of reinsurance cover.
Given it only has about $500 million in its kitty, if there was a big disaster today, the Government would have to find more than $1.6b to cover claims costs, before reinsurance cover could be used.
Any costs above the reinsurance cover would also fall on the Government.
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The minister responsible for the NHC, David Seymour, is in coming months expected to announce changes to levies home owners pay (via their private insurers) to the NHC.
The NHC covers the first $300,000 of damage to residential buildings in the event of certain natural disasters. Losses above this are covered by home owners’ private insurers.
The Reserve Bank warned the NHC could be lumped with very large bills, because an aftershock could prompt it to pay out up to a second $300,000 for a damaged property.
Because insurers, like IAG and Suncorp, also have reinsurance, the Reserve Bank noted they would only have to absorb a small portion of losses in the event of a big disaster.
Its warning about the need for the Government to have “sufficient fiscal buffers” came as it did a routine stress test of the insurers it regulates.
It modelled the effects of a magnitude 8.7 earthquake on the Hikurangi Subduction Zone, a subsequent tsunami and major aftershock, concluding this would create $62b of insured losses.
The Reserve Bank was comfortable private insurers would be able to withstand such an event.
It estimated that only about 3% of the country’s insured losses would fall on them.
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Given the amount of cover the NHC provides for residential property, it said much of the costs private insurers would be lumped with would be for commercial property.
The Reserve Bank estimated reinsurers would end up covering 39% of the costs in its simulation, and policyholders the remaining 8%.
It noted about 70% of claims in the scenario it modelled would be spread among seven reinsurers.
It was comfortable with this level of diversification, pointing out that for large global reinsurers, claims would be worth less than half their annual profits.
In addition to having ongoing availability of reinsurance, the Reserve Bank said it was important insurers could access capital from their parent companies after a big disaster.
IAG and Suncorp, which are by far the country’s two largest general insurers, are Australian-owned.
The Reserve Bank noted insurers would likely also need to hike their prices, adjust their reinsurance cover and cut costs following the type of major disaster it simulated.
Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
