Late payment as helpful as no insurance: Lessons from the Canterbury quakes

Getting a delayed payment from an insurer resulted in the same recovery for a business as those with no insurance, research on the impact of the Canterbury earthquakes has revealed.

Researchers from Resilience to Nature's Challenges have been investigating the role of insurance after the 2010-11 Canterbury Earthquakes as one of 11 government-funded national science challenges.

It surveyed businesses about their commercial insurance cover and found those with insurance who were paid promptly recovered much better than those without insurance.

But there was no significant difference in the recovery of those businesses who had insurance and whose payment was delayed and those who had no insurance at all.

Ilan Noy, lead researcher and economics professor at Victoria University, said this had come as a surprise.

"The primary assumption we always go by is that insurance is a good thing. That public policy should encourage insurance penetration."

But the research found having it was not necessarily better than not having it if the claim payments were not functioning well.

"It is good, as long as it pays promptly."

Noy said while there were a range of reasons why payouts were delayed, it was more of a systemic problem that there were no regulations around how long an insurer had to pay out a claim.

"[The insurers] have no legal obligation to pay within a certain amount of time."

He said most countries had an insurance regulator which could set deadlines for payment and investigate delays.

"There were a lot of reasons for delays but some of it could have been sorted by a regulator."

New Zealand's insurance law is under review at the moment and Noy said he had submitted asking for a regulator to be set up.

He said one of the reasons for the delays was that some insurers had so many types of contracts including one which had more than 100 different types.

"Who of their customers had what contracts was a complete mess."

"If each insurer had the same contract then resolution would have been a lot simpler."

The Reserve Bank is the current insurance regulator but Noy said it only regulated the insurers to stop them from failing financially.

That came as a result of the global financial crisis when AIG collapsed in America and in New Zealand AMI collapsed under the weight of the Canterbury earthquakes and was then bought by IAG.

He said the financial aspect was only one part of the role a regulator should play.

A regulator should also be looking at the types of contracts offered and claims resolution.

The research also looked at how and when the Earthquake Commission paid out money and what economic impact that had on Canterbury.

"Insurance payments were staggered over five years, which gave us the opportunity to identify their local impact."

Noy said for every 1 per cent increase in insurance payment for building damage, economic recovery increased by 0.36 per cent.

It also found cash payments contributed more to the local recovery rather than repairs carried out through the managed repair programme.

He said the managed repair programme was introduced because of fears people would spend the cash and either walk away or stay living in a sub-standard home and spend the money on other things.

Noy said it did not find evidence that people had walked away from their homes. But it did not know if they used the cash to fix their homes or spent it elsewhere.

"To really delve into those questions - we really need the data from the insurance companies."

So far no private insurers had given their data to the researcher.

He also did not know if not using the cash to fix up had resulted in people being unable to get insurance and he doubted people would own up to that.

But he said it was another area where having a regulator would help.

"If a home owner is not able to get insurance a regulator should be informed."

He said at the moment if people could not get insurance there was no way of knowing as the insurance companies did not have to tell anyone.

"In other jurisdictions they don't have to tell the public but they do have to tell the regulator."

He said this could become more of an issue as insurers changed the way they were insuring houses.

"There is a concern that some regions won't be able to get insurance - areas like South Dunedin.

"I don't think at this point we have large areas not covered - it is more of a concern for the future."

But he said as insurance companies started to change the way they priced policies it could become a bigger issue sooner rather than later.

"I'm not talking about a decade away but months. It definitely could happen quickly."

He hoped these issues would be dealt with as part of the insurance law review and the EQC review currently under way.

"I still think insurance is a good thing. I'm definitely not arguing we need less insurance."

He said for the public the biggest issue was under insurance of houses.

"We don't really know what part of the population is under-insured."

In commercial insurance the biggest issue was business interruption insurance and the fact that many did not understand it.

"There is a whole variety of contracts solving that issue."

But he said a lot of the time business interruption insurance was only triggered if the event had a direct impact on the property.

That could mean if there was a loss of power to a business that stopped it from being able to operate it was not covered.

"People don't know what they are covered for and companies don't know what they are insuring for."