ILS capital provided only a “small stake” in the $7 billion NZ EQC renewal

Conventional reinsurance capacity continues to dominate the reinsurance program of New Zealand’s state-owned residential catastrophe insurance entity, the Earthquake Commission (EQC), with initial capacity from alternative markets or ILS contributing only a “small share” in 2021. As Recently, we explained, the New Zealand Earthquake Commission (EQC) put the largest reinsurance program tower in history on renovation, securing nearly $7 billion in protection for the 2021/22 fiscal year.

This represents an increase in the size of NZ EQC’s reinsurance tower of more than 12%, after it purchased $6.2 billion in reinsurance the previous year.

The Commission told us last year that it used a small amount of alternative capital to renew its 2020 reinsurance programme.

The situation has not changed significantly, with Fraser Gardiner, chief financial officer of the New Zealand Seismic Commission this year telling us that alternative reinsurance or capital for ILS makes up only a “small share” of the $7 billion renewal in 2021.

Gardiner explained that the number of counterparties has not changed significantly for 2021, with a total of 70 reinsurers again.

He also explained that the reinsurance tower remains structurally similar, with the entire earthquake covered on a time-by-time basis.

Regarding the participation of alternative capitalists and ILS funds, Gardiner explained, “The program uses a limited amount of alternative capital, but is accessed through interface arrangements managed by global reinsurers.”

It only means that relatively “a small share of the program is backed by alternative sources of capital.”

Alternative reinsurance structures, including the use of ILS bonds or catastrophe bonds, remain something that the NZ EQC evaluates each year.

Gardiner explained, “The EQC continues to review its reinsurance program and available sources of capital. We have been very pleased with the level of support and pricing that we have been able to achieve from our existing reinsurance partners through this renewal, but we will continue to monitor a range of alternatives.”

So the alternative participation or equity capital of ILS continues in the NZ EQC reinsurance program, albeit on a relatively small basis.

It is encouraging that alternatives continue to be considered, as there may be a case for EQC sponsorship of catastrophe bonds to secure multi-year protection in the coming years, so it is important that the ILS market continues to engage with the Commission and its brokers.

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