New Zealand’s largest insurer is confident its $10 billion earthquake reinsurance coverage is sufficient

The country’s largest insurer says it is confident it can pay claims in the event of a major earthquake despite not increasing its worst-case scenario reinsurance cover in the past three years.

Trans-Tasman insurer IAG, which owns State Insurance, AMI and NZI, announced last week that it had secured reserve cover of up to A$10 billion for each of two separate major disasters in New Zealand or Australia in 2023.

In addition, IAG also has just over A$4.3 billion of its own capital that regulators estimate could be used to satisfy claims.

Despite recent high inflation, including a 17% jump in the cost of building new homes in the year ending September, IAG has not increased the reinsurance cover it can require to cover the cost of a major earthquake since 2020, when it raised that from 9 billion Australian dollars.

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An IAG spokesperson said the increase was unnecessary since last year the Earthquake Commission (EQC) agreed to increase the maximum amount you would be paid in the event of a disaster from $150,000 per insured property, to a new limit of $300,000 per property. Property.

“This means that the EQC’s liability for damage to homes across New Zealand, including in Wellington, has doubled,” she said.

This has resulted in a significant reduction in the potential liability of insurance companies. We are confident that this more than offsets any increases due to inflation or the number of properties we insure.”

John Kirk Anderson/Staff

Insurance company IAG says the fact that EQC will pick up the schedule for the first $300,000 in earthquake damage to insured property has mitigated its need for additional coverage.

The Insurance Council estimated in 2021 that the Canterbury earthquakes cost private insurers $21 billion.

It is often assumed that the bill for rebuilding Wellington following a major earthquake could be higher.

Moody’s stated in 2020 that New Zealand remained “one of the most highly insured countries in the world”.

But she also said it was clear that before the Canterbury and Kaikoura earthquakes “few people really understood their risk”, which she said exposed insurance and reinsurance companies to significant losses.

IAG said it was “confident in our capital position and our ability to pay claims, should a major event occur anywhere in the country.”

“IAG NZ has a financial strength rating of ‘AA-‘ by Standard and Poor’s, meaning we have a ‘very strong’ claims payability.”

The Reserve Bank is currently reviewing regulations for the insurance industry.

IAG said it had complied with the Reserve Bank’s requirements that it had enough capital or reinsurance to allow it to withstand “one in 1,000 years” earthquake.

A Reserve Bank spokesperson said the insurers used sophisticated models, supervised by the Reserve Bank, that included “simulating several thousand potential earthquake events” to calculate what such an event would look like and what it would cost them.

The new “temporary solvency standard” will be applied to individual insurance companies this year, from the date each of them moves into its new fiscal year.

This is designed to ensure that insurers have enough capital to be able to pay claims “even in the face of extremely adverse future events,” he said.

ROB STOCK/STOCK

IAG is not a household name to many households, but several of the insurance brands it owns are: State, AMI, NZI, Lantern Insurance, Swann Insurance, NAC Insurance, and Lumley.

It is not yet clear whether the new standard may see the bank require any of the insurance companies to buy additional reinsurance or improved coverage.

A spokesman for the bank said it was prohibited from commenting on matters relating to the regulation of individual insurance companies.

He suggested that inflation in the construction industry was less likely to increase potential liabilities for insurers as much as it might have done in the past, given that “property insurance has moved from replacement coverage to a sum insured basis.”

He hinted that the Reserve Bank believes a proportion of homeowners may now be uninsured, saying “at least for earthquakes, the risk that the amount insured is less than the replacement cost is borne primarily by policyholders, not insurance companies.”

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