Quake insurance not fuelling profits
Opinion piece published in The Press
By Tim Grafton, CEO Insurance Council of New Zealand
Improvements to insurers’ profitability in the past year has been framed misleadingly as immorally taking advantage of the earthquakes to hike premiums. This is mischief making of the worst order.
Insurers provide a wide array of insurance products – motor, marine, liability, contents, commercial damage, business interruption, travel etc., so profitability is not derived solely from premiums from catastrophe insurance.
The Insurance Council’s data shows that in 2010, the net earned premium for all types of earthquake insurance was $115.2 million while net claims were $242.6 million, a significant loss. In 2011, the loss was $1.49 billion and in 2012 it was $344.8 million. So, earthquake insurance is not fuelling profits.
Indeed, local insurers off-set a significant part of catastrophe risk to off-shore reinsurers, so what happens in the global reinsurance market has major impact on the premium homeowners pay to cover catastrophe risk.
Premiums for house insurance have risen sharply in the past two years. Some of this is due to increased costs, for example there are now 1200 more staff in the industry than in 2010, but the increase has largely been driven by the cost of reinsurance. Why did this come about?
With the Tohuku tsunami, extensive flooding in South East Asia and Queensland as well as the Canterbury earthquakes, 2011 saw the largest pay-out for catastrophe insurance in any year in history. Canterbury alone with its $30 billion-plus cost for private and public insurers and reinsurers was the fourth largest claims catastrophe the world has known.
The effect of this, and the impact of Hurricane Sandy hitting New York and drought in the US in 2012, was that in 2011 there was a strain on global capital and reinsurance could only be bought at a much higher cost. That’s how global markets work.
At the same time, local insurers sought to limit their catastrophe exposure by buying a higher proportion of reinsurance. For instance prior to the earthquakes, in 2009 insurers underwrote $113 million of earthquake insurance and reinsurers picked up about $100 million. In 2012, insurers underwrote $250 million and reinsurers picked up almost $300 million.
The public catastrophe insurers, the Earthquake Commission, have faced even greater dependence on reinsurers as they cover the first loss up to $100,000 ex GST and its reserves have been spent as a result of the earthquakes. So, the Earthquake Commission levy people pay on their house insurance was tripled to $210 a year in early 2012.
In fact, well over half the cost of $1000 of household insurance is met by reinsurance catastrophe cover, the Earthquake Commission levy, the fire service levy and GST on top of everything else.
Today, insurers now have a better understanding of the risk of earthquakes in New Zealand and as a result, better loss modelling. Some parts of the country will have seen sharper premium rises reflecting the relatively higher level of risk to our insurers, in order to continue to get reinsurance cover and to meet prudential regulations for capital held. These increased catastrophe costs are reflected in higher premiums most of which ultimately go through to other parties, not to insurers’ bottom lines.
Some insurers have also had to switch from total replacement home insurance to sum insured, so reinsurers know their maximum liability.
Even so, insurers have tried to keep house insurance as affordable as possible by introducing higher excesses on structures not covered by the Earthquake Commission. This is important as it maintains the very high levels of insurance penetration New Zealand enjoys given that we have one of the highest expected insured losses in the world as a proportion of GDP behind Bangladesh and Chile.
High insurance penetration is efficient for the New Zealand economy enabling quicker recovery from disaster than would otherwise be the case, as well as security for homes and businesses.
Portraying insurers as venal profiteers ignores the significant initiatives insurers have put in place to assist those in vulnerable situations. For example, funding the residents advisory service, providing flexible approaches to temporary accommodation payments which allows people to be housed during the repair or rebuilding of their homes, as well as prioritising the most vulnerable – the sick, elderly, young families and those in financial hardship.
Furthermore, unlike other countries where customers are paid a cheque and left to manage the repair or rebuild, insurers in New Zealand have largely taken on the task of managing the full recovery from this catastrophe.
Everyone wants faster progress. Insurers are committed to their customers and their own staff in Canterbury and only incur more costs through delays. The roadblocks are being worked on through the efforts of local and central government as well as EQC and insurers.