Rule number one in insolvency is to "secure the asset".
The recent catastrophes around the world have had a dramatic effect on the New Zealand insurance industry and the ability to obtain insurance. In particular the Christchurch earthquakes have made it more difficult and costly to obtain insurance cover for some of the properties and goods we need to secure. We asked Geoff Blampied, CEO, Aon New Zealand to provide some comments and advice on the subject. Geoff writes:
Firstly, we need to look at the Christchurch earthquake losses from a global perspective in order to understand the issues. Christchurch has now suffered three major quake losses and numerous aftershocks with total estimated insured claims of $26 billion. These claims are unprecedented and effectively funded from the total New Zealand premium pool of $3.5 billion of which only $250 million relates to earthquake cover. By comparison it is interesting to note Japan's recent earthquake and tsunami has an insurance loss estimate of NZ$45 billion, yet their annual premium spend is NZ$130 billion, proportionally much less.
This comes at a time when most Australasian insurers are facing substantial financial losses as a result of multiple recent catastrophe events resulting from bush fires, hailstorms, and floods. From a global reinsurance standpoint, although the Christchurch quake losses represent major events in their own right, further afield recent catastrophe losses include the Haiti earthquake, major flooding in Europe, the Chile earthquake, and USA storms. These events are placing significant upwards pressure on insurers' reinsurance costs, including reinstatement premiums. As a consequence insurer's retentions are being increased and terms and conditions are being critically reviewed.
Set against this background, the earthquake losses in Christchurch have had severe reverberations with major international reinsurers and, in practical terms, reinsurance costs have skyrocketed for insurers with increases of up to 200-300% on previous years and major restrictions being applied on policy coverage. This is resulting in pressure for increased premiums.
We are also seeing reluctance by insurers to provide catastrophe cover for buildings built prior to 1935 in earthquake prone zones, particularly Christchurch and Wellington. Many insurers will not provide any standalone earthquake cover at all in certain parts of Christchurch and some buildings are now simply uninsurable for natural catastrophes. The longer term position of insurers will ultimately be determined by their view of whether we have seen the last of major quakes in Christchurch for a considerable period or whether the current situation simply reflects a continuing seismic trend.
What can be done to optimise your insurance protection?
Firstly, the importance of having good quality insurance advice and having your insurance placed with a financially secure insurer has never been more evident. Clients who are well advised and insured are now seeing value. Those who are not well advised or insured are facing significant problems, particularly in the business sector.
You cannot assume that prior years' terms and conditions will be available at renewal. Insurers will continue to become more disciplined in how they price risk. They are carefully scrutinising risks and policyholders on a case by case basis, with those in high risk areas or with high risk characteristics facing more attention than ever before. Those in sectors with relatively low claims activity are likely to be treated more favourably, especially if they demonstrate a commitment to risk management, prepare well ahead for renewal negotiations, and explain and sell their risks effectively to their insurers.
From an underwriting perspective insurers are now looking for more information, including age of buildings, spread of risk, construction, land / soil structure, extent of strengthening work, together with seismic reports (if available). In that regard, it is helpful if insurance is arranged as part of a national scheme or a facility that presents insurers with an array of risks situated across the total country, rather than simply insuring Canterbury in isolation.
The strength and leverage of Aon's global network is becoming even more apparent in this environment. We are noting a variety of different requirements amongst insurers depending on their own internal approach to the Christchurch quake and, in our broking role, are spending a lot more time canvassing different market options both in New Zealand and internationally. We strongly advise that you allow your broker plenty of time (at least 60 days) before renewal to prepare the necessary submission to present to insurers.
For many years New Zealand has enjoyed very low earthquake rates which were only a fraction of premium rates required in locations such as Japan and California. We do need insurers to remain financially strong and we do need catastrophe cover. Insurers in turn will need an adequate risk premium just to pay their revised reinsurance costs, let alone considering any recovery of the cost of their claims. We are now being forced into a more brutal reality when it comes to insurance costs and capacity availability for earthquake and natural perils. Most parts of New Zealand will still be able to arrange earthquake insurance but we should all be prepared for an increase in premiums.
In summary, the insurance ramifications from the spate of recent catastrophe claims will be significant and having good quality insurance advice to optimise your insurance protection is simply essential.
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.