CEO hopes premium costs will settle

ALAN WOOD
Last updated 09:19 18/06/2012

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The Earthquake Commission says it will pay about $120 million in premiums for reinsurance in 2012, triple the amount it paid in 2010, but that hopefully the recent premium increases should settle in the period ahead.

Chief executive Ian Simpson said he and members of his EQC management team had made a couple of trips to the northern hemisphere this year to discuss with reinsurers the risks surrounding New Zealand, given the Canterbury earthquakes, and the response was encouraging.

"One fear with a huge earthquake is that reinsurers start to move away; they get scared of the region. It's been a really positive experience to meet the reinsurers and learn they are there still for New Zealand and particularly Canterbury," Simpson said.

EQC used a panel of 50 or so reinsurers, including the giants Swiss Re and Munich Re, and he had tried as many face-to-face meetings as possible during the trip to London, New York, Zurich, Munich and Bermuda.

Ahead of the September 4, 2010 earthquake the EQC had normally renewed pricing on 50 per cent of its reinsurance cover each year, with the other half just rolling over on an extended basis, but negotiations had changed that balance.

Now 75 per cent of the reinsurance cover was being placed and repriced on an annual basis with only 25 per cent being rolled over, Simpson said.

Also for the year starting on June 1, 2012 EQC had added a layer on top of its reinsurance to take it up to $5 billion worth of cover.

"In 2010 on my renewal trip, we placed the programme for about $40 million total premium cost. In the interim period of course we had the September and February earthquake, we went in June last year and the price doubled . . . and this year it's up by 50 per cent again so about $120m. It's roughly tripled."

While there were various factors that could impact on future premiums including future seismic events in New Zealand and globally, as well as changes to asset and bond prices that reinsurers invested into in the volatile European environment, premiums could stay stable.

"They give us their best pricing for the moment in time, though they do take a view on future risk. I would be able to say if nothing changed then we are looking at similar pricing in the next few years," Simpson said.

However, that was a big statement, he added. In the eyes of the reinsurers they were seeing surprising high losses from a country such as New Zealand, given the repeated nature of the earthquakes.

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"[Also] they've had a surprisingly high loss from Japan, they've had the floods from Thailand and to compound all that they're looking at the European sovereign debt crisis."

On September 3, 2010 the EQC assets had grown up to a figure of about $6b, with $2.5b of reinsurance and a built in reinstatement of that reinsurance for a second event.

But that total had eroded with the September 4 quake costing EQC an estimated $3.5b, the February 22 event costing $6.5b and the June 13 quakes costing $1.36b. Given the cost of other smaller quakes the total Canterbury bill to EQC was around $12.5b.

In New Zealand around 90 per cent of homes have EQC cover. Reinsurance had covered about $4.5b for the events, meaning the Government needed to pay between $1b and $1.5b of the $12.5b total under a Crown guarantee for which EQC paid $10m each year.

Getting the new reinsurance cover had been important for New Zealand, in order to transfer some of the risk overseas with EQC having run such programmes since 1988.

Simpson said he had been away for a total of three weeks, much of that time in face-to-face meetings, returning in early May.

In the meantime the Treasury department was scoping out a review of the EQC scheme with that review likely to go to ministers "relatively shortly".

- The Press

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