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New Zealand shaken

Quake losses may near $9B but won't roil reinsurance market

New Zealand shaken

CHRISTCHURCH, New Zealand—Despite causing up to nearly $9 billion in insured damage, a deadly earthquake last week in New Zealand's second largest city is unlikely to affect the global catastrophe reinsurance market, observers say.

The 6.3 magnitude quake, which devastated downtown Christchurch, killed more than 100 people.

It was the second quake to strike the Christchurch region in less than six months. A magnitude 7 quake in September, which resulted in no fatalities, caused insured damage as high as $4.5 billion, according to catastrophe modelers (BI, Sept. 13, 2010).

The nature and location of last week's quake added to its destructiveness.

“New Zealand is located in the Pacific Ring of Fire,” said Arash Nasseri, an engineer with AIR Worldwide Corp. in Boston. “After last year's earthquake, the region has been continuously experiencing aftershocks. The main reason for the significant loss and damage is the fact that the earthquake was very close to the main population center and was shallow.”

“It's not surprising to see lots of damage in that area,” said Mr. Nasseri. “Most of the construction in that area was masonry, and unreinforced masonry is very susceptible to earthquakes.”

He called the building code in New Zealand “very stringent,” but added that many of the buildings in Christchurch are old, and not many had been retrofitted.

“The extra challenge that we have is trying to back out damage that we've already attributed to the earlier event,” said Tom Larsen, senior vp at Oakland, Calif.-based catastrophe modeler EQECAT Inc. He said an example might be a structure that sustained $35,000 in damage in the September event but was destroyed by last week's temblor. That raises the issue of a second insurance deductible.

Mr. Larsen noted that although last week's earthquake was a smaller event than September's, it was nearly a “direct hit” on downtown Christchurch.

AIR estimated that insured damage could range from $5 billion New Zealand ($3.81 billion) to $11.5 billion New Zealand ($8.76 billion).

In an analysis accompanying its estimate, AIR pointed out that the New Zealand Earthquake Commission, a government-sponsored plan that offers insurance to homeowners, likely will bear the brunt of primary losses.

The Earthquake Commission provides up to $100,000 New Zealand ($76,100) in coverage of residential dwellings and up to $20,000 New Zealand ($15,300) for personal belongings.

The commission said it was treating last week's event as a separate quake and not an aftershock of the September quake.

“From EQC's perspective, for insurance and reinsurance purposes, this is a new event even though scientists have advised it is an aftershock” of September's earthquake, the commission said last week in a statement on its website. “All new damage and worsened existing damage is being treated as a new claim. Except for emergency repairs, we will be matching new claims with existing claims and, when we can, start assessing and reassessing again.”

But even two earthquakes resulting in multibillion-dollar losses probably will not shake the international reinsurance market, experts say. Reinsurance intermediaries said the quake will affect only local reinsurance rates.

David Flandro, London-based global head of business intelligence for reinsurance intermediary Guy Carpenter & Co. L.L.C., said the quake “is going to impact lines of business that are written in the New Zealand area specifically for quake. We don't believe it will impact the cost of British motor insurance or Florida property reinsurance; and globally, the reinsurance sector is still overcapitalized.”

John DeMartini, Stamford, Conn.-based leader of Towers Watson & Co.'s catastrophe risk management practice and its U.S. property reinsurance specialty practice, said much like last year's Chilean earthquake, “the market doesn't react by sort of spreading the pain” to catastrophe exposures elsewhere.

Mr. DeMartini said reinsurance rates for New Zealand catastrophe business could increase by double digits. It will increase by “what the market will bear,” he said.

Mark Dwelle, an insurance analyst with RBC Capital Markets, a unit of RBC Dominion Securities Inc. in Richmond, Va., also said the catastrophe was not large enough to affect the overall market.

“The industry is designed to absorb a set amount of losses,” although it has “already absorbed quite a bit, and there is that much less gas in the tank” when the next catastrophe occurs, Mr. Dwelle said.

“There is a likelihood of a hardening in global property catastrophe reinsurance pricing, though that is likely to be focused on Southern Hemisphere earthquake—remember the Chilean quake a year ago—and flood risks,” Robert Hartwig, president of the New York-based Insurance Information Institute, said in an e-mail.

He said he was “more skeptical” that a global hardening in property catastrophe pricing would occur.

“There is ample capacity on a global scale, including reinsurance, and other major catastrophe risks such as wind risk in the U.S. and Europe are sufficiently "siloed,'” so events such as earthquakes in New Zealand or Chile have little effect on pricing for these distinct risks, in terms of geography and the nature of the risk, said Mr. Hartwig.

Australian insurers said they did not expect to suffer major losses from the New Zealand quake.

“While still far too early to determine the extent of damage from this latest event, our reinsurance covers mean that the maximum financial impact on the group would be $40 million Australian ($40.6 million),” Insurance Australia Group Ltd. Managing Director and CEO Mike Wilkins said in a statement posted on the Sydney-based insurer's website.

Brisbane, Australia-based insurer Suncorp Group Ltd. said it was too early to estimate the cost of last week's quake or the reinsurance treatment of the event.

Suncorp said in a statement that its reinsurance program contains separate “drop-down” cover that limits its New Zealand exposures to $60 million New Zealand ($45.7 million).

The insurer, which released its half-year financial results last week, said the total cost of reinstatement premiums for the year to date was $223 million Australian ($226.3 million). Suncorp's financial year runs to June.

Among the buildings that collapsed in the earthquake was the Pyne Gould building in downtown Christchurch. The building housed Marsh's New Zealand's operations, and at least one employee died.

Sarah Veysey contributed to this report.

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