In terms of the most costly earthquakes on the planet since the 1950s, the Christchurch earthquakes were the 13th (Sept 4th 2010), 17th (Feb 22nd 2011) and 18th (June 13th 2011) most costly. (For a breakdown of the most costly see http://catastropheinsight.aonbenfield.com/Top10/Global-Earthquake-Economic-Insured-Loss-Events.pdf).
After the September 4, 2010 earthquake, the New Zealand current-account deficit (http://topics.bloomberg.com/new-zealand/) as a share of the economy, was reduced to a value near the smallest in a decade as local insurance companies received reinsurance payments from overseas. A catastrophe reinsurance payout is triggered if the aggregate of all of a reinsured’s policy claims arising from the defined event exceeds a specified threshold. This threshold works in the same way as the excess on a retail policy. The shortfall was 2.3 percent of gross domestic product in the year ended December 31, according to Statistics New Zealand. The gap in the year through September was revised to 2.2 per cent from a previously reported 3.1 percent. There was a NZD 3.52 billion deficit in the fourth quarter. At this point in time it was clear that the reinsurers would fund a good portion of the damage arising from the September 4 earthquake. However, finding information on reinsurance payments for the later Canterbury earthquakes is far more elusive. Establishing the facts remains difficult and more transparency here is definitely required. Whether the insurers will actually pay out all they were given, is even less scrutable……….particularly as we see a growing trend toward cash settlements.
Claims for reimbursement thus first affect primary insurers, but Reinsurers usually bear the lion’s share of insured losses when a large natural disaster occurs. They diversify concentrated risks among themselves and pass a fraction of the losses on to the broader financial market. It follows that the reinsurance contract between the reinsurer and the insurer will govern what information the primary insurer is required to give to the reinsurer with respect to claims. Just as good faith is the underpinning principle between the insurer and the policyholder, so it is between the insurer and their reinsurers. In order to avoid liability, the onus is on the reinsurer to prove bad faith or unprofessional behaviour in effecting settlement. Throughout the early months post earthquakes, in Canterbury, there were firms employed specifically by the reinsurers to assess and audit insurers’ decisions regarding quantum of damages in order to ensure that damage assessments are being carried out accurately and judiciously.
Everyone who has a rug knows perfectly well that if you don’t look under it now and again nasty things have a tendency to grow there. I suspect it is the same in the insurance industry. What I mean is that after more than three years of going slow, altering building standards, apportionment and other earthquake shenanigans, nobody appears to be peeping under the rug. Things may be festering and crawling down there. ‘How so?’ you ask. Well, you may remember that the nice reinsurance people who came over after the initial earthquake events coughed up billions of dollars to our not-so-nice private insurers, after they (the reinsurers) saw the size of our problem – our shattered buildings and our ruined infrastructure. ‘We’re going to have to rebuild all these’ said our local insurers, but since then- the word ‘rebuild ‘ has got messed-about with. The government decided it could save the Earthquake Commission a lot of money by introducing the MBIE Guidelines and fiddling with the essence of the Building Code, and by virtue of the EQC Act 1993, EQC were able to adopt it. “Hey that’s a good fiddle” said the local insurers, “why don’t we do this too. I tell you what, every time we engage an engineer to look at your property, we can tell them to just use the Minimum Standard Guidelines”. Many fat hands rubbed together and gleeful smiles lit up greedy faces. OK, reader, you’re asking ‘what’s this about?’ Actually it’s about what the private insurers were given by the reinsurers and what they actually paid or will pay out for repairs, and after three years, we want to know, who’s looking?
We and the reinsurers really ought to be looking because by my calculation the local private insurers are going to be paying out far less than they were given, unless of course some effective class action can be generated in relation to the fraudulent use of the MBIE Guidelines by the private insurers. That would be a game changer but in the absence of such legalities for now, it seems certain to me that the insurers will be looking forward to a very large ‘wind fall’ profit. And certainly recent information would prove that to be true. (Seehttp://www.stuff.co.nz/business/industries/9749259/Strong-profit-increase-for-IAG and http://www.stuff.co.nz/business/industries/9667134/IAG-plan-raises-competition-issues).
Should we care? Absolutely we should, because those are the funds that should have rebuilt our homes properly and not stuffed resin into broken foundations and packed out walls to make them ‘vertical’ again.
We know that in the early days some low-level auditing was carried out by the reinsurers – to see what the private insurers were doing – but given the huge delays, one needs to ask the question ‘is anyone still looking?’ Is anyone keeping the insurance industry honest? Reinsurers such as Aon, Swiss Re, Gen Re, Hanover Re, Munich Re, Zurich Re, all of whom have an interest in what’s happening here (there are some 30 reinsurers in total) really ought to take the time to come and check out the situation in this little backwater of the world.
In a global reinsurance market that has hundreds of billions to spend, the few billion that came into New Zealand is not big by global standards. But in terms of New Zealand’s gap it is a very significant amount of money. No doubt the Insurance Council will not agree but on the face of it there does appear to be a large discrepancy between what was received and what is being spent. And it is probably time that prudent reinsurers came back for a serious look at the situation and to establish what has and is really taking place. One of the problems of determining the true facts is the occluded nature of the negotiations between the private insurers and reinsurers e.g. when one earthquake event (September 4th, 2010) became three earthquake events ( Feb 22nd, 2011), and June 13, 2011) did the reinsurer pay out three times? The insurers might argue ‘that’s our business’ but I dispute that. It is everyone’s business. The insurers only ever held (hold) what they were paid, in trust, for the rebuild of the broken Christchurch money.
So what I’m saying is,“come on reinsurance industry it’s time for another (careful) look at what is really taking place in Christchurch. Look and let’s see what really happened and is happening, after all, the insurers may well have had three and a half years of interest on your/our money”.
Insured loss (Actual ) Insured Loss 2013 (USD)
September 4, 2010 3,100,000,000 3,200,000,000
February 22, 2011 13,500,000,000 14,200,000,000
June 13, 2011 1,800,000,000 1,900,000,000
~Future Proofing for a sustainable, participatory, democratic society.