New Zealand Quake Insured Loss Not Expected to Exceed Reinsurance Limits

Insurance companies are expected to have adequate reinsurance cover for losses caused by New Zealand's 7.0-magnitude earthquake in Christchurch on Sept. 4.

Reinsurance purchased by insurers in New Zealand is based on a scenario approach rather than on a return period basis. The key event modeled is a Wellington earthquake which couples a high peril risk with a high population.

Most insurers in New Zealand "prudently purchase to a level beyond many of their international peers," said Ben Miliauskas, head of analytics in Australia and New Zealand at Aon Benfield, an international reinsurance broker.

"For most clients, the Darfield earthquake will impact their catastrophe reinsurance programs to the lower to mid layers at best," Miliauskas said. Losses should not exceed the limit of reinsurance programs.

The private insurance market is exposed mainly to commercial and industrial loss, while the government provides residential earthquake protection of up to NZ$100,000 (US$73,265) for a home and NZ$20,000 for contents. Commercial and industrial losses are expected to be less than half the total loss.

The New Zealand Earthquake Commission, which covers most residential earthquake insurance for the country, said it has received 56,890 claims as of Sept. 15. The commission has a NZ$5.6 billion natural disaster fund and an international reinsurance program for major catastrophes.

The Darfield earthquake is estimated to have a total economic loss of about NZ$4 billion, according to New Zealand Treasury. The quake appears to have been the most damaging event to affect New Zealand since 1931, when the Hawke's Bay earthquake devastated Napier and Hastings, killing 256 people.

The September quake caused widespread structure damage in Christchurch. No fatalities have been reported. One of the contributing factors to this result was existence of earthquake loading codes, which in global terms are very sophisticated, Aon Benfield said in a report.

Insurance losses are estimated at between NZ$2.7 billion and NZ$6 billion. The event is thought to have a recurrence period of around 750 to 900 years. "Whilst the earthquake occurred in a new location, it wasn't inconceivable given how seismically active New Zealand is," Miliauskas said.

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)