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The Earthquake Commission's reinsurance premiums have more than tripled since the Christchurch earthquakes, leaving the Crown vulnerable to a big bill if the country is hit by another major event.
The government-backed natural disaster insurer is paying annual reinsurance premiums of $140 million, up from about $39 million before the spate of Canterbury quakes.
Premiums now have to be reviewed annually as opposed to every three years, chairman Michael Wintringham told parliament's finance and expenditure committee.
The new deal lifted EQC's cover to $3.25 billion from $2.5 billion previously, and raised the excess to $1.75 billion from $1.5 billion – figures revealed by NBR ONLINE in July.
"The price we are paying for our cover at the moment reflects the uncertainty of the Christchurch events, and the longer we go on without another one, the memory of the market fades," Mr Wintringham says.
The government has opted for cover where it pays the first $1.75 billion and anything beyond $5 billion in a major earthquake, with Wellington still seen as the most likely candidate.
The Crown's insurance liability for EQC property damage was $8.33 billion as at October 31 and $1.96 billion for the former AMI it took on, according to Crown accounts published today.
"This is not a decision which the board and management of EQC decided to take alone," Mr Wintringham says.
"We took that decision after sounding out from the government and government advisers about the degree of fiscal risk the government was prepared to take. There is a significant cost in terms of our reinsurance."
The annual EQC levy has been hiked to $207 from $69, while private insurance premiums have only doubled, based on anecdotal, chief executive Ian Simpson says.
Mr Wintringham says affordability of private insurance depends on the ability of insurers to offset its risk with reinsurers.
"We're seeing a significant step up in pricing. Maybe famous last words, but my judgment is that's peaked and we will start pulling back from that."
Canterbury Earthquake Recovery Authority chief executive Roger Sutton, appearing at the same hearing, says New Zealand's level of insurance is very high, with 99% of people in the Christchurch red zone covered.
Because many policies meant cover was uncapped, that surprised many insurers with how much they had to pay out.
When asked whether the changing market dynamics may lead to underinsurance, Mr Sutton said "we as a society need to think carefully about what they want to be covered for. Do they want to be covered for trivia or things that really matter?"
Mr Wintringham said these questions are a fundamental part of the government's review of the EQC Act, which was announced in September.
The Treasury-led review will cover:
- What the EQC insures, including the layer of loss covered.
- Which natural disasters are covered.
- How multiple events should be treated.
- Which types of property should be covered.
- The coverage of land, building and contents.
- What caps should be on the scheme.
- Whether it should be voluntary or mandatory.
Mr Sutton told politicians that being able to get reinsurance money has been "extraordinarily important" in getting the rebuild under way.
His focus for the coming year is to accelerate the residential reconstruction and the anchor projects in the central city, and to bring private investment into the city.