Reinsurance rates set to treble for some NZ insurers

Costs of Christchurch's earthquake damage mean reinsurance rates will treble for some New Zealand insurance companies, says a global ratings agency.

"The Christchurch earthquakes will contribute to materially higher prices for property catastrophe re-insurance cover as reinsurers attempt to claw back their recent material losses," Standard and Poor's ratings services said today.

"Reinsurance capacity is available, but the ability and willingness to negotiate price and terms is now clearly with the reinsurer,” said Standard and Poor’s credit analyst Michael Vine.

New Zealand rate increases were substantial for the current renewal season, which would begin on July 1, "with rates more than tripling in some cases for New Zealand-only placements", said another of the company's credit analysts, Mark Legge. He noted that increases might be as low as 50 percent for joint Australian-New Zealand programmes.

New Zealand's only listed insurance company, Tower Ltd, said on Thursday that it expected a further $7 million to $11 million in extra costs as a result of the previous week's two strong aftershocks -- which overseas agencies have estimated to have caused between $US3 billion and $US5 billion ($NZ3.7 billion to $NZ6.1).

These costs included its excess on reinsurance and were in addition to the $15 million- $20 million impact it booked from the February 22 aftershock which killed 181 people.

Tower's shares rose 1c on the NZX today, to 160c, nearly 10 percent below their level before the June 13 quakes.

Another ratings agency, Fitch, has warned the Christchurch earthquake will impact the earnings of Australia's major non-life insurers, but said that the buffer provided by reinsurance and the NZ Earthquake Commission should mean costs remained manageable, with big Australian insurers boosting their premiums.

Insurance Australia Group (IAG) is the largest insurer in New Zealand with approximately 35 percent of the non-life market, and has catastrophe reinsurance protection for up to $A4.1 billion, though it has to cover an excess of a $A250 million, Reuters reported.

Suncorp Group Ltd had another 25 percent of the New Zealand non-life market, and main catastrophe protection for $A5.6 billion, with a $A200m excess.

The largest-listed insurer in Australia, QBE Insurance Group had exposure to New Zealand through a 15 percent market share in addition to risks accepted through syndicates at Lloyds of London. The group had $US770 million of cover left of the $US1.6 billion it allowed for large and catastrophe losses during 2011.

Standard and Poor's said that New Zealand had historically had favourable reinsurance pricing compared with other countries, partly as a result of relatively benign climatic and natural disaster conditions.

" Indeed, some primary insurers would have benefited from discounts for loss-free records, which now will not be available," it said.

New Zealand rate increases were substantial, especially at lower reinsurance layers, and for insurers biased to South Island, Christchurch, and Wellington risks.

"It will be challenging for those small New Zealand-only -- especially South Island focused -- insurers to source affordably-priced reinsurance cover."

To recoup some of the reinsurance price increases, major insurers had already put through significant retail price increases of the order of 20 percent for property-related cover, with no material loss of customers.

"The significant number of earthquakes and aftershocks in New Zealand over the past nine months has created uncertainty in the country’s insurance markets," Standard and Poor's said.

The rapid escalation in catastrophes had made it difficult to be definitive not only about gross claims costs -- and the losses incurred by reinsurers -- but in some cases, about which event was responsible for damage claims, and importantly the extent to which reinsurers would increase prices.

Many insurers were in "challenging" reinsurance negotiations for cover starting at the end of this month,

But capital was adequately protected by reinsurance, there was sufficient reinsurance capacity available, and the reinsurance price rises would be largely passed through to the policyholders. There had been no significant flight of global reinsurers from New Zealand, and the looming higher prices might even make the local market more attractive.