NZ minister warns rate increases could force captive reinsurance solution

New Zealand's earthquake minister Gerry Brownlee has said that unless the right balance is struck between rate increases and moderation, it is possible that some parts of its insurance industry will consider turning to captive reinsurance.

"There's a balance between their attempts to recover off one part of what is their whole policy mix and encouraging a captive insurance situation or reinsurance situation for some sectors in New Zealand," he told The Insurance Insider.

Government agency the New Zealand Earthquake Commission (EQC) is one of the biggest cedants in the world. It purchases NZ$2.5bn of reinsurance in excess of NZ$1.5bn with one prepaid reinstatement.

Brownlee stressed, however, that it was too early at this point to know how the (re)insurance sector will respond in the long-term.

"This is just a bit of a watching brief at the moment," he said. "Everyone is being cautious because we are just starting to go into what we hope will be a more seismically settled period so I wouldn't rush to any particular statements about the appropriateness of [reinsurance] pricing or anything else."

Brownlee is attending Monte Carlo this year days after he addressed a meeting of underwriters at Lloyd's as he seeks to settle the nerves of international reinsurers after events that could ultimately end with payouts in excess of NZ$5bn on the EQC policies.

The Aon Benfield-placed EQC has already negotiated its first renewal since the earthquakes with an inception date of 1 June. The Insurance Insider understands that the average pricing on the programme more than doubled from roughly 1.5 percent rate on line to 3.5 percent rate on line.

Nevertheless, with the average rate on line on US cat programmes at 10 percent, many international reinsurers were still unhappy with the price on offer. Amlin and Tokio Millennium Re are known to have come off the programme, with others thought to have followed suit.

The EQC's $6bn disaster fund has now been totally exhausted and the earthquake minister said that the government had taken on the guarantee of losses..

Brownlee told this publication that his government would work closely with the EQC to determine how it looked to cover its risk in the future.

"There are a range of options that we could go to, but it's too early. One thing that I've learnt is that you cannot go into knee-jerk reaction when you have a seismic input that is continuing to unfold."

Asked about the possibility of placing a cat bond or purchasing other forms of alternative risk transfer, Brownlee said that he won't "close the door on anything". Nevertheless he seemed to imply that the traditional reinsurance market was still the favoured option.

This may change, though, if Brownlee finds that the dissipation of the immediate seismic threat and improvements to the building code do not push excess of loss reinsurance pricing down.

"We want the people who calculate the risk, the people who do the actuarial calculations, to understand that this is not a fixed point of time that stays that way forever. It changes. And the combination of the derisking activities we're involved in and the residual nature of the seismic activity, I think should see prices begin to settle in a while at a more reasonable level."

In a presentation earlier this month Aon Benfield estimated that the February New Zealand quake would cost US$14.5bn, with $9.5bn of these costs borne by reinsurers.