Earthquakes have shaken up New Zealand’s insurance market: A.M. Best

New Zealand’s property and casualty insurance market is in a state of transformation as it grapples with prolonged earthquake activity and associated regulatory developments, a new special report from A.M. Best finds.
The report, New Zealand’s Insurance Market on Cusp of Transformation, examines the availability of property and casualty insurance and reinsurance capacity in the wake of an estimated 8,000 aftershocks that have occurred over the past year following a series of three major earthquakes in late 2010 and early 2011.
“While reinsurance capacity is still available, coverage is more restrictive and comes at a significantly higher price,” the A.M. Best report notes. “Reinsurers have lifted rates significantly for risks in the Christchurch region and imposed more onerous terms and conditions.”
Restrictions imposed on cover are causing some companies to consider alternative risk transfer such as the use of captives, A.M. Best says.
The report also notes that, in addition to the recent natural catastrophes, regulatory demands are contributing to the re-shaping of the New Zealand P&C insurance industry. Capital requirements are becoming more stringent and regulators are considering the implementation of much more stringent return periods in future financial filings, A.M. Best notes.
“The insurance industry is also bracing itself for the impending Catastrophe Risk Capital Charge, which was published in October 2011,” the report notes. “For financial reporting periods commencing on or after Sept. 8, 2016, the loss return period will be set at a 1-in-1,000-year event.
“This is being phased in over a few years, with the capital charge being 1-in-750 years from Sept. 8, 2015 to Sept. 7, 2016.”
In Australia, the current concentration risk capital charge assumes a return period of 1-in-250 years.
Consolidation in the industry may be the end result, A.M Best suggests. A more onerous catastrophe risk capital charge is expected to increase reliance on reinsurance, which is in turn more expensive, thereby putting a squeeze on smaller insurers, the report notes.
“These factors will make it harder for insurers to survive independently,” A.M. Best says. “The larger insurers are expected to be in a position to increase their presence and acquire smaller players.”