By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
Loss estimates from the big New Zealand earthquake of Sept. 3 are coming in from various sources ... all over the place. Reports in the New Zealand press have the government treasury citing costs at $NZ 2 billion (about $1.46 billion), and JP Morgan calling for $NZ 5.8 billion (or $4.3 billion) in costs to reinsurers alone.
The most recent estimates from catastrophe modeling firm Eqecat Inc. are somewhere in between. EQE is estimating total economic damage at $2.5 billion to $3.5 billion, with $1.5 billion to $2.5 billion of that being insured damage. Of that, $200 million to $500 million will be from commercial insured losses, according to the modeling firm.
For the total insured losses, global reinsurers could be on the hook for 30 percent to 45 percent, estimated Imelda Powers, manager of the global professional services unit at Towers Watson's Catastrophe Management Group and senior consultant in the company's reinsurance brokerage business. The percentage of loss sustained by reinsurers in the New Zealand earthquake will end up being smaller than reinsurers' losses sustained in the Chilean earthquake because the New Zealand Earthquake Commission, the government-backed agency for residential properties, is able to take a larger retention on its residential losses than most private companies.
But you can expect the usual cast of big characters to be issuing loss estimates in coming days--Swiss Re, Munich Re and Lloyd's.
One of the big primary players impacted by the event--Australian-based Insurance Australia Group (IAG)--in its post-quake announcement stated, "The entire event will be covered by our reinsurance arrangements."
The other big primary player-- Australian-based Sun Corp.--reported in a press release that its reinsurance arrangements include a cap of $NZ 60 million on its exposures.
Their shareholders appear to have appreciated the stability that the carriers' reinsurance arrangements have provided.
"You would not think the earthquake changed the share prices," Powers said.
As for how well the global reinsurers are doing ... as Powers noted, their financials are fine despite the bevy of midsize catastrophe losses they've been taking in 2010, including the Chile earthquake in February and the Deepwater Horizon mess.
But after Haiti, Chile and now New Zealand, underwriters have more observations about and are learning more about earthquake exposure, according to Powers. They might also be startled by the fact that the rather large New Zealand quake came in an area not historically viewed as having high seismicity.
Some news reports have stated the obvious: that the New Zealand quake will raise reinsurance and then primary insurance rates locally. But Powers see the impact affecting rates everywhere.
"What we learn, our observations from earthquake in Chile and New Zeland, will have an impact on how we assess earthquake in California in Japan in Taiwan in Italy ... everywhere," she said.
One lesson learned on how to assess the risk might be the uncertainty of claims coming out of it. In the New Zealand instance, Christchurch just passed a bill that repairs after the quake must be done to a stricter building code, leaving question marks as to the cost of rebuilding.
Another reason for uncertainty is business interruption. Tom Chan, CEO of catastrophe engineering consulting firm Global Risk Miyamoto LLC, is getting reports back from his team on the ground that the real eye-opener has been nonstructural damage. For instance, his team visiting distribution and warehouse centers with no damage to their structures but "total collapse" of their storage racks. Imagine a Home Depot store with all of its inventory damaged.
As with businesses that experienced such damage in the Chile quake despite facilities designed to excellent building codes, businesses and their insurers could be surprised by the amount of time it takes to recover and get back up and running after such damage--and the price tag of the resulting business interruption insurance claims.
One other eye opener out of New Zealand: the lack of injuries and fatalities. The event occurred at about 4:35 a.m., thankfully, given the amount of interior damage in commercial structures, Chan said.
September 13, 2010
Copyright 2010© LRP Publications