Money has triumphed over fear in the New Zealand reinsurance market. Higher reinsurance rates are attracting reinsurers who have not normally operated in the market, offsetting fears that capacity is shrinking.

The treaty renewals in June and October have passed with no aggregate diminution in capacity, according to Aon Benfield Australia/New Zealand CEO Robert De Souza.

He says reinsurers from Bermuda and Europe as well as Lloyd’s have entered the New Zealand market as a result of higher rates.

“Some reinsurers are re-evaluating how much capacity they will apply to New Zealand and at what price, but at the same time reinsurers are coming into the market because they see prices going up,” Mr De Souza told insuranceNEWS.com.au.

There were fears of a withdrawal of capacity because reinsurers have sustained such heavy losses from New Zealand, where insurers had very low levels of retention. The reinsurers are now rewriting their risk models for both Australia and New Zealand.

Aon Benfield calculates that reinsurers have carried two-thirds of the losses from disasters in Australia and New Zealand since 2010. Aon’s catastrophe modelling subsidiary Impact Forecasting says reinsurers will pay $16 billion of losses from the Queensland floods, Cyclone Yasi, the Perth hailstorm and the earthquakes.

But with reinsurance rates for New Zealand increasing up to 500% at the July renewals, Mr De Souza says Aon has been able to find takers for all the business it wants to place.

Insurance Partner at Deloitte UK, Ian Clark, also does not see reinsurers quitting New Zealand.

“Reinsurers are the risk-takers at the end of the value chain,” he told insuranceNEWS.com.au. “These guys are used to catastrophe losses, and they know New Zealand is an earthquake zone.”

He says while the largest insurers – such as the Australian companies which dominate the New Zealand insurance market – will continue to get reinsurance cover (“they are just going to have to pay more”), smaller companies might find the cost of operating in New Zealand is prohibitive and not worth their while.

That means companies will weigh up the potential losses against the size of the market.

“You find insurers having to make decisions about whether they stay in the market to recover the losses they have made or whether the payback period is too big,” Mr Clark says.

“Some will take the decision to withdraw, at least for the provision of earthquake cover.”

This has been the case with church-based insurer Ansvar, which announced last month it will pull out of earthquake cover in New Zealand. Zurich has also announced it will not write new earthquake cover in most parts of the country.

Mr Clark says reinsurers expect losses, but after the amount they have incurred from the region in the last couple of years there is an argument that the New Zealand Government needs to take action to encourage reinsurers into the market.

He says it has many options, such as topping up the coverage provided by the reinsurers to reduce individual companies’ risk exposure.

Other measures might involve changing the building regulations so businesses and homes are rebuilt to higher standards and less likely to suffer earthquake damage.

This has already begun in New Zealand, where the Department of Building and Housing has implemented temporary measures for the rebuild of Canterbury and is now consulting on making them permanent.

Building standards are a key focus of the royal commission investigating the earthquakes, with its interim report making recommendations on building codes that are expected to affect building practices nationwide. 

There is also considerable work being done on soils and seismicity that will give insurers more information on which to write risk.

New Zealand Earthquake Recovery Minister Gerry Brownlee took a delegation to Reinsurance Rendezvous in Monte Carlo last month to drum up support from reinsurers and convince them the country is still a good place to do business.

Although some in the industry have privately questioned the effectiveness of the delegation, Mr De Souza attended the conference and says Mr Brownlee gave reinsurers confidence.

He says the Government saw the benefit of reinsurance to the Earthquake Commission and the wider New Zealand market, “and they wanted to support the ongoing provision of reinsurance capacity”.