BY HEATHER SPURWAY, account manager, JLT

New Zealand is now well and truly on the international insurance radar; our Canterbury quakes are known by the international insurance world as ‘the New Zealand earthquakes’ and this has focused the minds of both the retail insurance companies and their re-insurers.

We know the statistics and unprecedented losses following the Christchurch earthquakes. Add losses from the Haiti, Chilean and Japan natural disasters to those of the cyclones and floods from Western Australia, Victoria and Queensland and you establish an insured and economic loss totalling approximately $500 billion.

In respect of material damage and business interruption insurance, insurers and re-insurers’ underwriting models will likely be amended to factor the result of secondary losses to risks, i.e. perils triggering a new peril, such as earthquake triggering flood, liquefaction or tsunami. The current market focus now includes:

• the very real possibility that insurance on some older buildings may no longer be available in the future. Already some insurers have applied significant premium loadings for buildings constructed prior to 1936.
  
• significantly increased insurer premiums. The cost of earthquake insurance varies and is mainly dependent upon the geographical seismic ‘risk’ on particular areas.
  
• insurance on ‘natural perils’ being redefined by insurers to include not only earthquake, volcanic eruption and tsunami (and fire resulting from these) but also hydrothermal, geothermal activity, landslip and subsidence and all losses (not only fire) resulting from all these perils.
  
• the increase of natural disaster claims excesses/deductibles. These are now generally expressed as a percentage of the insured value of a site, previously generally a percentage of the loss. The range can be between 2.5 per cent through to 10 per cent of site value but in certain circumstances may be higher. For example: the natural disaster excess for damage of $50,000 to a building insured for $3,000,000 in most parts of New Zealand used to be 2.5 per cent of loss with a minimum of $2500. The excess now is now generally a percentage of site sum insured with a minimum ranging from $75,000 to a minimum of $300,000.
  
• co-insurance becoming a ‘normal’ for local authority material damage and business interruption placements, i.e. multiple insurers provide only a percentage each of the 100 per cent cover required.

Some insurance covers will, if not already, become more restrictive, usually initiated by re-insurers.

Offshore markets, including Lloyds, Singapore, London and Australia, are of course options for insuring local government assets and business interruption, particularly if the local market is limited in respect of insuring specific risks or risks at specific locations. They are not immune to the terms and conditions imposed by global re-insurers either, but if used wisely and with full knowledge of the often more complex policy wordings, they provide viable alternatives.

We suggest steps be taken now to achieve the best outcome for 2012 and years following. Councils, together with their broker, can investigate what alternatives they may have to reduce and/or mitigate insurance-spend increases.

While it is clear insurers will require a higher level of information than in previous years; they now include greater emphasis on underwriting criteria such as location, year of construction and construction materials and may also require various reports on specific risks. It is clear that short, clear and concise information will assist in attracting insurer capacity.

Councils should also consider the various policy structures that will have a positive impact on the level of insurance premium and capacity including structure where loss limits can be applied on selected or all risks.