Getting ahead of the next Big One The future of disaster insurance in New Zealand

Transcription

1 + Getting ahead of the next Big One The future of disaster insurance in New Zealand Janet Lockett : Clinton Freeman : Richard Beauchamp New Zealand Society of Actuaries Conference, 21 November 2012

2 + Why this presentation? The Canterbury earthquakes have challenged many of the concepts of insurance and recovery that New Zealanders have in the past held dear Actuaries should play their part in redefining disaster insurance for New Zealanders

3 + Objectives Garner member opinion on disaster insurance Build a well considered response to the NZ Government and Treasury review of the EQC Offer appropriate NZSA voice within the EQC review process

4 + Lessons from Canterbury New Zealand s disaster reality Journey A disaster insurance scorecard How different approaches rate Potential approaches for NZ Where to from here?

5 + Lessons from Canterbury The Canterbury earthquakes of 2010 and 2011 appear to have found the EQC wanting. Canterbury's citizens are fed up. And Wellington still represents a significant risk to New Zealand and its economy.

6 + Many of us were, and may still be, blissfully unaware Alpine Fault presented the highest probability of a large event but much further away from population Wellington typically seen as the location of the next big one Probably a view shared by society, government... and even the insurance industry

7 + despite the odds NZ fault lines are very active Deformation occurring in New Zealand (source: GNS Science report 2011/183, July 2011)

8 + There was inadequate preparation Industry and EQC disconnect EQC levy seen as tax by some insurers, them as collectors No industry-eqc test exercises No visibility of claims systems No systems integration for information sharing

9 + Which resulted in confusion and delay

10 + Few understood the EQC cover, even fewer the true earthquake risk Universal EQC levy too low and probably too broad Private insurer EQ premium unlikely to reflect expected cost of additional exposure EQC funds may have appeared unnecessarily large before the events in Canterbury

11 + Burdensome claims response and experience Duplication in assessments Inconsistent assessment Unecessary cost Extra delay Customer uncertainty Worsening industry reputation

12 + Slow repair and reinstatement (real or apparent) Difficulties sharing information Differences in repair methodology Disparate loss assessments Complexities of event apportionment Overall uncertainty about claims cost

13 + It s time to reassess NZ s approach Focus Knowledge Risk mitigation Emergency management Coordination or integration Cover and price Key areas Education and risk modelling Land and Building designs and codes Civil defence and personal safety plans Society, Industry, Government Better recognition

14 + New Zealand s disaster reality

15 + New Zealand s Hazards Earthquake Landslide Tsunami Volcanic eruption Extreme weather

16 + Volcano Sufficiently close to North Island population and air corridors

17 + Shallow earthquake Typically to the East of the country

18 + Large earthquakes Historically widespread

19 + Lessons from New Zealand s seismicity Building types react differently Location matters It s not just the shaking Every event has unusual features!

20 + After the event Co-ordinated effort needed to make funds available for recovery Building materials and labour constraints a reality Repair and rebuild applies to more than just the buildings

21 + Defining disaster insurance for New Zealanders

22 + Many considerations Equitable? Encourage mitigation? Mitigation Awareness Selection Responsibility Voluntary Contents Mandatory Residential Insurance Buildings Commercial Scope Land Practicality Inevitability Indemnity Cover Options Disaster Fund Flat rate Event Premium Risk rated Government Who provides? Deductible Postcode X-Y Zones Insurers/reinsurers Small Enough Information? Construction Intergenerational issues? Property owners Replacement Large Dollar Extent Single Multiple Percentage

23 + Developing a Score Card

24 + Componentry Individual / Community Private Insurers Government / Economy

25 + Scorecard Individual / Community 1. Extent of cover / excesses / limits A - E 2. Encourages risk mitigation efforts A - E 3. Manages expectations A - E 4. Quick claims processing A - E Private Insurers 1. Differential pricing / Actuarial risk pricing A - E 2. Stake in government programme A - E Government / Economy 1. Fund security A - E 2. Risk shared internationally A - E 3. High take-up of cover A - E OVERALL SCORE A - E

26 How do different + approaches to disaster insurance rate?

27 + Some well-known disasters Tohoku EQ Northridge EQ Hurricane Katrina Canterbury EQ

28 + Hurricane Katrina August 2005 Category 4 on landfall Insurance cost US$41bn NFIP cost $16bn

29 + Hurricane Katrina National Flood Insurance Program what went wrong? Operational Problems Failures exposed Financial Problems Lack of Participation

30 + Extend NFIP for (another) 5 years Phase out discounts for subset of properties Communities that repair deficient levees qualify for discounts for up to 5 years National Flood Insurance Program What has happened since Hurricane Katrina? Authorise NFIP to purchase private RI Enable lenders to accept non-nfip policies

31 + Scorecard NFIP Individual / Community 1. Extent of cover / excesses / limits B 2. Encourages risk mitigation efforts A 3. Manages expectations C 4. Quick claims processing D Private Insurers 1. Differential pricing / Actuarial risk pricing E 2. Stake in government programme B Government / Economy 1. Fund security B 2. Risk shared internationally D 3. High take-up of cover E OVERALL SCORE D

32 + Northridge Earthquake January 1994 Magnitude 6.7 Previously undocumented fault Insurance cost $15.3bn (RMS)

33 + Northridge Earthquake Insurance crisis California Earthquake Authority (CEA) More than $9bn claims-paying capacity Only 12% homeowners have EQ cover Source: USGS

34 + CEA insurance San Francisco $949,000 15% deductible ($142,350) $75k contents Premium = $5,940

35 + CEA insurance Santa Monica $995,000 15% deductible ($149,250) $75k contents Premium = $2,040

36 + Scorecard - CEA Individual / Community 1. Extent of cover / excesses / limits E 2. Encourages risk mitigation efforts B 3. Manages expectations C 4. Quick claims processing C Private Insurers 1. Differential pricing / Actuarial risk pricing A 2. Stake in government programme B Government / Economy 1. Fund security B 2. Risk shared internationally B 3. High take-up of cover E OVERALL SCORE C+

37 + Tohoku Earthquake March 2011 Magnitude 9.0 Subduction zone Insurance cost US$35bn Plus... tsunami, nuclear crisis

38 + Tohoku Earthquake Japan Earthquake Reinsurance Company (JER) Claims classified as: partial loss (5% of EQ S.I.); half loss; total loss Before quake, US$30bn fund 50% insured homeowners buy EQ cover (25% all households) Kakidai,

39 + Scorecard JER Co Individual / Community 1. Extent of cover / excesses / limits B 2. Encourages risk mitigation efforts C 3. Manages expectations D 4. Quick claims processing E Private Insurers 1. Differential pricing / Actuarial risk pricing C 2. Stake in government programme A Government / Economy 1. Fund security A 2. Risk shared internationally D 3. High take-up of cover D OVERALL SCORE C

40 + Market solution Capital Markets Insurers Government Post-funding...

41 + Market solution?

42 + Scorecard Market solution Individual / Community 1. Extent of cover / excesses / limits D 2. Encourages risk mitigation efforts E 3. Manages expectations C 4. Quick claims processing A Private Insurers 1. Differential pricing / Actuarial risk pricing A 2. Stake in government programme E Government / Economy 1. Fund security E 2. Risk shared internationally A 3. High take-up of cover D OVERALL SCORE D-

43 Gabriel, + Canterbury Earthquakes EQC $100,000 home cover Fund $6bn Contribution rate same across country

44 + Earthquake Commission (EQC) Earthquake and War Damage Act 1944 Amendment Acts Remove war risk but add weather Earthquake Commission Act 1993 No cover for extreme weather (except land) No longer cover for commercial property Deductibles and caps Problem with multiple events in one area

45 + Scorecard EQC Individual / Community 1. Extent of cover / excesses / limits C 2. Encourages risk mitigation efforts D 3. Manages expectations D 4. Quick claims processing C Private Insurers 1. Differential pricing / Actuarial risk pricing D 2. Stake in government programme C Government / Economy 1. Fund security B 2. Risk shared internationally B 3. High take-up of cover A OVERALL SCORE C+

46 + Where to from here? Defining a potential approach for New Zealand

47 + How did the approaches rate? Disaster and Government Disaster Insurance Programme Hurricane Katrina: National Flood Insurance Program Northridge Earthquake: California Earthquake Authority Tohoku Earthquake: Japan Earthquake Reinsurance Company Canterbury Earthquakes: Earthquake Commission Score D C+ C C+ A Market Solution D-

48 + But we have some direction Consult carefully Learn from Canterbury and Northridge No clear winner Evaluate thoroughly Use scorecard approach Improve or even start afresh Improve EQC Define a new framework

49 + What do we think today? How should the working group progress from here? Further consultation? Next steps

50 + The content of this presentation is provided for discussion purposes only. The opinions expressed are those of the authors alone and do not necessarily reflect those of their employers or of the New Zealand Society of Actuaries.