Yesterday I covered the first two important issues on this subject. Today I conclude this topic with the last two important issues:
3 – The requirements of the global reinsurers
With NZ contributing a miniscule 0.67% of premiums to the global insurance underwriting pool and yet necessitating one of the top 10 global insurance payouts in the last four decades, you can imagine that the global reinsurers were forced to look very closely at their exposure to the New Zealand market. It became quickly apparent that the already tiny premium pool was even smaller than it should’ve been due to the competitive market pressures mentioned in yesterday’s post. Not only was the premium pool tiny, but there were significant earthquake underwriting problems with the model in NZ.
NZ’s retail F&G insurers only carry between $5 and $10 million of the first portion of a large disaster claim – the rest is reinsured. Just as we pay premiums to retail insurers for the cover we seek carrying a portion of the risk ourselves via the policy excess, so retail insurers do the same. The first $5 million of an insurable event must be covered from the premium pool that the individual insurance company holds internally and above that, a claim is made on their insurance with the re-insurers. The re-insurers in turn charge the retail insurance company re-insurance premiums based on their accessed risk of that insurer’s portfolio of policies. The re-insurers spread the load amongst themselves by only taking a portion of a retail insurers’ risk so NZ insurance companies typically have treaties with a minimum of eight and sometimes up to fifteen re-insurers. The re-insurers in turn spread their risk load through the huge insurance syndicates that trade at Lloyds in London.
With such a massive claims event from such a small country (i.e. one that could take many decades to replenish the cost of the claims from future premiums), the only way a reinsurer could profitably remain doing business in such an earthquake prone country was to find ways to definitively quantify then cap the payouts and do everything legally possible to prevent a massive new round of claims in the event of another major earthquake. Two crucial decisions were taken by a consortium representing the reinsurers with the most exposure to the NZ market – decisions that if they could not be implemented, there were doubts as to whether they would stay in the entire New Zealand F&G insurance market AT ALL. A rushed visit to Brussels by the Insurance Council CEO and Earthquake Minister Gerry Brownlee reassured the reinsurers that NZ was worth keeping in their portfolio. The following two decisions were imposed externally by the reinsurers and would also have a dramatic impact on the claims management process and how long it would take to settle claims:
(i) The event had to finish.
Canterbury quickly became the epicenter of global seismologic research especially given the presence of what were considered new faults (e.g. the Greendale fault causing September 4 and the Port Hills fault causing February 22). Given the interrelated nature of the faults and the stress fracture points from the later quakes being triggered by the earlier sequences AND the huge number of aftershocks (1,500+ over 4 on the Richter scale, 63 over 5 and 6 over 6 – anyone who’s been through just a 4 will tell you it’s quite a good shake), the understandable rationale was: why should we (the reinsurers who are on the hook for the $29 billion of the insurable costs of the rebuild) spend those billions rushing to make repairs only to have a fresh earthquake sequence re-damage the repaired properties. Some of the early cosmetic repair work under the cap done by the EQC in early 2011 had to be redone as a consequence of the June 13 and December 23 sequences. The general reinsurance rule of thumb with serious earthquakes is that six months has to elapse without an aftershock above 5 before any major claim settlements could begin. The gap between quakes 5 or above for each of the five designated earthquake sequences commencing with September 2010 were: 3 months, then 2 months, then 4 months and then 6 months. It wasn’t until May of 2012 (after the December 23rd 2011 quake) that the reinsurers could formally declare the entire event over and begin the proper work of larger claim settlement. The claims ‘meter’ didn’t start running on the major claims in the eyes of the insurers until May 2012.
(ii) Ensuring durable earthquake proof repairs
Understandably the reinsurers did not want to be on the hook for another massive repair bill should Christchurch be struck again. The best way to ensure this would not happen was to make sure that rebuilt/repaired homes in the riskier parts of the city had deep and strong enough foundations done during the rebuild/repair process. Christchurch is a hodge podge of different land types with some areas far more prone to damage than others. It is why the western and northern parts of the city were relatively unscathed (more elevated drier clay laden and gravely soil) versus the east where the ground was closer to the water table, swampier and less stable. The land under suburbs immediately adjacent to the Avon and Heathcote Rivers was so unstable as to comprise the bulk of the residential red zone. In this area, the ground was deemed to be so unstable as to render it uneconomic to mediate possible future damage hence the settlement scheme.
Reinsurer requirements for stable repairs/rebuilds lay behind the re-designation of green zoned land into three subzones: Technical Category or TC1 (grey) being the most stable, TC 2 (yellow) being moderately stable and TC 3 (blue) being deemed the most unstable of land not zoned red. Repairs/rebuilds could commence on TC 1 and 2 designated properties but some 17,000 properties in the green zone were designated TC 3. Insurers would not begin to affect repairs or do a rebuild on properties zoned TC 3 until they knew precisely what type of soil the property was on so they could ensure the new foundations were strong enough to leave the repaired/new dwelling isolated from another large earthquake. This required soil tests to be done on every TC 3 section BEFORE the settlement of the claim could even commence by way of building work. Soil engineers don’t grow on trees and so a huge backlog of required tests built up and added to all the other issues that formed part of the suite of frustrating delays. I know several people in TC 3 hell and their lives have been miserable in their wobbly uneven cold draughty homes. Their plight is wretched and they all can share mind numbingly depressing stories about the massive runarounds their insurer and EQC have given them. It is of little comfort for them to hear that they effectively became the sacrificial lambs to preserve the right of all other kiwis to insure their homes, businesses and vehicles such was the knife edge that global underwriters teetered on in deciding on their continued exposure to the whole NZ insurance market. The protection from future claims inherent in the TC 3 process was the price that needed to be paid to keep the reinsurers in our market.
4 – Miscellaneous issues
Other issues that have impacted negatively on the claims settlement and rebuild process include:
* The Christchurch City Council’s consenting process as the rebuild gathered pace quickly came under massive strain. It was borderline efficient even before the quakes (I know because I built some apartments in 2004 before emigrating to the US). Despite the presence of CERA as a super agency given extraordinary ‘cut the red tape’ powers, the CCC’s consenting time frames and processes became even more bogged down as to impose a serious bottleneck particularly on the nascent commercial rebuild in the CBD. This culminated in the CCC having its consenting powers taken away from it by the NZ wide council consent accrediting agency IANZ and distributed to other councils with a proven track record in greater consenting efficiency.
* Staff shortages – an event of this magnitude was going to test the claims processing capacity of every insurer with exposure in the province. EQC had to increase its claims handling staff fifty-fold and private insurers, swamped with massive caseloads of claims, had to reallocate resources from other offices, bring people out of retirement and hire new staff and restructure their Christchurch claims handling processes to meet the load. This all took time. For a period of time, a raft of inexperienced even incompetent (and occasionally fraudulent) assessors and adjustors were wreaking some havoc with the lower end EQC claims. Millions of dollars were wasted on unnecessary paint jobs and smaller cosmetic repair work approved by the new adjusters rushed into the field but inexperienced with differentiating between earthquake damage and normal wear and tear. It has taken all the insurers, EQC, assessors, QSs, Fletchers’ approved contractors and others years to get up to speed in processing claims of this volume. These delays are common with any major global insurance event but they added on top of the ones unique to New Zealand detailed earlier.
The Christchurch earthquakes have been a massively traumatizing event for most of the population of the city even for those who did not face battles over claims over the cap. The problems of claims management by EQC, the insurers and Fletchers fill social media, blogs and other concerned citizen websites. This post is not to excuse the various mistakes made at various levels but merely to give some big picture context to the problems and to identify the combination of unique factors that have come together in somewhat of a perfect storm in Christchurch. Some could be ameliorated with procedural even legislative changes to the EQC and how it delivers the earthquake cover it offers but some is endemic to the global insurance market and those issues are beyond the ability of EQC, NZ’s biggest retail insurers and even the government to get around. It is hard to listen to the woes of those on the receiving end of all these issues and not be moved by their plight and to be sympathetic to their desire to blame simple scapegoats (EQC, the insurance companies and the government). Such criticism fit neat pithy sound bites so loved by the media. The truth is far more complex and cannot be described in a simple short sound bite hence this post.