NZ EQC sharpens cat bond focus. Floods & cyclone unlikely to trigger reinsurance

New Zealand’s state-owned residential property disaster insurance entity, Toka Tū Ake EQC (formerly known as the Earthquake Commission), does not expect the recent floods and cyclone will trigger its reinsurance, but as it thinks about how to navigate more challenging renewals this year, the EQC is more closely considering catastrophe bonds.

Chris Chainey, Chief Financial Officer of Toka Tū Ake EQC, provided Artemis with comments in the context of the two recent devastating severe weather events that occurred in New Zealand, Cyclone Gabrielle and the upper North Island flooding.

The severe flooding that affected the Auckland and North Island area of New Zealand was followed by Cyclone Gabrielle in February, between which significant property damage has been incurred and a number of insurance carriers are reporting a likelihood that their reinsurance towers will respond.

Commenting on the events, Chainey said, “These events, while being significant for the insurance industry, are extremely unlikely to activate our reinsurance arrangements.”

Adding that, “The EQC Scheme is fortunate to enjoy positive support from our current reinsurers, who support New Zealanders with $7.2 billion of reinsurance cover for natural hazard damage.”

However, Chainey highlighted that reinsurance markets globally are, “Responding to the challenges of climate change and severe weather events, which is impacting pricing of reinsurance.”

Which is increasingly leading the EQC to look to potential alternatives.

Chainey explained, “For the past few years, the Government has encouraged Toka Tū Ake EQC to look at the potential opportunity to access risk financing from global capital markets.

“With this permission and the reinsurance market context noted, we have been considering options to expand and diversify our sources of risk capital while continuing to protect the Crown’s balance sheet.

“Any additional or alternative source of risk capital would need to be competitive with our traditional markets, complement our core reinsurance programme and demonstrate value for money to Toka Tū Ake EQC.

“Alternatives, such as a catastrophe bond, may be a valuable source of additional and separate long-term capital.”

The current hard reinsurance market environment may be just the right time for the Toka Tū Ake EQC to enter the catastrophe bond market for the first time.

A cat bond could allow the entity to secure long-term reinsurance capital support, that can diversify it away from 100% reliance on the traditional market, securing cover across a multi-year period for some of its higher-layer risks.

“In line with previous years, we are currently structuring our reinsurance renewal programme and will soon be entering negotiations with the goal of ensuring natural hazard insurance remains available and affordable for insured residential homeowners in New Zealand,” Chainey said.

The Toka Tū Ake EQC reinsurance program is renewed at June 1st and we’ll report on any changes to its structure, or capital sources, as information becomes available.