2013 conference highlights

Flood definition ‘no panacea’

by Kate Tilley, Resolve Editor

Australia’s standard flood definition is no panacea because it doesn’t address the fundamental problem of what caused the loss, CGU technical counsel Chris Rodd told the NZILA conference in Queenstown.

He said the standard definition was “very helpful” and a useful tool”, but did not address the fundamental issue of causation. The standard definition had been widely embraced early by insurers, but the real need was pre-disaster mitigation.

Mr Rodd wants to see better flood mapping, improved land use, more funding on making communities more resilient. Post-recovery spending was “shutting the door after the horse has bolted”. Climate change was a very significant issue for the industry, affecting insurance’s price and availability.

Other key factors were the concentration of buildings in storm-surge-prone areas, the buildup of vegetation in bushfire-prone regions, much flood mapping data being outdated or unreliable and taxes on insurance.

Mr Rodd said one major Australian insurer was no longer offering cyclone cover north of Bundaberg. “Premiums are based on risk; some rural areas have no flood cover because of inadequate mapping.” Strata cover in north Queensland was very expensive and few insurers offered it.

 Mr Rodd said a survey showed only 50% of insurers were reacting to or preparing for the effects of climate change.

 

Adapt for affordability

Insurance Council of New Zealand CEO Tim Grafton, in a separate presentation, said adaptation to climate change was essential to keep insurance affordable.

He told the NZILA conference increased insurance penetration, coupled with climate change, would lead to increased premiums and higher deductibles. Research had shown NZ would have more intense flooding, more drought areas, get windier, and the frequency of cyclones would decrease, but they would intensify.

Procrastinating and “expecting insurers to take care of it all” would mean insurers would became “political scapegoats” and potentially subject to legislation that would make insurance more expensive.

Mr Grafton wants more research and event modelling. “A cost-benefit analysis would demonstrate the value of pre-event adaptation measures,” he said. “The social and economic costs of mot getting it right are huge; it’s critical we get that message across.”

Encouraging adaptation would keep insurance affordable and high-risk areas should be signalled through higher premiums and deductibles. Mr Grafton wants “more effective planning”, saying insurance is just one tool in the “risk transfer tool box”.

 

Major losses double

ICNZ insurance manager John Lucas said New Zealanders would be “hit in the pocket” if they exposed insurers and lenders by buying in high-risk areas.

He told the conference the number of major loss events in NZ had almost doubled over the last 30 years. From 1981 to 1990, one tornado made landfall, costing $NZ 4.46 million. In 2011-12, three tornadoes cost $10.3 million. Queenstown’s 1999 flood, which inundated the CBD and cost $NZ64 million in inflation-adjusted figures, saw deductibles increase to the extent most businesses were essentially self insured. For lake’s-edge businesses the annual flood risk was 13%.

But Mr Lucas said businesses had since become resilient, for example, identifying property that needed removal to higher ground. An early-warning system was introduced. Better hazard maps had helped insurers move to granular individual property-level underwriting, instead of the traditional model of cross subsidisation between good and bad risks.

Mr Lucas said not all insurers were using best-available technology. But banks were now buying hazard data to examine mortgage lending issues.

 

Big quakes, hurricanes feared events

The four scariest events for reinsurance CEOs are magnitude 8 earthquakes in Tokyo or Los Angeles, a category 4 hurricane hitting New York or a category 5 hitting Miami, Andrew Flitcroft, General Re client service manager, told the NZILA conference.

But he warned the “hidden catastrophe” was investment uncertainty. Traditionally, investments had “bailed out” insurers, but interest rates were now at an all-time low. Total global non-life assets were $15 trillion, with about 60% in interest-bearing securities, so a 1% interest rate reduction was a $90 billion loss. That compared to the costliest insured event “ever”, Hurricane Katrina, at $US43 billion. “The ‘hidden cat’ is recurring year after year,” Mr Flitcroft warned.

Five of the 12 most costly insured events ever had occurred in the past 2-1/2 years. While 2012 was renowned as a “benign year, there had been 905 significant events, compared with 850 in 2011, and $US72 billion of insured losses, compared with the 10-year average of $US53 billion.

During 2011-12, Australia and NZ’s gross natural catastrophe bill was $US25 billion, of which $US18 billion was paid by reinsurers. Reinsurers in 2010 collected only $US680 million in premium for Australia and NZ and the global catastrophe premium for the same year was $US16 billion, which meant Australia and NZ “used up all the global catastrophe premium, and more”.

Mr Flitcroft warned against putting too much faith in catastrophe modelling. The Christchurch quakes were not predicted because they occurred on an unknown fault and the liquefaction effects were not considered. While Japanese regions hit by the 20xx tsunami had 15m protection walls “they were not much use against 38m waves”.

Brisbane’s Wivenhoe Dam was “built to protect against flooding, but was used for water storage and its use was mismanaged”.  Modellers learnt post-event and improved their models, but “they’re predicting forces of nature and that’s near impossible”.

Mr Flitcroft said the key was in underwriting and taking into account exposure analysis; adequate terms; appropriate deductibles; and control of exposures.