Big rise in ’quake risk cost looms

Press, 17 May 1989, Page 1

Big rise in ’quake risk cost looms

By

PATTRICK SMELLIE

in Wellington

The basic cost of insuring against disaster such as earthquakes is likely to at least double under a new compulsory home insurance scheme announced by the Government.

For people in high earthquake risk zones, the cost of disaster insurance is expected to rise even more sharply. Even with levies significantly higher than at present, some insurance industry experts believe New Zealand will never be able to completely insure against a big disaster. This is because the world insurance market is not big enough to take on New Zealand’s unusually high earthquake risk. The scheme, announced in a White Paper made public yesterday by an Associate Minister of Finance, Mr Neilson, contains the following key elements: • Compulsory home insurance for every house used as a main residence, and with a value of more than $20,000. • Insurance will, in most cases, be for replacement value, rather than the lower indemnity value now in common use.

• Replacement of the Earthquake and War Damages Commission with a Disaster Commission of New Zealand to provide insurance to homeowners. • Private insurance companies will "be allowed to compete against the new commission for disaster insurance business.

• War damages will no longer be covered by the commission’s insurance because no private sector insurer provides such cover. • Owners of properties with replacement values of more than twice their market values may apply for the right to insure to indemnity values only. • Organisations and individuals with sufficient independent assets to pay for home replacement may apply for exemption. • The new commission will

bill all homeowners, who will pay unless they can prove adequate insurance has already been taken out. 9 All commercial property is excluded from the scheme. 9 The scheme is intended to take effect from April 1 next year. The range of disasters covered will be earthquake, slip, volcanic eruption, hydro-thermal activity, tsunami, and fire resulting from any of these. By leaving commercial property to fend for itself, and making homeowners pay for the true cost of their disaster insurance, the Government is attempting to right inadequate arrangements. Under the existing scheme all property owners with fire insurance pay 5c per $lOO of the property’s value up to an indemnity value (the value of what is

being lost), rather than replacement value (the cost of rebuilding what is lost). That levy has gone to the Earthquake and War Damages Commission which boasts a Government guarantee to put right any big disaster. It has been unchanged since 1944. Any house replacement insurance has required an additional premium, at a higher rate, paid straight to an insurance company. The existing arrangements have left the commission with funds of $2 billion, and reinsurance arrangements of $1 billion. But the estimated cost of a big earthquake in a New Zealand city is five times that at $l5 billion. While he supported the scheme, the head of the Colonial Mutual General Insurance company, Mr Peter Harcourt, said the existing 5c per $lOO levy could be expected to double, if not treble, to reflect true levels of disaster risk. “New Zealand has had historically low levels of disaster insurance premiums,” he said. The manager of AMP’s general insurance division, Mr Derek Fenton, said a serious issue for the Government to address was how to set rates for different parts of the country. If the basic rate rose to 10c per $lOO, and Wellington was 10 times more likely to have an earthquake, then in theory premiums in the capital should be $1 per $lOO. Main risks in the South Island were the West Coast around Inangahua, the Nelson region, and parts of North Canterbury. Christchurch was not a major risk.