So was yesterday’s earthquake in Christchurch an aftershock from the big quake last September, or a new event (as the insurance industry calls them)?
There’s a lot riding on it for the New Zealand government and for privately owned insurers and re-insurers globally. In fact billions of dollars will ride on just what sort of quake yesterday’s event was.
It’s why the TV coverage from NZ featured so many questions to government ministers and experts (geologists and other advisers) about whether it was a new quake or an aftershock from September 4.
How that is resolved will be difficult and highly technical, lawyers and quake experts at 20 paces, no doubt.
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So if we think the insurance argument over what constitutes a flood from the January floods in Queensland and Victoria has been a big deal, spare a thought for the Kiwis; their situation is far more complex and could impact the whole economy for years, as well as boost the cost of rebuilding the city and the way the country insures itself against events such as quakes.
Christchurch was starting to rebuild after the September 4 quake (7.1 magnitude), but yesterday’s 6.3 quake has posed a very big question that could see the New Zealand government and big global insurers end up in a court somewhere if some cool heads and a definitive answer don’t prevail.
It’s all to do with re-insurance and the definition of an insurable event. The first quake was an event, so after a set level of initial claims are paid by the NZ Earthquake Commission, the re-insurance kicks in up to a defined level, beyond which the commission resumes meeting claims.
Damage caused by subsequent aftershocks is covered by the initial event insurance arrangements, meaning that the commission, the government and possibly private insurers will have to pay for damage from continuing aftershocks.
If it is a new quake, those re-insurance arrangements kick in again, meaning the big global re-insurers will be up for more money, potentially more than $2 billion.
So was the quake in a new fault line, unnoticed under Lyttleton Harbour, which suddenly moved yesterday, or was it in a fault line that was part of the September 4 quake?
The government will have the support of private insurers in its belief that yesterday was a separate, new quake.
According to comments by NZ Finance Minister, Bill English yesterday he’s in no doubt.
“We are covered for this as a separate earthquake because the re-insurance was put in place after the last ones,” English said yesterday.
“My advice is that it is a new event. That means that the government reinsurance was back in place and any claims would be regarded as new claims.”
English said the commission is liable for the first $NZ1.5 billion of the cost of claims for damage to residential properties resulting from an earthquake.
He says that above that level, it has a further $NZ2.5 billion in “re-insurance” cover — effectively insurance it takes out with large overseas companies.
“However, if total claims exceed $4 billion, the EQC will have to dip back into its own reserves.
“Those reserves stood at $5.6 billion before last year’s quakes, which would have reduced them by about $1.5 billion, leaving the EQC with just over $4 billion to cover claims from yesterday’s quake. Claims from last year’s quake and its aftershocks generated between $2.75 billion and $3.5 billion worth of claims.
“Damage to Christchurch’s infrastructure was estimated to cost around $460 million to fix, with hundreds of millions more in damage to commercial buildings covered by private insurers.”
That cost alone will have skyrocketed yesterday with major buildings collapsing, churches badly damaged and other structures impacted.
The cost of this to the likes of QBE, Suncorp, IAG and a host of other companies will be higher than from the September 4 quake. They will throw their lot in with the government otherwise they face a huge escalation in losses.
And you can bet the re-insurers (such as Swiss Re, General Re, Munich Re, QBE, Lloyd’s of London and its various syndicates and other groups), will want this to be an aftershock. It saves them money.
The cost of the September quake for the re-insurers is already huge.
Munich Re, one of the top three global re-insurers, said in its fourth quake financial report earlier this month that the September 4 quake cost it €340 million (more than $A460 million). By way of contrast, Munich Re’s said the cost of the late-2010 floods in Queensland was about €270 million (about $A360 million).
Seeing the damage and the cost from yesterday’s quake is — and will be — much larger than the September 4 quake, the losses for the re-insurers will be much higher, so that’s why there will be a lot of effort (and arguing) put into deciding whether it was an aftershock or a separate, new event.
It sounds arcane, especially compared to the terrible loss of life and injuries, but the cost and how it is paid for will be the major continuing question for the city, its people and the NZ government.