Standalone cover issue anticipated

AMI Insurance yesterday seemed to fulfil a prediction made last week by ratings agency Standard and Poor's that some insurers exposed in Canterbury would face difficulty and require an injection of capital.

The Government has provided a last resort support package of $500 million to help AMI give certainty to its policyholders that it could meet claims from the Christchurch earthquakes.

On March 30, S&P primary credit analyst Paul Clarkson said in a ratings report that some standalone insurers that were more exposed to the Canterbury region, and did not have the benefit of a parent group support or adequate reinsurance protection, might face difficulty and require the injection of capital.

"Major global reinsurance players will bear the majority of insured exposure to the event. As a result, we expect significant reinsurance price increases for the region in the next renewal period."

The major players maintained extensive reinsurance protection and capital strength which had, to date, limited downward rating pressure, Mr Clarkson said.

The recent earthquakes would place further downward pressure on 2011 earnings due to both claims cost - albeit modest for some - and significant costs to reinstate reinsurance cover.

New Zealand's non-life insurance market has been downgraded to negative from stable by S&P.

Mr Clarkson said the negative outlook on New Zealand indicated that earnings and access to reinsurance were also likely to weaken following the recent earthquakes in Christchurch.

"We nevertheless expect capitalisation to remain adequate."

The New Zealand market benefited from a high degree of ownership by highly rated Australian parent companies, predominantly short-tail exposure and a lay of natural disaster insurance through the Earthquake Commission, he said.

Inherent earthquake risk in New Zealand moderated the sector's strengths.

It was still too early to estimate the cost of damage the February 22 quake caused, but S&P expected insurance losses to far exceed those from the September quake, Mr Clarkson said.

The September disaster caused estimated insurance losses of about $5 billion. The commission covered more than $3.5 billion of that amount but like the private sector, it had benefited from substantial reinsurance protection.

Current estimates suggested losses for the February quake would be two to three times greater than the September quake, he said.

The commission would again cover the first $1.5 billion of its eligible residential exposure from its own resources with $2.5 billion of reinsurance protection and additional resources available beyond that.

S&P expected overall economic conditions in New Zealand to remain challenging.

 

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