September 11 impact outstrips all in troubled domestic insurance market

By Chris Hutching

Friday 18th January 2002

Recent floods in New Zealand are unlikely to have as big an impact on the hefty insurance premiums hitting businesses as the terrorist attacks of September 11 on New York and Washington.

Auckland-based Aon Risk Services principal Bevin Maybey said yesterday recent increases for insurance premiums are commonly about 25% when people renew their policies and businesses could face increases of several hundred per cent depending on the type of risk. But this was the legacy of September 11 rather than claims arising from the recent bad weather, he said.

An example of the unusual weather affecting the country was when localised hailstorms a couple of weeks ago left a swathe of minor damage to homes in St Albans in Christchurch and assessors were this week checking similar claims in other towns and cities.

But businesses most affected by the widespread rain this January do not have insurance because of the cost.

For example the promoter of the recent Telstra Hyundai New Zealand Golf Open, FR Partners said it would cover any losses after a washout on one day of the tournament.

And few growers of summer fruit, such as cherries, insure their crops until after harvest during transportation. Central Otago stone fruit grower, Earnscy Weaver, said weather was just another risk that had to be managed by planting different harvesting varieties and different types of fruit. "If you're a cherry grower you're in the risk business. Them's the breaks."

With two weeks remaining for cherry harvest, Summerfruit NZ researcher Marie Dorkins said latest available figures showed exports of 114 tonnes compared to last year's 180 tonnes.

One of the few existing insurance schemes against total crop loss, supported by a $2.50/tonne levy, is operated by United Wheat growers in Canterbury where farmers have lodged claims worth about $500,000 from hailstorm damage in the Mayfield area. Most other crop insurance schemes take effect only after one third of the crop is affected and many growers prefer to manage the risk themselves because of the cost of premiums.

State Insurance said the effect of recent adverse weather was too early to tell but the rise in premiums being experienced by some customers was due to the increased cost of reinsurance arising from a longer-term decline in profits and the effect of the September 11 attacks.

A State spokesman said market conditions leading up to the terrorist attacks had already indicated a hardening trend caused by poor underwriting results due to an increase in weather-related claims over the past couple of years and falling investment income from volatility in equity markets and the dotcom crash.

Premiums would increase and there would be restrictions to terms and conditions for certain classes of business, meaning businesses will carry more commercial risk themselves.

Meanwhile, Aon's Mr Maybey said premiums for weather-related insurance were negotiated with reinsurers last July and any increases would be revealed at the same time this year.

Of more concern for businesses would be the rise in fire and earthquake insurance for buildings, which could typically rise up to 40%, while residential building insurance would typically rise about 25% as policies are renewed.

An example of the effect of September 11 on individual insurance companies was revealed last week when Standard & Poor's downgraded the financial strength rating for the international Royal & SunAlliance Group one point to A+. The drop relates to the British-based group's decision two years ago to return £750 million in "excess capital" to shareholders rather than any change in the fortunes of the New Zealand company (which bought AMP's fire and general insurance business last year).

The new rating also takes into account Royal & SunAlliance Group losses from the attack, estimated at £200 million or about 3% of its total market capitalisation.

The health insurance market is also facing steep increases with Southern Cross, Tower and Sovereign all announcing rises in premiums.

Higher payouts for disability claims and other increases saw the country's biggest life insurer, Sovereign, lift premiums 25%.

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