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New Zealand Government May Need to Recapitalize Its Disaster Safety Fund After Second Quake

Posted on 25 Feb 2011

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Analysts and insurers report that New Zealand's government may have to recapitalize its crucial national disaster safety fund after being hit by two major earthquakes in five months.

After its reinsurance program has dwindled to near depletion point from paying out on hefty insurance claims from the September earthquake, the government could decide to dip into its own coffers to top up the Natural Disaster Fund to pay current claims.

The fund's depletion could trigger the first foray for New Zealand into the fledgling catastrophe bond market as its government seeks for ways to boost its reinsurance portfolio.

Catastrophe bonds allow insurers to pass on extreme risks, like earthquakes or hurricanes, to financial market investors, and are seen as an alternative to reinsurance.

Insurers and reinsurers are still reeling from the September earthquake - 7.1 on the Richter scale - which struck Christchurch and caused an estimated NZ$4 billion in damage.

If claims from the Tuesday earthquake hit NZ$7 billion, the fund will run out of reinsurance protection altogether, say analysts and insurers.

Before the September quake, the New Zealand Earthquake Commission (EQC), which administers the Natural Disaster Fund, said it had NZ$4.5 billion in its Fund as well as NZ$2.5 billion reinsurance.

September's earthquake, as well as five aftershocks which generated over 185,000 claims, has already eaten through the first layer of reinsurance protection. Now the fund needs its reinsurance panel to pay out again for Tuesday's event - which is thought to be one of the costliest global insurance events in recent times.

"There's a distinct possibility they may have to go to the government," one insurer said.

"They've gone over from their first reinsurance levels," he said. "So they'll be down to their last billion or so but it will be a close call. They could sell some of their assets that haven't been classed as reserves."

Insurance losses of between $3.5 billion and $8 billion are expected from Tuesday's earthquake, according to catastrophe modelling firm Air Worldwide.