Assessing the Insurance Council claims

13/12/2012 § 1 Comment

The Insurance Council of New Zealand (ICNZ) issued a press release that the Dominion Post turned  into a piece on the op-ed page (but hasn’t loaded on the website, to my knowledge). The main message is that complaints about insurance companies in Christchurch aren’t accurate.

I’m not sure the ICNZ arguments actually stack up.

Let me start with the one that really got up my nose. The piece seems to be crying poverty — poor insurance companies having to pay out all that money:

Insurers will pay for most of the rebuild of … $20 billion, a sum far exceeding premiums paid over several decades.

Welcome to the insurance business — that’s exactly what you would expect. The earthquakes and their damage were rare events. The damage should represent decades of premiums. That’s the way insurance works.

The main argument offered against apparent delays by the companies is that there is no commercial reason to delay paying out. These are liabilities on the companies’ books, so it doesn’t help their balance sheets to retain them. The press release also says that the inflation in costs would outweigh the earnings from retaining the money. I’m not convinced. Delaying payments might not stack up from a balance sheet perspective, but businesses live and die by their cashflow. Spreading the payments over several years certainly helps that. As for cost inflation, it has been contained in Christchurch. The rebuild is happening slowly, and Fletcher and EQC are using their market power to keep costs low. In fact, slowing the insurance payouts actually reduces cost inflation by spreading out the rebuild work (technically, inflation is an endogenous variable in this system).

The piece also points out that the EQC co-insurance model was not designed for multiple events. The resulting administrative burden has complicated making payouts. The chutzpah of ICNZ on this one is astounding. One interpretation of the earthquakes is that there was one earthquake that set off thousands of aftershocks. Instead, EQC decided that several of the earthquakes would be ‘new events’. By re-setting the $100,000 limit with each ‘new event’, this interpretation saved the insurance companies money. I’m surprised they are complaining about it.

The fact that it has taken so long to settle some claims also comes up. We are told that it just wasn’t possible to settle claims within the first two years. Look, the EQC is required by the Act to pay out within one year (see this letter from Treasury (pdf), for example). They haven’t done that. Now, I can understand why — it’s a big job. The fact remains that Christchurch paid premiums based on legal requirements that were later waived. They paid for something they didn’t get.

The press release/article contains some good information. For example, it points out that 20,000 properties have more than $100,000 in damage, but New Zealand built only 10,000 houses in the past year. That gives a sense of the scale of the work.

However, if the insurance industry is trying to convince the public that they are the good guys, these arguments fall flat.

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