Insurance Shocks: Market Behaviour and Government Responses

Abstract

The seismic activity in Canterbury since September 2010 has led to a reappraisal of the earthquake risk in New Zealand by the insurance industry. There are signs that insurance cover is becoming more expensive and restricted than it has in the past, to the extent that the insurance market may not provide for the needs of home and business owners.

Purpose of this report
This report provides information on overseas cases where insurance market crises have occurred. Insurance provider behaviour as perils become more certain as to time and place can be observed in other areas of the world. The reactions of regulators and governments, including the outcome of their market interventions, can be used to indicate possible outcomes in New Zealand.

This report analyses the overseas experience with reference to lessons for New Zealand and draws some conclusions on what we can learn. The report makes no specific recommendations or findings. These would need to be based upon some preliminary decisions about the extent to which central or local government (or both) should intervene in the provision of affordable insurance, if they should intervene at all, and what financial consequences would be tolerated.

At the end of the report are case studies of most of the interventions mentioned in the body of the report. These are by no means the only international cases, and there are others with lessons for New Zealand. The chosen cases, though, collectively provide a reasonable overview of overseas experience with regard to the facilitation of affordable insurance for property owners.

Most market interventions by governments, both those detailed here and others, are aimed at homeowners. Some do also include business owners, even extending to compensation for business interruption. Where this report refers to property owners, as opposed to homeowners, it can be assumed that business property owners are included.