The devastating Christchurch earthquakes were always going to have a massive impact on the New Zealand insurance industry. While the country’s geological history and its position astride the Pacific’s so-called Rim of Fire is well understood, its risk profile has not been.

Reinsurers traditionally focused on such critical (and well-understood) risks as Atlantic hurricanes, North American tornadoes and European storms and floods. The southern hemisphere’s low population/small catastrophe nations were just a good place to invest in. Last year both put paid to that theory.

New Zealand has benefitted for many years from reinsurers’ short memories, which are said to vary from the length of an underwriter’s career (about 35 years) to as long as it takes until a catastrophe strikes somewhere else. Such cynicism aside, few expected the placid city of Christchurch to be the one that would expose the real risks involved in insuring New Zealand assets.

After all, the last devastating earthquake in New Zealand was at Napier, 81 years ago.

Prior to the Christchurch event, there was a certain element of complacency about the New Zealand insurance industry. It has led to a situation where things are going to have to change – quickly and drastically.

Wesfarmers Insurance Brokers CEO Steve Lockwood – who has considerable influence in the New Zealand market as CEO of leading local broker Crombie Lockwood – told a conference in Auckland 10 days ago that New Zealand insurance companies on their own couldn’t have afforded the amount of reinsurance needed to cover a disaster the size of the Christchurch quake.

The saviours of New Zealand policyholders and the country’s credit rating have been the Australian insurers which dominate the New Zealand industry – IAG, Suncorp, QBE and Lumley.

As Mr Lockwood explained to the Insurance Brokers Association of New Zealand (IBANZ) conference, the Australian insurers mainly carried New Zealand risks as part of their own reinsurance programs. There’s a suspicion that those risks were sometimes included in Australian reinsurance packages as a bit of a bonus.

That was then, says Mr Lockwood. The new realities for the New Zealand market are far less comfortable.

For starters, he warns that reinsurers are now awake to the fact that New Zealand risks aren’t benign. And with reinsurance rates for New Zealand rising steeply, Australian companies and their policyholders won’t subsidise New Zealand risks any more.

Following Mr Lockwood’s dissection of the market’s new realities, an IBANZ conference panel of leaders from across the various skillsets of the industry discussed what might happen next in the market. What became immediately obvious from their comments is that “normal” is no more. Change – some of it drastic – will be a feature of the country’s market for years to come.

The New Zealand insurance market is small, conservative and more resistant to change than the Australian industry. Its reinsurance bills will be a severe drain for years to come. Premiums will have to remain high to ensure the industry is viable. High premiums will inevitably lead to more underinsurance and non-insurance in the domestic market and force businesses to pass the cost of higher premiums on to customers.

Coverage of some risks – not all of them related to such hard-to-place business as abattoirs and sawmills – will become very difficult. In a country that believes in insurance, underinsurance and non-insurance is going to become more common.

The nation’s 3867 unreinforced masonry buildings, for example, will cost $NZ2 billion ($1.56 billion) to reinforce to new earthquake standards, but they’re only worth $NZ1.5 billion ($1.17 billion). The insurance ramifications of that situation alone are very difficult.

Most domestic property policies in New Zealand offer full replacement, rather than agreed value. As a result, insurers and reinsurers are still uncertain what the final cost of the Christchurch catastrophes will be. This is adding to consumer and political criticism. In the new reality, there is general agreement that such open-ended policies will disappear.

Commercial policies carry a range of unique wordings and definitions, and no one seems interested in sorting out the complications this causes. There is no centralised electronic transaction platform like Sunrise Exchange or Steadfast’s SVU, and little interest in developing one. Competition is still intense, which may not be totally realistic when a focus on market-wide solutions is needed.

After years of a regulatory system that was so relaxed it was verging on the ridiculous, the New Zealand insurance market is accepting new controls being introduced through the Reserve Bank of New Zealand.

The major insurers have generally welcomed the new rules, with some complaints about the extent of the reserving levels being imposed. The combination of tighter regulation and the Christchurch factor have already pushed some smaller insurers out of the market, and there will probably be fewer again in a few years as the regulations get tougher – as they inevitably must if New Zealand is to fall into step with international regulatory trends.

Reinsurers are very happy to have a tougher regulatory regime evolving. As one senior reinsurer told insuranceNEWS.com.au: “The New Zealand regulator is going to have to be tough if they want to be taken seriously internationally.”

Brokers, by contrast, have been treated very lightly in the new regulatory environment. They continue to operate under the common law “duty of care” provisions. The rules under which they operate are a stark contrast to those their counterparts in Australia must abide by.

Sources contacted by insuranceNEWS.com.au agree the New Zealand market will change quickly over the next couple of years, because it has no other option. There are some growth possibilities in the eventual privatisation of the Accident Compensation Corporation’s workers’ compensation book, but beyond that the market faces a difficult future.

The Australia-NZ Closer Economic Relations policy is something Kiwis understand very well, but insurance market harmonisation isn’t on the cards despite the dominance of Australian-owned insurers. National sovereignty issues aside, New Zealand’s population of 4.4 million is less than that of NSW (5.6 million), Victoria (4.8 million) or Queensland (4.6 million).

Innovative thinking is something New Zealand businesses and individuals have used in the past to make their mark on the world, and it will be interesting to see how much the insurance industry is prepared to think outside the square in embracing the new realities.