New Zealand’s Toka Tu Ake EQC has increased its reinsurance to a record level, just below $NZ8.2 billion ($7.6 billion), and has entered the catastrophe bond market for the first time.

The $NZ225 million ($208 million) catastrophe bond contributes to the overall increase in the size of the program from $NZ7.4 billion ($6.9 billion) last year.

“We are extremely proud the global reputation of our scheme, and the science we invest in, has enabled us to secure significant reinsurance cover for major events,” CEO Tina Mitchell said today. “We have been able to increase our reinsurance cover for the year ahead despite the reinsurance market hardening.” 

Ms Mitchell says while the catastrophe bond is a small addition to the total portfolio, its inclusion is a significant step for the long-term, providing more options in the future in terms of new risk capital markets and the duration of contracts.

“It is important that we have a diverse portfolio for risk transfer. By exploring catastrophe bonds now, we can access other reinsurance arrangements to complement the long relationships we have had with traditional reinsurers,” she said.

Toka Tu Ake EQC reinsurance is accessed if more than $NZ2 billion ($1.85 billion) is needed to pay claims. Before it kicks in, claims are paid through the Natural Disaster Fund and a Crown guarantee.

Ms Mitchell says the organisation had been looking at increasing the total cover required following a doubling of the cap for paying claims to $NZ300,000 ($277,757) from $NZ150,000 ($138,878).

“Because our program has grown, we have been talking to the minister about considering alternative forms of reinsurance just to complement our traditional program,” she told insuranceNEWS.com.au.

The catastrophe bonds have a multi-year term and are funded by institutional investors who provide their money upfront. If the funds aren’t needed over the lifetime of the bond they are returned to the investors.

Ms Mitchell says Toka Tu Ake EQC had received a positive response from the bond market, and in preparation it had provided material to provide more understanding of its history, role and the perils covered.

“We provide insurance, but we also invest in science and research and education,” she said. “So we're not only insuring for today, we're actually trying to prevent impacts for tomorrow as well, and I think people responded quite well to that.”

The higher overall program agreed this year includes inflation impacts and the deductible was increased after a long period without change, primarily in response to the cap change, but the impact of the hard reinsurance environment, illustrated in January renewals, was not as great for Toka Tu Ake as might have been experienced in other markets, she says.

“We have seen an increase that’s commensurate with inflation, but also we have moved with the market each year,” Ms Mitchell said. “We tend to do everything quite conservatively and incrementally.”

The North Island flooding and impacts from Cyclone Gabrielle happened as reinsurance negotiations were taking place, but Ms Mitchell says despite their size, they are not the type of events that would trigger Toka Tu Ake reinsurance.

The organisation covers landslips affecting homes, but in the case of flood it would only be involved in the clean-up of silt and debris around the house. The predecessor EQC has only claimed on reinsurance twice, both times in relation to the Canterbury earthquakes.