New Zealand’s leading insurers would probably have needed financial support from the Government after the Christchurch earthquakes but for the support of their Australian owners, according to Wesfarmers Insurance Broking CEO Steve Lockwood.

Speaking at the Insurance Brokers Association of New Zealand conference in Auckland, he said if the NZ market had been dominated by locally owned insurers rather than subsidiaries of Australian companies, “most would have blown well through their reinsurance protection” and “we would have struggled as a country”.

Mr Lockwood says the modelling used for the calculation of the maximum probability loss limits, which dictates how much reinsurance is required for a reinsurance program, was “wrong by as much as 100%”.

“Australian insurers buy reinsurance protection for a Sydney earthquake, and it is only because of those limits that adequate reinsurance protection was available for their New Zealand subsidiaries,” he said.

He told the conference, which attracted 650 delegates, that the Australian owners imposed a “token” reinsurance charge back to their New Zealand subsidiaries “which didn’t reflect the real risk”.

“Our market isn’t big enough to pay back the loss to reinsurers, unlike the US where rate revision can provide the payback,” he said. “But we do need a robust insurance and reinsurance market here because our economy is too small for the size of the losses we insure.”

Mr Lockwood says the insurers would have had to make commitments to their reinsurers to keep programs in place, and praised the reinsurers for their willingness to continue to be involved.

Such changes would mean an end to such things as open-ended domestic policies which cover the full replacement of damaged properties, as well as reduced terms, new agreements on deductibles and acceptance that some risks can’t be fully covered.

He says it is unrealistic for Australian parent companies to subsidise New Zealand risk in the future, “so a more realistic portion of the reinsurance program will have to be allocated”.

“New Zealand is a really ugly part of the Australian insurance business at the moment,” Mr Lockwood said. “But they have stuck by us.”

Also see ANALYSIS